Controlling Shareholders Of Mixed-Economy Companies* Are Punished For Violating The Brazilian Corporation Law

On May 26, 2015 the Board of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) judged, for irregularities involving breach of fiduciary duty and exercise of voting rights of the controlling shareholder, the following defendants:

1. State of São Paulo (Estado de São Paulo) - Punishment Administrative Process CVM nº RJ2012/1131; and

2. Union1 (União Federal) - Punishment Administrative Process CVM nº RJ2013/6635.

These two cases were established from the analysis by the Supervision of Relations with Companies (Superintendência de Relações com Empresas - SEP) of CVM and were reported by the Director Luciana Dias and their respective results are outlined herein.

The first case (Punishment Administrative Process CVM nº RJ2012/1131) involves complaints about transactions made between Empresa Metropolitana de Águas e Energia S.A. (EMAE) and Companhia de Saneamento do Estado de São Paulo (Sabesp), both mixed-economy companies controlled by the State of São Paulo.

In particular SEP analyzed the operations in which Sabesp withdraws water of two reservoirs owned by EMAE (Guarapiranga and Billings), free of charge and to the detriment of the hydroelectric generation capacity of EMAE, for public supply of the metropolitan region of São Paulo and for SEP these withdrawals would be non-commutative transactions between related parties.

According to the prosecution made by CVM's technical area, the State of São Paulo remained inert in this disadvantageous relationship resulting from the free catchment of waters of the reservoirs of EMAE by Sabesp. Consequently, the State of São Paulo have ceased to serve the interests of the other shareholders of EMAE and had therefore violated the provisions of the sole paragraph of article 116 of Law nº 6,404 of December 15, 1976 (the Brazilian Corporation Law - BCL). This was the conclusion of the prosecution.

A controlling shareholder is defined as an individual or a legal entity, or a group of individuals or legal entities by a voting agreement or under common control, which: (a) possesses rights which permanently assure it a majority of votes in resolutions of general meetings and the power to elect a majority of the company officers; and (b) in practice uses its power to direct the company activities and to guide the operations of the departments of the company2.

Pursuant to the sole paragraph of article 116 of the BCL, a controlling shareholder shall use its controlling power in order to make the company accomplish its purpose and perform...