Related-party Transactions Became More Transparent, But Regulation Didn’t Evolve, Says Former Regulator Board Member

In the past few years, self-regulation helped give more transparency to related-party transactions (RPTs) in Brazil, but its regulation is still lacking. That’s the view of Luciana Pires Dias, former board member of the Brazilian Securities and Exchange Commission (CVM), in an interview with Viewpoint Amec.

After spending five years as a member of the Brazilian capital market’s regulator board, the expert who currently works as a professor at Fundação Getúlio Vargas (FGV-SP) and is a partner at  L|Dias Advogados, has analyzed the hardships of dealing with corporate transactions when shareholders feel harmed.

She also remembered remarkable RPTs, such as Oi and Eletrobras’, that marked her tenure as a CVM board member between 2010 and 2015. The lawyer still discusses the failed attempt to regulate RPTs with Law 14.195/2021 and how CVM could regulate the issue. Check out the full interview below:

As a CVM board member, you have dealt with remarkable related-party transactions, such as RPTs involving Oi and Eletrobras. Could you walk us through such rulings?

Both of them are interesting to analyze. CVM let Oi’s controlling shareholder vote, even though it had an advantage compared to the other shareholders. However, CVM prevented Eletrobras’ controlling shareholder, the Brazilian Federal Government, from voting. The two situations were RPTs, one involving a corporate transaction and another involving a contract with the controlling shareholder. Still, CVM provided different rulings for each case, which sparked legal insecurity. Thus, I think the rules for when the controlling shareholder is allowed to vote or not should be more precise.

Do you believe that preventing the federal government from voting in Eletrobras’ transaction was the right decision? Was it significant for the market?

Yes. I acted as rapporteur for Eletrobras’ RPT, which means I have supported the decision. So, in my view, it was a better ruling than Oi’s case, in which my vote was defeated.

In the past few years, have you seen any evolution in the market’s approach to RPTs?

I believe that regulation somehow evolved. I think transactions are more transparent nowadays. But this does not mean that we have more or fewer problems, just that we can identify this kind of transaction more easily.

Has regulation evolved?

No. So far, there are no behavior rules for RPTs. There isn’t a rule that says what you can or cannot do. Not even a regulation that limits or establishes specific instances of approval for such transactions. There is a debate on whether CVM is allowed or not to do it. I believe it cannot issue further regulations for RPTs beyond transparency rules.

So, you mean that there are not yet any legal tools to prevent harmful RPTs to minority shareholders, for instance?

Precisely. There is nothing to prevent such transactions. Regulators hardly ever block a  transaction that doesn’t benefit minority shareholders.

But then, how is the market improving its approach to RPTs?

The regulation didn’t spark such evolution. CVM itself has been improving since 2011, demanding more transparency for the accounting terms of such transactions. And also, the latest update of the Novo Mercado listing segment, enforced as of 2021, demanded public companies should present a policy for RPTs. Although Brazil has not regulated companies’ behavior, which many similar economies have done, we have become more transparent.

So, besides demanding an RPT policy, what are the best practices for such transactions, according to Novo Mercado?

It depends on which transactions a given company regularly performs.  Usually, the policies must establish the mechanisms for identifying such transactions. Unfortunately, it is a lot harder to find a policy that includes corporate transactions — which are precisely the kind of operation that leads to more losses for minority shareholders.

Wouldn’t it be advisable to have a committee of independent members to analyze such transactions?

Some companies do not do this kind of transaction because their capital structure is so fragmented there are no related parties. Or simply because their business does not require this kind of transaction. So, demanding a committee for every company sounds like a burden that not every company needs to carry.

After a few changes proposed by Law 14.195/2021, the Brazilian legislation now demands that the shareholder’s assembly should deliberate on sales of at least 50% of a company’s assets in a related-party transaction. What do you think of this measure?

This new rule is a bit innocuous. I have never seen such a large deal in the Brazilian market, involving the sale of over 50% of the assets. The initial draft of the law noted that CVM would have the ability to define which deals should be submitted to the assembly. At some point in the debate, this rule was limited to RPTs involving the sale of 50% of assets or more. Honestly, this will never happen because this is a huge deal. The bill’s text is almost useless.

So, was the original draft better?

The first draft was better. It wouldn’t solve the problem completely because it demanded CVM should come up with a regulation, but it would allow us to give one step forward. However, it was not approved, so we got stuck where we were before. It’s been a slow evolution, with more transparency, but not effective in changing the behavior.