In July, the joint committee of the Securities and Exchange Commission of Brazil (CVM) examined a proposal for a consent order originating from a lawsuit filed to investigate the criteria used by a company in the allocation of earnings, pursuant to article 193 of Law 6,404/76 (Brazilian Corporations Law).

The analysis was based on inquiries and complaints filed by an investor who questioned the amounts recorded in the company's capital stock and profit reserve accounts. He also pointed out that a relevant part of the net profit was allocated to the profit reserve account, to the detriment of an increase in the capital stock.

The investor, who holds preferred shares, felt harmed, since the company's bylaws have a clause of priority dividends for holders of preferred shares, with a minimum value of 6% of the capital stock.

After inquiries from the CVM's technical area, the company reported that the profits had been allocated according to regular approvals in general meetings and that the allocations did not exceed the limit established in article 193 of the Brazilian Corporations Law - 20% of the value of the capital stock.

In addition, the company indicated that the amounts allocated to profit reserves derived, among other sources, from unrealized profits and reserves for contingencies, this being a practice presented and approved at general meetings of shareholders, aimed at preserving business security.

The technical area of CVM, after analyzing the company's statements, found that, with regard to:

  • the legal reserve, at the time of the facts presented by the investor, the company could not have proceeded with the allocations of net income, due to the limit provided for in article 193 of the Brazilian Corporations Law;

contingency reserves, there was non-compliance with articles 153 and 192 of the Brazilian Corporations Law, because the documents related to the general meeting did  not  mention the creation of contingency reserves;

  • retention of profits, there was non-compliance with article 196, paragraph 1, of the Brazilian Corporations Law, since, although it was stated in the management proposals that there would be no retention of profits, an analysis of the explanatory notes of the approved financial statements proved otherwise; and
  • the reserve of unrealized profits, there was violation of article 197 of the Brazilian Corporations Law, since the portion of net income realized exceeded the amount of the minimum mandatory dividends, and therefore the reason for the creation of the reserve of unrealized profits in the periods analyzed was not proven.

Regarding distribution of dividends, the Brazilian Corporations Law establishes that companies must allocate part of their net income to payment of mandatory dividends to shareholders, pursuant to article 202 of the Brazilian Corporations Law.

Paragraph 6 of article 202 of the law provides that "profits not allocated under the terms of articles 193 to 197 must be distributed as dividends." Exceptions are the amounts allocated to the profit reserves (which cannot exceed 20% of the capital stock), the amounts retained by the capital budget, or the amounts allocated to the unrealized profit reserve, in the event that the minimum mandatory dividend exceeds the realized portion of the net income.

In view of the facts, the CVM's technical area proposed accountability of those who were members of the company's board of directors in the period of the data analyzed. The defendants, in turn, after being made aware of the accusations, presented a joint proposal to enter into a consent order, which included, among other points, monetary obligations and obligations related to the correction of the irregularities pointed out in the proceeding.

After review by the Consent Order Committee (CTC), the following obligations were negotiated with the defendants:

  • pay to the CVM the amount of R$824,614.00;
  • allocate the amounts created in the unrealized profit reserve - as a result of the resolutions passed in the general meetings of the period analyzed - to the increase in the company's capital stock; and
  • make accounting adjustments to rectify errors in the company's financial statements.

Unanimously, the joint committee of the CVM accepted the CTC's opinion and accepted the proposal for a consent order.