On November 13, the Board of the Brazilian Securities and Exchange Commission (CVM) decided CVM Administrative Proceeding SEI No. 19957.005563/2020-75, which arose from an appeal filed against the understanding of the Bureau of Corporate Relations (SEP), manifested in Report No. 083/2020, to the effect that the founding shareholders of Linx S.A. are prevented from voting on certain matters on the agenda of the extraordinary general meeting (EGM) of the company called to resolve on the merger of all its shares into STNE Participações S.A.

 

Per the SEP’s understanding, the impediment on voting results from the receipt of a private benefit by the founding shareholders, pursuant to article 115, paragraph 1,[1] of the Brazilian Corporations Law (Law No. 6404/76), since the latter, due to the merger of shares, would enter into non-competition and consulting agreements with the acquiring company (ancillary contracts), and would be remunerated for the obligations assumed.

 

The founding shareholders argued that the benefit derived from the ancillary contracts was not linked to Linx's status as a shareholder, nor was it even a direct result of the decision at the meeting, which is why the compensation received could not qualify as a private benefit for the purpose of disqualification from voting under the Brazilian Corporations Law (LSA).

 

SEP, on the other hand, argued that "it would not be appropriate to believe the case of a private benefit provided for in article 115, paragraph 1, of Law No. 6,404/76 as restricted to benefits received in the condition of shareholders, either because there is nothing in the law that restricts this interpretation, or because article 109 itself already provides that the shares of each class will confer equal rights to their holders." From this point of view, a meeting resolution that intended to confer special rights to certain shareholders, in this condition as shareholder, would not be admissible according to article 109.

 

Also for SEP, "in spite of the non-competition commitments and the fact that the proposal to hire the [founding shareholder] is not, in itself, the subject matter of a resolution at a meeting, such agreements are an essential condition for the transaction, they originate precisely from STNE's proposal to take over Linx], and there is, therefore, an undeniable direct and intrinsic relationship between the benefit that will be received and the transaction to be resolved on at an EGM. This is not a circumstantial and uncertain situation which may potentially generate an environment that benefits the shareholder in some way. On the contrary, these are contracts signed in the context of a restructuring and whose effects only require approval of the transaction at a meeting.”

 

Within the scope of the proceeding, the Board of the CVM, by majority of votes, granted the appeal[2] filed by the founding shareholders, to admit their vote at Linx's EGM, which resolve on the transaction based on the following grounds (presented in summary form):

  • The ancillary contracts are not the subject of a resolution at the EGM, nor do they have Linx as a counterparty or intervening party, nor do they generate obligations or encumbrances for the company;
  • The benefits do not derive from the status of partner of the founding shareholders and are not even related to the position of those shareholders in Linx's capital stock. In this sense, they do not constitute a breach of equality in the treatment of shareholders, a necessary condition to establish the legal scenario for an impediment to voting;
  • The ancillary contracts are not "born" out of the decision of the Linx shareholders meeting regarding the matters on the agenda of the EGM in question, but out of the ability and expertise of the founding shareholders to compete with Linx after the transaction has been completed or to provide the services contracted, as the case may be;
  • There is clearly a correlation between the meeting resolution and ancillary contracts, due to the connection for generating effects, but even so, it is not characterized as a direct benefit to which the shareholders will give cause through the meeting decision; and
  • The interpretation that the concept of a private benefit would encompass indirect benefits, whether derived from contracts of any nature or from other sources (and not those received as shareholders), would create too great an intersection between the concepts of private benefit and conflicting interest.

 

In a dissenting vote, and corroborating the understanding expressed by SEP, board member Henrique Machado found an impediment to vote due to the private benefit or, alternatively, due to a conflict of interest, based on the following grounds:

  • The principle of equal treatment of all shareholders continued to be protected by article 109, paragraph 1, of the LSA, and thus the appropriate interpretation of the scenario for a private benefit under article 115, paragraph 1, is that which presupposes equal treatment among shareholders and provides abstention from voting regardless of whether the advantage to be gained is linked to the condition of shareholder, provided that it is not extended to the other partners;
  • Although the ancillary contracts are not resolved on by the EGM, the fact remains that they were negotiated together and are included in the conditions and characteristics of the transaction;
  • In the field of governance, there is a typical situation of adverse selection prior to the formation of the contract (ex ante) that should give rise to the adoption of mechanisms to prevent the risk of expropriation and encourage the alignment of interests between management and minority shareholders, such as recusal from voting; and
  • Even if one could rule out the possibility of a private benefit, the potential conflict between Linx's interests and those of its founding shareholders resulting from ancillary contracts, whose imperative expression "may not vote" in article 115, paragraph 1, of the LSA prevents the participation of the founding shareholders.

 

In his statement of vote, board member Alexandre Costa Rangel diverged from board members Marcelo Barbosa and Flávia Perlingeiro exclusively in relation to the recognition of the impediment to voting by shareholders in cases of conflict of interest, under the following terms: "I do not envisage legal support to prevent in advance the exercise of the right to vote of a shareholder in a conflict of interest, based on article 115, paragraph 1, in fine, of Law 6,404/76. In my opinion, the legal framework provided for by the Brazilian Corporations Law does not authorize formal prohibition a priori of the vote of a shareholder in the event of a conflict of interest, in accordance with the aforementioned provision."

 

As a result, the lawsuit reversed SEP's understanding, and the CVM's Board stated that, for the facts under analysis (those suggested in the SEP Report and others heard up to the judgment date), Linx's founding shareholders would not be prevented from voting at the EGM called to approve the transaction.

 

 

[1] Article 115. Shareholders must exercise the right to vote in the interest of the company; votes exercised in order to cause damage to the company or other shareholders, or to obtain, for oneself or for others, an advantage to which one is not entitled and which results, or may result, in prejudice to the company or to other shareholders are considered abusive.

Paragraph 1. Shareholders may not vote on resolutions of the general meeting on the valuation report of assets with which to contribute for the formation of the capital stock and approval of their accounts as officer, or on any others that may benefit them in a particular way, or in which they have an interest conflicting with that of the company.

[2] With votes in favor by Marcelo Barbosa, chairman, and the directors Flávia Perlingeiro and Alexandre Costa Rangel.