CVM Orienting Opinion No. 35 of September 1, 2008

CVM ORIENTING OPINION NO. 35, OF SEPTEMBER 1, 2008.
Fiduciary duties of administrators in merger, incorporation, and share swap operations involving the controlling company and its controlled companies or companies under common control.

1. Object of this Orienting Opinion

Merger, incorporation, and share swap operations involving a controlling company and its controlled companies or companies under common control require special attention. In these operations, as highlighted in the Statement of Reasons of Law No. 6,404, of December 15, 1976, there are no "two distinct shareholder majorities, which deliberate separately on the operation, defending the interests of each company." Consequently, there is considerable risk that the share exchange ratio in the operation is not commutative.

In this context, the administrators of the controlled company, or of both companies under common control, have a relevant function to perform. Under the system of Law No. 6,404, of 1976, it is up to them to negotiate the merger or incorporation protocol to be submitted for approval by the general meeting. In negotiating the protocol, administrators must fulfill the fiduciary duties attributed to them by law, defending the interests of the company they administer and its shareholders, ensuring the establishment of an equitable exchange ratio.

This opinion seeks to give concreteness to these duties. Through it, the CVM intends to recommend to administrators of publicly-held companies that they observe certain procedures during the negotiation of merger, incorporation, and share swap operations involving a controlling company and its controlled companies or companies under common control. In the CVM's view, these procedures tend to facilitate compliance with the provisions of corporate legislation regarding this matter.

2. Incidence of Fiduciary Duties

It is settled in the CVM that Art. 264 of Law No. 6,404, of 1976, created a special regime for merger, incorporation, and share swap operations involving the controlling company and its controlled companies or companies under common control, making it clear that the controller can, as a rule, exercise their voting rights in these operations. It is also settled in this regulatory agency that the share exchange ratio can be freely negotiated by administrators, according to the criteria they deem most appropriate.

However, it is also settled in this regulatory agency that the special regime provided for in Art. 264 does not exclude the application of Arts. 153, 154, 155, and 245 of Law No. 6,404, of 1976, as demonstrated by various precedents. Therefore, when negotiating a merger, incorporation, or share swap operation, administrators must act with diligence and loyalty to the company they administer, ensuring that the exchange ratio and other conditions of the business observe strictly commutative conditions.

CVM ORIENTING OPINION NO. 35, OF SEPTEMBER 1, 2008.
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3. Concretization of Fiduciary Duties

Law No. 6,404, of 1976, established the fiduciary duties of administrators in an abstract manner, setting general standards of conduct that need to be specified in light of concrete situations. Through this opinion, the CVM intends to give concreteness to these duties in a specific context, guiding administrators of publicly-held companies regarding procedures to be followed in merger, incorporation, and share swap operations involving a controlling company and its controlled companies or companies under common control.

Art. 154 of Law No. 6,404, of 1976, provides that the administrator must exercise their functions "to achieve the purposes and in the interest of the company," being prohibited from failing in this duty "to defend the interests of those who elected them." Similarly, Art. 155 determines that the administrator must "loyalty to the company" and not to third parties. Therefore, the administrators of controlled companies must negotiate merger, incorporation, and share swap operations for the benefit of all their shareholders and not just the controller.

Art. 153 of the law disciplines the manner in which administrators must seek this purpose: with "the care and diligence that every active and honest man usually employs in the administration of their own business." Consequently, the administrators of controlled companies must negotiate merger, incorporation, and share swap operations with the same prudence, caution, and, above all, effort that they would use to negotiate a similar operation involving a company of which they were the sole owners.

Finally, Art. 245 of Law No. 6,404, of 1976 determines that the administrator must ensure that operations involving affiliated companies, controlling or controlled companies, "observe strictly commutative conditions." This means, in the context of merger, incorporation, and share swap operations, that administrators must negotiate an equitable share exchange ratio for the shareholders of both companies, reflecting the value of each and sharing between them the potential gains obtained from the operation.

The CVM understands that, to fulfill their duties and achieve the results expected by Law No. 6,404, of 1976, administrators of publicly-held companies must establish procedures and take all necessary measures so that the exchange ratio and other conditions of the operation are negotiated independently. An independent negotiation process tends to facilitate the commutativity of the operation and demonstrate compliance with the fiduciary duties provided by law.

In this sense, the CVM understands that the administrators of controlled publicly-held companies or, in the case of companies under common control, of both companies, must adopt the following procedures in the operations referred to in Art. 264 of Law No. 6,404, of 1976:

i) the exchange ratio and other terms and conditions of the operation must be the subject of effective negotiations between the parties to the operation; ii) the start of negotiations must be disclosed to the market immediately, as a relevant fact, unless the social interest requires that the operation be kept confidential; iii) administrators must seek to negotiate the best exchange ratio and the best possible terms and conditions for the shareholders of the company; iv) administrators must obtain all necessary information to perform their function; v) administrators must have sufficient time to perform their function; vi) deliberations and negotiations must be properly documented, for subsequent verification; vii) administrators must consider the need or convenience of hiring legal and financial advisors; viii) administrators must ensure that hired advisors are independent in relation to the controller and adequately remunerated by the company; ix) the work of hired advisors must be properly supervised; x) any appraisals produced by advisors must be properly substantiated and their respective criteria specified; xi) administrators must consider the possibility of adopting alternative forms to conclude the operation, such as acquisition offers or share swaps; xii) administrators must reject the operation if the proposed exchange ratio and other terms and conditions are unsatisfactory; xiii) the final decision of the administrators on the matter, after analyzing it with loyalty to the company and with the diligence required by law, must be properly substantiated and documented; and xiv) all documents that supported the administrators' decision must be made available to shareholders, in the form of Art. 3 of CVM Instruction No. 319, of December 3, 1999.

Furthermore, following international experience regarding the interpretation of administrators' fiduciary duties, the CVM recommends that:

i) an independent special committee be constituted to negotiate the operation and submit its recommendations to the board of directors, observing the guidelines contained in the previous paragraph; or ii) the operation be conditioned on the approval of the majority of non-controlling shareholders, including holders of shares without voting rights or with restricted voting rights.

In forming the aforementioned independent special committee, the CVM recommends adopting one of the following alternatives:

i) a committee composed exclusively of company administrators, with the majority being independent;

CVM ORIENTING OPINION NO. 35, OF SEPTEMBER 1, 2008.
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ii) a committee composed of non-administrators of the company, all independent and with notable technical capacity, provided that the committee is provided for in the bylaws, for the purposes of Art. 160 of Law No. 6,404, of 1976; or iii) a committee composed of: (a) one administrator chosen by the majority of the board of directors; (b) one councilor elected by non-controlling shareholders; and (c) a third party, administrator or not, chosen jointly by the other two members.

The independence of the members of the special committee cannot be determined in advance; it must be examined in each case. In any event, the CVM will presume the independence, unless demonstrated otherwise, of persons who meet the definition of "independent councilor" provided for in the Regulations of the Novo Mercado of the São Paulo Stock Exchange.

4. Application and Effects of this Opinion

The CVM understands that the procedures described above are adequate forms of fulfilling the fiduciary duties of administrators provided for in Arts. 153, 154, 155, and 245 of Law No. 6,404, of 1976.

However, the procedures described in this opinion are not exclusive nor exhaustive. In the exercise of its supervisory and punitive competence, the CVM may admit the use of other ways of fulfilling legal duties.

In the application of this opinion, the CVM will observe, when applicable, Art. 2, sole paragraph, XIII of Law No. 9,784, of January 29, 1999, which prohibits the retroactive incidence of new interpretation.

Approved by the Collegiate Body in a meeting on August 26, 2008.
Original signed by
MARIA HELENA DOS SANTOS FERNANDES DE SANTANA
President