The Return of São Sebastião

In the final quarter of the 16th century, Portugal faced a series of problems triggered by the supposed death of King Sebastião I in the Battle of Alcácer-Quibir.

Since the monarch’s body was never found, the prophecy that Dom Sebastião would return to the Portuguese kingdom to help his subjects, rescuing the prosperity of the past, had great popular support. “The Return of Dom Sebastião”, the motto that governed the nostalgic phenomenon, generated political, social and cultural repercussions during the decades that followed.

Now, at the beginning of this century, a Sebastianist movement reappears in the Brazilian business environment (needless to say, involuntarily and infinitely less dramatic).

At the end of 2021, Law No. 14,195 was enacted, which made important changes to the Brazilian Corporation Law, such as the obligation for certain transactions with related parties to be approved at a general shareholders’ meeting when they involve publicly-held companies.

Transactions with related parties, in which only the interest of the controlling shareholder of the companies involved prevails, are more prone to situations that constitute a conflict of interest and hence the noble objective of the change of conferring a qualified quorum for the approval of the matter.

However, the measure conflicts with the solution currently in force suggested by the Brazilian Securities and Exchange Commission (CVM) and brings back an old problem.

Historically, CVM caselaw has fluctuated on the possibility of the controlling shareholder voting on matters in which it has a conflicting interest. Sometimes the interpretation of formal conflict prevails (in which, beforehand, the controller cannot vote) and sometimes the understanding changes to that of material conflict (where the conflict of interests must be proved after the controller has cast its vote).

Observing these distinct precedents and in order to provide greater legal certainty to transactions, in 2008, CVM published Guidance Opinion No. 35 with two alternatives for approving a merger, merger of shares and amalgamation involving the parent company and its subsidiaries or companies under common control: (i) submit the matter for approval by the majority of non-controlling shareholders; or (ii) that a special independent committee be constituted to negotiate the transaction and submit its recommendations to the board of directors.

Since then, most transactions with related parties involving publicly-held companies were carried out with the adoption of an independent committee and, consequently, the number of cases in which the matter was approved at a shareholders’ meeting with CVM intervention decreased.

However, Law No. 14,195 extinguished the possibility of approval by the independent committee when transactions involve 50% of the value of the company’s total assets measures as per the last approved balance sheet.

With this, we return to the scenario of the discussion about the possibility of voting by the controlling shareholder and now, the CVM, by decision of third parties, resumes the role of “mediator” in the dispute between the controlling shareholder and minority shareholders in transactions with related parties.

It remains to be seen whether this return of the CVM to the throne of corporate guardian will live up to the expectations of those more nostalgic people (who, by definition, magnify the joys of the past, minimizing their regrets) or if old problems will come back to disturb the resistant Brazilian business environment.

By Mateus Lopes da Silva Leite

Partner at Candido Martins Advogados.