Although there is no previously set out legal figure that applies to a cornerstone investor under Brazilian regulations, these investors have played a significant role in developing stock markets in certain countries such as China, and since 2006 they have been significantly boosting market responsiveness to IPOs.

CAPITAL MARKET - Eliana Ambrósio Chimenti


Although there is no previously set out legal figure that applies to a cornerstone investor under Brazilian regulations, these investors have played a significant role in developing stock markets in certain countries such as China, and since 2006 they have been significantly boosting market responsiveness to IPOs.

The term “cornerstone investors” usually refers to investors proposing to invest a certain amount in an offering unrelated to the issuer or its controlling shareholders. They may be mere equity investors or they may be strategic investors for the issuer.

As a rule, these investors sign with the issuer an investment or subscription agreement for a certain number of shares, which will vary depending on the offering price. In exchange, they receive an assurance that they will be able to invest even if the offering is oversubscribed. In other words, even
Banking where there is excess demand these investors’ orders will be allocated and will not be subject to apportionment like others. 

In many markets, the involvement of cornerstone investors in public offerings is seen as a positive one, since their reputation can act as a real “seal of quality” for both the issuance and the issuer. By investing their own funds or assets under their management, and in many cases by not selling stock during a lock-up period, these investors can boost the market´s confidence in an offering.

The question being asked is whether the involvement of these investors in public offerings under the above conditions complies with applicable regulations. More specifically, the fact that Brazilian rules state that public offerings must be made under conditions that ensure equitable treatment to those receiving and accepting an offer, and that the lead bank must organize a distribution plan that may take into account its customer relationships and other commercial or strategic considerations for the lead bank and the offeror, in order to ensure fair and equitable treatment for investors, among others (Art. 21 and Art. 33, paragraph 3, CVM Instruction 400/2003, as amended).

In Brazil there are some key issues to be considered when structuring an offer involving cornerstone investors. For example, one might ask whether the risk taken by those investors - which will be greater the longer the lock-up period - is a fair reward for the certainty of allocating their investment in a deal that may cause significant excess demand. Furthermore, does their involvement really help improve the market´s responsiveness to an offering? Will the information detailed in the prospectus be sufficient to enable others participating in the offering to make their investment decisions?

If the answer to the above questions is yes, then there is no reason to expect that there will be any adverse effect on the offering or on the smooth functioning of the securities market arising from the involvement of these investors.

BANKING – Bruno de Oliveira Duarte Ferreira

Central Bank alters export finance facility rules again

In March this year, the Central Bank of Brazil’s Circular 3580 altered the rules for credit or pre-payment against export revenues earned in foreign currency. It limited the possibility of extending this type of credit to any party other than the importer and set repayment at 360 days. Subsequently, on June 28, 2012, the Bank issued Circular 3604 extending access to this type of export finance to other legal entities abroad (in addition to importers), including financial institutions.

However, there was no change in the maximum period of 360 days between officially arranging foreign currency conversion and shipping the goods or services being exported, as established by Circular No. 3580. For transactions made prior to Circular No. 3580, the Central Bank´s position so far has been to favor amending their details on record, including financial conditions, and the lengthening or shortening of repayment periods.

This type of credit, pre-payment against export revenues earned in foreign currency, has long been a wellused source of financing for Brazilian exporters. Restoring the possibility of funding for financial institutions responds to the concerns of exporters who were searching the market to find alternative ways of arranging this type of financing.

CAPITAL MARKET – Luis Claudio Abreu Coutinho

Independent directors

Since 2000, BM&FBovespa has introduced special listing segments for the stock market. Based on Corporate Governance, this set of segments is characterized by the fact that it requires what the market considers as good practices, although such practices are not legally required.

Having independent directors is a requirement for the Novo Mercado and Corporate Governance Level 2 segments - but not for Level 1 and Bovespa Mais. Under these regulations, at least 20% of members of the board of directors of a listed company must be independent directors (the stock exchange suggests 30% for companies moving to an IPO). In some cases, “independent directors” are deemed persons elected in accordance with Art. 141, §§ 4 and 5 of the Law of Corporations (elected by minority shareholders and/or holders of preferred shares).

There is no legal concept, but the regulations do define an “independent director”. Based on the IBGC Best Practices Code, BM&FBovespa has listed a number of situations in which a person may not be eligible as a board member. The list is of a somewhat restrictive and uncompromising nature.

However, while listing objective situations (not being a spouse or second degree relative of a Company officer), the regulations also use broad terms that involve a certain degree of subjectivity, such as the question of “ties” (not having any ties to the Company other than holding shares).

As a result, issuers that wish to move into these segments often raise questions as to what constitutes an “independent director”. An individual may in principle be considered independent in the sense of not being barred on account of an objectively defined condition, but there may be a subjective or indirect connection with the controlling shareholder of the Company, its subsidiaries or affiliates. How can one tell whether or not this connection is strong enough for this person to be ruled out as a potential independent director?

The issue has to be analyzed on a case by case basis. When a company notifies the BM&FBovespa, then they will decide, based on the documentation submitted, whether persons appointed as independent directors, either in relation to the controlling shareholder or the Company, its affiliates and subsidiaries, do or do not have a connection or relationship to the extent that they may not reasonably be described as independent for the purposes of the applicable regulations.

ENVIRONMENTAL - Roberta Danelon Leonhardt and Yuri Rugai Marinho

Environmental Law: incentives for improvement

Traditionally, both the legal system and society are in favor of punishment for any conduct detrimental to the environment, and do not show much interest in the causes of such conduct, or the difficulties facing the party deemed guilty of infraction, or even the broader scope of environmental law - prevention and remediation of damage. People often overlook the fact that incentives for a particular behavior may be of more benefit to the environment and be more effective in upholding environmental standards and their applicability, while also involving less of a public spending burden.

Incentives encourage good entrepreneurs and ordinary citizens while removing motives for committing offenses, thus ensuring the environment remains intact and that people live healthier lives. Avoiding environmental damage is less costly for society than investigating and correcting harm, and punishing the offender responsible for it.

It is true that the law must resort to punitive methods for educational purposes, or to suppress undesirable conduct. However, they may not be the only instruments that can be used, especially in cases such as environmental problems, where damage can hardly be repaired.

Every law abiding person or entity under public or private law that does not harm the environment has an important role to play in society to prevent the occurrence of damage to the environment and to ensure its protection. Such persons or entities, we may add, should be recognized and incentivized to continue making their contribution.

Note that what we are proposing here is not to introduce a kind of salary for citizens who fulfill their constitutional duty to protect the environment. The aim is simply to incentivize good environmental practice. This may be done in various ways: (i) reducing tax burdens; (ii) cutting back the red tape needed for land ownership or get title deeds officially recognized; (iii) providing facilities to obtain loans; (iv) listing or ranking persons or entities known for their good environmental practices; (v) mitigating penalties in cases of unintentional environmental damage, and many others.

The international community has been moving toward something along these lines, and Brazil too has shown support for this, as noted in the content of federal regulations issued after 1992, especially its policies on Climate Change (2009) and Solid Waste (2010). However, much more could be done.
We have to examine the issue and change. Incentives are needed in order to improve.