The Brazilian Securities and Exchange Commission (CVM), through Public Hearing SDM No. 07/19, proposes to regulate, pursuant to article 291 of the Brazilian Corporations Law, a scale to reduce the percentage of share capital provided for in paragraph 4 of article 159. The objective of the draft instruction, currently under review by the agency is to make it easier for minority shareholders to file civil liability suits against officers and directors. If approved, the draft may have some impacts, which are analyzed below.

According to the current wording of the head paragraph of article 159 of the Brazilian Corporations Law, the rule provides for the possibility of filing a civil liability suit against officers and directors, first against the company, upon prior resolution at a general meeting of shareholders. If, however, the general meeting decides not to move forward with the suit, it may be brought directly by shareholders representing at least 5% of the capital stock, the so-called "derivative suit."

The draft CVM instruction suggests changes in this percentage. The proposal is to divide public companies into five bands, according to the value of their capital stock. For each of the bands, a percentage of the shares required is established so that minority shareholders may directly file the civil liability suit. The higher the capital stock, the lower the minimum percentage required:

The possibility for a minority shareholder to file suit directly is a mechanism to protect against abuses by controlling shareholders. The objective is to prevent them from creating a bubble to protect dishonest acts performed by officers and directors appointed by them, to the detriment of the best interests of the company and its shareholders as a whole.

What is discussed is not the existence of the mechanism itself, but the percentage considered "ideal" to avoid abuses, by both controlling and minority shareholders.

This is not the first time that the CVM has exercised its prerogative under article 291. An example of this is CVM Instruction No. 165/91, in which the agency regulated the scale, reducing the percentage of capital required for a request for a multiple vote, and No. 324/00, which regulated the percentages for requests for setting up an audit committee at companies that do not have one.

The justification presented by CVM in the public hearing notice refers to an alleged low capacity of coercion of the measures established by the provisions to be regulated. The CVM also mentions in the document that while, on the one hand, the existence of minimum percentages prevents the filing of frivolous suits, on the other hand, high percentages may prevent relevant shareholders from taking measures to protect the interests of the companies themselves.

It cannot be denied that the CVM's intention to establish mechanisms to strengthen the healthy and positive performance of minority shareholders is a beneficial measure that should be applauded. The measure could be even more effective if combined with the intention demonstrated by the CVM at the same hearing to reduce the percentages required for full disclosure of the company's books (pursuant to article 105 of the Brazilian Corporations Law) in cases where acts violating the law or the by-laws are reported or there is a well-founded suspicion of serious misconduct committed by a body of the company. This is because the prerogative of inspection is directly related to the possibility of filing a lawsuit.

The standard suggested, however, will not necessarily foster activism on the part of minority shareholders, since they do not obtain direct financial benefits from the measure. In fact, according to paragraph 5 of article 159 of the Brazilian Corporations Law, positive results of actions for compensation are intended only for the company, and not for the shareholder who filed the action. This shareholder will have reimbursed only the expenses incurred, including interest and adjustment for inflation). That is, for that individual shareholder, who does not have a relevant interest in the Company, the intended change may be ineffective, since this shareholder will continue to not directly benefit from the filing of such measure.

On the other hand, it cannot be ignored that the intention to reduce the percentages for filing such lawsuits could lead to abuses by minority shareholders, since the rule did not establish mechanisms to avoid opportunistic conduct, such as the requirement of uninterrupted corporate holding for a minimum period. This measure, in our opinion, could discourage the filing of lawsuits by shareholders that are not in line with the company's long-term policies and strategies. It could also make the idea of buying shares in a company for the sole purpose of bringing suits for liability against certain members of management less attractive.

Thus, although we believe that the measure may be beneficial to encourage greater participation and representativeness of minority shareholders in the Brazilian capital market, it does not seem advisable to us to simply reduce the percentages without creating any additional requirement to prevent abuse by ill-intentioned minority shareholders.