Change in the Corporate Law proposes to punish company administrators in case of accounting fraud – 06/02/2023 – Market

A change in the Corporate Law proposed by the government of Luiz Inácio Lula da Silva (PT) provides for the punishment of company administrators who infringe the rules of operation of the capital market, which includes cases of accounting fraud.

Investors harmed by irregularities may propose a specific lawsuit to collect compensation, and administrators will be civilly liable for damages, provided that guilt or intent is proven (intention to act).

The project seeks to provide greater legal certainty to investors and remove the risk of new crises of confidence in the Brazilian capital market, after the negative impact caused by emblematic cases of accounting fraud involving Americanas, CVC and IRB.

After the revelation of the inconsistencies in the Americanas balance sheet, large Brazilian retailers saw their sources of credit dry up amid widespread distrust that other companies in the sector might have problems with their financial statements.

The government’s objective is to act preventively, ensuring punishment and compensation mechanisms in case new episodes of omission of information or fraud occur in the future.

The bill with the changes was forwarded this Friday (2) to the National Congress. The text will be analyzed first by the Chamber of Deputies and then by the Federal Senate.

If approved, the new rules will apply to facts that occurred after the passage of the text. This means that the recent cases, although they have contributed to motivate the government’s internal discussions, will not have their investigations affected by the changes.

The proposal also increases the powers of the CVM (Comissão de Valores Imobiliários), the body responsible for overseeing the capital market. The text authorizes the municipality to ask the Judiciary to adopt search and seizure measures to assist in its investigations.

Today, the market regulator does not have this prerogative, already granted to Cade (Administrative Council for Economic Defense).

The strengthening of the CVM also involves the opening of a new public contest to fill vacancies in the autarchy in the near future. This specific point, however, is not within the scope of the bill sent to the Legislature.

The set of measures stems from the Ministry of Finance’s diagnosis that the laws governing the capital market are good, but there is a challenge in ensuring that they are applied in practice. The assessment is that it is necessary to modernize the instruments and expand the inspection capacity to improve the functioning of the market.

Even if the CVM managed to detect all the problems, its main instrument is the imposition of fines. The autarchy does not guarantee compensation for any losses incurred by investors, especially minority shareholders — a task that falls to the courts.

Judicial mechanisms, however, are considered deficient and rarely result in convictions.

The bill wants to open up new possibilities for shareholders of publicly-held companies to seek accountability from managers for damages caused. The text also intends to facilitate the filing of civil liability actions against the administrator for damages caused to his assets.

The law today says that this type of action is incumbent upon the company, upon prior deliberation of the general meeting of shareholders. Alternatively, shareholders representing at least 5% of the company’s share capital may also take this initiative.

The bill prepared by the Ministry of Finance reduces this obstacle, expanding the scope of shareholders who can join the action. One of the provisions reduces the requirement to shareholders representing at least 2.5% of the share capital, or whose value is equal to or greater than R$50 million.

The government widened the gateway because 2.5% of the share capital of a very large company could be a difficult requirement to meet. In the case of Petrobras, for example, it would be R$9.46 billion.

The text proposed by the Lula government also provides for mechanisms to provide greater transparency to the arbitration processes used to resolve corporate disputes —a practice widely used by companies that have joined the so-called Novo Market, a segment with greater governance on the Stock Exchange.

Today, arbitration processes are confidential. The project institutes, as a rule, the publicity of these processes, leaving the CVM to decide on the need for secrecy in any case.

The Ministry of Finance states, in a note, that the purpose of the project is “to improve the protection of minority investors in the capital market against damages caused by illicit acts by controlling shareholders and managers, increasing the legal security of investments”.

“The intention is to ensure the safe development of the capital market, aligning Brazil with the best international practices”, says the folder.

The body says it hopes that the measure will contribute to improving the corporate governance of companies, “with the consequent increase in investor confidence in the capital market and a greater stimulus to the granting of credit outside the banking system, diversifying the sources of financing for companies” .