1. DOMESTIC MARKET OVERVIEW

While analyzing stock property in Brazil, it is important to keep in mind that Law 8021/90 prohibited securities to be in the bearer or endorsable form. The legal obligation to maintain the ownership records, according to Law 6404/76, is with the companies. Article 100 of this law establishes that publicly held companies must keep several records concerning ownership, including:

• Stock Registration Book, which must contain (a) stockholder’s name and quantity in possession, (b) initial payment made by the stockholder, (c) conversion of shares into another series or class, (d) redemption, refund, and amortization of shares or their acquisition by the own company, (e) changes resulting from the transferring of shares, and (f) pledge, lien, or any other encumbrance upon the shares that may hinder its negotiation.

• Shares Transfer Book, for the purpose of recording shares transfers.

These books evidence ownership rights especially for customers on scrip-based systems.

In addition, CVM Instruction 202/93 rules that publicly held companies must provide and update the CVM with several data through different forms. The "IAN" (annual information) form, which must be filed by all publicly held companies with the CVM annually, provides many types of information, including those on beneficial ownership of every shareholder holding more than 5% of the voting capital of a company. Information consists of names, the Federal Revenue Service’s registration number ("CPF"), and quantity of shares.

The CVM may request the Federal Revenue Service other data, such individual addresses, which may be retrieved through "CPF". The information given must reflect a position held at least 30 days before the form is filled. In addition, when listed owners are other Brazilian companies, information must be added until it is clear who are the individual persons in control of the corporation. On the other hand, if the shareholder is a foreign company, no further information must be added to the form.

However, the vast majority of companies’ shares are held in book entry form, therefore dematerialized; companies that still issue certificated securities are usually state-owned. When a publicly held company issues dematerialized shares, it must hire a registrar, which must be accredited with the CVM.

Furthermore, it is important to stress that shares may be subject to fungible custody (articles 41 and 42 of law 6404/76). When securities are immobilized in one of the Central Depositories (necessary for trading), transfer of ownership is performed either via book-entry on the accounts open in the central depository. At the registrar level, the central depository appears as the fiduciary stockholder, i.e., a trustee of the shareholders, being able to exercise rights such as split-ups, subscription, or dividends.

CVM Instruction 115/90 establishes that the depositories, in turn, must open an account in the name of every shareholder, who will be the only ones able to operate it and must issue a statement showing the number of shares that are deposited. With this certificate in hand, shareholders using these services are entitled to attend shareholders' meetings and exercise their voting rights. Thus, the depository has no ownership right over the immobilized securities, which is granted to the owner.

In order to the companies to maintain the legal records described in the beginning of this answer, CVM establishes in Instruction 115/90 that custodians and depositories must provide the companies with information on shareholders who use its custody services update companies’ records at least quarterly, or due to dividends, split-ups or subscriptions, or upon companies’ request. The same Rule also states that, while securities are immobilized in a central depository, their trustees are responsible for any losses caused by irregularities in services performed by custodians.

In summary, evidence of title of the security holder in most cases is a certificate issued by the clearinghouse (immobilized securities) or by the registrar (dematerialized securities). For companies that still adopt physical certificates, evidence is presented in the form of a registered certificate.

Stock and futures exchanges, as well as regularized OTC systems associations, are self-regulated in their operational process. Following this concept, CVM Instruction 220/94 establishes that stock exchanges must develop rules concerning data kept by broker-dealers regarding their customers and their transactions in the securities markets. Such guidelines must be observed by broker-dealers in order to execute buying or selling orders diligently and to conduct their activities with probity, taking always into account the best interests of their customers and the integrity of the market. It is also stated that the broker-dealer must establish internal rules (following stock exchange regulation) concerning order execution procedures. These must specify receiving, registering, time limit, priority, execution, distribution, and canceling procedures.

In addition, Instruction 220/94 also establishes that customers must be perfectly identified, establishing the minimum data that must be kept, that is copy of the ID card and the revenue department number. Broker-dealers must also store a document dated and signed by customers stating (1) that the information given concerning their personal data is true, (2) that they are compelled to inform any changes on this data within 10 days, (3) that they operate for themselves or if not, they must specify for whom (for instance, parents operating for their minor children or operations carried out through power of attorney), and (4) that they are not prohibited to operate in the securities market. This document must be available to CVM inspection. In addition, legal entities must provide a copy of their Articles of Incorporation or by-laws, and must also file the names of the individuals authorized to issue orders.

Broker’s files also contain information such as customer’s name, sex, date of birth, telephone, address, marital status, parents and consort names, identification card and revenue department registration number, profession and commercial address, and nationality. In addition, companies and institutional investors must provide additional data, such as date of incorporation, activities and, names of controllers.

Brokers also have to register each operation, either in written or electronic form, including the type of the order, the security’s type, quantity and price, the time at which the transaction is held, and the customer’s stock exchange code number.

Although broker information is not standardized, customers must be also registered in the stock exchange in a standard basis in order to issue orders. These records include, besides all information above, the date of the last operation and the mentioned customer’s code number. This is the key for CVM’s inspection purposes, as each operation must be associated to this number. Therefore, information on the beneficial owner of a buying or selling order can be easily retrieved in T+1 by CVM through stock exchange computer terminals, not being necessary to get the information through the broker house.

Stock exchanges also keep daily records of operations, including the issuer and type of the securities traded, quantity and the time of trading, and the broker-dealer that conducted the purchase and the sale. The CVM can monitor this information instantly through stock exchange terminals. All this information must be kept for five years (Instruction 220/94).

Although Instruction 220/94 does not apply to futures exchanges, their by-laws require that brokers keep records containing at least the same data that is required by stock exchanges, as stated above.

As for OTC markets, Instruction 42/85 states that all institutions of the distribution system must keep customers identification on each trade carried in OTC markets. These records must be available for the CVM or Central Bank inspection purposes. There are three different possibilities of securities trading in Brazilian regularized OTC markets:

• Debentures and Secured Bond transactions are carried out by an electronic system (CETIP), which only allow the trading of Bonds registered with an authorized custodian. Only the intermediary identifies customers. As CETIP transactions are of high value, customers are usually financial institutions, corporations, pension funds, and mutual funds.

• The Electronic Stock Quotation OTC Systems (SOMA), which was authorized to function in 1996. SOMA was designed to list minor companies, which would have fewer costs than if they were traded in the main exchange.

In addtition to all procedures described above, CVM’s Instruction 301/99 requires that brokers store additional information, specially those related to orders superior to R$ 10.000 (around US$ 6.000) for the purpose of combating money laundering, as stated in Law 9613/98.

All data described in this section has to be fully available to the CVM for inspection purposes.

1. Are there any restrictions on the ability of shareholders to transfer shares? If so, what are they?

Restrictions apply only to persons who have assets frozen through a court order.

1. Participation and Voting in General Shareholder Meetings:

1. Are all shareholders furnished with information concerning the date, location, and agenda of the meeting, as well as information regarding the issues to be decided at the meeting? If so, how far in advance of the meeting is the information provided to shareholders? Also, how much information is provided?

According to article 124 of the Corporation Law, shareholders must be furnished with information on the place, date and time, and the issues to be decided at the meeting.

The information is provided to shareholders through a notice published at least three times, the first of which must be made public no later than eight days prior to the meeting. Should the meeting not take place, a second call for the meeting must be published at least five days prior to the meeting.

2. Do all shareholders have the right to ask questions of the board and to propose the inclusion of items in the agenda to a shareholder meeting? If so, under what circumstances?

Article 123 of the Corporation Law determines that it is up to the administrative council or to the directors to summon a general meeting and to propose issues for discussion. However, under special circumstances, listed below, there are exceptions:

• the statutory audit committee may call (i) the annual general meeting should the administrative bodies delay doing so for more than one month, and (ii) an extraordinary general meeting whenever serious or urgent matters occur, including in the agenda of the meeting such matters as it may deem necessary;
• following the by-laws provisions, a general meeting may be called by any shareholder whenever the officers delay the call for more than sixty days;
• shareholders representing at least five per cent of the corporation’s capital may request to the corporation officers that a general meeting, indicating the matters to be discussed, take place; should the officers not comply with the request within eight days, the mentioned shareholders may call the general meeting directly;
• shareholders representing at least five per cent of the voting capital, or five per cent of nonvoting shareholders, may call a general meeting whenever the corporation officers do not, within eight days, comply with the request that a meeting be called in order to appoint a statutory audit committee. (the minimum of five percent was recently reduced by CVM’s according to a progressive table depending on the company’s net worth)

1. Are shareholders able to vote in person and in absentia? Please describe how it works. If allowed by local regulations, what are the requirements and formalities for proxy voting at a shareholder meeting? Are telephone and electronic voting permitted?

Shareholders must vote in person, duly producing proof of shareholder status, or be represented by a proxy, who may be a shareholder, a corporation officer, or a lawyer; in a publicly held corporation, the proxy may also be a financial institution. The power of attorney must be no older than one year.

Legal representatives of shareholders are also entitled to vote at general meetings, while telephone and electronic voting are not permitted.

1. Fundamental Corporate Changes:

1. Fundamental corporate changes may include: amendments to statutes or governing documents of the company; the authorization of additional shares; and extraordinary transactions that in effect result in the sale of the company. Please describe any other corporate activities that would be considered fundamental corporate changes in your jurisdiction.

As shown on the response to question 11-a, a general meeting is empowered to decide all matters relating to corporate purposes and to pass such resolutions, as it deems necessary for the protection and development of the corporation.

General meetings have exclusive authority to, among other issues (please refer to the response to question 11-a), to amend by the governing documents of the company. According to articles 166, 168, and 169 of the Corporation Law, a general meeting may decide to increase the capital through the issue of additional shares and a decision of the Administrative Council may do so only if the increase is within the limits, if any, established by the by-laws. Should there be no limits, i.e., no authorized capital increase, only a general shareholder meeting may decide on increasing capital.

The Corporation Law requires (article 136) a ‘qualified quorum’, i.e., the approval of shareholders representing at least one-half of the voting shares, for deciding on the following fundamental issues:

1. creating preferred shares or increasing an existing class without maintaining its ratio to the other types and classes (at least half of the preferred non-voting shares shall approve it);
2. altering a preference, a privilege, or a condition of redemption or amortization conferred upon one or more classes of preferred shares, or creating a new, more favored, class (at least half of the preferred non-voting shares shall approve it);
3. reducing the compulsory dividend;
4. merging the corporation with another corporation or consolidating it;
5. participating in a group of corporations.
6. changing the corporate purpose;
7. terminating a state of liquidation of the corporation;
8. creating founders’ shares;
9. dividing the corporation;
10. dissolving the corporation.

The CVM may authorize a reduction of the quorum under this article in the case of a publicly held corporation whose shares are widely held and whose last three general meetings were attended by shareholders representing less than one-half of the voting shares.

1. Are shareholders sufficiently informed of fundamental corporate changes? If so, how? Before the change or after?

As virtually all fundamental changes have to be approved at a general shareholders meeting, shareholders are informed when the notice to call a meeting is published in newspapers, containing the place, date and time, and the issues to be decided at the meeting (please refer to the answers to question 6).

2. Can shareholders participate in decisions with respect to fundamental corporate changes?

Hostile takeovers are unusual in Brazil due to the concentration of control in the hands of family groups that own the majority of the voting shares of Brazilian public corporations. Articles 257 to 263 of the Corporation Law authorize any person interested in acquiring control of a public company to attempt to do so pursuant to a tender offer to all shareholders, with the observance of the following basic rules:

• the offer must be effected with a financial institution acting as underwriter;
• the offer must be irrevocable during the period of validity established by the bidder; and
• the bidder must state the minimum number of shares that he will purchase and the maximum number of shares, if any.

1. Are there any arrangements that might enable certain shareholders to obtain a level of control not proportionate to their equity ownership? Must these arrangements be disclosed?

Article 118 of the Corporation Law allows shareholder agreements for the exercise of the right to vote, which may result in a level of control not proportionate to equity ownership. It is also important to keep in mind that Brazilian law establishes that up to 2/3 of the capital may be of preferred (non-voting) shares. In that case, one may control the whole company holding 50% plus one of the voting shares, that is, 17% of the total capital.

As mentioned in question 1, it is also important to stress that it is usual that the control of the companies belongs to a holding, which on its turn may belong to another holding or a private company. Such arrangement may also contribute for a level of control not proportionate to the capital.

 

 

III. THE EQUITABLE TREATMENT OF SHAREHOLDERS

 

2. Voting Rights:

1. Is more than one outstanding class of voting capital stock permitted?

Not for public corporations, according to article 16 of the Corporation Law.

2. If voting preferred stock is permitted, do holders of this stock vote as a separate class and under what circumstances and on what matters?

Although preferred voting stock is permitted, they are normally non-voting, according to article 111 of the Corporation Law. A preferred share without a right to vote shall acquire such a right if, during a period provided for in the by-laws, which shall not exceed three consecutive fiscal years, the corporation fails to pay dividends to which the share is entitled, and the right shall continue until payment has been made, if the dividend is not cumulative, or until all cumulative dividends in arrears have been paid.

There are special circumstances under which preferred stock is entitled to vote, as determined by the following articles of the Corporation Law:

• 45 – appraisal rights: considering that the market value of shares in Brazil is usually lower than the book value, the Corporation Law determines that dissenting shareholders shall be refunded based on the book value or on the ‘economic value’ of the corporation; the latter value must be calculated by three experts or by a specialized firm, to be selected at a general shareholders meeting, in which every shareholder may vote;

• 87 – regardless of its type or class, each share is entitled to one vote at the first general meeting, or general meeting of incorporation.

• 161 – the holders non-voting preferred shares without voting rights or with restricted voting rights shall be entitled to elect one member of the statutory audit committee and his alternate at a separate election;

• 229 – when a division of the corporation takes place, the shares paid up with part of the assets and liabilities of the divided corporation shall be attributed to its shareholders in substitution for the extinguished shares, in proportion to the shares owned; the attribution in different proportions requires an agreement among all shareholders, including those who own non-voting shares.

1. If more than one class of voting common stock is permitted, do the voting rights differ among classes and, if so, under what circumstances and on what matters?

Not applicable to public corporations.

2. Within any given class, do all shareholders have the same voting rights?

Yes.

3. Are all investors able to obtain information about the voting rights corresponding to all classes of shares before they purchase them? If so, how?

Yes. Although common voting shares may not be divided into classes, information on voting rights (and the acquisition of voting rights by preferred stock) must be included in the corporation’s by-laws, which, in turn, must be disclosed to investors. By-laws of all public corporations are available at CVM’s website or directly on CVM’s offices..

4. Are changes in the voting rights corresponding to a class of shares subject to the approval of shareholders? If so, are these changes subject to the approval of all shareholders or only to those holding shares of that particular class?

According to Article 136 of Law 6404/76, with text as determined by Law 9.457/97, creating preferred shares or increasing an existing class without maintaining its ratio to the other types and classes (unless otherwise provided in the bylaws) or altering a preference, a privilege or a condition of redemption or amortization conferred upon one or more classes of preferred shares, or creating a new, more favored, class, the approval of shareholders representing at least one-half of the voting shares shall be necessary for a resolution.

Such resolution shall only take effect if the holders of more than one-half of the affected class of preferred shares prejudiced by such resolution, assembled at a special meeting called by the officers of the corporation and held according to the formalities provided for in this Law, shall have previously approved or ratified it within a not extendible period of one year.

5. Describe the manner in which votes can be cast by custodians or nominees. Is approval by the beneficial owner of the shares required?

According to article 25 of the Securities Law (6385/76), portfolio managers and custodians may not exercise voting rights of the shares under their management or custody, except in the event of a specific power of attorney that may not be older than one year. Please refer to question 5 item "b" for details.

1. Shareholder Meetings:

1. Describe the processes and procedures for public companies’ shareholder meetings. Please indicate the applicable rules, regulations and local practices.

Articles 121 to 137 of the Corporation Law govern public corporations’ shareholder meetings.

A general meeting is empowered to decide all matters relating to corporate purposes and to pass such resolutions as it deems necessary for the protection and development of the corporation.

General meetings have exclusive authority:

I – to amend the bylaws;

II - to elect or discharge corporation officers and audit committee members;

III - to receive the yearly accounts drawn up by the corporation officers and to accept or reject financial statements presented by them;

IV - to authorize the issue of debentures;

V - to suspend the rights of shareholders that do not comply with legal or by-laws provisions;

VI - to accept or reject the evaluation of property stemming from any shareholder to form the corporation’s capital;

VII - to authorize the issue of founder shares;

VIII - to pass resolutions to transform, merge, consolidate, or divide the corporation, to dissolve and liquidate it, to elect and discharge its liquidators and to examine their accounts;

IX - to authorize the officers to admit insolvency of the corporation and to promote reorganization.

In the event of an emergency, the declaration of bankruptcy or the promotion of reorganization may be made by the officers with the agreement of the controlling shareholder, if existent, and a general meeting shall be called forthwith to consider the matter.

2. What are the formal requirements for calling and conducting shareholder meetings? Are there different kinds of shareholder meetings?

The procedures for summoning a shareholders meeting and for the voting process is described on the answers to question 6.

A general meeting shall be opened on first call with the presence of shareholders representing at least one-quarter of the voting capital; on the second call, it shall be opened with any number. A shareholder without a right to vote may attend a general meeting and take part in the discussion of matters submitted for consideration.

The resolutions of a general meeting shall be passed by a simple majority of votes, abstentions not being taken into account (except in cases of "qualified quorum", described in question 7). In the event of an equal number of votes being cast in favor of and against a resolution, if the by-laws do not provide for arbitration and do not contain any provision to the contrary, a general meeting shall be called after a period of at least two months to vote on the resolution; if the equality in votes persists and the shareholders do not agree to entrust the decision to a third party, it shall be incumbent upon the court to decide the issue in accordance with the interest of the corporation.

Once the annual general meeting has been opened and upon the request of any shareholder, the financial statements, the audit report, and the opinion of the statutory audit committee, if any, shall be read and submitted by the board for discussion and voting.

The corporation officers or at least one of them and the independent auditor shall be present at general meetings to deal with any request by shareholders for clarification.

Should the general meeting require further clarification, it may postpone the resolution and order an investigation; subject to a waiver by the shareholders present at the meeting, the resolution may also be deferred if an officer, a member of the statutory audit committee or the independent auditor fails to attend the meeting.

The approval of the financial statements and accounts shall exempt the officers and members of the statutory audit committee from liability except as regards error, bad faith, fraud, or misrepresentations.

If in the course of approving the financial statements the general meeting changes the amount of the profit of the fiscal year or the amount of the corporation's liabilities, the officers shall within thirty days republish the financial statements with the alterations approved at the meeting; if the use of profits as proposed by the administrative bodies is not approved, the changes introduced shall be included in the minutes of the general meeting.

There are two types of general meetings: the annual general meeting and the extraordinary general meeting. The annual meeting is held every year no later than the fourth month after the closing of the fiscal year in order to (i) discuss the accounts rendered by the corporation officers and to examine, discuss, and approve the financial statements, (ii) decide on the distribution of dividends and on the destination of net profits, and (iii) elect the officers and the members of the statutory audit committee, if any. Meetings called to discuss any other matters are termed as extraordinary.

3. Are companies permitted to require personal attendance or to charge fees to vote at a shareholder meeting?

Personal attendance by the shareholder or a proxy is required by law, as mentioned in the response to question 6-c. Charging fees to vote has never happened in Brazil, and would be considered by the CVM an abuse of power. Law 6404 prescribes only two cases in which the company can charge the shareholder, that are issuing a physical certificate and printing a shareholders’ list.

4. Are shareholders able to request that the company or another body, such as a court, call a shareholder meeting in case the board of directors does not do it?

As mentioned in the answer to question 6-b, shareholders may call general meetings directly under certain circumstances.

Article 206 of the Corporation Law establishes that, under some circumstances, e.g. bankruptcy, a corporation may be dissolved through a court order, in which case a judge will appoint the liquidator, who, in turn, (i) is entitled to call general meetings whenever necessary and (ii) must call final general shareholder meeting in order to present the dissolution report.

5. Under what circumstances, if any, is it possible for shareholders to take binding action without a meeting? Are other shareholders informed of such actions?

According to Article 159 of Law 6404, by a resolution passed in a general meeting, the corporation may bring an action for civil liability against any officer for the losses caused to the corporation's property. This resolution may be passed at an annual general meeting and, if included in the agenda or arising directly out of any matter included therein, at an extraordinary general meeting.

In this case, the officer or officers against whom the legal action is to be filed shall be disqualified and replaced at the same general meeting. Should the general meeting decide not to institute proceedings, they may be instituted by shareholders representing at least five per cent of the capital.

Should such proceedings are not instituted within three months from the date of the resolution of the general meeting, any shareholder may bring the action. In this case, any damages recovered by proceedings instituted by a shareholder shall be transferred to the corporation, but the corporation shall reimburse him for all expenses incurred, including monetary adjustment and interest on his expenditure, up to the limit of such damages.

The action described above shall not preclude any action available to any shareholder or third party directly harmed by the acts of the officer. Should such action constitute a material event according to CVM’s Instruction 31/84, it must be disclosed to shareholders through the newspaper.

 

2. Dispute Resolution:

1. What legal recourse is available to the shareholders if their rights are violated?

Shareholders who feel that their rights have been violated may file a formal complaint with the CVM, who will take action such as issue orders to a supervised entity or initiate an administrative inquiry. However, CVM currently may not initiate a legal action in the name of the shareholder, which on their turn may initiate such action directly at any time.

2. Are there non-adversarial mechanisms to solve disputes between shareholders and the company or between themselves, e.g., commercial arbitration panels, stock exchange mediation, etc., or is civil litigation the only alternative?

Should there be a misexecution of an exchange order, the investor has right to pledge an reimbursement through the Stock Exchange Guarantee Fund, right granted by CMN’s Resolution 1656/89. Should the exchange deny the pledge, the investor has still the right to appeal to the CVM.

Law no. 9307 regulates the arbitrage courts, providing an alternative means to the judicial litigation. However, this law has not yet been applied to the resolution of disputes among shareholders, concerning corporate matters.

For other circumstances, there are two alternatives: civil litigation and administrative procedures within the CVM. Although the CVM may charge fines and set other penalties, it has the limitation of not determining reimbursement directly to investors. Law 9457/97, however, introduced new mechanisms that allow the suited entity to refund the investor against the filing of the process:

According to the Law, an alternative means of dispute resolution may be adopted by the CVM, consisting of the suspension of the administrative procedure at any moment, if the defendant or accused concedes in settleling the dispute by compromising to:

I - refrain from the activities or acts regarded as illicit by the CVM; and

II - amend the irregularities, including offering compensation for losses.

In this case, this settlement does neither imply a confession of the matter or a recognition that the conduct was illicit. The instrument shall be published in the Official Federal Government Journal and shall establish a period in which the obligations assumed by the parties shall be fulfilled. Non-compliance with the obligations assumed in the settlement instrument shall constitute a crime of disobedience.

When applying the penalties provided for in this law, special consideration will be given to any person who voluntarily confesses an offense or provides relevant information concerning the commitment of an offense.

It is important to mention that, under article 31 of the Securities Law, in any legal proceedings or actions regarding matters included under the authority of the CVM, the latter must always be notified and be given the opportunity to submit an opinion or render explanations (amicus curiae).

 

3. Insider Trading:

1. Is insider trading prohibited? If so, are the prohibitions contained in the securities laws or under other types of statutes?

Insider trading is prohibited by article 155 of the Corporation Law and by articles 9-12 of CVM Rule No. 31/84.

Article 155 of the Corporation Law determines that officers of publicly held corporations must treat as confidential any information not yet revealed to the public, which he obtained by virtue of his position and which may significantly affect the quotation of securities, and that they may not make use of such information to obtain any advantages for himself or for third parties by purchasing or selling securities. The officers must also ensure that such confidential information is not revealed by a subordinate or third party.

Any person defrauded by insider trading is entitled to compensation, except if he/she knew about the information.

CVM Rule 31 classifies insider trading as a serious offense, subjecting violators to all penalties listed in the Securities and Exchange Law (which vary from warnings and fines up to temporary disqualification for holding positions in corporations and prohibitions to operate on the market).

2. What are the key provisions of the insider trading prohibitions?

Please refer to 13-a.

3. Who is subject to insider trading prohibitions?

Normally corporation officers, directors, or controlling shareholders, but virtually anyone may be subject to the prohibition, as long as he/she possesses information and, knowing it has not yet been made public, trades on the market based on that knowledge.

4. How are these insider trading prohibitions enforced? Can actions be brought by civil, administrative, and criminal authorities?

CVM’s Market Surveillance Department, assisted by the stock exchanges in their capacity as self-regulators, analyzes the patterns of trading before and after the publication of a material event.

Actions may be brought by civil and administrative authorities only, as insider trading is not a crime in Brazil.

 

4. Conflicts of Interest:

1. Is self-dealing by the board and executives prohibited or subject to certain legal safeguards? Please explain.

Self-dealing is subject to restrictions. Article 155 of the Corporation Law establishes that corporation officers must serve the corporation with loyalty and treat its affairs with confidence, and they may not:

• use any commercial opportunity which may come to his knowledge, by virtue of his position, for his own benefit or that of a third party, whether or not harmful to the corporation;
• fail to exercise or protect corporation rights or, in seeking to obtain advantages for himself or for a third party, fail to make use of a commercial opportunity which he knows to be of interest to the corporation; or
• acquire for resale at a profit property or rights that he knows the corporation needs or which the corporation intends to acquire.

Under article 156 corporation officers may not take part in any corporate transaction in which he has an interest which conflicts with an interest of the corporation, nor in the decisions made by the other officers on the matter. He shall disclose his disqualification to the other officers and shall cause the nature and extent of his interest to be recorded in the minutes of the administrative council, or board of directors’ meeting.

In addition, an officer may only contract with the corporation under reasonable and fair conditions, identical to those which prevail in the market or under which the corporation would contract with third parties. Any business contracted otherwise is voidable and the officer concerned shall be obliged to transfer to the corporation all benefits that he may have obtained in such business.

1. Are members of the board and executives required to disclose any material interests in transactions or matters affecting the company? If so, please discuss how and when this information is made available to shareholders. For example:

1. Is the remuneration of directors and executives disclosed to investors?


Yes, through the Annual Information Form, which is due each year on May 31 or after any of the information in it is changed (the total value is disclosed, but this figure can be divided by the number of directors to infer individual values).

2. Is the relationship between any of the directors and a controlling shareholder disclosed to investors?

No.

3. Are officers, directors, and owners of a certain amount or percentage of shares required to disclose their holdings and trading activities?

As explained in question 4, every person owning more than 5% of the voting shares are required to disclose their position through the Annual Information Form, which is due each year on May 31 or after any of the information in it is changed.

According to CVM’s Instruction 31/84, directors and controlling shareholders are obliged to communicate to the company itself the number and characteristics of securities issued by the company and by subsidiary companies and publicly held holding companies, of which they are holders. The directors and controlling shareholders shall proceed in accordance with this provision immediately after their investiture to the office or upon acquiring control.

The directors and controlling shareholders shall also indicate the securities that are owned by their spouses from which they are not separated legally or under common law, or held by common law wives (husbands), and any dependent included in their annual income tax form.

Every trading must be communicated to the company, within a maximum period of 10 (ten) days after the end of the month during which the negotiations were conducted. Information should include the type of transaction and other relevant information. This information should be kept with the companies’ premises and available for CVM’s inspection purposes.

The disposals of CVM Instruction 299/99 referred in question 8 item "b" requiring disclosure of increases in positions of 5% by controlling shareholders are also pertinent to this issue.

1. Can a stakeholder (employees, creditors, and suppliers) participate in corporate governance, e.g., employee representation on boards, employee stock ownership plans, creditor involvement via insolvency proceedings?

As explained in Section VI, the Brazilian Corporation Law requires that management of public companies be incumbent on an Administrative Council, mainly responsible for corporate strategy, and a Board of Directors, the executive body. Only shareholders may become members of the Administrative Council, whereas a director must not be a shareholder.

Further requirements to become a member of the Administrative Council or a director may be found at the response to question 21-b. An employee, a creditor, or a supplier may participate in corporate governance if all conditions are met.

Specifically in the last years, in most of privatized companies in Brazil, an amount of shares were reserved for employees in a favorable price, in order to encourage them to participate in the process. Stock ownership plans (calls) for directors and high-level managers are becoming more popular, as they link the remuneration with the company’s financial results.

Regarding the last issue, CVM’s Instruction 323/2000 defined as an abuse of power if the calls are exercised exclusively at a date chosen by the manager or if it designed to be profit without an increase of the results of the company.

 

2. Where stakeholder interests are protected by law (e.g., labor law, contract law, insolvency law), do stakeholders have the opportunity to obtain effective redress for violation of their rights?

The Constitution grants the right for every person that feel prejudice to their rights to suit another party, including corporations. Employees may initiate labor actions, and any persons may initiate civil actions. Regarding the penal issue. According to the Brazilian legal system, corporations and any legal entities do not hold criminal responsibility. However, article 177 of the penal code, transcribed below may be applicable for the related persons as individuals:

Art. 177. To promote the incorporation of a publicly held company, by providing false information about the incorporation, by using either prospects or the media, to the public or to the shareholders general meeting, or by concealing facts related to the company.

Penalty - 1 (one) to 4 (four) years of imprisonment, and fine, whether the act does not configure a crime against the public economy.

Paragraph 1. If the act does not configure a crime against the public economy, the same penalty shall be applied to:

I - the officer, the manager, or member of the audit committee of the company, who provides false information concerning the financial situation of the company, or conceals, as a whole or in part, facts related to the company, in prospects, reports, opinions, financial statements or communications to the shareholders general meeting;

II - the officer, the manager, or the member of the audit committee of the company, who promotes, by any measure, false quotations of the securities issued by the company;

III - the officer or the manager who borrows company assets, to his own or to third parties benefit, without previous authorization at the shareholders general meeting;

IV - the officer or the manager who buys or sells shares issued by the company, acting in its name, except when permitted by law;

V - the officer or the manager who accepts pledges or bonds on the securities issued by the company, as guarantee of credits owed to the company;

VI - the officer or manager who, in the absence of a financial statement, in disagreement with its terms, or by using a false financial statement, distributes fictitious profits or dividends;

VII - the officer, the manager or the member of the audit committee who, represented by a third party, or by an illegal arrangement with a shareholder, manages to obtain the approval of financial statements or company reports;

VIII - the liquidator, in the situations provided for in items I, II, III, IV, V and VII;

IX - the representatives of a foreign company, with Government authorization to operate in the Country, who incurs in the situations provided for in items I and II, or provides false information to the Government.

Paragraph 2. The shareholder who, with the intent to obtain advantage to himself or to a third party, negotiates his right to vote in the decisions of the shareholders general meetings, shall be subject to the period of 8 (eight) months to 2 (two) years of imprisonment, and fine.

Lawsuits related to this article 177 are only initiated by the public attorney. The CVM, when dececting the described frauds and abuses has the obligation to communicate the attorney.

It is also important to stress that Law 6404/76 sets periods of limitations regarding some types of lawsuits as follows:

Actions to Annul Incorporation

According to Article 285 of Law 6404/76, proceedings to annul the incorporation of a corporation on the grounds of an irregularity or defect shall not be commenced after a period of one year has elapsed from the date of publication of its incorporation documents. The corporation may take steps to rectify any such irregularity or defect, even though proceedings have been commenced, by resolution of a general meeting of shareholders.

Actions to Annul Resolutions

Article 286 states that proceedings to annul resolutions made at a general or special meeting of shareholders which has been called or opened otherwise than in accordance with the law or bylaws, or which has been the subject of error, bad faith, fraud or misrepresentation, shall not be commenced after a period of two years has elapsed from the date of the resolution.

Other Civil Actions

Article 287 states that the period of limitation within which proceedings must be commenced shall lapse after one year, in the case of:

(a) proceedings against experts or subscribers of capital for redress relating to the evaluation of property, the period running from the publication of the minutes of the general meeting at which the evaluation report was approved;

(b) proceedings by unpaid creditors against the shareholders and liquidators, the period running from the publication of the minutes which closed the liquidation of the corporation;

after three years, in the case of:

(a) proceedings for the recovery of dividends, the period running from the date on which they were made available for distribution;

(b) proceedings against the founders, shareholders, officers, liquidators, statutory audit committee members or a leading corporation for redress with respect to actions taken otherwise than in accordance with the provisions of the law, bylaws or a group agreement; the period running:

(1) as regards founders, from the date of publication of the articles of incorporation documents of the corporation;

(2) as regards shareholders, officers, statutory audit committee members or the leading corporations, from the date of publication of the minutes which approved the balance sheet for the fiscal year in which the violation occurred; and

(3) as regards liquidators, from the date of publication of the minutes of the first general meeting held after the action was taken;

(c) proceedings against shareholders for the refund of dividends received in bad faith, the period running from the date of publication of the minutes of the annual general meeting of the fiscal year during which the dividends were declared;

(d) proceedings against the officers or holders of founders’ shares for the refund of shares in profits received in bad faith, the period running from the date of the publication of the minutes of the annual general meeting of the fiscal year during which such shares were paid;

(e) proceedings against the trustee of debentureholders or holders of founders’ shares for redress with respect to actions taken by him otherwise than in accordance with the provisions of the law or of the deed of issue, the period running from the publication of the minutes of the general meeting which became aware of the violation;

(f) proceedings for redress with respect to breach of the duty of confidentiality imposed by article 260, the period running from the date of publication of the offer referred to in the said article.

Civil Actions when Criminal Proceedings Pending

According to article 288, when both civil and criminal liability may arise from the same matter, the period in which civil proceedings must be commenced shall not begin to run until the criminal matter has been finally decided or the period of limitation in which criminal proceedings must be brought has elapsed.

It is important to stress that in a bankruptcy process, the first to be redressed must be the employees, then the government, then other creditors and finally shareholders, whose responsibility for losses is limited to the amount invested in the corporation. (for corporate bondholders their position as a creditor may vary according the type of guarantee).

V. DISCLOSURE AND TRANSPARENCY

 

3. Indicate which of the following items is subject to disclosure, as well as to whom the disclosure is made. Please discuss how and when this information is made available to shareholders.

1. The financial and operating results of the company;
2. Company objectives;
3. Major share ownership and voting rights;
4. Members of the board and key executives, and their remuneration;
5. Material foreseeable risk factors;
6. Material issues regarding employees and other stakeholders; and
7. Governance structures and policies.

All of the items above are disclosed by corporations. Financial information is provided quarterly and items b to g are normally disclosed annually through the Annual Information Form, which is due each year on May 31. Disclosure is made to the CVM and to the market. CVM currently discloses such information through the Internet within 24 hours it receives it, making it accessible for a vast number of investors worldwide.

With regard to item c, CVM Instruction 69/87 requires that the acquisition of a certain percentage of shares must be disclosed. Whenever a person or group of persons reaches or acquires 10% of equity ownership, a public statement must be made, informing on the purpose of the acquisition and the number of shares held. Further announcements must be made whenever such ownership increases 5% (please also refer to question 14 item "b-iii")

 

4. Financial Statements and Audits:

1. Are financial statements prepared, audited, and presented in accordance with high quality, internationally acceptable standards of accounting and auditing? Are comparable high quality, internationally acceptable standards applicable to non-financial disclosures?

Yes. It is important to stress that Brazilian accounting standards differed from international standards until recently, as inflation adjustments were necessary to reflect the reality of the environment to financial statements. Currently, CVM is participating in international efforts (such as IOSCO Working Party #1) in order to create and spread international practices. As a practical result, CVM set a bill to the congress to modernize accounting standards, including the introduction of cash flow statements.

 

2. Is the audit conducted by an independent auditor in order to provide an external and objective assurance on the way in which financial statements have been prepared and presented?

Yes.

1. How are external auditors appointed and removed?

Independent auditors are appointed and removed by the Administrative Council (please refer to section VI) of the company. CVM’s Instruction 308 prescribes that every 5 years the company must change the auditor.

2. Are there any regulations that establish auditing standards and ensure auditors’ independence and responsible professional conduct?

Yes. Federal Accounting Council’s (CFC) rules and CVM’s Instruction 308 are applicable. This Instruction states that an independent auditor is forbidden to act directly or indirectly in the audited entity or if he breaches rules issues by CFC relative to independence. It is specifically forbidden for the auditor:

I – to acquire securities issued by any corporation related to the audited entity;

II – to render consultancy services that may reduce his independence, such as those related to company’s reorganization, asset valuation, tax planning, changing of the accounting or controlling system.

The CVM may decide to determine to the corporation to change the auditor if such conditions are not fulfilled.

It is also stated in this instruction that the independent auditor must be submitted to a technical qualification examination jointly held by the Federal Accounting Board – CFC and the Brazilian Institute of Accountancy - IBRACON. A continued education policy for its personnel must be maintained in accordance with guidelines issued by those institutions.

In addition, an internal control program must be implemented in accordance with the rules issued by CFC and IBRACON. Such quality control program must be reviewed every four years by another auditor (peer review), who must prepare and deliver a report to CVM.

Specifically, it is stated that the auditor must verify the following issues while auditing a company:

a) if the financial statements and auditor’s opinion were disclosed on the newspapers assigned for that purpose and if such statements were the same that the audited ones;

b) if the information and financial analysis presented in the management report are in accordance to the statements audited;

c) if the profits are destined in accordance to the provisions stated in the Corporate Law (6404), and in compliance with company’s by-laws and rules issued by CVM;

d) eventual breaches to the applicable law and breaches that reflected or may reflect on the financial statements or the audited company operations.

In addition, the auditor must produce a report containing its observations related to deficiencies of internal controls and accounting procedures and present such report for the management and when requested, to the Audit Committee. The auditor must also inform CVM in case of any relevant problems within 20 days of the observation of the fact.

All documentation related to the auditors work shall be kept for a minimum of five years, and should be available for CVM’s inspection purposes.

 

3. How is "auditors’ independence" defined?

Independence is defined in the Federal Accountings Council Rule NBC P 1, article 1.2 as follows:

"The auditor must be independent, not being influenced by facts, prejudice to, or any other material or affective elements that result in loss of his independence". Some specific case, such as family relationship are also prescribed in this rule.

 

5. Describe the channels through which relevant information is disseminated to users, e.g., filing of reports via electronic filing and data retrieval systems, disclosure of material information via the internet?

Almost all information (financial statements, Annual Information Form) is electronically filed by corporations with the CVM, being automatically available via Internet. Exceptions include minutes of general meetings, whose hardcopies are filed with the CVM, and calls for general meetings and communications of material events, which are printed in newspapers or disseminated electronically, in addition to the copies filed with the CVM. The investor may also request hard copies of any public documents to the CVM, which has centers to attend investors in Rio and São Paulo.

 

6. Comment on aspects in your current disclosure regime that you would like to see reformed, indicating whether there is any support for such reforms internally and the main barriers that you see for implementing change.

Rules related to special operations (merges, acquisitions, etc.) are recent, and therefore, their effectiveness should be observed for a longer period before any changes are considered.

An improvement that should be considered is to suppress the company to use the economic value in a withdrawal process if this last one is inferior to the par value of shares. As the economic value is a subjective criterion, it may be used in detriment of minority shareholders.

Disclosure rules demand small enhancements, once they were based on American ones. Differences are related to an increasing number of details, sometimes excessive ones.

The real weak point is the lack of CVM’s human resources to enforce existing disclosure rules.

 

 

VI. THE RESPONSIBILITIES OF THE BOARD

 

The Brazilian Corporation Law requires that management of public companies be incumbent on an Administrative Council and a Board of Directors.

The Administrative Council is the decision-making body, being responsible for determining the basic guidelines and policies of the company, establishing the corporate strategy, reviewing business plans, and supervising the activities of the executive officers, and last but not least, nominating directors. The members of the Administrative Council do not perform executive functions.

The Board of Directors is the executive body of the company, responsible for day-to-day management and for the implementation of the general guidelines and policies established by the Administrative Council. Its members, the directors, are vested with exclusive power to act on behalf of the company.

This structure is complimented by an independent Audit Committee enacted to issue opinions on boards acts and company’s financial reports (please refer to question 25 for details).

Responses to questions 21 to 24 refer to the Administrative Council.

7. Structure of the Board:

1. Who nominates, elects, and removes the members of the board?

The general shareholders’ meeting elects and removes the members of the board. There are no requirements for nomination. Usually the controlling shareholder nominates members.

1. Do shareholders have cumulative voting rights? If so, please describe.

Yes. According to article 141 of the Corporation Law, whether or not provided for in the by-laws, shareholders representing at least one-tenth of the voting capital may request that a multiple voting procedure be adopted to entitle each share to as many votes as there are council members and to give each shareholder the right to vote cumulatively for only one candidate or to distribute his votes among several candidates

2. How are vacancies on the board filled?

Except when otherwise provided in the bylaws, in the event of a vacancy in a position on the administrative council a replacement shall be appointed by the remaining council members and shall serve until the next general meeting. Should vacancies occur in the majority of positions, a general meeting shall be called to hold a new election.

In the event of vacancies in all the positions of the administrative council, the board of directors shall call the general meeting.

A replacement elected to fill a vacant position shall serve for the remainder of the term of office of the original officer.

3. Are the election and identity of the members of the board disclosed to the securities regulator and the stock exchange, and is this information publicly available? If so, how?

Yes. Since all members are elected and removed by the general meetings and all minutes of general meetings must be disclosed to the CVM and to the market, it is publicly available. In addition, the names and a brief résumé of all members are available at CVM’s website, within the electronic "Annual Information" form ("IAN").

2. What are the requirements for serving as a member of the board?

1. Can foreigners or non-residents be board members?

Yes, according to article 146 of the Corporation Law, amended in April, 1999 through Provisional law 1754-16/99. This ammendment permitted the appointment of individuals resident abroad to the Board of Directors of Brazilian companies. Directors that reside abroad must in turn appoint an attorney-in-fact resident in Brazil, with powers to receive service of process regarding claims based on corporate laws. The term of validity of such power of attorney must equal the term of office of the Director of the company. A Provisional is enacted by the president, and must be reissued on a monthly basis to maintain their effectiveness prior to being accepted by Congress (and converted into a law) or refused by Congress.

 

2. What are the prohibitions on being a board member?

Persons disqualified by special law, or sentenced for a bankruptcy offense, fraud, bribery or corruption, misappropriation of public funds or embezzlement, crimes against the national economy or decency or public property, or to any criminal sanction which precludes, even temporarily, access to public office are prohibited from becoming a board member.

In addition, any person who has been declared by the CVM not to be qualified is also ineligible for election to an administrative office in a publicly held corporation.

3. What is the maximum term of office for members of the board? Are classes of board members permitted? If so, describe the circumstances and rights of each class.

Three years, but a second term is possible. Classes of board members are not permitted.

4. Are there any legal provisions requiring independent members of the board? If so, how is "independent" defined?

The legal provision of independence is described in the answers to question 22 item "c". This are general guidelines, but the code of ethics for Board Members issued by IBGC (please refer to question 2) states specifically that board members must be independent. The requirements of independence are the following:

• not to have any relationship with the company;
• not to have been an employee of the company or one of its controlled companies;
• not be providing any kind of product or services to the company or being an employee of a company which provides such products or services;
• not to be a relative to any director, manager or controller of the company
• not to receive any other payment of the company other than the compensation for his services as a board member

1. Are members of the board compensated? If so, how and subject to what approvals?

Yes. The general meeting shall prescribe the total or individual amount of the compensation of members, including benefits and allowances, taking into account their responsibilities, time they dedicate to their tasks, their competence, professional reputation, and the amount at which their services would be valued at market prices.

If the corporation’s by-laws provide a compulsory dividend of twenty-five per cent or more of the net profits, it may attribute to members a share in the corporation profits, provided the total amount thereof does neither exceed the annual remuneration of the officers nor one-tenth of the profits.

The code of ethics issued by IBGC states that the compensation should be calculated by hours worked, at the same value of hour of the main executive.

2. Describe the typical structure and functioning of the board, e.g., calling of the meetings, quorum, majorities, other formal requirements.

According to article 140 of Law 6404/76, the administrative council shall consist of at least three members, who shall be elected at a general meeting and subject to removal by a general meeting at any time; the bylaws shall establish:

1. the number of council members or the maximum and minimum number permitted, and the procedure for selecting and replacing the president of the council;
2. the procedure for replacing council members;
3. the term of office, which shall not exceed three years, re-selection being permitted;
4. the rules subject to which the council may be convened, installed and operate, its resolutions being passed by a majority of votes.

1. Functioning of the Board:

1. Describe the key functions of the board. In particular, please indicate whether the board is responsible for the following functions:

According to article 142 of the Corporation Law, the Administrative Council shall:

1. establish the general strategy for the corporation's business;
2. elect and discharge corporation directors and prescribe their duties in accordance with the relevant provisions in the by-laws;
3. supervise the performance of the directors, examine the books and records of the corporation at any time, request information on contracts signed or about to be signed, and take all other necessary action;
4. call a general meeting whenever deemed advisable;
5. give its opinion on the reports of the management and on the accounts of the board of directors;
6. give its opinion in advance on actions or contracts whenever required by the by-laws;
7. when so authorized by the by-laws, decide whether to issue shares or subscription warrants;
8. unless otherwise stated in the by-laws, authorize the transfer of fixed assets, the creation of in rem charges and guarantees for liabilities of third parties;
9. select and discharge independent auditors, if any.

1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

2. Selecting, compensating, monitoring, and, when necessary, replacing key executives and overseeing succession planning.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

3. Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

4. Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

5. Ensuring integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

6. Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

7. Overseeing the process of disclosure and communications.

Yes. Although not all functions are literally provided for by the Corporation Law, those are normal functions of the board.

1. What standards must the board follow when it makes decisions on corporate issues? What duties do board members owe to the company and its shareholders, e.g., loyalty, due care, foregoing corporate opportunities?

Board members must serve the company faithfully and fairly, keeping its dealings confidential and holding secret any facts not disclosed to the market.

A member shall use the powers conferred upon him by law and by the by-laws to achieve corporate purposes and to support its best interests, including the requirements of the public at large and of the social role of the corporation.

A board member elected by a group or class of shareholders shall have the same duties toward the corporation as the other officers and shall not fail to fulfill such duties, even at the expense of the interests of those who elected him.

All duties mentioned in question 22 item "c" are applicable for board members.

1. Are there any sanctions applicable to the members of the board for a breach in the performance of their duties? If so, please enumerate them, indicating the remedies for violations.

A board member shall not be personally liable for the commitments he undertakes on behalf of the corporation and by virtue of action taken in the ordinary course of business; he shall, however, be liable for any loss caused when he acts:

I - within the scope of his authority, with fault or fraud;

II - contrary to the provisions of the law or of the by-laws.

A board member shall not be liable for unlawful acts of the other members, except when acting in connivance with them, when neglecting to investigate such acts or when, despite knowledge of them, he fails to take action to prevent such acts. A dissenting member shall be exempt from liability when he makes his dissent to be recorded in the minutes of a meeting of the administrative body, or, if this is not possible, when he immediately informs the administrative body, the statutory audit committee, if in operation, or a general meeting about his dissent in writing.

The members shall be jointly and severally liable for the losses caused by failure to comply with the duties imposed by law to ensure the normal operation of the corporation, even when in accordance with the by-laws such duties do not devolve upon all officers.

Anyone who concurs in the performance of any act contrary to the law or bylaws with the intention of obtaining advantages for him or for a third party shall be jointly and severally liable with the officer.

2. Do shareholders have any legal recourse available to them to make members of the board accountable for any breach of their duties?

Provisions mentioned in questions 11 item "e" and 16 are applicable.

3. Is the board permitted to obtain and rely upon disinterested professional advice - from accountants, investment advisers, appraisers - in order to determine whether a transaction is proper and fair to the company and shareholders?

Not prohibited by law. The IBGC code, however, states that external opinions shall be paid by the company and that the board should set rules to regulate the usage of external consultants.

4. Are decisions by the board entitled to a presumption of "business judgment," which shields the decisions from shareholder challenge? If so, under what circumstances and conditions?

Shareholders may challenge board decisions through complaints to the CVM or a civil action if they feel such decisions are harmful to the corporation. Provisions mentioned in questions 11 item "e" and 16 are applicable in the last case.

2. What duties does the board owe to shareholders where it makes a decision that may affect different shareholder groups differently?

The following general duties are prescribed in articles 153 to 156 of Law 6.404/76:

In the exercise of his duties, a corporation officer shall employ the care and diligence which an industrious and honest man customarily employs in the administration of his own affairs.

An officer shall use the powers conferred upon him by law and by the bylaws to achieve the corporation corporate purposes and to support its best interests, including the requirements of the public at large and of the social role of the corporation.

An officer elected by a group or class of shareholders shall have the same duties toward the corporation as the other officers and shall not fail to fulfill such duties, even at the expense of the interests of those who elected him.

An officer is prohibited from:

(a) performing any act of generosity to the detriment of the corporation;

(b) borrowing money or property from the corporation or using its property, services or taking advantage of its standing for his own benefit or for the benefit of a corporation in which he has an interest or of a third party, without the prior approval of a general meeting or the administrative council;

(c) by virtue of his position, receiving any type of direct, or indirect, personal advantage from third parties, without authorization in the bylaws or from a general meeting. Any sum received contrary to this provision shall belong to the corporation.

In view of the corporation's social responsibilities, the administrative council or the board of directors may authorize the performance of reasonable gratuitous acts to benefit the employees or the community to which the corporation belongs.

An officer shall serve the corporation with loyalty, shall treat its affairs with confidence and shall not:

I - use any commercial opportunity which may come to his knowledge, by virtue of his position, for his own benefit or that of a third party, whether or not harmful to the corporation;

II - fail to exercise or protect corporation rights or, in seeking to obtain advantages for himself or for a third party, fail to make use of a commercial opportunity which he knows to be of interest to the corporation;

III - acquire for resale at a profit property or rights which he knows the corporation needs or which the corporation intends to acquire.

An officer of a publicly held corporation shall also treat in confidence any information not yet revealed to the public, which he obtained by virtue of his position and which may significantly affect the quotation of securities, and shall not make use of such information to obtain any advantages for himself or for third parties by purchasing or selling securities. He must also ensure that this provisions are not infringed by a subordinate or third party enjoying his confidence.

An officer shall not take part in any corporate transaction in which he has an interest which conflicts with an interest of the corporation, nor in the decisions made by the other officers on the matter. He shall disclose his disqualification to the other officers and shall cause the nature and extent of his interest to be recorded in the minutes of the administrative council, or board of directors’ meeting.

An officer may only contract with the corporation under reasonable and fair conditions, identical to those which prevail in the market or under which the corporation would contract with third parties. Any business contracted otherwise than in accordance with this provisions is voidable and the officer concerned shall be obliged to transfer to the corporation all benefits which he may have obtained in such business.

1. Board Independence:

1. Are there any requirements that the board assign non-executive board members capable of exercising independent judgment to tasks where there is a potential conflict of interest? If so, under what circumstances?

Not legally required. However, under article 161 of the Corporation Law, corporations must have a statutory audit committee, whose responsibilities include the overview and monitoring of corporate governance.

2. Can specific committees be created within the board? If so, describe their composition and responsibilities. Are there any requirements that some committees be composed solely, or at least primarily, of independent board members?

The Corporation Law allows corporation by-laws to create bodies or commissions with special technical or consultation functions. Members of such committees must follow the same rules applicable to Administrative Council members of to directors.

3. Are there any limitations on the number of board positions that an individual can hold?

Up to a maximum of one-third of the members of the administrative council may be elected to positions on the board of directors. As mentioned before, there must be at least three members for the administrative council and two for the board of directors, with no maximum required. Legally there are no limits on board positions an individual can hold.

2. Describe how and when board members can gain access to relevant information necessary to make decisions on corporate issues.

Board members have full access to information retained by the company while exercising their duties.

For a brief explanation on the Brazilian two-tier board system, please refer to Section VI. It is important to recall that besides the two-tier system composed by the board of directors and the administrative council (highest body in a organization). In addition, an auditing committee (please refer to question 25) complements the structure

The two-tier structure mentioned above is complemented by an auditing board. Such Board does not have decision powers, but is enacted to review all manager’s decisions and verify their compliance to the Law and Company’s by-laws, and issue an opinion on the management board report. A seat in the Audit Committee is granted to the preferred shareholders and another to minority shareholders holding more than 10% of ordinary shares.

The council may be either permanent or appointed for a specific fiscal year, at the request of the shareholders. This audit committee shall be composed of at least three and not more than five members and an equal number of alternates, who shall be elected at a general meeting and who may or may not be shareholders. The members shall hold office until the next annual general meeting held after their election, and may be re-elected.

Only a person who resides in Brazil and is a university graduate or has held a position of corporation officer or statutory audit committee member for at least three years may be elected to the statutory audit committee. The duties of a member of the statutory audit committee may not be delegated.

In addition to restrictions set in question 21 item "b-ii", the following persons may not be elected to the statutory audit committee: a member of an administrative body, an employee of the corporation or of a controlled corporation or a corporation in the same group, and the spouse or any relative up to the third degree of a corporation officer.

When not operating on a permanent basis, the statutory audit committee shall be appointed by a general shareholders' meeting at the request of shareholders, and each period of operation shall terminate at the first annual general meeting held after its appointment. Below, there is a table with the % of shares necessary for minority shareholders to call a meeting to install the auditing committee, as defined by CVM Instruction 324/2000:

The request for the statutory audit committee to operate, even if the subject is not included in the call notice, may be made at any general meeting, which shall elect the members of the council.

The following rules shall be observed in appointing the statutory audit committee:

1. the holders of preferred shares without voting rights or with restricted voting rights shall be entitled to elect one member and his alternate in a separate election; the minority shareholders shall have the same right, provided they jointly represent ten per cent or more of the voting shares;
2. notwithstanding the provisions of the previous item, the other shareholders with the right to vote may elect the effective members and the alternates, who, in any event. shall be equal in number to those elected under sub-paragraph (a), above, plus one.

The remuneration of the members of the statutory audit committee, besides the mandatory reimbursement for traveling expenses, board and lodgings incurred by their duties, will be fixed by the general meeting which elects them. The remuneration of each member shall not be less than ten per cent of the average remuneration paid to each director. Benefits, allowances and shares in profits will not be included in that figure.

The statutory audit committee shall:

1. supervise the acts of the officers and ensure that they comply with their legal and statutory duties;
2. give an opinion on the annual report of the management, including the supplementary information deemed necessary or useful for deliberation at a general meeting;
3. give an opinion on any proposals of the administrative bodies to be submitted to a general meeting, regarding an alteration in the capital, the issue of debentures or subscription bonuses, investment plans or capital budgets, dividend distribution, transformation, merger, consolidation or division;
4. report any error, fraud or criminal acts it may discover to the administrative bodies, and, if these fail to take the necessary steps to protect the corporation's interests, to a general meeting suggesting an appropriate course of action;
5. call the annual general meeting should the administrative bodies delay doing so for more than one month, and an extraordinary general meeting whenever serious or urgent matters occur, including in the agenda of the meeting such matters as it may deem necessary;
6. at least every three months examine the trial balance sheet and other financial statements periodically prepared by the corporation;
7. examine the accounts and financial statements for the fiscal year and give an opinion on them;
8. exercise such responsibilities during a liquidation, bearing in mind the special provisions which regulate liquidations.

The administrative bodies (please refer to section VI) shall by written notice within ten days provide the members of the statutory audit committee with copies of the minutes of their meetings and, within fifteen days of receipt with copies of trial balance sheets and other financial statements which are prepared from time to time, and of budget performance reports, when available.

Upon the request of any of its members, the statutory audit committee shall request clarification or information from the administrative bodies, as well as the preparation of special financial or accounting statements.

The members of statutory audit committee shall attend the administrative council, if any, or the board of directors' meetings in which decisions are made on matters about which the statutory audit committee should express its opinion (items II, III and VII, above).

If the corporation has independent auditors, the statutory audit committee, by request of any of its members, may demand that they provide any clarifications or information considered necessary, and that they investigate specific facts.

In order to perform its task more effectively, the statutory audit committee may, if the corporation has no independent auditors, select an accountant or an auditing firm, fixing reasonable remuneration in accordance with current market standards and compatible with the economic resources of the corporation, and its remuneration shall be paid by the corporation.

Upon request, the statutory audit committee shall supply information on matters within its competence to any shareholder or group of shareholders representing at least five per cent of the capital.

If the statutory audit committee wishes to ascertain a fact where clarification is needed to carry out its functions, it may justifiably pose questions to be answered by an expert. It may request the board of directors to recommend within at the most 30 days three experts, who may be either natural persons or legal entities, with a recognized specialized knowledge in the area. From these the committee will select one, whose fees shall be paid by the corporation.

The members of the statutory audit committee, or at least one of them, shall attend general meetings and shall answer requests for information from any shareholders. The opinions and representations of the statutory audit committee may be presented and read at a general meeting, irrespective of publication and even if the matter has not been included in the agenda.

The members of the statutory audit committee shall have the same duties as the officers, as described in question 22, and shall be liable for any damages resulting from any failure to comply with their duties and from culpable or fraudulent acts or any violations of the law or the bylaws.

A member of the statutory audit committee shall not be liable for the illegal acts performed by the other members, unless he acted in connivance with them or concurs in the practice of the act.

The members of the statutory audit committee shall be jointly and servally liable for omissions in performing their duties, but any dissenting member shall be exempt from such liability if he causes his dissent to be recorded in the minutes of an statutory audit committee meeting and informs the administrative bodies and the general meeting about it.

25. If so, please indicate the following:

Answer to this question relies on the relationship between the board of directors and the administrative council:

1. Substantial differences between the supervisory board and the board of directors, the shareholders meetings and the auditor;

The administrative council is responsible for the matters listed on the responses to question 22-a. Directors form the executive body of the corporation and are responsible for the day-to-day management of the company. Shareholders meeting are responsible for the matters detailed on the responses to questions 7-a (special quorum) and 11-a.

2. Supervisory board’s duties and powers that overlap with those of the board of directors, the shareholders meetings and the auditor;

Difference between those items is clearly stated in the Corporation Law. Please note that in case of conflict of interest, the relation of powers is also very clear, as the shareholder’s meeting is the highest decision body, and is responsible for nominating administrative council’s (supervisory board) members. This council, on its turn, is responsible for appointing both the board of directors and the independent auditor.

3. Is the relationship between any of the members of the supervisory board and the independent accountant certifying the corporation’s financial statements disclosed to investors? Are such relationships prohibited?

Such relationship is prohibited. According to Federal Accountings Council Rule NBC P 1, article 1.2, independent auditors are prohibited to audit companies if he has family relationship with companies’ managers and any employees which have decision powers or work in the accounting department. It is also prohibited to have direct or indirect participation as a shareholder (which on the other hand is mandatory for members of the board). The auditor may also not be employee or manager of the company in the last two years, which in practice prohibits members of the board to become auditors right after their resignation.