The CVM is the Brazilian Securities Exchange
Commission. It provided an important precedent about the rules of state owned publicly
traded companies. In the case Eletrobras, the Agency applied the rules of
conflict of interests to the Federation, the controlling shareholder of the
company. One of the main features of the Brazilian Market is the presence of
the state as shareholder of some of the biggest corporations, and this is
exactly the case of Eletrobras. Eletrobras is the leading corporation in a structure of six
subsidiary companies, six distribution companies, the Electric Power Research
Center (Eletrobras Cepel) and Eletrobas Participações S.A. (Eletrobras
Eletropar) and is also holder of 50% of the capital stock of Itaipu Binacional.
It is in the sector of electricity power generation, which is considered a
public service by the Constitution. This public service is owned by the Union
at the same time that the Union is a shareholder in the publicly traded
company, which created a situation of conflict of interests in the shareholders
meeting that decided the grounds of the contract of the company with the State.
The Rules of State Companies are a mix of norms
regarding public and private interests. According to Brazilian Constitution, in
article 173, the presence of the State in any economic sector demands a
situation of public relevance, which must be stablished by a written Law. In
addition, the Law of Corporations (Law n. 6404/76) provide protection to the
investors of state owned company, stating that those corporations are submitted
to the same regime of rules of private companies. Therefore, the same fiduciary
duties applied to the privately owned corporations are also applied to companies
controlled by the state when the company is publicly traded.
The decision of CVM applied a penalty to the
Union for voting in violation of conflict of interests. According to the
interpretation of the norm provided by the Agency, a shareholder shall not vote
when he/she personally has an interest in the matter that is not the same of
the corporation. The Federal Government of Brazil presented a defense, arguing
that the vote was necessary to protect the public interest that motivated the
creation of the firm.
The issue is complex. Brazilian Administrative
Law created two types of public interests, the primary and the secondary. The
first one is the interest that allows the state shareholder to vote deliberately
against the objective of profits in a shareholder meeting. However, pure
economic concern is a secondary interest, which is not protected by the exception
of the Law. Therefore, in those cases, the same rules of a private shareholder applies
to the State shareholder.
A little summary of the case
The electricity sector has passed through some
difficult times lately in Brazil. The prices are controlled by the State and
the Government artificially maintained low rates to the public users of the
energy during the year of 2014. That was the year of the elections, thus, the
decision was due to pure political reasons. Therefore, the constant policy of
freezing rates in the energy sector allowed the producers of electric energy to
demand indemnities from the government. The relationship between producers and
the state is contractual, because the Union contract a third party to build plants,
produce and distribute energy. These contracts have long terms, and the
majority of them was close to the ending period.
By that time, the Government was negotiating
with the counterparties how to repair the economic losses of the operators of
the electricity plants. One of the possible solutions was a proposal of a
contract extension for the companies to recuperate themselves with revenues of
the extended contractual period. However, the Government suddenly changed the criteria
of valuation of the economic losses, by an administrative act of the President
of Brazil. In that sense, the Union requested that the producers of energy
should agree with the changes of the method of valuing the losses in order to
extend their contract. The Eletrobras Corporation was submitted to the same
condition and the company extended its contract with the wining vote of the
State Shareholder against the will of the minority shareholders.
In the findings of CVM, the State could not
have voted in the meeting due to the rules of conflict of interests. The agency
understands that the rule of conflict of interests requires an analysis ex ante of the conflict, since the
judgment of the case Tractebel. Many jurists are not in favor of that vision,
because they apply the “material theory of conflict of interests”, which allows
a shareholder to vote in those cases, and the conflict should be assessed only
if there was a harm to the company or other shareholders. Despite the existence
of these two theories, the fact is that CVM is building a rule over conflict of
interests and it looks like it will apply to private owned companies and to
state owned companies.
In conclusion, after the decision of CVM, we
can expect judicial actions of the minority shareholders to recover damages to
the corporation and themselves. The Eletrobras does not have the arbitration
provision in its bylaws, as other corporations do. It would definitely be quite
helpful to the investors if there was such a provision, because the duration of
actions regarding corporate matters are not solved in less than 4 or 5 years. Finally,
it remains the question if the judiciary will uphold the same finding of CVM,
since it has the ultimate power to decide about legal issues (there is no res judicata of Agency precedents).
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