Jayme Petra de Mello Neto
Lawyer at Marcos Martins Advogados
On September 25, 2018, the Brazilian Securities and Exchange Commission (“CVM”) published Guidance Opinion No. 38, which deals with indemnity agreements between publicly-held companies and their managers (“Opinion”).
The indemnity agreements referred to in the Opinion are those through which listed companies guarantee payment, reimbursement or indemnification for expenses related to arbitration, judicial or administrative proceedings involving acts performed by their managers in the exercise of their duties.
These instruments can have a substantial impact on the company’s assets, unlike civil liability insurance contracts, commonly known as “D&O”, in which the company is obliged to pay the premium, set out in the insurance policy, in exchange for the indemnity offered by the insurer.
Furthermore, in the event of these expenses, if the assessment of the payment is made by a body made up of the company’s own directors or people under their influence, there is a risk of decisions with conflicting interests.
Because of these issues, the CVM recommends, through the Opinion, the adoption of rules and procedures that mitigate the risks of conflict of interest inherent in this type of contract and that strike the necessary balance between, on the one hand, the company’s interest in protecting its directors against financial risks arising from the exercise of their functions and, on the other, the company’s interest in protecting its assets.
The Opinion is not intended to cover all matters relating to indemnity agreements, but only to provide guidance to managers and the market on important issues relating to the process of drafting, approving and executing them.
In summary, the CVM has demonstrated the following main objectives:
(i) transparency through disclosure by companies to the market of the existence of indemnity agreements and their main terms;
(ii) mitigation of conflicts of interest, through measures such as: (a) double degree of approval; (b) establishment of an internal evaluation body for the granting of the indemnity; and (c) guaranteeing the involvement of shareholders in the evaluation of the conclusion and release of the benefit; and
(iii) establishing exclusions from coverage of payment, reimbursement or indemnity in cases of acts outside the exercise of the director’s duties, bad faith, willful misconduct, serious fault or fraud, in their own interests or those of third parties, or to the detriment of the company’s interests.
In this way, we can see that the Opinion consolidates the CVM’s understanding of the matter, providing the market with more secure parameters. The biggest novelty is the very detailed guidelines on corporate approvals for this type of instrument, which, while on the one hand aim to and can improve companies’ governance and transparency, on the other can be seen as excessive procedures.
Although the Opinion does not have normative force, it is recommended that its provisions be applied by companies, thus reducing the risk of investigative actions and/or punishments that may be imposed by the CVM.
Marcos Martins Advogados is at your disposal to assist you with the application of CVM Guidance Opinion No. 38, as well as with other matters related to the business and corporate environment.
