Volume 4, Number 27, Page 3

Changes to the Corporations Law

Levy & Salomão Advogados

The Brazilian Corporations Law (Law No. 6.404, of December 15, 1976) was modified by Law No. 9.457 of May 5, 1997 (published in the official gazette of May 6, 1997). This new law is already in force, except for existing companies, for which the law comes into force 30 days after its publication. An analysis of the main changes to the Corporations Law follows.

Benefits for Preferred Stock

The new law establishes the obligation to assign to preferred shares a dividend that is at least 10% higher than that paid on common shares unless the preferred shares have the right to a fixed or minimum dividend (Art. 17). This provision will likely result in an increase in the value of preferred shares, thereby fostering the development of the Brazilian capital market.

Right of Withdrawal

The new law excludes the right of withdrawal by dissenting shareholders in cases of dissolution, split-off, and cessation of the liquidation of a company. It also eliminates the right of withdrawal, in cases of merger, incorporation, and group participation in companies, by (1) shareholders whose shares form part of representative indices of stock portfolios traded on a stock exchange, and (2) shareholders in a listed company, provided that more than half the shares issued by the company are in circulation in the market. All of the shares not held by the controlling shareholder are deemed to be “in circulation in the market.”

In the first scenario, shares that can be sold in the market with reasonable ease can no longer include withdrawal rights. In the second scenario it seems that the law presumes that listed companies, whose controlling stockholder owns less than half of the issued stock enjoy liquidity.

This amendment to the law seems beneficial because it limits the “withdrawal industry”: investors buying stock, at market price, in companies that were soon to undertake operations and which would give the right of withdrawal paid according to the book value of the share, higher than the market value.

The change to Article 137, I of the Corporations Law consolidates the understanding, already established in doctrine, that in cases where preferred stock is created, or an existing class of shares is increased without maintaining the same proportion with other classes, or where there are changes to preferred stock, only the holders of classes of shares that are adversely affected have the right to withdraw from the company.

The new law expressly revokes Law 7.958/89, which had altered Article 137 of the law of corporations. The new law is opportune because controversy persisted as to the effects of such a law on the right to withdrawal.

The appraisal value of the shares in a withdrawal may be lower than the book value (this was banned by the previous wording of Article 45), if provided for in the bylaws. In this case, the amount to be paid on withdrawal will be calculated on the basis of the “economic value” of the company. To calculate a company’s economic value, three experts or a specialized company will be appointed after being proposed by the board of directors and approved by the shareholders at a general meeting. This approval requires an absolute majority of votes; each share, regardless of class or type, has the right to one vote.

Value of a Share Issue

Reflecting prevailing doctrinal understanding, Article 170 of the law was modified to explicitly state that the value of a new stock issue will be set so as not to produce an unjustified dilution of the present equity of the shareholders. This valuation should take into account the company’s profitability prospects, the book value of the shares, and the price of the shares in the stock market.

Merger or Split-off of a Listed Company

If a merger or split-off involves a listed company, the successor company or companies must, within a period of 120 days, seek a listing on the stock exchange for the purpose of having their shares traded on the market. If this is not done, shareholders will have the right to withdraw from the company (Art. 223).

Article 223 aims to ensure that holders of shares traded on the stock exchange or the over-the-counter market are not deprived of the benefits of liquidity after a merger, split-off or incorporation.

The wording of Article 223 is unclear as to whether the right of withdrawal is granted to all stockholders or only to those dissenting from the merger or split-off. The withdrawal must, in our view, be granted to all of the company’s stockholders, regardless of their respective viewpoint.

Nonproportional Split-off

The new law allows a split-off to occur without shareholders retaining the same proportion of shares held before the split-off, provided the split-off has the approval of all shareholders (Art. 229, §5). This provision was expressly included to permit a process that has long been recognized in doctrine and is of great practical use, particularly for the purpose of disengaging contentious partners.

Transfer of Control of a Listed Company

Pursuant to the revocation of Article 254, the transfer of a controlling interest in a listed company no longer requires prior authorization by the Comissão de Valores Mobiliários (CVM). Equal treatment of minority shareholders, formerly obligatory through a simultaneous public offer, is no longer required.

Revocation of Article 254 will be detrimental to the holders of common stock not forming part of the controlling block. The value of their shares will tend to depreciate as they no longer have the right to the premium paid for winning control in a possible transfer, nor the right to special dividends as preferred stock currently does.

The transfer of a controlling interest in a listed company that needs a permit to function no longer requires equal treatment of holders of non-controlling interests. The transfer is merely subject to authorization by the body competent to approve the alteration to the bylaws (Art. 255), if any. The increase in the discretionary powers of these competent bodies may be harmful to minority stockholders in financial institutions and air transport and mining companies, among others.

Calling of a General Meeting

Minority shareholders holding at least 5% of a company’s capital may call a General Meeting if the company’s directors fail to respond, within eight days, to a request for such a call.

In addition, shareholders holding at least 5% of the shares, whether voting or not, may call a General Meeting if the company’s directors fail to respond, within eight days, to a request for such a meeting by the Supervisory Council.

Supervisory Council

The new law has increased the power and responsibilities of the Supervisory Council. For example, its members can now request clarification from the independent auditors that analyzed the financial statements of the corporation. Furthermore, the Council can request that the corporation’s managers appoint an expert to help analyze any fact that is important for the due performance of the Council’s duties.

Dispensation from Publishing Documents

A closed company with a balance sheet net worth of less than R$1,000,000 is released from the obligation to prepare and publish a statement of sources and application of funds (Art. 176, §6).

In addition, closed companies with less than 20 shareholders, regardless of the amount of their net worth, may enjoy the benefits of Article 294 of the law. These benefits include the following: (1) call for a General Meeting by direct delivery of the announcement to the shareholders; and (2) release from the obligation to publish the directors’ report, the financial statements and the independent auditors’ opinion, provided these are filed in the Commercial Register.

Conclusions

The changes brought about by Law No. 9.457/97 primarily and, in large part, adversely affect minority shareholders. At the same time, however, the new law corrects significant distortions in Law No. 6.404/76, which has changed little in the more than 20 years since it went into effect. The new law will allow greater flexibility in restructuring companies and will undoubtedly encourage mergers and acquisitions, particularly those involving listed companies.

The law firm of Levy & Salomão Advogados is located in Sao Paulo, Brazil. Its practice areas include international banking, contracts, taxes, litigation and corporations.