Guidance 38 gives guidance to disclosure of indemnity agreements

At the end of September, the Brazilian Securities and Exchange Commission (CVM) published the Guidance (PO) 38, the first document of the Brazilian regulator exclusively focused on indemnity agreements. The guidance report explains CVM’s opinion on the fiduciary duties of officers regarding agreements that ensure the payment, reimbursement or advance of funds in cases of arbitration, judicial or administrative proceedings involving acts practiced by them in the exercise of their duties. “Despite the growing adoption of indemnity agreements, people continue to have lots of doubts about them. The document brings CVM’s opinion and provides the market with guidelines to reduce uncertainties,” explains Marcelo Barbosa, CVM’s chair.
Like any guidance report, the document issue by the CVM does not bring any regulatory change. Officers will continue to be indemnified for losses resulting from acts out of the scope of their professional duties – bad faith, willful misconduct, gross fault or malicious fraud -, in addition to acts in one’s or third-party’s best interest in detriment to the company’s interests.
An innovation in the document is that it sheds light on the agreements. “Transparency is the best strategy to mitigate risks,” states Barbosa. That was the solution found by the regulator to minimize potential conflicts of interest in agreements that, despite the legal effect between the parties (the company and the officer), can be misused and affect third parties and the company’s financial health. With that in mind, the Guidance 38 establishes that companies must develop adequate procedures to ensure that decisions authorizing indemnities are taken on an independent basis and on their best interest.
The Guidance is not intended to be prescriptive, but to offer recommendations and provide investors with the necessary information to evaluate the pertinence of the agreements. The CVM lists, for example, data disclosed by the companies that can help investors in their evaluation, among which the existence of the agreement and its terms, the limit value in case of indemnity, the period of coverage, the competence to enter into indemnity agreements, hypotheses excluding the right to indemnity, and procedures for decision-making on the payment (the responsible body and the rules adopted). The regulator also addressed situations that should be submitted for shareholders’ approval in general meetings: when more than half of the directors with no direct beneficiaries of the indemnity decision or the financial exposure are significant and in the event of disagreement on the payment.
The Guidance 38 was prepared with the support of market’s entities, among which Amec, through restricted hearings. Click here to read the document.