Mirror, Mirror on the wall, who’s best to vote of them all?

In the past weeks, a real estate investment fund, owner of one building in Sao Paulo, has come under the spotlight. The uproar was due to the well-known enemy of investors: the conflict of interest.

It all began with an unsolicited offer from another real estate investment fund to acquire the building. The problem was that the manager of the offeror was an indirect investor of the offeree.

The indirect investor of the offeror called the investors’ meeting of the offeree to vote the proposal. Under the fund’s regulation, the sale of assets is approved with the affirmative vote of investors representing 25% of the quotas of the fund, which means that the asset could have been sold to the unsolicited offeror by the decision taken by few investors.

To bring more color to the discussion, the purchase price apparently was below the market value of the asset.

The confusion was resolved a few days before the date scheduled for the meeting to take place, when another fund (“white knight”) made a higher offer for the building.

If there had not been another proposal on the table, this soap opera would have had a more dramatic outcome. The question is: can the offeror vote (indirectly) at the offeree’s meeting of investors?

Brazilian Corporate Law prohibits a shareholder from voting on matters that may benefit him or her, or in which he/she has a conflicting interest with that of the company. In the case of a real estate investment fund, CVM Instruction 472 expressly provides in article 24 that the quotaholder whose interest conflicts with that of the fund may not vote at general meetings.

However, the precedents of the Brazilian Securities Exchange Commission (CVM) point out that shareholders do not need to express their conflict at the time they vote but they are liable for any losses caused to the company. The underlying (and unanswered) question is “would CVM would have this same position for this case?”

By Thalita Igarashi, associate at Candido Martins Advogados

The best of the party is… not to pay Tax on Services (ISS)

The rental of spaces for events, such as weddings, has become an important revenue for many hotel chains in Brazil and abroad. The famous “destination weddings” are trendy. In Brazil, these celebrations are not only to the couple and their guests. Hotel’s owners have obtained favourable outcomes in courts regarding the non-taxation of ISS in the rental of their spaces for such events.

The understanding of superior courts is uncontested in the sense that the rental of movable property, since such is not classified as “to do” obligation, is not an activity subject to taxation by ISS. Some higher courts have applied the same reasoning to sustain the position that the rental of immovable property, such as the rental of spaces for events by the hotel sector, is also not subject to ISS.

Many hotels are unaware of the above higher court decisions and offer to taxation the total amount of their revenues. And depending on the preponderance of each activity performed by the hotels, improper taxation of its revenue from the rental of event spaces can be very costly.

There is still not a consensus from the higher courts regarding the incidence of ISS in such cases. Most of the decisions that are favourable to taxpayers come from the Rio Grande do Sul State Higher Court (TJ-RS). The São Paulo Higher Court (TJ-SP), however, maintains the understanding that the revenues from event space rentals by hotels are subject to taxation by ISS, especially when the preponderance of the activity performed is not differentiated.

Considering this scenario, this subject still needs to be further analysed by Brazilian courts. However, its already possible to say that the hotel sector has good chances to obtain success to not have their revenues taxed by ISS only because of the simple rental of its spaces for events.

By Júlia Malafaia Vituli Silva, associate at Candido Martins Advogados