Place of incorporation & Brazilian Depositary Receipts & Applicable Law

Federal Law No. 6.385, of December 7th, 1976, outlines the mandate of the Brazilian Securities Commission (Comissão de Valores Mobiliários). Under article 16 of Federal Decree No. 6,382, of February 27th, 2008, the Department of Public Company Supervision oversees not only publicly-traded companies, which are regulated by Federal Law No. 6.404 (Corporations Act), of December 10th, 1976, but also other issuers of securities. The Department’s decisions may be appealed to the Board of Commissioners and thus comprise the administrative case-law generated by the Commission.

In Adeonidas Bento da Silva et al vs. Laep Investments Ltd, a 2013 case, the Commission had to rule on the applicability of Brazilian law to foreign issuers. The result, whilst illustrating the Commission’s approach to some pressing due process of law issues, was a rather broad study in Brazilian Private International Law. Claimants were holders of Laep’s Brazilian Depositary Receipts issued in Brazil. Laep was, at that point, a corporation incorporated in the Bermudas. Against this background, a number of rules, other than those mentioned above, came to the fore in the Commission’s ruling: (a) Articles 8, 9 and 11 of Decree-Law No. 4,657 (Brazilian private international law statute); (b) Article 170 of the Constitution; (c) Articles 75, 166, 187 and 1.126, of Federal Law No. 10.406, of January 10th, 2002 (Brazilian Civil Code); (d) Article 36 of Federal Law No. 12.529, of November 30th, 2011 (Antitrust Act); (e) Article 1 of Annex 32-I of the CVM Act No. 480/09.

Claimants sought that Laep be subject to Brazilian law. This would derive from a non literal construct of Article 11, of Decree-Law No. 4,657, which states: “Entities pursuing collective interest goals, such as corporations and foundations, are governed by the law of the State of incorporation”. Claimants argued that by merely applying Article 11, the Commission would trump national sovereignty; the social function of property; and consumer protection, all of which are enshrined in Article 170 of the Constitution. This would be so taking into account the fact that Laep had most of its assets in Brazil; and that the bulk of the company’s obligations, specially those towards the Claimants, was to be performed in Brazil.

Therefore, instead of Article 11, the Commission should apply Articles 8 and 9 of the Decree-Law No. 4,657. The former reads that to qualify and regulate assets, one should apply the law of State wherein they are located; the latter reads that to qualify and regulate obligations, the law of the country where they were established is applicable. Furthermore, according to Claimants, Article 11, paragraph 1, of Decree-Law No. 4,657, provides that Brazilian law governs branches and establishments of foreign entities in Brazil.

Article 75 of the Brazilian Civil Code would also support the Claimant’s case, in positing that the domicile of legal entities is where their board sits and where management operates. To prove that, Claimants disclosed several documents issued by Laep’s office in São Paulo. Laep’s office in the Bermudas, on the contrary, was that of a law firm specialized in providing services to companies that merely were incorporated in that country, but which conducted their business elsewhere. Corroborating that, Laep had been given a tax break by the government of the Bermudas which relied precisely on the fact that it had no business in the country. Claimants also contended that all of Laep’s stock was traded in Brazil and its shareholders were all Brazilians. Additionally, Article 36 of Federal Law No. 12,529 (Antitrust Act) would be infringed if Laep were to be allowed to compete against Brazilian companies without the constraints and investor protection standards imposed by the Brazilian Corporations Act.

Finally, Claimants argued that the Commission had unlawfully enacted Article 1 of Annex 32-I of the CVM Act No. 480/09. Claimants opposed the Commission’s transitional rule for foreign entities applying to issue securities targeting Brazilian investors. The Commission lacked the power to waive in such a fashion the applicability of Brazilian law. Under this scheme, implemented in 2009, the Commission itself had tried to stall situations similar to that of Laep from taking place. Issuers would be required to provide substantial proof of their activities being carried out abroad - prior to that the mere incorporation taking place abroad would suffice. Should issuers fail to give such proof, they would be subject to Brazilian law. This was done whilst securing that previous BDR programs were allowed to remain operative and out of the scope of the Brazilian Corporation Act.

On a more factual basis, Laep argued that most of its assets are located abroad; and that its stock was issued and traded in Luxembourg, the totality of its shareholders being foreign entities. Laep objected that the lawyer hired by the Claimants was not a member of the Bermudas Bar Association and thus could not validly give an opinion on the construct of the legislation of that country. Moreover, according to Laep, Claimants’s rights were not those of Laep’s shareholders, but those expressly stated in the Brazilian Depositary Receipts contract. This document set forth that, in respect to investor’s rights, the law of Bermudas, which was to govern the investment, might be more restrict.

The Attorney-General’s Office special appointee to the Commission issued an opinion on the matter. The Commission, the report said, had no power to overcome Article 11 of the Decree-Law 4.657 and thus apply Federal Law No. 6.404 to the relationship between Claimants and Laep. The Judiciary alone, it was argued, could do that. What’s more, as per Article 4 of Federal Law No. 6.385, it was the Commission’s mandate to oversee its affairs on the basis of a free, competitive and informed market. As long as full and fair disclosure had been granted, investing in the stock market was to remain a risky business, for which investors are typically accountable.

At the normative end of the spectrum, the Board of Commissioners found that Article 1.126 of the Brazilian Civil Code circumscribes what is to be understood as a national company. To that effect, a national company must be organized in accordance to Brazilian law and must have the headquarters of its management in Brazil. Besides that, Article 11 of Decree-Law No. 4,657 posits a connecting factor (place of incorporation), which, in the interest of legal certainty, should be born in mind.

According to the Commission, though, the Claimants’ case depended not so much upon finding that Federal Law No. 6.404 could be applicable to foreign issuers, such as Laep; but rather upon finding that Laep did not meet the requirements to be considered a foreign issuer. Indeed, the Commission should delve into the question whether Laep’s decision to be incorporated in the Bermudas was due to Laep’s wish to evade obligations it otherwise would have to Brazilian investors. Hence, the Commission should look for evidence of abuse of rights and fraud, as provided by Articles 187 and 166 of the Brazilian Civil Code. In the absence of those, and taking into account that Laep had abided by the pertinent rules at the time of the issuance, the case was denied.


Processo Administrativo CVm nº Rj2012/11523 - Adeonidas Bento da Silva e Outros vs. Laep Investments Ltd (In Portuguese, here).

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