Investors that trust in the Brazilian capital markets as a tool for the economic development got scared several times in the second half of 2018. A “crop” of corporate operations raised serious doubts about the enforceability of our market, about whether investors are actually treated fairly and about the responsibility of some companies’ executives. Many of the cases involve companies listed in the Novo Mercado – what raised further doubts about the ability of our market’s premium listing segment to effectively protect investors’ rights
This worrying wave of corporate operations, which share the common characteristic of benefiting few people to the detriment of many, demands not only an in-depth discussion about topics of utmost importance for the Brazilian capital markets, but also the adoption of regulatory measures based on analyses of specific cases, new discussions on current laws or review of past decisions.
The Qualicorp case is an example of that. In brief, the company’s board of directors decided to make an electronic transfer of BRL 150 million to its de facto controlling shareholder and CEO. The material fact about the board’s decision was disclosed one week after it was taken, thus preventing the regulator from issuing a preliminary injunction to bar the payment. The directors justified the payment as a way of “aligning the executive’s interests” – supposedly disregarding the fact that, pursuant to the law, all directors have the obligation of being loyal to their companies.
To justify the measure, the company’s directors classified the payment of a non-compete agreement. With that, the matter was no longer subject to the requirement of deliberation in a general meeting as it would if considered a compensation.
In addition, the directors also claim that they consulted prominent international firms to justify the payment. When questioned, these service providers, in turn, say that did not cosign the per se payment. It seems the company’s officers used a sophistic rationale and came to the conclusion that the executive should be remunerated twice: (1) for his position and (2) for the non-compete agreement.
It is important to highlight that non-compete agreements are a common practice in the market. When an executive leaves a company, he/she can receive a payment for not working for competitors – and take the expertise acquired as a result of the exercise of his/her duties in the former company. However, such payment can only take place after his/her resignation or dismissal, but never before that. Executives are either remunerated for their work or for signing non-compete agreements. They are never remunerated for both simultaneously.
Such a huge payment, not approved in a general meeting, does not seem to be legally supported. Additionally, in Qualicorp’s specific case, it is a significant amount as it represents 40 percent of the company’s net profit in the 12-month period prior to the payment.
If this act of liberality at the expense of the company is confirmed – what seems to be the case – we are facing a new way of inflicting losses on the minority shareholders that believe in our companies. It is an approach that potentially harms the credibility of our capital markets that must be not only curbed, but also exemplarily punished, in the administrative and legal spheres. It is important to mention that Amec, fulfilling its objective of defending minority shareholders, has already raised these points to the Brazilian Securities and Exchange Commission (CVM) and to the Public Prosecutor’s Office. But that is not enough.
This case opens up a further discussion as it seems to represent a misappropriation of the company’s funds to benefit its officers. It is the “act of liberality at the expense of the company,” provided for in the Article 154, paragraph II of the Law 6,404/76. Although illegal, it is not a crime. And that has to be rethought.
Unfortunately, cases like that do not take place only in Brazil. In the beginning of the millennium, we witnessed a number of similar cases in the United States. John Rigas, founder and main executive of Adelphia, was accused of using the company’s assets on his own account. Dennis Kozlovski, from Tyco, became famous for paying USD 6,000 for a shower curtain and USD 15,000 for an umbrella holder, in addition to having paid half of the costs of his wife’s birthday party with the company’s funds – USD 1 million. The former was convicted to 15 years in prison. The latter, to up to 25 years.
In Brazil, at least for the time being, nobody will go to jail as a result of acts of liberality at the expense of companies simply because, according to the Article 154, they are not considered a crime. The maximum penalties are a fine and disqualification by the CVM, and can (what, based on the precedents, is not likely to happen) lead to the indemnification for the losses caused to the market. Taking the international experience and the losses caused to the company’s stakeholders into account, it is a too lenient punishment.
It’s high time we discussed the criminalization of corporate misappropriation. Those who are trustees of the capital market’s confidence should be exemplarily punished when they destroy that confidence.
In fact, we can say that the misappropriation of corporate assets can be considered even more serious than other crimes for at least two reasons. When it comes to listed companies, we are talking about what Americans refer to as public corporations. A listed company is public in the sense it raises funds from the public. We are talking about people who save money, pensioners and investors that rely on the capital market for a better future. All of them are damaged when funds are misappropriated from a listed company.
Additionally, the possible misappropriation of assets from a listed company, when not punished, leads to the perception that such situation can happen to any company. It damages the reputation of our capital markets, pushes investors away and increases the capital cost for all companies – including those led by honest and competent executives. It negatively affects job creation and the country’s development.
That is why Amec suggests that, as part of the review of the Law 6,404/76 and the Law 6,385/76, acts of liberality at the expense of the company, mainly in one’s own benefit, be included in the list of crimes against the Brazilian capital market. Together with the criminalization of this practice in Brazil, the Public Prosecutor’s Office should take strict measures to combat corporate crimes and preserve the confidence of our capital markets, as already set forth by the Law 7,913/89.