The first day of September 2008 will go down in the annals of CVM (the Securities and Exchange Commission) marked by an audacious initiative. Upon editing its Parecer number 35 (an official expression of a view to the market), the autarchy dared to put an end to the recurring conflict between controlling and minority shareholders during mergers. In a very easy-to-understand manner, they suggested measures that aim to make the fiduciary duties of managers explicit when they decide to acquire a subsidiary’s shares.

It is usually the share trade ratio provided and the obligation to make such a trade which is at the center of criticisms by minority shareholders dissatisfied with these agreements. When an unassociated company is adquired, there are two majority shareholders – one from each company – seeking the best for their investors. This rationale is not the same, however, if the operation involves a parent company and its subsidiary. 

“This characteristic enables abuse, and Law 6404/76 already provided for that”, explains Marcos Barbosa Pinto, CVM director. For this reason, Parecer 35 is presented by him as a compilation of understandings released throughout the autarchy’s history about five articles of the Corporate Act (Lei das S.As), especially article 264. According to the director, CVM has always understood that managers should negotiate as if the parties were independent. The document is here to show them how to do it.

Renato Tastardi Portella, an attorney at Mattos Filho law office, praises CVM’s positions. “The path to be taken has become clearer.” His colleague, Thiago Giantomassi of the Demarest & Almeida office, agrees with that idea and goes further. “Parecer 35 is a principle and not a rule”. Thus, the detailing of the path that CVM deems ideal makes room for the market and the autarchy itself to question those who fail to follow it. “I see the edition of Parecer 35 as a step toward a sort of ‘Comply or Explain’ for mergers among companies under common control”, he says, referring to the system that prescribes justification by companies who fail to fulfill certain items of the corporate governance codes.

Giantomassi also highlights two tips given in Parecer 35 as the most important to the management. One of them is being careful with the operation’s documents. In the final text, the autarchy explains that the heads of a company in this situation must gather all the data to prove that they acted in the best interests of those that elected them. The second highlight goes to the regulator’s approach in preserving the administrators’ independence. CVM suggests that a special committee be created to evaluate the takeover or that an shareholders meeting be convened without the majority shareholder votes. Pinto, of CVM, says that takeover-related decisions made through minority shareholder voting is uncommon in Brazil. “But it’s a good way for managers to extend their responsibilities to the other owners of the company.”

Even more uncommon is forming a special committee to negotiate the operation. The idea, imported from the United States, raised controversy during the public hearing. In the draft, installing a committee was given as one of the subsidiary management’s duties. In the final edition, the autarchy only recommended the group’s creation. Another change affected the composition of this committee. During the consultation, CVM proposed that the members be administrators and that the majority of them be independent. “The market found this a heavy requirement. After all, some companies do not have independent administrators on their board”, says the CVM director.

In its final draft, the autarchy suggested two other ways of forming the committee. One of them had a manager elected by the majority of the board of directors, one counselor elected by the minority shareholders, and a third member – management or not – chosen jointly by the pair. The other suggested manner uses only people that do not work at the company and are independent from the parent company. The definition of independent is the same used by the Novo Mercado (the highest corporate governance level in Bovespa).

MORE COSTS – The president of the Brazilian Association of Public Companies (Abrasca), Antonio Castro, is against the committee. “Hiring third parties will increase the operation’s costs”, he highlights. This body’s role, in Castro’s opinion, is already currently played by the board of directors. The consequence, says the Abrasca president, will be losses incurred by shareholders.

Pinto, of CVM, plays it down. “If the expense were recurring, this could be a problem. But a company is normally not acquired more than once. It’s an extraordinary event.” The autarchy’s director believes that the magnitude and importance of such an operation in companies’ lives make some expenses necessary, such as the evaluation report. This report produced by hired assessors, is the document that assigns a price for share swapping, and, therefore, influences how the operation will unfold. Abrasca’s president defends that an indication by CVM about what the document should contain and the responsibilities of those who produce and analyze it would be more effective than the current opinion. 

Detailing of the way makes room for the market and for CVM itself to question those who fail to follow it

Disrespecting the opinion of CVM may be an evidence that a managern administrator is violating certain aspects of the law

NO ESCAPE – And what will happen to managers who don’t embrace the recommendations presented by CVM? This is a question that has been feeding doubt in the market. According to Pinto, the answer is: whoever fails to comply with the opinion may be punished. Noncompliance with the suggestions, he explains, is evidence that the manager may be investigated regarding aspects prescribed by the law, such as lack of diligence, independence or equality in the treatment given to shareholders. “We will analyze those who don’t follow them. With a magnifying glass”, he stresses.

Attorney Luiz Leonardo Cantidiano, a senior partner at Motta, Fernandes Rocha Attorneys, criticizes the opinion’s initiative. Despite acknowledging that there were “the best of intentions”, he believes that article 264 of the Corporations Act fulfills the role of making the operation fairer by granting dissatisfied parties the “direito de recesso” (right of selling shares to the company at a certain price). “Looking at it from a legal standpoint, a proposal like this should come through the legislators, not a CVM opinion. They overstepped their boundaries”, says the attorney, a former president of the autarchy.

Even with all the criticism, Cantidiano believes that the managers of companies in the situation for which it provides will abide by Parecer 35 and the market may see this soon. Some parent-subsidiary takeover operations are in progress. The negotiation conducted by the administrators of Aracruz Celulose, which will be merged into a holding controlled by VCP and Banco Safra – controllers of the cellulose manufacturer up to that moment, jointly with the Lorentzen family – will probably be Parecer 35’s first test of strength. Though the operation was announced in August, and the document highlights that the recommendations do not apply retroactively, the understandings contained therein are not new. In reality, emphasizes the director, they are interpretations gathered throughout the autarchy’s history. “They may apply them to takeovers that are yet unconcluded, for instance,” explains the director, without naming any company specifically.