Clarissa FreitasRafael Costa Silva e Bernardo de Barros Castro

The Cvm's Superintendence of Business Relations (SEP) took a stand against the proposal to change Vale S.A.'s bylaws that sought to change the system of election of the members of the company's board of directors, introducing the possibility of negative voting (or rejection). Under the new system, only candidates who obtained more favorable than negative votes from the company's shareholders would be eligible.

Understanding that the proposal did not represent the best governance practices adopted by true corporations, an independent board member of the company filed with CVM on February 4, a consultation on the lawfulness of the proposed changes in the election system that would be appreciated by the company's shareholders at an extraordinary general meeting convened with this and other objectives.

More precisely, the object of the consultation was restricted to the analysis of items V and VI of the new §10 of Article 11 of the company's bylaws, transcribed below:

"V – Candidates with the highest number of favorable votes will be considered elected, provided that the number of favorable votes are higher than the number of negative votes; in the event of a tie, the candidate who has received the least negative votes or turns out to the oldest will be considered elected successively;

VI – In case there is not candidates in a number corresponding to the composition approved for that mandate eligible according to item V above, a new election will be held in another meeting for the unfilled positions, with the preparation of a new list of candidates , in a number of at least equal to the positions to be filled, and in that period the Board of Directors shall operate with the members already elected."

In the understanding of the board member who made the consultation, the implementation of the negative voting system would make it difficult for minority shareholders to elect candidates on the board of directors, since Vale still has many major shareholders, even though it has become a dispersed capital company. Thus, the candidates nominated by minorities would already count, at first, with a significant amount of negative votes (conferred by the large shareholders). Most likely, this would make them ineligible without further repercussions. It is important to note that this negative voting system would apply only to the "general" election of members of the board of directors. It would not be valid for multiple voting and separate voting modalities.

In addition, the board member pointed out that, in a similar case analyzed by CVM in 2015 (CVM Administrative Procedure No. RJ2015/2925, involving Usiminas), SEP would have already concluded that there would be no negative votes, for the purposes of quorum deliberation, in elections of members of the board of directors.

Defending the proposal, the company argued that, given the absence of any legal fence, the changes would be lawful and, therefore, could integrate its bylaws. Furthermore, it argued that the Usiminas case had never been the subject of scrutiny by the CVM Collegiate, having been analyzed only incidentally.[1] Finally, it was based on a recent thesis of former CVM director Gustavo Machado Gonzalez that the elections of the companies' boards of directors – according to Law No. 6,404/76 – would not be restricted to the majority voting system. It would be up to each company to adopt the model that would be most convenient for it.[2]

In its manifestation, SEP stressed that, despite the similarities between the Usiminas case and Vale's, it cannot be concluded that the former represents a precedent for the second. This is mainly because the express prediction that a candidate for the board of directors cannot be elected if he has obtained more negative votes than approvals is, it seems, unprecedented for our corporate law.

The SEP also understood that the amendment proposed by Vale would fragment the procedure of elections to the council, something not provided for in the applicable rules. In the "new" system, those candidates whose vote balance was negative would be excluded. In a second moment, the new advisors would be chosen from among the remaining candidates.

In addition, SEP pointed out that the negative voting system could generate distortions, since one candidate could be elected even if he received fewer favorable votes than another, which would represent a distortion of the election process and the will of shareholders. In this sense, the SEP based that the changes in the elections to the board of directors intended by Vale were not compatible with the system of Law No. 6,404/76, and therefore rejected the lawfulness of the contrary vote.

After SEP’s decision, Vale chose to give up presenting the proposed amendment to its shareholders. The matter was not analyzed by the Collegiate, but it is likely that this decision of the technical area already serves as a disincentive to other companies that want to introduce the system of negative voting in their bylaws.

Under the current CVM's understanding, companies may allow shareholders to vote against a particular candidate. However the registration of this type of vote is only admitted to delimit the shareholder's liability. In practice, the negative vote is equivalent to abstention.

[1] The CVM Board did not analyze the case because the applicants dropped out.

[2] GONZALEZ, Gustavo Machado. "Notes on the election of the board of directors by means of majority voting." In: Rodrigo Rocha Monteiro de Castro, Luis André Azevedo and Marcus de Freitas Henriques (coord.). Corporate Law, Capital Markets, Arbitration and Other Topics - Tribute to Nelson Eizirik. São Paulo: Latin Quarter, 2021, p. 446-447.