The Position Of The Brazilian Regulator Vis-À-Vis The “Poison Pills”

On June 23, 2009, the Board of the Brazilian Securities and

Exchange Commission (Comissão de Valores

Mobiliários – CVM) approved Opinion

(Parecer de Orientação) No. 36, of the same

dated, about statutory provisions imposing encumbrance(s) on

shareholders who vote favorably to the elimination of the share

dispersion protection clause inserted in the company's

bylaws. These clauses are usually referred to as "poison

pills"1 and are also known as "shark

repellent", "porcupine provisions" or

"shareholder rights plan".

In the last years, the bylaws of several Brazilian companies

have been amended to include share dispersion protection clauses

which force any investor who is determined to acquire a certain

percentage of the outstanding shares of the target company to make

a public offering to purchase the remaining shares. Furthermore,

some of these bylaws contain an accessory clause, imposing a

substantial burden on the shareholders who vote favorably to

suppress or amend such provisions, that is, to eliminate the

obligation to make a public offering previously contemplated in the

bylaws.

These accessory clauses are classified under Brazilian law as

"cláusulas pétreas", which means

"clauses carved on stone", i.e. provisions that cannot be

modified or eliminated at the discretion of the beneficiaries (the

shareholders) or at the request of third parties (the potential

purchasers).

CVM understands that the mandatory application of these

accessory clauses is not compatible with several principles and

rules of Law No. 6.404, of December 15, 1976, as amended (the

Brazilian Corporate Law – BCL), mainly those contemplated

in articles 115, 121, 122, I, and 1292, which are

analyzed below.

In this regard, the CVM Board has identified the following legal

grounds which justify the understanding expressed in the

Opinion:

By imposing a substantial encumbrance to the shareholders who

approve the suppression of a share dispersion protection clause,

the accessory clause may limit the sovereignty of the General

Shareholders' Meeting established by article 121 of

BCL3.

If the purpose of the accessory clause is to make the share

dispersion protection clause almost unchangeable in practice, this

will be contrary to the provisions of article 122, I, of

BCL4, which empowers the General Shareholders'

Meeting to amend the bylaws whenever this is required by the social

interest.

The practical effect of the accessory clause is to require the

unanimous consent, or the approval of almost all the shareholders,

to eliminate the share dispersion protection clause from the

bylaws. Indirectly, the accessory clause may increase the

quorum set forth in the applicable legislation to take

this resolution, which is forbidden in the case of a publicly-held

corporation by force of article 129, § 1º, of

BCL5.

The bottom line is that the accessory clause may violate

article 115 of BCL6. Consequently, the economic burden

established by the accessory clause may prevent the shareholder to

exercise his/her/it voting rights in the best interest of the

company as determined by law.

Based on the above-mentioned reasons, the Brazilian regulator

decided to issue an Opinion to clarify that CVM will not apply any

penalties, in administrative proceedings, to the shareholders who,

in compliance with the legislation in force, vote for the

suppression or amendment of the share dispersion protection clause,

regardless of making a public offering as set forth in the

accessory clause.

The first benefit to justify the adoption of

"poison pills" by a company is to assure equal treatment

to all the shareholders and to cause the acquisition of control of

a target company to also favor the minority shareholders by means

of a public offering addressed to all the shareholders. However, it

is important to give the shareholders the option to exclude the

"poison pills" from the bylaws should under specific

circumstances they deem convenient to do so, i.e. if they conclude

that the administrative cost of the public offering is not

justified in the concrete case and may be avoided.

Unlike other jurisdictions such as the United States in which

the wider share dispersion is quite common and constitutes the

general rule, in Brazil many publicly-held corporations have an

owner (or a group of owners) holding the share control7

and share dispersion still remains an exception8.

In the case of wider share dispersion companies, the

shareholders do not have any specific interest in suppressing the

"poison pills" because they would like to maintain the

equal treatment among them in the event of takeover of the target

company by a potential investor.

If the company is controlled by a person or a group of persons,

the importance of the "poison pills" is dramatically

reduced since the equal treatment is assured, at least in part, by

article 254-A of BCL9. Upon transfer of control of a

publicly-held corporation, this provision grants to the minority

shareholders the right to receive at least 80% of the amount paid

for the voting shares comprising the controlling stock (tag along).

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