General Meetings: More Information and More Votes

Written by João Marcelo G. Pacheco and Leonardo Baptista Rodrigues Cruz of Pinheiro Neto Advogados

Unofficial English Translation from Portuguese by Dwight Clancy of Glass, Lewis & Co., LLC

1. After hearing from market participants regarding Public Comment n° 02/2009, on December 12, 2009, the Brazilian Securities Commission (CVM) published Instruction 481 which seeks to regulate two principal themes involving the general shareholders’ meetings of public companies, further detailed below: (i) the disclosure of information and documents that should accompany the meeting notice and/or should be made available in advance to shareholders; and (ii) proxy solicitations.

2. By means of this regulation, the intentions of Instruction 481 are to: (i) improve the quality of information that is disclosed by companies to their shareholders and to the market in general, encouraging the use of the internet; (ii) lower the cost of voting and increase shareholder participation at the general meeting, especially in those companies with a disperse shareholder base; and, thus, (iii) facilitate the supervision of the business.

3. Meeting Announcements. In general, Instruction 481 consolidated the CVM’s understanding of other rules and administrative acts on the subject, including that: (i) the meeting announcement should not include the agenda item “transaction of other business”; (ii) the meeting notice should state the minimum percentage of the share capital necessary for the requisition of cumulative voting for the election of directors; (iii) to lessen the bureaucratic admissions process for the general meeting, the company can solicit the advance deposit of necessary identification and power of attorney; however, the company cannot prevent the participation of a shareholder who presents the documents at the meeting itself.

4. The CVM decided however, to permit those companies whose bylaws stipulate the advance deposit of these documents, to require the advance deposit. This will require a change in the practices of various companies that require the advance deposit of documents by means of the meeting announcement, and not their bylaws.

5. Availability of Information and Documents. Instruction 481 requires that all the documents and information related to the items on the agenda for the general meeting be made available via the CVM’s website on the date of the first publication of the meeting notice (unless Brazilian Companies Law, Instruction 481, or any other regulations requires a longer period). What information and documents does this refer to?

6. Instruction 481 goes beyond the generic language of Brazilian Companies Law regarding what is “relevant” or “pertinent” to the discussions of the general meeting. It expressly defines what information and which documents should accompany the meeting notice and be made available through the CVM’s website for each of the following issues or circumstances that may be subject to discussion at the general meeting: (i) amendments to bylaws; (ii) election and remuneration of directors (and the election of the supervisory council); (iii) stock option plans; (iv) the creation of or amendment to the terms of preferred shares, their benefits or conditions for redemption or cancellation; (v) reduction of the mandatory dividend; (vi) acquisition of control of another company; (vii) concession of the right to withdrawal and; (viii) appointment of appraisers. This material should be carefully revised by the company and its advisors.

7. With regard to the approval of the company’s accounts, which is carried out at the annual general meeting, it’s worth noting that Instruction 481 requires management’s discussion and analysis of the financial situation of the company to be disclosed together with the other documents and information that must be disclosed 30 days in advance of the meeting according to Brazilian Companies Law.

8. In line with his/her responsibility to communicate with shareholders, the director of investor relations (DIR) is responsible for the disclosure of the abovementioned documents and information. As such, the regulations stipulate that the other directors, members of the supervisory council, and shareholders should provide the necessary material to the DIR for him/her to carry out his/her duties.

9. Proxy. Motivated by clear signs of evolution in the Brazilian market, especially the growing number of companies with a disperse shareholder base, Instruction 481 finally regulates the provision regarding proxy solicitations in Brazilian Companies Law.

10. What are proxy solicitations and how are they defined? The answer depends on the means of communication utilized to make the solicitation. The solicitation occurs: (i) when public means of communication are utilized, such as the television, radio, magazines, newspapers or the internet; or (ii) when, if made by the board or by the controlling shareholder, it is directed at more than five (5) shareholders; or (iii) when, if made by any other person, it is directed at more than ten (10) shareholders (under conditions (ii) and (iii), independently of the means of communication utilized). It’s worth noting that in principle, anyone – director, controlling shareholder, minority shareholder, or third-party – can carry out a solicitation; what changes essentially, are the rules regarding the reimbursement of the costs (described below), and some details regarding the mechanics of disclosure (periods, etc.).

11. A proxy solicitation must be carried out in accordance with the following rules established by Instruction 481: (i) it must be directed to all shareholders with voting rights; (ii) it must be accompanied by the respective proxy card, as well as other information prescribed by Instruction 481, such as the materials for which the proxy is being solicited, and the identification of the people who sponsored  or expensed the solicitation (including information regarding any business or familial relationships with the company or its stakeholders).  All the material utilized for the solicitation must be made available to shareholders by the company on the CVM’s website.

12. How will the votes be instructed? The proxies should indicate how the representatives at the meeting should vote in relation to each item on the agenda, as well as appoint distinct representatives to: (i) vote in favor; (ii) vote against; and (iii) abstain from each one of the proposals subject to solicitation.

13. With regard to the vote instructions: a solicitation made by the board for the election of directors (or supervisory council) should facilitate the possibility to vote for other candidates nominated by shareholders that represent at least 0.5% of the share capital. In consideration of this objective, Instruction 481 provides mechanisms that allow shareholders to indicate their nominees to the company prior to the proxy solicitation made by the board.

14. Who pays for the costs of solicitation? If the solicitation was made by the board, the company can expense it independent of the result.

15. If made by shareholders, the treatment varies; however, with the intention of preventing frivolous solicitations, only shareholders representing at least 0.5% of the share capital will be reimbursed.

16. Companies that do not accept electronic proxy solicitations should reimburse the following costs incurred by shareholders during the solicitation process: (i) the publication of up to three (3) announcements in the newspaper used by the company; and (ii) printing and shipping of the proxies. The reimbursement will be made in full if the general meeting approves the proposal indicated in the solicitation, or elects at least one of the nominees. In the case of a negative outcome, at least 50% of the incurred costs will be reimbursed, allowing the company to fix a higher percentage.

17. In the case where the company has adopted an electronic proxy voting system (whose characteristics are established in Provisionary Measure No. 2200-2, of August 24, 2001), the obligation of the reimbursement to shareholders will be waived. In this case, shareholders representing 0.5% of the share capital can demand that their proxy solicitations be included by the company on the electronic system, i.e. without printing and shipping costs.

18. Finally, to allow for the solicitation of proxies by shareholders to their fellow shareholders, Instruction 481 regulates the provision from Brazilian Companies Law (article 126, §3°) regarding the requesting of the shareholder list for those shareholders who represent at least 0.5% of the share capital of the company.

19. The company can only request from the shareholder requesting the list his/her identification and notarized signature, as well as a declaration stating the intention to use the list to carry out a proxy solicitation. During the “period prior to the general meeting”, further detailed in Instruction 481, the company is obligated to attend to the request within three (3) business days, and without charging the shareholder requesting the list. The list must provide the information of all the company’s shareholders, ranked by number of shares held, from most to least, without necessarily disclosing the number of shares held.

20. Conclusion. Instruction 481 is a reaction to the growth and potential of Brazilian capital markets, addressing rather important themes regarding general meetings and the exercise of voting rights by shareholders. As a result, beginning January 1, 2010, every company will have to carefully prepare itself for their next shareholders’ meetings.

São Paulo, December 23, 2009.