The Brazilian Securities Commission (CVM) disclosed, on November 27, CVM Instruction No. 540, amending some provisions of CVM Instruction No. 391, dated July 16, 2003, with respect to the operation of investment funds in equity (FIPs).

According to the previous wording of ICVM 391, FIP was required to participate in the decision-making process of investees and effectively influence the determination of the strategic policy and management thereof. Such participation would mainly occur through the appointment of members of the Board of Directors or, also, holding shares comprising the respective controlling block, through the execution of a shareholders’ agreement or the adjustment to the corporate purpose. FIP investment in such companies should represent 90% of FIP’s shareholders equity, subject to some exceptions.

Upon the issuance of ICVM 540, the rules requiring FIP to influence the determination of the strategic policy and management of investees may not be mandatory, provided that according to the following conditions:

  1. the investees must be listed in a securities special trading segment instituted by a stock exchange or organized over-the-counter market, directed to Access market and ensuring, through contractual bond, corporate governance standards more strict than those required by law; and
  2. FIP investment, in such investees, shall be subject to the limit of 35% of FIP’s shareholders’ equity.

In practice, 35% percentage – calculated on FIP’s shareholders equity – does not represent broad flexibility so that FIP may invest in such companies without holding the required governance practice, especially in the beginning of the investment period (in other words, if FIP initially invests in an access market company, a portion close to 100% of FIP’s shareholders’ equity will be represented by such investment). Another situation to be looked at is the 35% limit that is calculated on FIP’s subscribed capital stock.

Also note that the abovementioned limit may be increased to 100% during the funds’ investment term, established up to six months counted from each event of the payment of quotas set forth in FIP’s investment commitments. After FIP’s quotas are paid up, the manager may allocate up to 100% of FIP’s shareholder equity to access market companies; provided, however, that it must, within six months, for the reclassification of FIP: (i) provide for the divestiture in such companies and invest such fund in other companies ensuring the governance required pursuant to ICVM 391, or (ii) obtain the required governance in access market companies.

CVM 540 also provided for that, during the divestiture period in access market companies, FIP shall no longer be required to comply with the influence requirement for the definition of strategic policy and management of the respective company, which shall make the divestiture process easier. Such flexibility could have been applied to all companies comprising FIP’s portfolio. However, CVM chose to leave such matter to be discussed in a broader reform though which ICVM 391 will undergo soon.

Finally, the new ICVM 540 sets forth that, is FIP is not in accordance with the abovementioned percentages, the manager must immediately inform CVM with the proper justification and provide the reclassification estimate, and it must later inform the reclassification of the fund’s portfolio when it occurs.