i Sources of law
The pillars of securities legislation in Brazil are Law No. 6,385, which governs the securities market, and Law No. 6,404, which governs corporations. Both were enacted in 1976 and, jointly with Law 4,595/1964, which governs the financial sector, they outline the legal framework of the Brazilian financial system.
The Brazilian securities market further relies on a solid body of regulation issued by the Brazilian Securities Commission (CVM), whose regulatory powers cover the matters dealt with under Law No. 6,385/1976 and Law No. 6,404/1976.
Moreover, rules enacted by specific self-regulatory authorities – such as securities exchanges and organised over-the-counter (OTC) markets managing entities, pursuant to CVM Rule No. 461/20072 – also serve as official guidance.3 In this regard, special mention must be made of the general listing rules and rules governing specific listing segments established by BM&FBovespa stock exchange, to which major Brazilian corporations have voluntarily adhered and which impose higher corporate governance standards and stricter disclosure requirements.4
ii Regulatory authorities
Under Brazilian legislation, securities offences may give rise to civil, criminal and administrative liability. Thus, offenders may be prosecuted in all three independent spheres, before different regulatory authorities, and face different sanctions in relation to the same offence.
Enforcement of securities-based claims brought by private party plaintiffs is subject to the jurisdiction of the Brazilian courts. However, several such cases are referred to and resolved by final and binding arbitration, especially since Law No. 6,404/1976 expressly allows by-laws to mandate arbitration of disputes between companies and their shareholders, or between controlling and minority shareholders. The consolidation of arbitration as the preferred dispute resolution mechanism for civil disputes based on securities claims is also attributed to the mandatory statutory arbitration provisions included in the listing rules of certain BM&FBovespa special listing segments, which oblige companies listed in those segments, their shareholders, managers and BM&FBovespa itself to refer disputes to arbitration before the Market Arbitration Chamber.5
As to public enforcement, the CVM is invested with powers to discipline, oversee and sanction securities and capital market agents, being thus responsible for public enforcement of securities actions at the administrative level. The CVM is managed by a collegiate board composed of a chairperson and four commissioners, who are in charge of judging the administrative proceedings initiated by CVM’s technical staff divisions for the prosecution of violations of the laws and rules governing the Brazilian securities market.
The CVM has entered into collaboration and information-exchange agreements with foreign regulators (including bilateral and multilateral agreements within the framework of the Multilateral Memorandum of Understanding concerning Consultation and Cooperation and the Exchange of Information of the International Organization of Securities Commissions), the Brazilian Central Bank, the Brazilian Public Prosecutor’s Office and BM&FBovespa stock exchange, among others, to improve supervision and prosecution of related claims.
Moreover, in judicial securities enforcement actions, CVM may join the Public Prosecutor’s Office as co-plaintiff or as an assistant to the prosecution. It may also intervene as amicus curiae to submit its opinion or clarifications on the subject matter, which has proved extremely valuable in cases brought before less experienced or specialised courts with regard to securities legislation. The CVM may additionally file appeals if the parties fail to do so, pursuant to Article 31 of Law No. 6,385/1976.
Other administrative authorities and self-regulatory entities hold specific enforcement systems. For instance, BM&FBovespa stock exchange’s supervisory body – BSM – administers a mechanism for the compensation of damage caused to investors by intermediaries within the securities, commodities and futures markets.
In total, 1,267 cases were resolved by BSM between 2008 and 2016, of which 37 per cent were dismissed and 63 per cent were allowed and awarded investors total or partial compensation.6 However, compensation via this mechanism is subject to a considerably low cap (120,000 reais per investor and per incident) and decisions can be appealed under certain circumstances to the CVM.
With regard to criminal claims, prosecution is carried out by the Public Prosecutor’s Office before national courts.
iii Common securities claims
Securities litigation in Brazil is highly concentrated in public enforcement actions, particularly in the prosecution of securities claims by the CVM, even though they do not allow for shareholder financial recovery.7 Nonetheless, the establishment of a substantial body of precedents, combined with hefty penalties and other sanctions imposed by the CVM, provide a strong deterrent effect.
Insider trading, breaches of fiduciary and disclosure duties and market manipulation cases were among the most frequent claims brought and judged by the CVM between 2010 and 2015.8 Other common claims brought by the CVM include fraudulent or misleading statements or omissions, audit failures, conflicts of interest, abuses of power by controlling shareholders and abusive voting practices. Private enforcement of securities claims, on the other hand, is not as active or as effective in Brazil for a number of reasons, in particular the lack of efficient enforcement mechanisms and reduced financial recovery for investors.
Nevertheless, in recent years there has been an increase in both the number and complexity of securities actions brought before Brazilian courts (and arbitration panels), with leading decisions rendered in cases concerning claims of insider trading, market manipulation and breach of fiduciary duties.
In Brazil, prohibitions against insider trading are set forth under Article 155, Paragraph 4, of Law No. 6,404/1976 and Article 13 of CVM Rule No. 358/2002. It also constitutes a criminal offence under Article 27-D of Law No. 6,385/1976. In the criminal sphere, the prosecution must prove not only that the agent had privileged access to material non-public information (and that the agent was therefore under a duty not to disclose that information), but also that the information was used in the trading of securities, in such a manner capable of generating undue advantage. A similar burden of proof applies under the administrative provision.
Likewise, market manipulation constitutes both an administrative offence under CVM Rule No. 8/1979 and a criminal offence under Article 27-C of Law No. 6,385/1976. The latter also imposes an elevated burden of proof, since, to prevail, the prosecution must demonstrate not only the use of simulated transactions or other fraudulent manoeuvres, but also the agent’s specific intent of (1) artificially altering the regular functioning of the securities market and (2) obtaining undue advantage or profit, or causing damage to third parties. There has been substantial debate on how to construe these elements and criticism as to the degree of discretion left to interpreters by the criminal provision.
The CVM is also empowered with the prosecution of cases involving the performance of specific regulated activities in the securities market without the necessary registration or authorisation – such as, for instance, investment management, which is subject to prior registration with the CVM. This also constitutes a criminal offence under Article 27-E of Law No. 6,385/1976.
As regards such securities claims, Article 11 of Law No. 6,385/1976 authorises the CVM to punish violations of all those laws and rules for which it supervises compliance, including Law No. 6,385/1976. In other words, the CVM may also sanction violations under the above-described criminal offences.
Secondary liability claims do not commonly apply to financial and legal advisers under Brazilian legislation, unless circumstances prove for wilful misconduct or the pursuit of joint benefits arising from the misconduct by their clients. However, CVM may bring public enforcement actions – in most cases against auditors – for negligence or omission of duty. In this regard, it is worth noting that Law No. 6,385/1976 specifically provides for auditors’ civil liability for damages in respect of third parties, and administrative liability before the Brazilian Central Bank in relation to the auditing of financial institutions and other entities accredited by the latter.
II PRIVATE ENFORCEMENT
i Forms of action
Private enforcement actions may be classified according to the authors of the damage, to the damages or remedies sought and to the beneficiaries of the damages.
In Brazil, concentrated ownership structures have historically been the norm, thus the existence of a controlling shareholder – that is, of a shareholder or group of shareholders bound by a voting agreement that holds the majority of voting shares and thus the authority to determine the company’s business – is frequent. Therefore, it is essential to assess the differences between conflicts (and claims that result therefrom) between majority and minority shareholders from claims between shareholders and the management since the corresponding reliefs sought and damages vary accordingly.
In addition to direct civil-based claims – that may be filed by minority shareholders against the controlling shareholders – Brazilian legislation provides for a specific derivative9 damages lawsuit against controlling shareholders.10 Indeed, pursuant to Article 246 of Law No. 6,404/1976, controlling shareholders may be held liable for damages arising from abuses of the power of control.11 Brazilian legislation provides, however, that, in cases where the shareholder plaintiffs12 own less than 5 per cent of the company’s total share capital, they must secure, prior to filing, the deposit of litigation expenses and attorneys’ fees due in case of loss of suit. This requirement was purportedly devised to avoid strike suits by minority shareholders; however, it has been increasingly challenged by Brazilian scholars.
On the other hand, damages suits against managers are provided for under Article 159 of Law No. 6,404/1976, pursuant to which managers may be held personally liable for damages resulting from wrongful or unlawful acts and breaches of applicable legal or statutory rules. However, it also provides that managers’ liability may be set aside whenever they are found to have acted in good faith and in the company’s best interests. Thus, defences in lawsuits brought against managers are commonly grounded on this exculpatory provision, including with regards to the application of the business judgement rule doctrine.13
Lawsuits against managers may be classified as ut universi, ut singuli (derivative) or regular civil liability suits.
Ut universi suits refer to damages claims brought by the company against its managers, subject to shareholders’ approval at a general meeting, pursuant to Article 159 of Law No. 6,404/1976.14
The approval of the filing of an ut universi lawsuit at a shareholders’ meeting automatically precludes the accused managers from performing their functions and forces the election of substitutes.
If the company fails to file the ut universi suit within three months of the relevant shareholders’ meeting, any number of shareholders may nonetheless file an ut singuli suit against the managers, pursuant to Paragraph 3 of Article 159.
Furthermore, whenever the filing of an ut universi suit is not approved at a shareholders’ meeting, shareholders representing no less than 5 per cent of the company’s total share capital may file an ut singuli derivative suit against the company’s managers, pursuant to Paragraph 4 of Article 159, in their own names on behalf of the company.
In both ut universi and ut singuli lawsuits, the recovered damages revert directly in favour of the company, thus they do not allow for financial recovery by shareholders.15 Moreover, shareholders and other aggrieved parties may bring civil liability claims against managers, pursuant to Paragraph 7 of Article 159. It is commonly understood that civil liability claims of this sort may also be filed against controlling shareholders, which similarly to managers, are liable before other shareholders, and against financial intermediaries.
Civil liability claims allow shareholders to seek the recovery of direct damages (i.e., for damage suffered directly by the plaintiffs). They are not intended for the recovery of indirect damages (i.e., damage suffered by the company) and therefore the use of civil liability claims is restricted to circumstances in which shareholders are directly affected by acts performed by managers or controlling shareholders, such as when shareholders are unjustly prevented from exercising specific rights or voting at a shareholders’ meeting.16 Thus, indirect damages may only be claimed by shareholders through derivative suits.17 Furthermore, debate exists on whether shareholders are entitled to file civil liability claims against companies for the compensation of direct damage suffered as a result of acts performed by the company (i.e., by the company’s managers acting on its behalf), particularly as a result of breaches of disclosure duties.
Finally, Brazilian legislation allows for the filing of public civil lawsuits, which are class action-like proceedings governed by the Public Civil Suits Act (Law No. 7,347/1985) and, more specifically, by Law No. 7,913/1989, for the avoidance or recovery of damage caused to investors as a result of fraudulent transactions, non-equitable practices, market manipulation, insider trading or incomplete, inaccurate or misleading disclosure of information, among others, and do not preclude the filing of direct civil liability suits.
Pursuant to Law No. 7,913/1989, such public civil lawsuits may be brought by public prosecutors – ex officio or at the CVM’s request – on behalf of a class of aggrieved investors; nonetheless, the CVM may also join as co-plaintiff.18 However, based on a systematic interpretation of Law No. 7,913/1989 jointly with Law No. 7,347/1985, scholars maintain that public civil lawsuits may also be brought by securities investor-protection associations. Precedents, although they are few, have confirmed the possibility of public civil lawsuits being filed by such private-party plaintiffs.19 This peculiarity grants such lawsuits a hybrid nature as both a public and private enforcement mechanism.
This instrument was instituted in light of the common perception that securities offences affect not only directly aggrieved investors, but also investors’ confidence in the securities market as a whole. Thus, Brazilian legislation allows public prosecutors and market associations to serve as representatives of a given class of investors that are individually entitled to damages claims. The damages recovered revert in favour of the aggrieved investors and must be allocated in proportion to the individual damage suffered.
Civil procedure under the recently revoked Code of Civil Procedure (Law No. 5,689/1973) could prove extremely complex and burdensome, especially since it allowed for long and intricate wars of appeals before thoroughly overloaded courts, particularly in cases concerning complex subject matters such as securities.
The reform of these deficiencies motivated legislative efforts, which resulted in the enactment of the much anticipated new Brazilian Code of Civil Procedure (Law No. 13,105/2015), which came into effect on 18 March 2016, revoking Law No. 5,689/1973. The practical impact of this legislative reform has yet to be seen.
Brazilian legislation does not contemplate discovery proceedings. Thus, especially prior to the enactment of Law No. 13,105/2015, plaintiffs’ (often limited) information-gathering ability made it hard for them to meet their burden of proof.20
However, the new Code of Civil Procedure brought an important innovation in this regard: Article 373, Paragraph 1 allows for the inversion of the burden of proof in cases in which parties demonstrate the impossibility or excessive difficulty of meeting their burden of proof, or the greater ease of obtaining proof of contrary facts.
Moreover, the Brazilian Federal Constitution provides for the non-confidential (public) nature of legal proceedings. However, a relevant percentage of securities claims are commonly resolved under confidential arbitration. It is well established under decisions rendered by the CVM21 that the confidentiality of arbitral proceedings concerning corporate and securities disputes does not violate investors’ right to information, since it does not exempt the parties to such proceedings of applicable legal and regulatory disclosure duties.22
Public civil lawsuits tend by their nature to result in generic court awards confirming (or dismissing) investors’ right to compensation. Law No. 7,913/1989 determines that the recovered damages shall be directly allocated to shareholders proportionally to the damage suffered individually; however, it fails to properly set out how such individual damages shall be calculated. Therefore, liquidation and enforcement proceedings can prove complex and time-consuming.
Settlements are allowed in civil liability lawsuits. These can be either judicial or extrajudicial, the latter being subject to judicial homologation if the relevant lawsuit has already been initiated.
However, in derivative suits, settlements are considered ineffective because of shareholder plaintiffs’ lack of authority to waive or dispose of the company’s right to compensation. In other words, it is understood that shareholders are not the direct creditors of the amounts due, therefore a settlement would not effectively discharge the defendant of its duty to compensate. Nonetheless, shareholder plaintiffs may choose to discontinue derivative suits, since they ultimately hold control over the procedure.
The same applies to public civil lawsuits concerning securities claims, since, because of the nature of such claims, public prosecutors may not waive or dispose of investors’ rights to compensation.
iv Damages and remedies
Damages may be awarded in private enforcement actions, including loss of profit and consequential damages, as well as moral damages. Specific performance and other equitable remedies may also be granted.
In public civil lawsuits, collective moral damages may be awarded, which intend to compensate the collectivity of investors for offences that ultimately compromise their trust in the securities market.23
In derivative suits, all damages recovered shall revert in favour of the company. However, as a policing incentive, Article 246 of Law No. 6,404/1976 awards successful plaintiffs a 5 per cent premium over the total value of the damages due from the convicted controlling shareholder.
With regards to the allocation of expenses in litigation, Brazil adopts the ‘loser pays’ rule, which increases risks and may discourage shareholders from initiating derivative suits. As a general rule, judges shall fix attorneys’ fees at between 10 and 20 per cent of the value of the damages due, taking into consideration the attorneys’ diligence, the time devoted to the case, the nature and importance of the claim and so forth. However, specific rules apply to derivative suits against managers, whereby all expenses incurred by the successful plaintiff must be reimbursed by the company, capped at the total value of the damages due.
Additionally, in derivative suits against controlling shareholders, the latter must bear the plaintiff’s attorneys’ fees at a fixed rate of 20 per cent of the total value of the recovered damages. This provision signals legislators’ incentive for attorneys’ role as gatekeepers in the development of a more active private enforcement system. Nevertheless, it has been met with resistance by Brazilian courts.24
III PUBLIC ENFORCEMENT
i Forms of action
The CVM is responsible for prosecuting and sanctioning illegal and non-equitable behaviour by managers and shareholders of publicly traded companies, intermediaries and all other market participants, regardless of their civil or criminal liability.
CVM Rule No. 8/1979, which defines and sets forth the sanctions applicable to the creation of artificial conditions regarding the offer, demand or price of specific securities, price manipulation, fraudulent transactions and the use of non-equitable practices, is among the main rules governing securities offences at the administrative level.
If the CVM’s investigations reveal the existence of a potential criminal offence subject to public judicial proceedings, it must notify the Public Prosecutor’s Office for the prosecution of the criminal case, pursuant to the procedure established under the Brazilian Criminal Procedure Code (Law No. 3,689/1941).
The main rules governing criminal securities offences are set out in (1) Law No. 6,385/1976, concerning crimes against the securities market, such as insider trading and market manipulation (see Section I.iii, supra); (2) Law No. 7,492/1986, concerning crimes against the national financial system (white-collar crime); and (3) Law No. 9,613/1998, concerning money laundering crimes.
The rules governing administrative proceedings before the CVM, particularly Law No. 9,784/1999 and CVM Resolution No. 538/2008, are grounded on principles of criminal procedure. As a general rule, administrative proceedings before the CVM are preceded by investigations, which if fruitful give rise to accusations. Accused parties must submit their defences within a given term, which might be accompanied by settlement proposals (see Section III.iii, infra). CVM case files are generally available to the public upon reasoned requests for access or copies, and judgments by the CVM’s Board of Commissioners ordinarily occur at public sessions. Additionally, the decisions rendered by the CVM’s Board of Commissioners are made available on the CVM’s website.
Pursuant to CVM Rule No. 545/2014, certain objective offences – for example, the failure to disclose certain required information – are subject to summary proceedings, initiated and decided by the responsible CVM technical staff division.
Decisions rendered by the CVM’s Board of Commissioners may be appealed – either by the convicted party or by CVM prosecutors – to the Appeals Council for the National Financial System (CRSFN), which is a collegiate body subordinated to the Brazilian Treasury Department pursuant to Article 11, Paragraph 3 of Law No. 6,385/1976. The CRSFN is the second and final instance for decisions concerning sanctions applied at the administrative level by CVM and other authorities of the financial, securities, exchange, rural and industrial credit markets. However, in practice, the number of CVM decisions overturned by the CRSFN is low.25
Furthermore, CVM decisions have in the past been challenged before local courts.26
The Public Prosecutor’s Office and the CVM both have settlement instruments that were inspired by consent decrees established under US law and constitute extrajudicial execution instruments, meaning they are subject to judicial enforcement.
Law No. 6,385/1976 authorises the CVM to suspend administrative proceedings, on the basis of its own criteria and in the benefit of the public interest, whether during preliminary investigations or in the course of the proceedings for the execution of a settlement agreement, whereby the accused (or investigated) party agrees to: (1) cease the performance of the acts or activities deemed illicit by the CVM; and (2) rectify (and compensate for) any irregularities found. The procedure applicable to the execution of such settlement agreements is governed by CVM Resolution No. 390/2001.
It is worth noting that such settlements do not represent an acknowledgement of guilt on behalf of the relevant signatory, nor a confirmation of the illicit nature of the relevant conduct.
Therefore, in the event that the obligations set forth in such settlement agreements are not complied with by the accused (or investigated) parties in due time, the CVM may resume the suspended administrative proceedings and ultimately impose the sanctions deemed appropriate.
Furthermore, Law No. 7,347/1985 also allows for the execution of settlement agreements in relation to public civil lawsuits, including those concerning securities claims.
On occasion, collaboration between the CVM and the Public Prosecutor’s Office may result in the execution of combined settlement instruments, aimed at simultaneously settling administrative and judicial proceedings concerning the same securities offence,27 and determining the compensation payable to aggrieved investors and to the Fund for the Defence of Collective Rights.28
iv Sentencing and liability
The sanctions that may be imposed by the CVM in securities enforcement actions, pursuant to Law No. 6,385/1976, range from warnings and monetary penalties to temporary suspensions, disqualifications and prohibitions on the performance of certain activities or transactions in the securities market for up to 20 years. Monetary penalties may not exceed the greater of (1) 500,000 reais, (2) 50 per cent of the value of the irregular securities issuance or transaction, or (3) three times the amount of the economic advantage obtained or the loss avoided as a result of the illicit act, except in the event of recidivism, in which case they may be three times greater.
Factors taken into consideration in the application of these sanctions include voluntary confessions and the disclosure of material information regarding the offence.
Criminal prosecution of securities offences may further result in custodial sentences.
In this regard, it is worth noting that Law No. 6,385/1976 sets forth the monetary penalties and terms of imprisonment applicable to market manipulation and insider trading offences, the application of which must take into consideration the damage caused or illicit advantages obtained by the offender, and which also may be up to three times greater in cases of recidivism, as well as to the irregular performance of certain activities in the securities market without the necessary prior registration or authorisation.
IV CROSS-BORDER ISSUES
Foreign issuers registered in Brazil are subject to Law No. 6,385/197631 and therefore to the CVM’s supervision concerning disclosure of information, including financial statements, and compliance with CVM Rules No. 358/2002 and 480/2009.
Several foreign issuers use Brazilian depositary receipts programmes or offers to access the Brazilian securities market, pursuant to CVM Rule No. 332/2000, in the former case the depositary institutions are liable before the CVM (and other regulatory authorities) for any irregularities.32
Additionally, as a general rule, to operate in Brazil, a foreign issuer must appoint a legal representative, with powers to receive summons, subpoenas and notifications concerning lawsuits brought against it in Brazil or based on Brazilian legislation or regulation, as well as to represent it before the CVM. The representative shall also hold the duties and liabilities commonly attributed to investor relations officers in Brazil.
V YEAR IN REVIEW
Over the past year, continuing trends in public enforcement were identified, such as a significant number of sanctions (especially monetary penalties) applied and administrative proceedings settled by the CVM. In 2016, approximately 25 administrative proceedings were settled (approximately 25 in 2015 and 26 in 2014) and, out of the total number of sanctions applied, approximately 5.9 per cent were warnings (14.9 per cent in 2015 and 9.6 per cent in 2014); 84.8 per cent were monetary penalties (72.38 per cent in 2015 and 84 per cent in 2014), which added up to more than 40 million reais (207 million reais in 201533 and 54 million reais in 2014); 0.55 per cent were disqualifications (5.97 percent in 2015 and 4.8 per cent in 2014) and 8.7 per cent were prohibitions (5.97 per cent in 2015 and 1.6 per cent in 2014).
Furthermore, the CVM continued to reject an increasing number of settlement proposals (eight in 2014, 24 in 2015 and 54 in 2016) – particularly concerning charges of insider trading and non-equitable and fraudulent market practices – under the argument that the judgment of such cases by its Board of Commissioners was important as a position statement to guide market practices on the matters dealt with therein.
The year saw an increase in delisting activity,34 which entailed greater activism by minority shareholders and strict supervision by the CVM regarding delisting tender offers, particularly in the matter of appraisal reports prepared to comply with the legal prerequisites applicable to going-private transactions in Brazilian.
High-profile securities litigation cases continued to hit the headlines and foment debate, particularly on the difficulties faced by shareholders in private enforcement actions.35 Additionally, as a result of the cooperation between Brazilian and foreign law enforcement officials, noteworthy global leniency agreements and other combined settlement instruments were concluded involving securities-related matters.36
Finally, in 2016 the first criminal conviction for market manipulation in Brazil was rendered in the Mundial case.37 The case results from cooperation between the CVM, the federal police and the Public Prosecutor’s Office. In 2012, the Public Prosecutor’s Office pressed charges for securities law violations by certain Mundial managers and independent investment agents, for irregularities in the trading of shares issued by Mundial, based on documents obtained by the federal police through the execution of search and seizure warrants. The CVM joined the court proceedings as an assistant to the prosecution. The decision, which has been appealed, convicted the controlling shareholder and CEO of Mundial and an independent investment agent for insider trading and market manipulation, respectively. In parallel administrative proceedings, the CVM’s Board of Commissioners also convicted the independent investment agent for market manipulation and acquitted the other defendants.38
VI OUTLOOK AND CONCLUSIONS
The coming year is likely to be an exciting one for securities litigation.
Pending securities litigation in high-profile cases both in Brazil and abroad (see Section V, supra) shall continue to generate debate on private enforcement and further cooperation between Brazilian and foreign law enforcement officials is expected in securities-related matters.
Unlike in the past couple of years, which were marked by significant delisting activity, stronger listing and offering activity can be anticipated in view of the slow-paced recovery of the Brazilian economic scenario, as well as an increase in the number and scale of corporate reorganisations and change-of-control transactions. This may result in greater activism by minority shareholders and other investors, and in related securities litigation.
Furthermore, strong enforcement activity is anticipated on behalf of the CVM, particularly with regard to recently issued rules concerning investment funds (CVM Rule No. 555/2014) and investment managers (CVM Rule No. 558/2015) and other issues currently on its radar, such as insider trading and trading during blackout periods, compliance in real estate and agribusiness receivables certificates issuances, BSM’s and CETIP’s performance as self-regulatory agents, irregularities in the offering of condo-hotel units, failures in the independent auditing of financial statements and the impact of fintech on the Brazilian securities market.39
Finally, further debate is expected concerning the bill on punitive administrative proceedings before the CVM and the Brazilian Central Bank. Although this bill was introduced in October 2015, it might have been overshadowed by other legislative initiatives and it did not make the progress expected in 2016. The bill aims to provide more vigorous tools for the enforcement of legislation and rules applicable to the securities and financial markets, including a substantial increase in the size of existing monetary penalties, the introduction of whistle-blowing settlement agreements, and the amendment of the current definitions of the crimes established under Law No. 6,385/1976, such as insider trading and market manipulation, among other controversial measures.
1 Marcelo Trindade is a partner and Fabiana Martins de Almeida is an associate at Trindade Sociedade de Advogados.
2 Pursuant to CVM Rule No. 461/2007, the managing entities of securities exchanges and organised OTC markets must establish rules concerning the organisation and functioning of such organised markets. In July 2016, the CVM’s Board of Commissioners approved a report that resulted from its staff’s efforts to revise the self-regulation model currently in place concerning organised securities markets managing entities. The report proposes the adoption of a unified self-regulation model to govern all such trading environments (as opposed to the current model, whereby each managing entity issues its own rules), the implementation of which would require the reform of CVM Rule No. 461/2007. Therefore, the CVM is expected to release the proposed amendments to CVM Rule No. 461/2007 and to seek public comments thereon in the near future. In the meantime, two managing entities that currently act as self-regulatory authorities in the Brazilian securities market – BM&FBovespa stock exchange and the Clearing House for the Custody and Financial Settlement of Securities (CETIP) – combined their activities in March 2017. The deal was approved by CADE, the Brazilian antitrust authority, and by the CVM, upon certain commitments mostly aimed at ensuring platform access to potential newcomers. This includes BM&FBovespa’s commitment to adhere to the recommendations contained in the CVM’s report concerning the adoption of a unified self-regulation model for organised securities markets managing entities and to implement the relevant measures within its market supervision branch, BM&FBovespa Market Supervision (BSM) (see Section I, ii, infra). The full extent of this reform is yet to be determined.
3 Additionally, other entities – such as market associations – also act as self-regulatory organisations in the Brazilian securities market. For example, the Brazilian Financial and Capital Markets Association (ANBIMA) has issued several voluntary codes of best practices governing a wide range of matters, such as investment funds, tender offers and securities custody. Compliance by market participants who adhere to these codes is supervised by ANBIMA’s Market Supervision branch and the CVM has entered into agreements with ANBIMA to delegate the preliminary analysis of certain documents within the registration process for tender offers and public offerings of specific securities (including debentures, promissory notes, depositary receipts, subscription warrants and real estate receivables certificates, among other securities) to the latter.
4 In 2016, BM&FBovespa initiated a public hearing on the reform of the listing rules for the Novo Mercado and Level 2 segments. Amendments are being proposed to rules governing liquidity – such as the minimum free float percentage, currently set at 25 per cent – and delisting requirements, among others. If approved, the revised rules are expected to be released in the second semester of 2017.
5 Law No. 6,404/1976 was reformed by Law No. 13,129/2015 (the Arbitration Reform Act) to provide that shareholder resolutions approving the amendment of by-laws for the inclusion of mandatory arbitration provisions (1) bind all of a company’s shareholders (including dissenting shareholders), and (2) grant dissenting shareholders the right of withdrawal, except in particular circumstances (for instance, whenever the amendment is a condition for the company’s migration to special listing segments with 25 per cent minimum free-float requirements, such as those instituted by BM&FBovespa).
6 Available at: www.bsm-autorregulacao.com.br/ressarcimento-de-prejuizos/como-funciona (accessed on 2 April 2017).
7 However, Law No. 6,385/1976 allows the CVM to execute settlement agreements conditioned upon the compensation of damage caused in the securities market (see Section III.iii infra).
8 Excluding decisions rendered in summary proceedings. Available at: www.cvm.gov.br/export/sites/cvm/publicacao/relatorio_anual/anexos/Relatorio_Anual_2015.pdf (accessed on 2 April 2017).
9 The term ‘derivative suit’ is used herein to designate lawsuits brought by shareholders on behalf of the company.
10 Article 246 makes reference solely to ‘controlling companies’. However, the majority of legal scholars and case law sustain that it must be interpreted so as to include natural persons and other legal entities.
11 Note that Brazilian legislation dedicates special attention to controlling shareholders, imposing on them special duties and obligations. For reference see Articles 116 and 117 of Law No. 6,404/1976.
12 In the leading Petroquisa case (Special Appeal No. 745739-RJ) 28 December 2012, the Superior Court of Justice confirmed that preferred and common shareholders are equally entitled to file such a lawsuit.
13 Regarding the current understanding of Brazilian scholars and the application of the business judgement rule by Brazilian authorities, see the decisions rendered in CVM Case Nos. 2005/1443 and 08/2005.
14 In recent years, there have been at least two important ut universi lawsuits filed against managers of Brazilian listed companies before national courts: Aracruz Celulose (now Fibria Celulose SA) and Sadia (now BRF SA). Additionally, because of mandatory statutory provisions, certain ut universi claims are now being prosecuted in arbitration, such as in the recent Forjas Taurus case.
15 The limited number of precedents involving derivative lawsuits against managers as compared with the considerable number of complaints filed before the CVM on management misconduct indicates that this has not been the preferred litigation mechanism against managers of public companies thus far in Brazil.
16 As a general rule, the same applies to civil liability claims filed by aggrieved investors against other securities market participants.
17 The Superior Court of Justice confirmed that investors lack standing to claim indirect damages (such as a decrease in dividends attributed to fraudulent behaviour by managers and controlling shareholders) in civil liability suits in the Radio Clube case (Special Appeal No. 1.214.497/RJ).
18 For example, in the Laep case (Case No. 0005926-19.2013.4.03.6100), a public civil lawsuit was filed before the São Paulo Federal Court by the Public Prosecutor’s Office and the CVM as co-plaintiffs against the company’s managers accused of market manipulation. Nevertheless, the CVM’s authority to join the Public Prosecutor’s Office as co-plaintiff, and even to file public civil lawsuits on its own initiative, is disputed among scholars.
19 However, the law does not authorise individual investors or groups of investors to file such public civil lawsuits directly. This has raised criticism as to the lack of effective aggregate litigation mechanisms in Brazil.
20 Prior to the enactment of the new Code of Civil Procedure, the inversion of the burden of proof was a controversial measure typically granted in consumer law cases in view of the power disparity between the parties and exceptionally extended by courts (for example, to disputes involving retail fund investors, in spite of the controversy among scholars as to the applicability of consumer rights laws to securities market investors).
21 For reference, see CVM Case No. RJ2008/0713.
22 Pursuant to CVM regulation, these duties include the disclosure of relevant information concerning arbitral proceedings by means of notices to the market, annual reports and financial statements.
23 For example, the decision rendered by the Regional Federal Court of the Third Region in the Sadia case (Criminal Appeal No. 0005123-26.2009.4.03.6181/SP), concerning the insider trading conviction of its former managers, also determined the award of collective moral damages arising from the offence. This decision was appealed and substantially confirmed by the Brazilian Superior Court of Justice in February 2016.
24 In the judgment of the Telemar case (Special Appeal No. 1,220,272-RJ), Justice Luis Felipe Salomão incidentally declared that this percentage should not be calculated based on damages recovered in relation to shareholders other than the plaintiffs.
25 The CRSFN enacted new internal rules in February 2016 aimed at expediting proceedings. Important innovations include the elimination of automatic (de oficio) appeals, as a result of which acquittal decisions rendered by the CVM are no longer subject to mandatory re-examination.
26 For example, in the RioPrevidência case (Case No. RJ 0017585-47.2010.4.02.5101), the Courts of Rio de Janeiro annulled a 500 million reais penalty applied by the CVM to market participants for damage caused to the RioPrevidência pension fund. The CVM appealed and lost on the second instance, since the annulment of the penalty applied to the main accused party was maintained.
27 This solution was adopted in certain leading cases such as the Vailly case (CVM Case No. RJ2007/12231), which involved insider trading charges, and the Aracruz case (PAS 16/2008), which involved charges of irregular trading of derivatives.
28 The Fund for the Defence of Collective Rights was instituted by Law No. 7,347/1985 as a special fund for the compensation of collective damage, such as damage to the environment, consumers and the economy.
29 The limits of Brazilian civil jurisdiction are set forth under Article 21 of Law No. 13,105/2015 and include (1) defendants domiciled in Brazil, regardless of nationality; (2) obligations that shall be performed in Brazil; and (3) claims grounded on facts occurred or acts practised in Brazil.
30 Article 5 of Law No. 2,848/1940.
31 As a general rule, Law No. 6,404/1976 does not apply to foreign issuers. This understanding was confirmed in CVM Case No. RJ2012/11523.
32 In April 2017, the CVM enacted new rules governing Brazilian depositary receipts, which reformed CVM Rule No. 332, with the aim of facilitating and incentivising the use of these instruments. This initiative was propelled by market research that indicated reduced participation by foreign issuers in the Brazilian securities market (representing approximately 0.6 per cent of BM&FBovespa’s total trading volume, as opposed to 17 per cent in the Colombia stock exchange, 15.4 per cent in the Lima stock exchange, 9.5 per cent in the Mexico stock exchange, 8.5 per cent in NASDAQ and 16.19 per cent in London Stock Exchange, according to studies conducted by BM&FBovespa). Available at: www.cvm.gov.br/export/sites/cvm/audiencias_publicas/ap_sdm/anexos/2016/sdm0716editalcerto.pdf (accessed on 7 April 2016).
33 This increase derives notably from the 157 million reais penalty applied in connection with irregularities verified in a capital increase transaction in the Clarion case (CVM Case No. RJ2011/11073).
34 It is worth noting that 13 delisting tender offers were registered before the CVM in 2016, with a total volume of approximately 2,3 billion reais, and eight other requests for registration are still under analysis. In contrast, seven delisting tender offers were registered in 2015 and five in 2014. Available at:
http://sistemas.cvm.gov.br/?opa (accessed on 9 April 2017).
35 For example, in 2014, a corruption scheme involving Brazilian oil company Petrobras and its executives was revealed and sparked litigation in Brazil and abroad, including class action litigation brought on behalf of investors who traded Petrobras securities in the United States for alleged violations of the US federal securities laws by the defendants. Petrobras has since approved settlements with investors to end individual lawsuits abroad. Other major Brazilian corporations whose securities are traded overseas through depositary receipts programmes are also involved in similar class action litigation. This has ignited debate on the lack of financial recovery by Brazilian investors and may propel related securities litigation in Brazil.
36 For example, in 2016, Brazilian aircraft manufacturer Embraer and construction conglomerate Odebrecht jointly with petrochemical company Braskem entered into agreements with Brazilian and foreign law enforcement officials, including the US Department of Justice and Securities and Exchange Commission, to resolve corruption and bribery charges upon the payment of monetary penalties – such that, according to the Department of Justice, the latter was the ‘largest foreign bribery case in history’. Available at:
global-penalties-resolve (accessed on 9 April 2017).
37 Case No. 506709618.2012.4.04.7100/RS. Available at:
www.cvm.gov.br/noticias/arquivos/2016/20161111-2.html (accessed on 7 April 2017).
38 CVM Case No. RJ2012/11002. Available at: www.cvm.gov.br/noticias/arquivos/2016/20161208-2.html (accessed on 7 April 2016).
39 Available at: www.cvm.gov.br/menu/acesso_informacao/planos/sbr/bienio_2017_2018.html (accessed on 9 April 2017).