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