Getting the Deal Through - Corporate Governance 2011 by Araujo e Policastro Advogados

Corporate Governance Board structures and directors’ duties in 34 jurisdictions worldwide

2011 Published by Getting the Deal Through in association with: Amarchand & Mangaldas & Suresh A Shroff & Company Anderson Mo¯ri & Tomotsune Araújo e Policastro Advogados Arzinger Badri and Salim El Meouchi Law Firm Bofill Mir & Alvarez Jana Bonn Schmitt Steichen Davies Ward Phillips & Vineberg LLP Davis Polk & Wardwell LLP Deacons De Brauw Blackstone Westbroek NV Duane Morris & Selvam LLP Edward Nathan Sonnenbergs Inc Hausmaninger Kletter Rechtsanwälte – Gesellschaft mbH KK Legal Kluge Advokatfirma DA Mah-Kamariyah & Philip Koh Mamic´ Peric´ Reberski Rimac METIS Rechtsanwälte LLP Migallos & Luna Law Offices Navarro Castex Abogados Nomos Law Firm Polenak Law Firm Popovici Nit¸u & Asociat¸ii S A Evangelou & Co LLC Sanchez DeVanny Eseverri, SC Schellenberg Wittmer Šelih & partnerji o.p., d.o.o. Slaughter and May Somay Hukuk Bürosu Streamsowers & Köhn Ughi e Nunziante Vivien & Associés Weil, Gotshal & Manges LLP Yukov, Khrenov & Partners

contents ®

Corporate Governance 2011

Global Overview Arthur Golden, Thomas Reid, Kyoko Takahashi Lin, Ron Aizen, Joanna McGinley and Brian Wolfe Davis Polk & Wardwell LLP 3

Contributing editors: Ira Millstein and Holly Gregory Weil Gotshal & Manges LLP

Argentina Alberto Navarro and Luciana Chamberlain Navarro Castex Abogados

Business development managers Alan Lee George Ingledew Robyn Hetherington Dan White Marketing managers Ellie Notley Sarah Walsh Alice Hazard Marketing assistants William Bentley Sarah Savage Subscriptions manager Nadine Radcliffe Subscriptions@ gettingthedealthrough.com Assistant editor Adam Myers Editorial assistant Lydia Gerges

Austria Robert Bachner and Mark Kletter Hausmaninger Kletter Rechtsanwälte – Gesellschaft mbH 16 Brazil Lira Renardini Padovan and Caroline Rodrigues Ogata Araújo e Policastro Advogados

Canada Carol Hansell Davies Ward Phillips & Vineberg LLP

Chile Rony Zimerman, Rodrigo Saffirio and Nicolás Espina Bofill Mir & Alvarez Jana

Croatia Natalija Peric´ Mamic´ Peric´ Reberski Rimac

Cyprus Spyros A Evangelou and Michael Tsikouris S A Evangelou & Co LLC

France Bernard Laurent-Bellue and Emmanuel Chauvet Vivien & Associés

Germany Lars Friske, Bernhard Maluch and Andreas Rasner METIS Rechtsanwälte LLP

Greece Maria Vastaroucha Nomos Law Firm

Hungary Zoltán Kató and Gyula Ko˝rösy KK Legal

India Vineet Bansal Amarchand & Mangaldas & Suresh A Shroff & Company

Italy Fiorella Federica Alvino Ughi e Nunziante

Japan Takeshi Watanabe Anderson Mo¯ri & Tomotsune

104

Senior production editor Jonathan Cowie Chief subeditor Jonathan Allen

Lebanon Chadia El Meouchi, Samia El Meouchi and Hala Okeili Badri and Salim El Meouchi Law Firm 110 Luxembourg Alex Schmitt, Evelyn Maher and Philipp Mössner Bonn Schmitt Steichen

122

Subeditors Davet Hyland Sarah Morgan Caroline Rawson Joanne Morley

Macedonia Kristijan Polenak and Tatjana Siskovska Polenak Law Firm

127

Malaysia Peter Ling Mah-Kamariyah & Philip Koh

136

Editor-in-chief Callum Campbell Publisher Richard Davey Corporate Governance 2011 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 © Law Business Research Ltd 2011 No photocopying: copyright licences do not apply. ISSN 1476-8127 The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer– client relationship. No legal advice is being given in the publication. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of July 2011, be advised that this is a developing area.

Mexico Cristina Sa´nchez-Vebber, Daniel Maldonado-Alcantara and Cecilia Curiel-Piña Sanchez DeVanny Eseverri, SC 143 Netherlands Bernard Roelvink and Michael Schouten De Brauw Blackstone Westbroek NV

150

Nigeria Tamuno Atekebo, Otome A Okolo and Omolayo Longe Streamsowers & Köhn

158

Norway Atle Degré, Naja Dannow and Linn Hoel Ringvoll Kluge Advokatfirma DA

166

Philippines Barbara Anne C Migallos and Rolaida F Pua Migallos & Luna Law Offices

175

Romania Florian Nit¸u and Alexandru Ambrozie Popovici Nit¸u & Asociat¸ii

182

Russia Andrey Yukov and Zinaida Zakharova Yukov, Khrenov & Partners

188

Singapore Leon Yee Duane Morris & Selvam LLP

196

Slovenia Nina Šelih and Tjaša Lahovnik Šelih & partnerji o.p., d.o.o.

204

South Africa Mohamed Sajid Darsot and Anli Dowling Edward Nathan Sonnenbergs Inc

211

Switzerland Lorenzo Olgiati Schellenberg Wittmer

220

Thailand Andrew Wynne and Poosit Luengruengtip Deacons

228

Turkey Metin Somay Somay Hukuk Bürosu

235

Ukraine Maksym Cherkasenko and Lada Zhurbelyuk Arzinger

242

United Kingdom Simon Robinson Slaughter and May

250

United States Holly J Gregory and Rebecca C Grapsas Weil, Gotshal & Manges LLP

272

Printed and distributed by Encompass Print Solutions Tel: 0844 2480 112

Law Business Research

www.gettingthedealthrough.com

Brazil

Araújo e Policastro Advogados

Brazil Lira Renardini Padovan and Caroline Rodrigues Ogata Araújo e Policastro Advogados

Sources of corporate governance rules and practices 1

Primary sources of law, regulation and practice What are the primary sources of law, regulation and practice relating to corporate governance?

The primary sources relating to corporate governance are: • the Corporations Law, Act No. 6,404/76 (the CL), as amended by Acts Nos. 9,457/97; 10,303/01, 11,638/07 (which basically introduced more transparency and more requirements for the disclosure of information in financial statements of publicly held corporations that are more in line with the rules and recommendations adopted by the International Accounting Standards Board) and 11,941/09 (which basically amended the requirements for the preparation and bookkeeping of corporations’ financial statements and explanatory notes); • the Securities Law, Act No. 6,385/76, as amended (the SL); and • the Civil Code, special part, book II. The Securities and Exchange Commission (CVM) issues various regulations in connection with the securities market that affect corporate governance practice. State stock exchanges and over-the-counter markets are formed under the supervision of the CVM and they issue special rules on corporate governance in connection with the public distribution of securities. There are also rules concerning pension funds that determine the types of investments that may be made in corporations that adopt certain standards of corporate governance. Although Brazil is a federation, laws on corporations are enacted on a national basis. As for regulations affecting public companies, the Brazilian Securities and Derivatives Stock Exchange (BM&FBOVESPA) has created distinctions between categories of listed shares by means of the ‘New Market’ and Levels 1 and 2 of Corporate Governance (the CG Levels or CG Level 1 and CG Level 2). Both of these apply to companies that have opted to be bound by more stringent corporate governance and disclosure rules than those imposed by the CL and CVM rules. The New Market and the CG Levels are grounded in the same basic principles and they all seek to facilitate the disclosure system for better supervision of management and controlling shareholders’ activities. BM&FBOVESPA has recently issued updated regulations of the New Market and the CG Levels (as mentioned in ‘Update and trends’ below). The main voluntary codes or models that address corporate governance matters are the Brazilian Code on Corporate Governance, launched by the Brazilian Institute on Corporate Governance (IBGC), which has been updated and recently published by IBGC (an entity designed to study and foster good policies on corporate governance in Brazil) and the CVM Recommendations on Corporate Governance, the Code of Self-Regulation for Primary and Secondary Offerings, launched by the National Association of Investment Banks (ANBID). Basically, the Code of Self-Regulation for Primary and Secondary

Offerings is mandatory for entities that are part of ANBID as well as for any entity that expressly chooses to adhere to such code by means of execution of a deed of adherence. Finally, companies’ by-laws can contain provisions on corporate governance as long as such provisions are not in violation of the law. 2

Responsible entities What are the primary government agencies or other entities responsible for making such rules and enforcing them? Are there any well-known shareholder activist groups or proxy advisory firms whose views are often considered?

The CVM has jurisdiction to issue and enforce regulations in connection with the CL and SL, as well as to give formal opinions and impose penalties on companies and directors or officers for breach of duty of care and duty of loyalty, failure to disclose information, and conflicts of interest, among others. The CVM is designed, inter alia: • to ensure the proper functioning of the exchange and over-thecounter markets; • to ensure public access to all relevant information about securities traded and the companies that issue them; • to ensure that all market participants adopt fair trading practices; • to stimulate savings and investment in securities; and • to promote the expansion and efficiency of the securities market and the capitalisation of publicly held companies in Brazil. The CVM has been very active in the issuance of guidelines and rules designed to better corporate governance, especially on its 2010 acts relating to the preparation of financial statements of publicly held corporations in light of International Accounting Standards (the IAS) and International Financial Reporting Standards (the IFRS), such as those on disclosure of information on related parties. The rights and equitable treatment of shareholders 3

Shareholder powers What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action?

Shareholders are entitled to appoint directors and remove them from office by means of shareholders’ meetings. Shareholders should not encroach directly on directors’ management powers. Shareholders, therefore, do not have the means to require the board to pursue specific courses of action other than by oversight, disclosure rules and other mechanisms of control, except by means of a valid shareholders’ agreement. A valid shareholders’ agreement can be an effective vehicle to make its provisions binding against members of the board. The CL establishes that either the absence or the abstention from voting at board meetings of any members of the board appointed under the

Getting the Deal Through – Corporate Governance 2011

Araújo e Policastro Advogados terms of the shareholders’ agreement entitles the other members of the board appointed in the same way to vote, consistent with the shareholders’ agreement, in place of the board member who has not voted due to absence or abstention. In addition, votes at board meetings that violate a shareholders’ agreement shall not be counted. Specifically in connection with the latter comments, which result from the application of article 118(8) and (9) of the CL, the IBGC has issued a guideline letter in order to shed light on how to interpret and apply such provisions in such a way that does not hinder the independence of directors. 4

Shareholder decisions What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

In a nutshell, the CL gives the following powers to the shareholders’ meeting: • to change the by-laws; • to appoint and remove directors and members of the auditing committee; • to review on an annual basis the managers’ accounts and approve financial statements; • to authorise the issue of debentures, except for specific situations involving debentures issued by publicly held corporations, in which case the board of directors may undertake this task; • to table the exercise of shareholders’ rights in case of noncompliance with obligations required by law or the by-laws; • to resolve on the valuation of assets for capital contribution; • to resolve on mergers, amalgamations, spin-offs, dissolution and conversion into another type of company; and • to authorise the board and the officers to admit bankruptcy and file for corporate reorganisation. Under the CL, the shareholders’ meetings shall resolve on the global or individual amounts of compensation for the administrators. 5

Disproportionate voting rights To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Under the CL, a corporation can issue classes of shares with voting rights, limited voting rights or no voting rights. Each common share gives the right to one vote at shareholders’ meetings, multiple votes being prohibited in any class of shares. Preferred shares with limited or no voting rights are restricted to 50 per cent of the issued stock. The CL establishes that, if the company does not distribute the fixed or minimum dividends to preferred shareholders within the term provided for in the by-laws (which can never be more than three fiscal years), such preferred shareholders will have the right to vote at shareholders’ meetings. 6

Shareholders’ meetings and voting Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote?

Under the CL, all shareholders can participate in shareholders’ meetings, including those without voting rights. Shareholders may participate in person or via a representative. In the first case, shareholders shall evidence their position as shareholders and, in the second case, the attorney-in-fact must be a shareholder or administrator of the company or lawyer appointed for a one-year term. Financial institutions may be appointed as the attorney-in-fact of publicly held corporations. The IBGC recommends the facilitation of the access of shareholders to the meetings by using video webcasts, online transmissions, www.gettingthedealthrough.com

Brazil or electronic or proxy voting. In addition, the Code on Corporate Governance suggests the preparation of guidance notes in order to facilitate and stimulate the participation of shareholders in the meetings. Such guidance notes should offer detailed information about the matters to be discussed in the meetings, including the position of the company on each matter, as well as models of powers of attorney to shareholders with different voting positions. With respect to public corporations, IBGC recommends the publication of these guidance notes on the corporations’, the respective stock exchange’s and the CVM’s websites. Specifically in relation to proxy voting, the IBGC suggests that the corporation use electronic signatures and digital certification, and make it available for voting agents to be empowered by shareholders to vote according to their instructions. Finally, the CVM has published special rules applicable to publicly held corporations for the public request of proxy voting. For the exclusive purpose of this CVM regulation, public request of proxy voting shall be addressed to all shareholders with voting rights and is defined as a request made by using public means of communication, by the corporation or the controlling shareholder addressed to more than five shareholders and by any shareholder addressed to more than 10 shareholders. 7

Shareholders and the board Are shareholders able to require meetings of shareholders to be convened, resolutions to be put to shareholders against the wishes of the board or the board to circulate statements by dissident shareholders?

In principle, the shareholders’ meeting is called by the board of directors or, when there is no board, by the officers of the corporation. The shareholders’ meeting may also be convened by: • the auditing committee in two specific situations defined in the CL (in which cases the auditing committee in fact has the obligation, not the right, to call the meeting); • any shareholder, when management has delayed the calling of the shareholders’ meeting, as provided for by law or the company’s by-laws, for more than 60 days; • shareholders representing at least 5 per cent of the corporate capital when the managers have not responded, within eight days, to the request presented by such shareholders; and • shareholders representing at least 5 per cent of the voting capital or 5 per cent of the shareholders with no voting rights when managers have not responded to the request for installation of the auditing committee within eight days. With respect to public corporations, the CVM has the authority to decrease the above percentages, but never to increase them. As to closely held corporations, the company’s by-laws may also establish a lower percentage. There is no provision under the CL authorising the calling of the shareholders’ meeting by judicial courts or the CVM. The last two items above present situations in which minority shareholders have a voice in calling shareholders’ meetings. The managers cannot deny the request once the formal requirements provided for by law have been met by the shareholders. In such cases, the managers must call the meeting, which itself will serve as the forum to discuss whether the call was abusive, improper or otherwise problematic. Although shareholders cannot require the board of directors to circulate the dissident shareholders’ statements, such statements must be listed in the minutes of the corresponding shareholders’ meeting and duly signed by the attending parties.

Brazil 8

Controlling shareholders’ duties

12 Restrictions on the transfer of fully paid shares

Do controlling shareholders owe duties to the company or to non-

Are restrictions on the transfer of fully paid shares permitted, and if so

controlling shareholders? If so, can an enforcement action against

what restrictions are commonly adopted?

controlling shareholders for breach of these duties be brought?

The controlling shareholder should look to the corporation’s objectives. Controlling shareholders have duties and obligations as regards the corporation and the other shareholders and stakeholders in general and must respect their interests and rights. In terms of enforcement, the subject matter for any claims against the controlling shareholders covers abuse of power, as defined in the CL and in the CVM regulations. 9

Araújo e Policastro Advogados

Shareholder responsibility Can shareholders ever be held responsible for the acts or omissions of the company?

Shareholders are liable up to the amount equivalent to their paid-in capital contribution, except for the liabilities imposed in cases of piercing the corporate veil. As a general rule, shareholders are held liable for their own acts, not for acts or omissions of the company. In addition to the above liabilities of the controlling shareholder and of the shareholders who abuse their voting powers, managers, who are sometimes also shareholders, may be held liable for acts exercised with neglect or malice or in violation of the law or the company’s by-laws. Corporate control 10 Anti-takeover devices Are anti-takeover devices permitted?

Some defensive tactics against takeovers are often adopted by corporations and these include supermajority voting requirements for shareholders’ meetings, company reorganisations, shareholders’ agreements with provisions that restrict the increase of capital or transfer of shares, among other actions. Also, there are some defensive tactics against takeovers known as ‘poison pills’. Overall, the Code on Corporate Governance discourages the adoption of poison pills. 11 Issuance of new shares May the board be permitted to issue new shares without shareholder approval? Do shareholders have pre-emptive rights to acquire newly issued shares?

As a general rule under the CL, capital increases are a matter of shareholder approval and depend on the amendment of the by-laws. However, the board is permitted to deliberate on the capital increase under certain conditions and up to a certain limit (of amount or number of shares) without the need to amend the by-laws, provided that such authorisation is previously set out in the by-laws. This hypothesis is known as authorised capital and the CL provides for the limitations to be followed by the board in such cases. In general, the CL establishes that the shareholders have preemptive rights to acquire new shares in the proportion of their interest in the company’s corporate capital. The company’s by-laws or the shareholders’ meeting shall determine the term for the exercise of the pre-emptive rights, which shall not be less than 30 days. In the event that the corporate capital encompasses different classes of shares, each shareholder shall exercise the pre-emptive right on shares identical to the ones it holds. The company’s by-laws may exclude the shareholders’ preemptive rights in very specific circumstances, as per comprehensive provisions in the CL.

In general terms, contractual restrictions on the transfer of fully paid shares are permitted, such as, for instance, the right of first refusal or restrictions for the purchase and sale of shares, which are often included in shareholders’ agreements. Under the CL, the by-laws of a closely held corporation can impose restrictions on the transfer of nominative shares as long as such restrictions are specifically regulated and do not ultimately prevent negotiation of such shares or submit the relevant shareholders to the will of the board of directors, officers or the majority of the shareholders. For the acquisition of control of a public corporation, the CL requires the purchaser to undertake the obligation to make a public offer for the acquisition of the voting shares pertaining to the remaining shareholders in such a way as to ensure such minority shareholders a minimum price equal to or higher than 80 per cent of the price paid for each share of control of the corporation. The rules applicable to such public offers are set by specific regulations issued by the CVM. For the companies listed in the New Market or in the CG Levels of BM&FBOVESPA, the sale conditions for the transfer of control must apply to all the other shareholders (based on the defined terms of the applicable regulations), which is in line with the Code on Corporate Governance issued by the IBGC. In addition, the IBGC recommends that, in publicly held corporations with dispersed capital, the acquisition of control should be subject to the approval of all shareholders, who may dismiss the acquisition of the total amount of the shares. Finally, under the CVM Recommendations on Corporate Governance, the ‘tag-along’ provision should give equal treatment to all classes or types of shares and the price paid to the minority voting shares should also be extended to preferred shares with limited or no voting rights. 13 Compulsory repurchase rules Are compulsory share repurchase rules allowed? Can they be made mandatory in certain circumstances?

In general, corporations cannot compulsorily repurchase their shares, except in the following circumstances: the redemption of shares by using a surplus to buy the redeemed shares; the acquisition of shares to be cancelled or kept as treasury stock, upon compliance with certain restrictions; or the sale of treasury stock. The CVM has special rules for the repurchase of shares by public corporations and some of the cases are subject to prior approval by the CVM. 14 Dissenters’ rights Do shareholders have appraisal rights?

Under the CL, the approval of some specific matters by the shareholders’ meeting gives the right to the dissident shareholder to withdraw from the company and to receive the reimbursement of the amount corresponding to its share capital, which shall be appraised in accordance with the procedure established in the company’s by-laws and, in a nutshell, shall be no lower than the net equity mentioned in the last balance sheet approved by the shareholders’ meeting.

Getting the Deal Through – Corporate Governance 2011

Araújo e Policastro Advogados The responsibilities of the board (supervisory) 15 Board structure Is the predominant board structure for listed companies best categorised as one-tier or two-tier?

Public companies must have a board of directors, officers and an auditing committee. Closely held corporations need not have a board of directors, although they usually do, nor is a permanent auditing committee required. 16 Board’s legal responsibilities What are the board’s primary legal responsibilities?

The board of directors is responsible for, inter alia: • the establishment of the businesses of the corporation; • the appointment and removal of officers, according to the limitations of the company’s by-laws; • calling shareholders’ meetings whenever it deems appropriate; • the issuance of opinions on the management’s accounts; • the supervision of the officers’ functions, by requesting information, clarification, copies of corporate books and other material; and • appointing and removing the independent auditors, where this applies. The IBGC also suggests the following responsibilities of the board, inter alia: • the discussion, approval and monitoring of decisions involving strategy, capital structure, mergers and acquisitions, contracting, dismissal and remuneration of the CEO and other executives, based on the proposal presented by the CEO; • the appointment and evaluation of independent audits; • overseeing corporate governance practices; • dealing with relationships with related parties; • establishing a code of conduct; • supporting and continually monitoring the management of the corporation with respect to business, risks and people; • management of the corporate risk; • planning the succession of the directors, the CEO and the other executives; • giving guidance regarding sustainability policy; and • establishing public relations policy. Finally, IBGC states that the board should not interfere in operational matters, but should be free to request any relevant information to perform its duties. 17 Board obligees Whom does the board represent and to whom does it owe legal

three months of the shareholders’ meeting, any shareholder may file a derivative suit. If, however, the shareholders’ meeting resolves not to file suit, then any shareholders representing at least 5 per cent of the corporate capital can bring a derivative suit. 19 Care and prudence Do the board’s duties include a care or prudence element?

The board (as well as the officers) owes the company and its shareholders a duty of care; that is, directors must discharge their duties with the degree of diligence and care that an ordinarily prudent person would exercise in a similar position under similar circumstances. Board members also owe a duty of loyalty, which encompasses the obligation not to disclose confidential or strategic information of the corporation (unless it is material information required to be disclosed by listed companies), as well as the obligation not to usurp corporate opportunities for their own benefit or at the expense of the corporation, among other duties. Should the board act negligently with malice or in violation of the law or the corporation’s by-laws, its members can be held personally liable for the damages caused to the company, its shareholders and any other third parties. The CVM has issued a guideline opinion that covers concrete standards for administrators’ role of publicly held corporations in mergers or mergers of shares involving a controlling company and companies it controls or companies under one same control. Such opinion contributes to the specification of what the fiduciary duties of administrators are in such transactions, thus facilitating such transactions at arm’s length. 20 Board member duties To what extent do the duties of individual members of the board differ?

All directors owe the same duties to the corporation and to the shareholders regardless of their background and skills, although one could argue that directors who serve on certain committees can be subject to higher standards in respect of their specific knowledge. The IBGC recommends that the board of directors should be composed of members with different experiences, skills and behavioural styles in order to encompass the skills required for the exercise of its duties. In addition, the Code on Corporate Governance suggests the following skills that the board should have: participation in other boards of directors; senior executive experience; experience in crisis management, identification and control of risks; people management; financial, accounting and legal knowledge; and contacts in the areas of the corporations’ interest. 21 Delegation of board responsibilities To what extent can the board delegate responsibilities to

duties?

Under the CL, the board represents the corporation and has duties to the shareholders that appointed its members in the same way as it has duties to other shareholders and to the corporation. 18 Enforcement action against directors Can an enforcement action against directors be brought by, or on behalf of, those to whom duties are owed?

Upon prior approval by the shareholders’ meeting, enforcement actions against directors, officers and members of the auditing committee can be brought by the company on its own account. In the event that the suit or claim is not brought by the company within

www.gettingthedealthrough.com

Brazil

management, a board committee or board members, or other persons?

The board of directors is charged with establishing the policies and businesses of the corporation and can delegate to the officers the dayto-day responsibilities that fall within the parameters of these policies, provided that such delegated powers are not the same specific powers delegated to the board by law. The board can also establish that specific matters are better analysed and supervised by tailormade committees, even though the decision-making power continues to rest with the board. Under the Code on Corporate Governance issued by the IBGC, the board of directors should have board committees, the existence of which does not imply the delegation of board responsibilities; they are basically created as a way of assisting the board of directors to carry

Brazil

Araújo e Policastro Advogados

out specific and detailed activities, such as auditing, human resources, remuneration, governance, finance and sustainability.

be avoided. The IBGC advises that the CEO should not be a member of the board, but should attend the board meetings as a guest.

22 Non-executive and independent directors

25 Board committees

Is there a minimum number of ‘non-executive’ or ‘independent’

What board committees are mandatory? What board committees

directors required by law, regulation or listing requirement? If so, what

are allowed? Are there mandatory requirements for committee

is the definition of ‘non-executive’ and ‘independent’ directors and

composition?

how do their responsibilities differ from executive directors?

There is no minimum number of independent directors required by law, regulation or listing requirement in Brazil, although the IBGC and the CVM recommend that most of the directors be independent. Under the CL and the CVM regulations, the directors shall not hold a position in any company that might be considered a competitor of the relevant corporation and they shall not have interests that conflict with those of the corporation. According to the Code on Corporate Governance, the number of independent directors on the board depends on the degree of maturity of the corporation, its life cycle and its characteristics. The IBGC recommends that the majority of the directors should be independent, contracted by formal procedures and with roles and qualifications clearly defined. 23 Board composition Are there criteria that individual directors or the board as a whole must fulfil? Are there any disclosure requirements relating to board composition?

According to the CL, to be a member of the board, managers or officers must be individual persons. As to the criteria concerning the board of directors, managers must be shareholders of the company; on the other hand, officers could be shareholders but must be resident in this country. BM&FBOVESPA’s updated regulation provides that a member of the board of directors must deliver a list to the company specifying the positions they hold on the board of directors, on the audit committee and on executive bodies of different companies or entities within five months after the end of the fiscal year. 24 Board leadership Do law, regulation, listing rules or practice require separation of the functions of board chairman and CEO? If flexibility on board leadership is allowed, what is generally recognised as best practice and what is the common practice?

The CL does not have provisions that require the separation of the functions of the chairman of the board and the CEO; it simply establishes that up to a third of the members of the board can serve as officers. Common practice has shown that it is usual for board members to also be officers of the same corporation. Since the board of directors oversees the officers’ activities, the CVM Recommendations on Corporate Governance, in line with the worldwide trend in this area, advises that the chairman’s and the CEO’s positions be occupied by different individuals to prevent conflicts of interest. In the new regulations recently enacted by BM&FBOVESPA in connection with the New Market and CG Levels, the chairman’s and the CEO’s positions must be occupied by different individuals, except for some very specific situations. The companies were given three years counted as of the date of beginning of the negotiation of securities under the New Market or the CG Levels to adapt to this provision of the BM&FBOVESPA regulations. The recommendation of IBGC is that the duties of the board chairman should be different from and complementary to the CEO’s duties. With the purpose of preventing concentration of power at the expense of proper management supervision, the accumulation of the positions of both board chairman and CEO by the same person should

According to the CL, publicly held companies must have an auditing committee, whose attributes are set forth in the law and the company’s by-laws. The auditing committee must be composed of a minimum of three and a maximum of five members, to be appointed at the shareholders’ meeting. Members of the auditing committee cannot: • hold a position in any company that might be deemed a competitor of the corporation; • have interests that conflict with those of the corporation; • be directors, officers or employees of the corporation, of a controlled company or of the same group of the corporation; or • be a relative (up to the third degree) or spouse of a director or officer of the corporation. Furthermore, some corporations have set up an advisory board, which falls into the category of the allowed board committees, to assist the board of directors and officers in the establishment of policies and day-to-day measures. According to the Code on Corporate Governance issued by the IBGC, the board of directors should have several board committees to assist the board in the carrying out of specific and detailed activities, such as auditing, human resources, remuneration, governance, finance, sustainability, etc. The number of committees should reflect the size of the corporation. However, an excessive number of committees could affect the internal structure of the board and cause inappropriate interference in management. The existence and scope of each committee should be reviewed periodically to ensure that each has an effective role. 26 Board meetings Is a minimum or set number of board meetings per year required by law, regulation or listing requirement?

There is no minimum number of board meetings established by law, regulation or listing requirements, but the Code on Corporate Governance suggests that the board meet as many times as necessary to take care of the corporation’s business, but no more than once per month to prevent excessive interference in the officers’ powers. In addition to a schedule detailing the dates of board meetings, the IBGC recommends that the board chairman should organise an agenda indicating the important matters to be discussed by the board during the year and the dates on which they will be discussed. This method allows the board to examine the strategic matters in depth and to have a more proactive role. Another advantage is to allow the management to organise itself and know when the matters under its responsibility will be scrutinised by the board. This agenda does not preclude any important matters from being discussed in extraordinary board meetings. 27 Board practices Is disclosure of board practices required by law, regulation or listing requirement?

Board practices need not be disclosed. Nevertheless, the board must disclose relevant and material information that concerns the corporation (see question 35).

Getting the Deal Through – Corporate Governance 2011

Araújo e Policastro Advogados 28 Remuneration of directors How is remuneration of directors determined? Is there any law, regulation, listing requirement or practice that affects the

Brazil employees and administrators of publicly held corporations (board members or officers or managers), as mentioned in the last part of question 28.

remuneration of directors, the length of directors’ service contracts, loans to directors or other transactions between the company and any director?

30 D&O liability insurance Is directors’ and officers’ liability insurance permitted or common

The CL establishes that the shareholders’ meeting will fix the remuneration of the directors, taking into account their background, skills, responsibilities, position, reputation, etc. The Code on Corporate Governance is more detailed and suggests a system of checks and balances designed to avoid the waste of corporate assets, but with fair remuneration and incentives to good directors. The IBGC also recommends a formal and transparent procedure for the approval of the remuneration and benefits of the directors and it should take into account the costs and risks arising from the share incentive programmes offered to the directors. In addition, the remuneration policy should contain a detailed breakdown of all the benefits received by the directors and the conditions for the achievement of the variable remuneration, and should also be available on the corporations’ website. The CL establishes that the company’s by-laws shall determine the length of the directors’ terms, which cannot be longer than three years, with re-election being permitted. There are no provisions under the CL specifically applicable to loans to directors. The Code on Corporate Governance recommends that the extension of loans between the company and any related parties should be prohibited and this directive is consistent with the US Sarbanes-Oxley Act provisions. In addition, the Brazilian law that regulates financial institutions (Act No. 4,595/64) prohibits loans to directors, officers, members of the consulting and auditing committees and related parties. In respect of transactions between directors and the corporation, the CL provides that any transaction in which the director has interests that conflict with those of the corporation, and any other situation that implies a conflict of interest, must be disclosed to the other directors at the board’s meeting. CVM Resolution No. 642 of 07 October 2010 (Resolution 642) regulates special requirements of related parties’ disclosure of information in the financial statements of publicly held corporations

practice? Can the company pay the premiums?

The Private Insurance Agency (SUSEP) has regulated the insurance market for civil responsibilities on the ‘claims made basis’, a regulation that provides for insurance that covers the civil responsibilities of directors and officers for acts or facts resulting from the exercise of their official position. This insurance is known as D&O insurance (directors’ and officers’ insurance) and it allows the payment of its costs by the company. D&O insurance premiums have been increasing substantially in response to the rise in the number of lawsuits and claims filed against directors and officers. 31 Indemnification of directors and officers Are there any constraints on the company indemnifying directors and officers in respect of liabilities incurred in their professional capacity? If not, are such indemnities common?

No, there are no express constraints on indemnification for directors or officers for liabilities arising from the exercise of their official positions. There are a small number of cases where companies have established policies for advancing expenses and indemnifying directors and officers as a way of attracting and retaining high-calibre, loyal professionals. The structuring of the advancing of expenses and indemnification should be approached with great care to avoid systems that might turn out to be harmful to the company, since the indemnification structure represents a shift of the burden from the executive to the company as regards the cost of any obligations resulting from some lawsuits or from particular consequences of the director’s or officer’s acts. Whenever such a shift of costs diverts certain legal or regulatory sanctions, the structure of the systems for advancing expenses and indemnification should be revised accordingly. 32 Exculpation of directors and officers

29 Remuneration of senior management How is the remuneration of the most senior management determined? Is there any law, regulation, listing requirement or practice that affects the remuneration of senior managers, loans to senior managers or other transactions between the company and senior managers?

The remuneration of the most senior management is determined on a market basis or in any such a way to attract or provide an incentive to good officers. There is no law, regulation, listing requirement or practice that affects the remuneration of senior managers. The rules applicable to the loans and other transactions between directors, officers and the corporation also apply to transactions involving senior managers (see question 28). The IBGC recommends that the remuneration of officers in general be somehow linked to results by means of reasonable and coherent incentives, aimed at achieving better performance of the corporation’s interest. The remuneration policy should be transparent and officers should not be involved in the decisionmaking process regarding the remuneration package. In addition, the remuneration policy should contain detailed breakdowns of all the benefits received by the directors and the conditions for the achievement of the variable remuneration, and should be available on the corporations’ website. Resolution 560 provides for certain requirements relating to the disclosure of information regarding the compensation package of www.gettingthedealthrough.com

To what extent may companies or shareholders preclude or limit the liability of directors and officers?

There is no provision in the CL authorising neither the companies nor the shareholders to preclude the liability of directors and officers. There are some measures that may be taken in order to protect the directors and officers from liabilities arising from the exercise of their position. Comfort letters are used by companies and their shareholders to indemnify and protect the directors and officers from future indemnification resulting from lawsuits and claims filed by third parties. In addition, some companies adopt D&O insurance (see question 30). 33 Employees What role do employees play in corporate governance?

The CL currently provides for the participation of employees’ representatives in the board of directors, but practice shows that employees have no direct or significant participation in corporate governance matters in Brazil. The IBGC states that, whenever an employee is appointed as member of the board of directors, he or she should have the required skills for the position and should act in the corporation’s interest.

Brazil

Araújo e Policastro Advogados

Update and trends Corporate governance guidelines are growing stronger in Brazil and they are heading towards more investment in risk management policies and better definition of duties inside the companies. After almost two years of discussion, the main recent development in corporate governance was the amended regulations issued by BM&FBOVESPA and applicable to the companies listed in the New Market and CG Levels, which were approved and became effective on 10 May 2011 (notwithstanding specific transition periods for enforcement of some of the new provisions). Such amended regulations have introduced even greater transparency and improvement to corporate governance. Some of them are (i) the prohibition that the positions of chairman of the board of directors and of CEO be occupied by the same individual; (ii) the obligation of each listed company to present to BM&FBOVESPA a policy of trading of securities as well as a code of conduct establishing the values and principles of the company and that shall be preserved in the relationship with the administrators, employees, service providers and others; and (iii) the company’s by-laws may not

Disclosure and transparency 34 Corporate charter and by-laws Are the corporate charter and by-laws of companies publicly available? If so, where?

Yes, articles of incorporation, by-laws and other corporate acts are publicly available at the Commercial Registry of each state (Act No. 8,934/94). As for public companies, there is also mandatory registration with the stock exchanges and with the CVM. 35 Company information What information must companies publicly disclose? How often must disclosure be made?

With regard to the CVM regulations, some of the information that public companies are required to disclose includes: financial statements (including information on related parties’ relationships and transactions) and, if applicable, consolidated statements, accompanied by the annual report and opinion from an independent auditor, within at least three or four months (depending on the case) of the fiscal year-end or on the date of publication of the financial statements in the press; summaries of the decisions taken at the shareholders’ meeting on the same day it has taken place (except that in some cases the summaries are dismissed); minutes of the shareholders’ meeting within seven days after it has taken place; and quarterly financial information to be presented one month from the end of each fiscal quarter. The public corporations listed in the New Market and the

establish limitations on the number of votes of shareholders or group of shareholders in percentages that are lower than 5 per cent of the corporate equity, except in some specific cases. Along with the new regulation, BM&FBOVESPA also published additional rules concerning the application of pecuniary penalties as well as the basic provisions that must be part of the listed companies’ by-laws. The first establishes the application of penalties in case of failure to comply with obligations set forth in the new BM&FBOVESPA regulation and the second basically gives examples of language that must somehow be reflected in the listed companies’ by-laws. The CVM has also issued new regulations in the past year that helped develop corporate governance and improved the rules applicable for the presentation and preparation of consolidated financial statements according to the international accounting principles based on the rules of the International Accounting Standards Board (IASB).

CG Levels of BM&FBOVESPA are subject to rules of disclosure that are more stringent than those summarised herein. Furthermore, public corporations need to disclose material facts that may involve strategic information. Any fact relating to the corporation’s business that is likely to affect the decision of investors to buy or sell securities of the corporation is deemed to be a material fact. Material facts are broadly defined. Some of the facts considered by the CVM as material are: • resolutions approving stock option plans; • modifications to forward-looking statements published by the company; • performance, termination or frustration of any contract where there is an expectation in the market with regard thereto; • approval, modification, abandonment or any delay in implementation of projects; • the commencement, taking-over or interruption of the manufacturing or commercialisation of a product or service; • the discovery, change or development of technology and other resources; • execution of, or changes to, the shareholders’ agreement; • spin-offs, mergers or amalgamation of the company or affiliated companies; • changes in accounting policies; • renegotiation of debt; and • filing of suits that might adversely affect the financial situation of the company. Finally, the Code on Corporate Governance issued by the IBGC, based on the principle of transparency, recommends that the corporation formalise a policy of information disclosure. This policy

Lira Renardini Padovan Caroline Rodrigues Ogata

lpadovan@araujopolicastro.com.br cogata@araujopolicastro.com.br

Av Brigadeiro Faria Lima, 2739, 2nd floor 04538-905 São Paulo Brazil

Tel: +55 11 3049 5700 Fax: +55 11 3078 6120 www.araujopolicastro.com.br

Getting the Deal Through – Corporate Governance 2011

Araújo e Policastro Advogados should include the disclosure of information beyond that required by law or regulation. The premise is that the disclosure should be complete, objective, timely and equitable. Also, it is advisable that the corporation make it available to the market in its annual report, including financial statements and environmental reports, preferably audited. Hot topics 36 Say-on-pay Do shareholders have an advisory or other vote regarding executive remuneration?

The shareholders’ meeting is competent to deliberate on executive remuneration. The CL establishes the parameters for the fixing of such remuneration, taking into consideration the executive’s responsibilities, the time dedicated to their functions, their qualification and professional good standing and the market value of their services.

www.gettingthedealthrough.com

Brazil 37 Proxy solicitation Do shareholders have the ability to nominate directors without incurring the expense of proxy solicitation?

The shareholders do not need to incur the expense of proxy solicitation in case of a valid shareholders’ agreement. A valid shareholders’ agreement can be an effective vehicle to make its provisions binding against members of the board. As a general rule, the CL establishes that either the absence or the abstention from voting at board meetings of any members of the board appointed under the terms of the shareholders’ agreement entitles the other members of the board appointed in the same way to vote, consistent with the shareholders’ agreement, in place of the board member who has not voted owing to absence or abstention. In addition, votes at board meetings that violate a shareholders’ agreement shall not be counted.

速

Annual volumes published on: Air Transport Anti-Corruption Regulation Arbitration Banking Regulation Cartel Regulation Climate Regulation Construction Copyright Corporate Governance Dispute Resolution Dominance e-Commerce Electricity Regulation Enforcement of Foreign Judgments Environment Foreign Direct Investment Franchise Gas Regulation Insurance & Reinsurance Intellectual Property & Antitrust Labour & Employment Licensing

Life Sciences Merger Control Mergers & Acquisitions Mining Oil Regulation Patents Pharmaceutical Antitrust Private Antitrust Litigation Private Equity Product Liability Product Recall Project Finance Public Procurement Real Estate Restructuring & Insolvency Right of Publicity Securities Finance Shipping Tax on Inbound Investment Telecoms and Media Trademarks Vertical Agreements

For more information or to purchase books, please visit: www.GettingTheDealThrough.com

The Official Research Partner of the International Bar Association

Strategic research partners of the ABA International section Corporate Governance 2011

ISSN 1476-8127