CVM Orientation Opinion No. 38: Fiduciary Duties of Administrators Regarding Indemnity Agreements with Publicly Held Companies

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ORIENTATION OPINION CVM NO. 38, OF SEPTEMBER 25, 2018.
Fiduciary duties of administrators within the scope of indemnity agreements entered into between publicly held companies and their administrators.

1. Object of this Orientation Opinion
   This Orientation Opinion addresses indemnity agreements entered into between publicly held companies and their administrators 1, through which the former commit to guaranteeing the payment, reimbursement, or advance of resources to cover certain expenses related to arbitral, judicial, or administrative proceedings involving acts performed by their administrators in the exercise of their duties or powers.

Depending on their terms, indemnity agreements may have a substantial patrimonial impact on the company, in contrast to civil liability insurance contracts, commonly known as “D&O”. In the latter, the company commits to paying the premium, fixed in the insurance policy, in exchange for the indemnity offered by the insurer. In an indemnity agreement, as practice shows, the company assumes part of the individual financial risk of the administrator, relative to the investigation, accusation, or liability to which they are subject, subject to the terms and conditions established in the contract.

Furthermore, in the event that the fulfillment of the disbursements provided for in indemnity agreements depends on an assessment made by a body composed of administrators of the company itself or by persons under their influence, there are reasons to identify a risk of such persons acting in conflict of interest, whether in defining the terms of the contract or in decision-making regarding disbursements.

While recognizing the value of the indemnity agreement as an instrument for attracting and retaining qualified professionals, the CVM considers that administrators of publicly held companies have an important role to play regarding such instruments 2, in order to ensure that they are drafted and executed in compliance with the fiduciary duties that Law No. 6,404, of December 15, 1976, attributes to administrators of corporations, especially those reflected in its articles 153, 154, 155, and 156.

In order to ensure compliance with these duties, the CVM recommends the adoption of rules and procedures that mitigate the risks of conflict of interest inherent to this type of contracting and that confer the necessary balance between, on one hand, the company's interest in protecting its administrators against financial risks arising from the exercise of their functions, within the scope of administrative, arbitral, or judicial proceedings, and, on the other hand, the interest of society in protecting its assets and ensuring that its administrators act according to the standards of conduct expected and required by law.

This Orientation Opinion does not intend to exhaust all matters related to indemnity agreements, but only to guide administrators and the market in general regarding some important issues related to the process of drafting, approving, and executing such contracts.

2. Acts and expenses eligible for indemnification
   The CVM sees no legal obstacle to the provision, in an indemnity agreement, of the right to indemnification in favor of administrators for expenses suffered due to their position or function. Nevertheless, the granting of indemnification to administrators based on the indemnity agreement should not occur in all cases, such as those in which the legal standards of conduct to which they are subject have not been observed.

In this sense, it is understood that expenses resulting from acts performed by administrators are not eligible for indemnification, among others, those resulting from:
a) acts performed outside the exercise of their duties; b) acts performed with bad faith, intent (dolo), gross negligence, or fraud; or c) acts performed in the interest of themselves or third parties, to the detriment of the social interest of the company 3.

The CVM recommends that the exclusions be provided for in the indemnity agreement and, once the administrator requests a disbursement from the company, the assessment of their incidence in the specific case must occur prior to any decision on its granting. Acting in this manner, companies avoid creating incentives for administrators to base their conduct in disagreement with standards reflected in Law No. 6,404, of 1976.

The indemnity agreement may provide for the advance of expenses to its beneficiaries – for example, those related to the defense of administrators in ongoing proceedings. In such cases, it is expected that the body responsible for the analysis in question decides, when analyzing the request for advance, based on the factual and evidentiary set available at the time of deliberation on its granting.

It is highlighted that, on one hand, a preliminary decision not to advance funds to the administrator does not bind a new judgment to be made by the competent body after the end of the process, notably in case of acquittal. On the other hand, if the company deliberates on the advance of expenses before a final decision within the arbitral, judicial, or administrative proceedings, the administrator will be obligated to return the advanced values in cases where, after such decision, it is proven that the act performed by the administrator is not eligible for indemnification under the terms of this Orientation Opinion or the respective indemnity agreement.

Finally, it is important that, when establishing the terms and conditions of indemnity agreements, due reflection is made regarding the scope of coverage that will be offered to administrators, in order to avoid that a legitimate instrument for attracting and retaining executives takes on the appearance of shielding for conduct inconsistent with the degree of care expected of each member of the administration.

3. Decision on the granting of indemnification
   Given the risks of conflict of interest inherent to indemnity agreements, in order to fulfill their fiduciary duties, administrators must ensure that the company develops procedures capable of guaranteeing that decisions authorizing the expenditure of resources are taken independently and always in the best interest of the company.

For this reason, the company's administration must ensure that the contract includes clear and objective rules, specifying:
a) the body of the company responsible for evaluating whether the administrator's act falls under any of the exclusions referred to in item 2 of this Orientation Opinion; and b) the procedures that will be adopted to exclude the participation of administrators whose expenses may be indemnified in the evaluation process referred to in item ‘a’ above, in accordance with article 156 of Law No. 6,404, of 1976.

Decisions that authorize the expenditure of resources based on the indemnity agreement must consider the reasonableness of the values involved, as well as all necessary and available information at the time to evaluate the adequacy of granting indemnification. Administrators must ensure that the company has adopted appropriate procedures to guarantee the proper formalization of the decision-making process, including the reasons why the administrator's act was considered eligible for coverage.

It is incumbent upon administrators to evaluate, in the specific case, the existence of a conflict of interest and the need to adopt additional procedures to protect the independence of deliberations regarding indemnification, as well as to ensure that they are taken in the interest of the company.

In addition to other cases where the company deems it pertinent, the CVM understands that additional governance procedures that reinforce the independence of decisions, as well as their orientation in the interest of the company – such as referring the matter for deliberation at a general assembly – should be considered in situations where: (i) more than half of the administrators are direct beneficiaries of the decision on the expenditure of resources; (ii) there is a divergence of understanding regarding the classification of the administrator's act as eligible for indemnification; or (iii) the company's financial exposure proves to be significant, considering the values involved.

4. Terms and conditions of the contract
   The risks of conflict of interest and the impact that indemnity agreements may have on the company's assets impose on the company's administration the duty to ensure that the terms and conditions proposed in the indemnity agreement are adequately disclosed, so that shareholders can evaluate the possible patrimonial consequences for the company, and, as applicable, take the measures they deem appropriate.

In this regard, the CVM considers that the involvement of shareholders in the decision to enter into indemnity agreements – through, for example, the inclusion of a statutory provision authorizing the company to indemnify its administrators or the submission of the general terms and conditions of the contract draft to the general assembly – has the potential to mitigate the concerns mentioned in the previous paragraph.

Additionally, the CVM recommends that, at a minimum, the following information be disclosed by the company:
a) whether there is a statutory provision regarding indemnification and, if affirmative, its terms; b) whether the contract must provide for a limit value for the indemnity offered and, if affirmative, what that value is; c) the coverage period that may be covered by the contract; d) the administrators who may enter into an indemnity agreement with the company; e) the exclusion scenarios for the right to indemnification; f) the types of expenses that may be paid, advanced, or reimbursed based on the contract; and g) the procedures regarding decisions on the payment, reimbursement, or advance of expenses resulting from the indemnity commitment, indicating: (i) the body of the company responsible for decisions regarding its granting; and (ii) the rules and procedures that will be adopted to mitigate conflicts of interest, guarantee the independence of decisions, and ensure that they are taken in the interest of the company.

The CVM considers it desirable that the execution of an indemnity agreement be supported by a detailed opinion prepared by the Board of Directors and approved by the Board of Trustees, in which the grounds are described by which the bodies understand that the terms and conditions fixed in the contract mitigate the risks of conflict of interest inherent to this type of contracting and balance the interests of the company at stake.

After signing, it is also recommended that indemnity agreements, their amendments, and any other documents that also reflect the terms and conditions applicable to the indemnity regime – such as minutes – be submitted, within 7 (seven) business days from the date of their signing, to the electronic system available on the CVM's website on the world wide web.

While there is no specific provision in CVM regulation, companies must make available the documents and information mentioned in the previous paragraphs according to guidance to be issued by the Department of Corporate Relations (SEP), noting that the category “Indemnity Agreements” has already been created in Module IPE of the Empresas.NET System for the submission of said contracts.

5. Application and effects of this Orientation Opinion
   Formal compliance with the guidelines contained in this Orientation Opinion does not rule out the possibility of holding administrators liable if, in the supervision of specific cases, it is verified that their actions did not meet the purposes and regulatory objectives specified herein.

Finally, in the application of this Orientation Opinion, the CVM will observe, when applicable, article 2, sole paragraph, XIII of Law No. 9,784, of January 29, 1999, which prohibits the retroactive application of new interpretations, and Decree-Law No. 4,657, of September 4, 1942, as amended by Law No. 13,655, of April 25, 2018, which provides for legal certainty and efficiency in the creation and application of public law.

Approved by the Collegiate Body in a meeting on August 29, 2018.
Original signed by
MARCELO BARBOSA
President

--- Footnotes ---
1 This Orientation Opinion specifically addresses the relationship between publicly held companies and their administrators, regarding indemnity agreements, as well as members of statutory committees to whom the duties and responsibilities of administrators apply, in accordance with article 160 of Law No. 6,404/76. Nevertheless, we recognize the possibility of companies choosing to enter into these agreements with other office holders or functions in the company, a scenario in which we also understand that the recommendations contained herein apply, insofar as applicable. 2 It is possible to opt to include the terms and conditions usually contained in indemnity agreements in other instruments, such as, for example, the bylaws, internal regulations, or company policy on the subject. In this case, the guidelines contained in this Orientation Opinion also apply. 3 Here included are values related to indemnities resulting from liability actions provided for in article 159 of Law No. 6,404, of 1976, or to the reimbursement of damages referred to in article 11, § 5º, II of Law No. 6,385, of December 7, 1976.