New Rules For The Portfolio Of The Brazilian Private Equity Investment Funds

On May 11, 2011 the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) enacted CVM Instruction No. 496 (CVM Instr. 496/2011), that amended CVM Instruction No. 391, of July 16, 2003 (CVM Instr. 391/2003), which regulates the incorporation, operation and administration of Private Equity Investment Funds (Fundos de Investimento em Participações - FIPs) in Brazil.

FIPs are closed-end investment funds created with the purpose of acquiring shares, debentures, subscription bonuses and other securities convertible into or exchangeable for shares issued by publicly or privately held corporations (the target companies).1

The FIP must participate in the decision-making process of the companies in which it invests, typically through one of the following ways: (i) by participating in the controlling group; (ii) by entering into shareholder agreements; or (iii) by entering into any other agreement or adopting procedures that ensure the participation of the FIP in defining the strategic and management policies of the target company(ies).

In the case that the target company is a privately-held corporation, the target company must: (i) not issue founder's shares; (ii) establish a joint term of office of one year for the members of their board of directors2; (iii) disclose all related-party agreements, shareholder agreements, stock option plans and share buyback plans; (iv) adhere to an arbitration chamber for resolution of corporate disputes; (v) undertake to adhere, in the event of going public, to a special segment of the stock exchange or entity supporting a regulated over-the-counter market that ensures, at least, the differentiated levels of corporate governance described in items (i) to (iv) above; and (vi) have their annual financial statements audited by independent auditors registered with CVM.

The main change introduced by CVM Instr. 496/2011 is to oblige the new FIPs incorporated after May 12, 2011 or the existing FIPs that decide to increase their capital after May 12, 2011 to maintain, at least, 90% of their assets invested in shares, debentures, subscription bonus or other securities convertible into or exchangeable for shares issued by publicly or privately held corporations, pursuant to the terms of article 2 of CVM Instr. 391/2003.

It is expected that the remaining 10%, if not invested in the same assets, be used for cash purposes or to acquire...