Company response strategies


What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?

Fiduciary duties according to Brazilian law include duty of care, duty of loyalty, duty of secrecy, and duty to inform, as applicable. There is no different standard for directors to fulfil their fiduciary duties when considering an activist proposal. According to Brazilian law, directors and officers always must act exclusively on behalf of the company’s interest. However, the law provides that the disclosure of the acts or facts by the director at request of the shareholders may only be used in the legitimate interest of the company or the shareholder. In case of abuse of right by the activist shareholder, he or she may be liable for the request of information.

What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?

The safest way to minimise the risks is to adopt a complete and effective corporate governance and compliance programme. The law regarding penalties on administrative proceedings before the CVM has been recently changed to increase general penalties from up to 500,000 to 50 million reais. Therefore, public companies shall increase substantially their investments in compliance in order to prevent serving as examples to the market when the CVM starts using its new heightened supervision authority.

Having an effective compliance programme involves the adoption of best practices of disclosure, which includes providing information to the market in a concise, complete and accurate way, and consistent performance as well. Material facts, policies applicable to related party transactions, internal controls are important strategies for a good relationship with minority shareholders, including activists. If a company is guided by clear and well-known polices and complies with its disclosure duties, the shareholder’s mistrust of the company’s management and controlling group tends to reduce.

There is no official quantitative data available to enable us to establish in a broad sense whether shareholder activism is a matter of heightened concern in the boardrooms of Brazilian public companies. However, minority shareholders such as investment fund managers, pension funds of state-owned companies, experienced individual investors and state-owned investment funds may have a significant influence on the removal of managers or adoption of specific policies.

Considering that most recent shareholder litigation has focused on corruption, it is highly advisable that public companies should have strong anti-corruption and anti-money laundering compliance programmes.


What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?

Brazilian capital markets have a structural defence against shareholder activism, which is a substantial concentration of corporate control. Most companies have a well-defined control group, by families or government. As a result, any shareholder activism focused on changing management would not be able to succeed without the participation of the controlling group.

Although Brazilian law prevents the issuance of multiple-voting shares, there are other structural mechanisms to enhance the power of the controlling group as a defence against shareholder activism. Brazilian law allows corporations to issue preferred shares without voting rights provided that the total amount of such shares does not surpass 50 per cent of the total number of shares of the company. However, listing segments with a higher level of corporate governance at the B3 forbid public companies from issuing non-voting shares (eg, Novo Mercado) or provide additional rights to non-voting shareholders (Nível 2), such as voting rights on major matters such as transformation, merger, spin-off or consolidation, approval on agreements between the corporation and the controlling shareholder and choice of specialised company for the valuation of the corporation.

Another tool that has been used is the inclusion of ‘poison pill’ provisions in the by-laws of a company to discourage a potential hostile takeover. The most common type of ‘poison pill’ is related to the mandatory tender offer of all the shares of the company held by the other shareholders if a shareholder acquires or becomes the holder of a certain percentage of the stock capital of the company as provided in such a ‘poison pill’. In this case, the tender offer is subject to a price or a criterion already set forth in the ‘poison pill’ provision. Such prices usually include a very high premium that may jeopardise the efforts of activists to acquire relevant stockholdings.

Arbitration provisions in the charters may be regarded as a defence against minority shareholder litigation. Such provisions are required for public companies listed in the Novo Mercado, Nível 2, Bovespa Mais and Bovespa Mais Nível 2, and optional for other public companies. However, many companies choose arbitration instead of subjecting themselves to the courts since arbitration provides further confidentiality to the dispute. CAM’s case law is not public and presents much higher costs for minority shareholders to initiate disputes.

Reports on proxy votes

Do companies receive daily or periodic reports of proxy votes during the voting period?

Brazilian law does not provide for a periodic or daily report requirement of proxy votes for the company. However, CVM rules on remote voting provides that the register agent of the shares must forward to the company two documents. These are:

  • an analytic document with voting statement of shareholders duly identified with the extract of corporate shareholdings; and
  • a summarised document with voting statement of shareholders, specifying how many approvals, refusals or abstentions on each subject and how many votes each candidate or list of candidates had received.

Such information must be delivered to the public company 48 hours in advance of the holding of the relevant shareholders’ meeting.

Private settlements

Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?

There is no public information in this regard. As mentioned before, certain special listing segments at B3 require a provision of arbitration clause in the companies’ charter. Considering the high costs of initiating an arbitration procedure in Brazil, the existence of an arbitration clause eventually pushes activists, directors and controlling shareholders into negotiations before the filing of an arbitration request.