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The International
Capital Markets Review
Law Business Research
Fifth Edition
Editor
Jeffrey Golden
The International Capital Markets Review
The International Capital Markets ReviewReproduced with permission from Law Business Research Ltd.
This article was first published in The International Capital Markets Review - Edition 4(published in November 2015 – editor Jeffrey Golden)
For further information please [email protected]
The International
Capital Markets Review
Fifth Edition
EditorJeffrey Golden
Law Business Research Ltd
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The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:
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ACKNOWLEDGEMENTS
Acknowledgements
ii
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iii
Editor’s Prefaces ..................................................................................................viiJeffrey Golden
Chapter 1 AUSTRALIA .............................................................................. 1Ian Paterson
Chapter 2 BRAZIL ................................................................................... 22Ricardo Simões Russo, Gustavo Ferrari Chauffaille and Luiz Felipe Fleury Vaz Guimarães
Chapter 3 BULGARIA ............................................................................. 31Viktor Tokushev
Chapter 4 CHINA .................................................................................... 42Xusheng Yang
Chapter 5 COLOMBIA............................................................................ 58Camilo Martínez Beltrán and Veronica Umaña
Chapter 6 CZECH REPUBLIC ............................................................... 68Tomáš Sedláček and Zdeněk Husták
Chapter 7 DENMARK ............................................................................. 81Rikke Schiøtt Petersen, Morten Nybom Bethe, Anton Malling Mikkelsen and Jakob Gregers Andersen
Chapter 8 FINLAND ............................................................................... 92Juha Koponen, Janni Hiltunen and Laura Vaelitalo
Chapter 9 FRANCE ............................................................................... 101Antoine Maffei and Olivier Hubert
CONTENTS
iv
Contents
Chapter 10 GERMANY ........................................................................... 127Kai A Schaffelhuber
Chapter 11 INDIA ................................................................................... 137Vishnu Dutt U
Chapter 12 INDONESIA ......................................................................... 147Yozua Makes
Chapter 13 IRELAND.............................................................................. 160Nollaig Murphy
Chapter 14 ITALY .................................................................................... 179Marcello Gioscia and Gianluigi Pugliese
Chapter 15 JAPAN ................................................................................... 194Akihiro Wani and Reiko Omachi
Chapter 16 KAZAKHSTAN .................................................................... 208Shaimerden Chikanayev and Marina Kahiani
Chapter 17 KUWAIT ............................................................................... 234Abdullah Al Kharafi and Abdullah Alharoun
Chapter 18 LUXEMBOURG ................................................................... 245Frank Mausen and Henri Wagner
Chapter 19 MEXICO ............................................................................... 268René Arce Lozano and Lucía Báez de Hoyos
Chapter 20 NETHERLANDS ................................................................. 278Mariëtte van ’t Westeinde and Martijn Schoonewille
Chapter 21 NEW ZEALAND .................................................................. 293Deemple Budhia and John-Paul Rice
v
Contents
Chapter 22 NIGERIA ............................................................................... 303Fred Onuobia and Bibitayo Mimiko
Chapter 23 PERU ..................................................................................... 314Juan Luis Avendaño C and Nydia Guevara V
Chapter 24 PHILIPPINES ....................................................................... 325Maria Teresa D Mercado-Ferrer, Joan Mae S To and Earla Kahlila Mikhaila C Langit
Chapter 25 PORTUGAL .......................................................................... 342Orlando Vogler Guiné and Sandra Cardoso
Chapter 26 RUSSIA .................................................................................. 355Vladimir Khrenov
Chapter 27 SOUTH AFRICA .................................................................. 370Clinton van Loggerenberg and Stephen von Schirnding
Chapter 28 SPAIN .................................................................................... 381David García-Ochoa Mayor and Daniel Pedro Valcarce Fernández
Chapter 29 TANZANIA ........................................................................... 393Kamanga Wilbert Kapinga and Kenneth Mwasi Nzagi
Chapter 30 TURKEY ............................................................................... 399Umut Kolcuoğlu, Damla Doğancalı and Begüm İnceçam
Chapter 31 UNITED ARAB EMIRATES ................................................ 408Gregory J Mayew and Silvia A Pretorius
Chapter 32 UNITED KINGDOM .......................................................... 421Tamara Box, Ranajoy Basu, Nick Stainthorpe, Caspar Fox, Roy Montague-Jones, Jacqui Hatfield and Winston Penhall
Contents
vi
Chapter 33 UNITED STATES ................................................................ 445Mark Walsh and Michael Hyatte
Appendix 1 ABOUT THE AUTHORS .................................................... 463
Appendix 2 CONTRIBUTING LAW FIRMS’ CONTACT DETAILS .. 485
vii
EDITOR’S PREFACE TOTHE FIFTH EDITION
A review of the Editor’s Prefaces from prior editions (which the publishers have kindly included in this volume) of The International Capital Markets Review will reveal a common thread: what I referred to last time around as ‘a somewhat nervous look-back over the shoulder’ both at the global financial crisis (GFC) and the impact that it has had on the professional opportunities and workload of international capital markets lawyers.
That should hardly be surprising. Seven years on from the collapse of Lehman Brothers in September 2008 and nearly four years since the first edition of this review appeared, a great deal of ink has been spilt, so to speak, in recording the lessons of the GFC, much of it reflecting an attempt to focus on what brought the crisis about: risk-taking by bankers, blind spots and lack of understanding on the part of regulators, rating agencies asleep at the wheel and wrong economic incentives from policymakers and management.
Lots of answers with hindsight. (But as Queen Elizabeth II profoundly asked, after having been briefed by a group of academics about the causes of the GFC when opening a building at the London School of Economics in 2008, if it was all so obvious how come everyone missed it?)
Again, none of that should be surprising. But what is certainly interesting, if not surprising, is that with all the finger-pointing – bankers, regulators, rating agencies and policymakers – law firms and lawyers in them have emerged relatively unscathed. There has been no shortage of lawsuits, enforcement actions, penalty fines, and most recently criminal prosecutions for financial market misconduct. However, it has been non-lawyers, and not their counsel, who have found themselves in the hot-seat.
Still, that begs, rather than answers, the question, ‘What was, or should have been, the role of the lawyer in mitigating the risk of a financial market meltdown?’ Was sufficient resort to outside counsel made by financial institutions in the run-up to the GFC? Would greater utilisation of independent counsel have made a difference? What public responsibility, if any, do international capital markets lawyers have to ensure not just that underlying transactions are legal as a matter of positive law but that the financial marketplace is benefited, and financial market stability not threatened, by them? Until now, these are questions that seem to travel mostly beneath the radars of the financial market commentators who have been reflecting on the GFC.
Editor’s Preface to the Fifth Edition
viii
Let us put to one side for a moment the increasing specialism in our area of law and the special challenges that follow from it – I will return to this. Let us leave aside too the fact that the technical skills that may position an international capital markets (ICM) lawyer so as to be able to structure a transaction and render the required legal opinions on enforceability or tax consequence may not qualify that lawyer to assess the business merits of the transaction, give deep knowledge of the customers who sign up to them or provide the necessary context to assess the macro-finance impact of large-scale development of a particular financial product or service. In either case, two questions remain: Can ICM lawyers do a better job to mitigate financial market systemic risk? And, if a more expansive role for the lawyer is to be expected to achieve this, will clients be prepared to pay for it?
It is interesting, is it not, that in what could be argued to have been their earlier ‘glory years’, financial institutions did rely heavily on outside counsel to keep on the legal straight and narrow. However, there is much evidence to suggest that there was much greater reliance on in-house teams in 2008 following the considerable build-out of these in the preceding decade. Cost-cutting became the ‘buzz word’.
Did that institutional ring-fence, however, heighten the risk of seeing everything through too narrow an institutional prism? Gillian Tett, in her excellent new book The Silo Effect,1 reminds us of the major risk of insular groupthink in an age of increased specialisation.
Seeking outside and independent advice on such matters had been seen as a kind of insurance against that. Of course, that insurance was never thought to be cheap. But was it cheap in fact, at least when compared with the penalties, fines and other conduct costs many financial institutions have paid since the GFC? And did the financial institutions in any way connect the cutbacks in legal spend on independent counsel with the GFC? Here’s the paradox: the more that lawsuits and enforcement actions have followed in the wake of the GFC, the greater the pressures seem to have been to reduce the budget for independent legal advice in connection with ongoing transactional work. And those pressures continue.
Still, to change our clients’ thinking about legal cost-cutting, ICM lawyers must do two things: first, they must avoid giving the impression themselves of being victims of the silo effect. And for many ICM lawyers in modern practice there is similarly the risk both of the silo of their law firm and the silo of their jurisdiction. Failure to share the expertise of lawyers in different law firms and from different jurisdictions can be catastrophic. In this regard, The International Capital Markets Review aims to be what Ms Tett would call a ‘silo buster’.
And second, important as it may be to demonstrate value added by being aware of the widest possible range of relevant issues and global market practice, it is important too to get there in as cost-efficient a manner as possible. As has just been noted, this is a time when clients have never been more cost-conscious. Since it first appeared, this publication has sought to reduce the costs of staying current in a rapidly changing,
1 G Tett, The Silo Effect (Little, Brown 2015).
Editor’s Preface to the Fifth Edition
ix
multi-jurisdictional and expansive area of practice by bringing a wide range of relevant experience within a single volume and constantly updating its content.
As I write this preface, my morning newspaper reports, in addition to bond funds experiencing record inflows, that US$50 billion of global market deals were announced this week, adding to US$300 billion of M&A activity in a record August and more than US$3 trillion since January – keeping things on track for record levels seen only before the GFC. This is all good news for international capital markets lawyers. Plenty of opportunity.
Still, plenty of risk too, especially for any lawyer living in a silo and looking down instead of around. This is not a time to follow the ostrich and its habit of putting its head down when it senses risk in the air.2 For today’s ICM lawyer, the risk comes from a complicated and ever-changing landscape, and not least the plethora of new regulatory developments and regulations reported in the pages that follow. You constantly need to look about you.
So, heads up, bust out of that silo, get your copy of this new edition of The International Capital Markets Review at the ready and share in the expertise that follows. Fingers crossed, may the record year continue, and I wish our readers more than their fair share of it!
In the meantime, I tip my hat once again to the impressive and growing group of experts who have taken on the challenge of this book. This year we welcome five new jurisdictions: Bulgaria, India, Kazakhstan, Mexico and Nigeria. I want to thank all our authors sincerely for their contributions and for allowing me the continuing privilege of serving as their editor.
Jeffrey GoldenP.R.I.M.E. Finance FoundationThe HagueNovember 2015
2 Pliny the Elder had led us to believe that the ostrich buries its head in sand to avoid danger, but we now know the behaviour of the ostrich is more a matter of ‘duck and cover’.
x
EDITOR’S PREFACE TOTHE FOURTH EDITION
It is good of the publishers to include in this volume the Editor’s Preface to each of the previous editions of The International Capital Markets Review. Reading through these is like an archaeological dig.
The first begins with a somewhat nervous look-back over the shoulder at the then-recent financial crisis. An expression in that preface of admiration for the ‘resilience’ of the markets sounded at the time more a hope and expectation than a certainty or done deal.
In the second, further signs that a ‘big freeze’ on capital market transactional work was ‘thawing’ were noted; however, the challenge of new and voluminous regulation, as much as the potential for deal flow, made this publication of particular relevance when that edition appeared.
By the time the third preface was written, the major global financial institutions were hiring again, but we were still looking for hard evidence or ‘confirmation’ that an uptick in deal flow lay ahead and that the extra staffing was in anticipation of opportunity rather than more simply a reaction to a compliance burden.
Now, as I put pen to this Editor’s Preface to the fourth edition of the work, we have just witnessed the successful launch of the world’s largest-ever stock flotation. Alibaba shares soared 39 per cent on the first day of trading and, after the bankers exercised a greenshoe option, raised US$25 billion. Meanwhile, The Times reports a buoyant London braced for a ‘listing stampede’. Hong Kong is rivalling New York for the greatest number of cross-border deals. The Financial Times also reminds us that in fact, measured by deal value, year-to-date listings in New York have raised twice as much as in London and Hong Kong combined – the fastest pace since 2000. A corner turned? Hopefully, we are seeing real opportunity, at least for the informed ICM lawyer. As in the past, this book seeks to keep at the ready for just such an ICM lawyer relevant analysis as a means for staying on top of an ever-expanding flow of necessary information.
New capital market regulation increases exponentially, and often purports to have extraterritorial reach. More than half of the Dodd-Frank rulemakings have now been finalised but nearly a quarter of the rulemaking requirements are still yet to be proposed. This past year has also been a busy period for regulatory reform at the European level and in other key jurisdictions covered in this volume. Notably as well, courts around the world have been building up a significant jurisprudence in disputes involving complex products and other capital market structures. We have almost certainly seen more ISDA
Editor’s Preface to the Fourth Edition
xi
contract cases since this book first appeared than in all the years that preceded that first edition put together.
Not surprisingly then, this volume keeps getting ‘fatter’. Soon the publishers will have to provide wheels for the book! What started as coverage of 19 relevant jurisdictions, now surveys 33 – five of which (Colombia, Kuwait, Norway, Peru and Portugal) are included for the first time.
There has, however, certainly been no dilution in the quality of contributions. Someone clever once said that you are only as good as the company that you keep, on which basis the reader can feel very good indeed when turning to the lawyers and law firms that share their collective experience in the pages that follow. It remains a privilege and an honour to serve these contributors as their editor.
I am confident that the latest surveys that follow will prove useful to our practitioner readers, and I will not be surprised if a few legal archaeologists among those get to excavating beyond the prefaces and examine the strata of the jurisdictional landscapes of earlier editions as they aim to equip themselves for their professional journeys ahead. Who knows? One of you may even be an Indiana Jones, who, armed with the information herein, may be tempted to grab that bullwhip and fedora and undertake a particularly ground-breaking transactional adventure or two. Indeed, it may even be that those adventures form part of the ICM story when it gets told in future editions of The International Capital Markets Review !
Jeffrey GoldenP.R.I.M.E. Finance FoundationThe HagueNovember 2014
xii
EDITOR’S PREFACE TOTHE THIRD EDITION
As I write the preface to this third edition of The International Capital Markets Review, my morning newspaper reports that one of the major global banks, having shrunk its workforce by more than 40,000 employees over the past two years, will now embark on a hiring spree to add at least 3,000 additional compliance officers.
It would be nice if the creation of these new jobs evidenced new confidence that capital markets activity is on the rise in a way that will justify more hands on deck. In other words, capital markets lawyers will have something to celebrate if this bolstering of the ranks was thought necessary to ensure that requisite regulatory approvals and transactional paperwork would be in place for a projected expansion in deal flow.
And, indeed, my morning newspaper also reports a new transaction of some significance, namely, Twitter’s filing for a multi-billion dollar international public offering, accompanied by a tweet, of course – but with a true sign-of-the-times disclosure: ‘This Tweet does not constitute an offer of any securities for sale’!
Yes, confirmation of an uptick in deal flow – especially ‘big deals’ flow – would be nice. In the preface to the last edition of this work, I speculated that there were ‘signs that any ‘big freeze’ on post-crisis capital markets transactional work may be thawing’. All the better if the current newspaper reports provide continued and further support for that inference. After all, when our first edition appeared a little over two years ago, the newspapers were saying terrible things about the capital markets.
What is more likely, however, is that this increased staffing aims to cope with regulatory complexity that will now impact the financial markets regardless of any growth and perhaps may even have been designed to slow down the business being done there. That complexity, but also just the scale of recently promulgated new regulation and the practitioner’s resulting challenge in ‘keeping up’ have all encouraged this new third edition. The 8,843 pages of Dodd-Frank rule-making that I reported in my preface to the last edition have now grown to more than 14,000 pages at this time of writing – and approximately 60 per cent of the job remains unfinished. Other key jurisdictions have been catching up. Plus the rules are purposive and aim to change the way things have been done. If compliance and even ethics in the capital markets were ever instinctual, rather than matters to be taught and studied, that is probably a thing of the past.
Editor’s Preface to the Third Edition
xiii
The thickness of this volume has grown as well because of the increased number of pages and coverage in it. Nine new contributors (Finland, Indonesia, Italy, the Netherlands, the Philippines, Spain, Switzerland, Tanzania and the UAE) and an overview of EU Directives have been added. Banks are lending less to corporates, which in turn are having to issue more to meet liquidity needs. Moreover, with the low interest rate environment of quantitative easing, central banks are encouraging risk-taking rather than hoarding. For investors, risk-free assets have become very expensive. So we see a growing willingness to get off the traditional highway in search of yield. Investment banks are, as a result, often taking their clients (and their clients’ regular outside counsel) to difficult, or at least less well-known, geographies.
Having a pool of country experts and jurisdictional surveys that facilitate comparative law analysis can be very helpful in this instance. That is exactly what this volume aims to provide: a ‘virtual’ legal network and global road map to help the reader navigate varying, and increasingly difficult, terrain to arrive at right places.
There has been much relevant change in the legal landscape surveyed in the pages that follow. However, what has not changed is our criteria for authors. The invitation to contribute continues to go to ‘first in class’ capital market specialists from leading law firms. I shall be glad if, as a result, the biographical notes and contact details of the contributing firms prove a useful resource as well.
The International Capital Markets Review is not a novel. Impressed I might be, but I would certainly also be surprised by anyone picking up and reading this volume from cover to cover. What I expect instead, and what is certainly the publisher’s intention, is that this work will prove a valuable resource on your shelf. And I hope that you will have plenty of opportunities to take it off the shelf and lots of excuses to draw on the comparative jurisdictional wisdom it offers.
Let me again express my sincere gratitude to our authors for their commitment to the task and their contributions. It remains a privilege to serve as their editor and a source of great pride to keep their company in the pages of this book.
Jeffrey GoldenP.R.I.M.E. Finance FoundationThe HagueOctober 2013
xiv
EDITOR’S PREFACE TOTHE SECOND EDITION
It was my thought that we should also include in this second edition of The International Capital Markets Review my preface to the first edition. Written less than a year ago, it captures relevant background and sets out the rationale for this volume in the series. The contemporary importance of the global capital marketplace (and indeed you must again admire its resilience), the staggering volume of trading and the complexity of the products offered in it, and the increased scrutiny being given to such activity by the courts all continue. And, of course, so does the role of the individual – the difference that an informed practitioner can make in the mix, and the risk that follows from not staying up to date.
However, I was delighted, following the interest generated by our first edition, by the publisher’s decision to bring out a second edition so quickly and to expand it. There were several reasons for this. The picture on the regulatory front is much clearer for practitioners than it was a year ago – but no less daunting. According to one recent commentary, in the United States alone, rule-making under the Dodd-Frank report has seen 848 pages of statutory text (which we had before us when the first edition appeared) expand to 8,843 pages of regulation, with only 30 per cent of the required regulation thus far achieved. Incomplete though the picture may look, the timing seems right to take a gulp of what we have got rather than wait for what may be a very long time and perhaps then only to choke on what may be more than any one person can swallow in one go! Regulatory debate and reform in Europe and affecting other key financial centres has been similarly dramatic. Moreover, these are no longer matters of interest to local law practitioners only. Indeed, the extraterritorial reach of the new financial rules in the United States has risen to a global level of attention and has been the stuff of newspaper headlines at the time of writing.
There are also signs that any ‘big freeze’ on post-crisis capital markets transactional work may be thawing. In the debt markets, the search for yield continues. Equities are seen as a potential form of protection in the face of growing concerns about inflation. Participants are coming off the sidelines. Parties can be found to be taking risks. They are not oblivious to risk. They are taking risks grudgingly. But they are taking them. And derivatives (also covered in this volume) are seen as a relevant tool for managing that risk.
Editor’s Preface to the Second Edition
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Most importantly, it is a big world, and international capital markets work hugs a bigger chunk of it than do most practice areas. By expanding our coverage in this second edition to include six new jurisdictions, we also, by virtue of three of them, complete our coverage of the important BRIC countries with the addition of reporting from Brazil, Russia and China. Three other important pieces to the international capital markets puzzle – Belgium, the Czech Republic and New Zealand – also fall into place.
The picture now on offer in these pages is therefore more complete. None of the 24 jurisdictions now surveyed has a monopoly on market innovation, the risks associated with it or the attempts to regulate it. In light of this, international practitioners benefit from this access to a comparative view of relevant law and practice. Providing that benefit – offering sophisticated business-focused analysis of key legal issues in the most significant jurisdictions – remains the inspiration for this volume.
As part of the wider regulatory debate, there have been calls to curtail risk-taking and even innovation itself. This wishful thinking seems to miss the point that, if they are not human rights, risk-taking and innovation are hardwired into human nature. More logical would be to keep up, think laterally from the collective experience of others, learn from the attention given to key issues by the courts (and from our mistakes) and ‘cherry-pick’ best practices wherever these can be identified and demonstrated to be effective.
Once again, I want to thank sincerely and congratulate our authors. They have been selected to contribute to this work based on their professional standing and peer approvals. Their willingness to share with us the benefits of their knowledge and experience is a true professional courtesy. Of course, it is an honour and a privilege to continue to serve as their editor in compiling this edition.
Jeffrey GoldenLondon School of Economics and Political ScienceLondonNovember 2012
xvi
EDITOR’S PREFACE TOTHE FIRST EDITION
Since the recent financial markets crisis (or crises, depending on your point of view), international capital markets (ICM) law and practice are no longer the esoteric topics that arguably they once were.
It used to be that there was no greater ‘show-stopper’ to a cocktail party or dinner conversation than to announce oneself to be an ICM lawyer. Nowadays, however, it is not unusual for such conversations to focus – at the initiation of others and in an animated way – on matters such as derivatives or sovereign debt. Indeed, even taxi drivers seem to have a strong view on the way the global capital markets function (or at least on the compensation of investment bankers). ICM lawyers, as a result, can stand tall in more social settings. Their views are thought to be particularly relevant, and so we should not be surprised if they are suddenly seen as the centre of attention – ‘holding court’, so to speak. This edition is designed to help ICM lawyers speak authoritatively on such occasions.
In part, the interest in what ICM lawyers have to say stems from the fact that the amounts represented by current ICM activities are staggering. The volume of outstanding over-the-counter derivatives contracts alone was last reported by the Bank for International Settlements (BIS) as exceeding US$700 trillion. Add to this the fact that the BIS reported combined notional outstandings of more than US$180 trillion for derivative financial instruments (futures and options) traded on organised exchanges. Crisis or crises notwithstanding, ICM transactions continue apace: one has to admire the resilience. At the time of writing, it is reported that the ‘IPO machine is set to roar back into life’, with 11 flotations due in the United States in the space of a single week. As Gandhi said: ‘Capital in some form or another will always be needed.’
The current interest in the subject also stems from the fact that our newspapers are full of the stuff too. No longer confined to the back pages of pink-sheet issues, stories from the ICM vie for our attention on the front pages of our most widely read editions. Much attention of late has been given to regulation, and much of the coverage in the pages of this book will also report on relevant regulation and regulatory developments; but regulation is merely ‘preventive medicine’. To continue the analogy, the courts are our ‘hospitals’. Accordingly, we have also asked our contributors to comment on any lessons to be learned from the courts in their home jurisdictions. Have the judges got it right? Judges who understand finance can, by fleshing out laws and regulations and applying them to
Editor’s Preface to the First Edition
xvii
facts perhaps unforeseen, help in the battle to mitigate systemic risk. Judges who do not understand finance – given the increase in financial regulation, the amounts involved, and the considerable reliance on standard contracts and terms (and the need therefore for a uniform reading of these) – may themselves be a source of systemic risk.
ICM lawyers are receiving greater attention because there is no denying that many capital market products that are being offered are complex, and some would argue that the trend is towards increasing complexity. These changing financing practices, combined with technological, regulatory and political changes, account for the considerable challenge that the ICM lawyer faces.
ICM activity by definition shows little respect for national or jurisdictional boundaries. The complete ICM lawyer needs familiarity with comparative law and practice. It would not be surprising if many ICM practitioners felt a measure of insecurity given the pace of change; things are complex and the rules of the game are changing fast – and the transactions can be highly technical. This volume aims to assuage that concern by gathering in one place the insights of leading practitioners on relevant capital market developments in the jurisdictions in which they practise.
The book’s scope on capital markets takes in debt and equity, derivatives, high-yield products, structured finance, repackaging and securitisation. There is a particular focus on international capital markets, with coverage of topics of particular relevance to those carrying out cross-border transactions and practising in global financial markets.
Of course, ICM transactions, technical though they may be, do not take place in a purely mechanical fashion – a human element is involved: someone makes the decision to structure and market the product and someone makes the decision to invest. The thought leadership and experience of individuals makes a difference; this is why we selected the leading practitioners from the jurisdictions surveyed in this volume and gave them this platform to share their insights. The collective experience and reputation of our authors is the hallmark of this work.
The International Capital Markets Review is a guide to current practice in the international capital markets in the most significant jurisdictions worldwide, and it attempts to put relevant law and practice into context. It is designed to help practitioners navigate the complexities of foreign or transnational capital markets matters. With all the pressure – both professional and social – to be up to date and knowledgeable about context and to get things right, we think that there is a space to be filled for an analytical review of the key issues faced by ICM lawyers in each of the important capital market jurisdictions, capturing recent developments but putting them in the context of the jurisdiction’s legal and regulatory structure and selecting the most important matters for comment. This volume, to which leading capital markets practitioners around the world have made valuable contributions, seeks to fill that space.
We hope that lawyers in private practice, in-house counsel and academics will all find it helpful, and I would be remiss if I did not sincerely thank our talented group of authors for their dedicated efforts and excellent work in compiling this edition.
Jeffrey GoldenLondon School of Economics and Political ScienceLondonNovember 2011
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Chapter 2
BRAZIL
Ricardo Simões Russo, Gustavo Ferrari Chauffaille and Luiz Felipe Fleury Vaz Guimarães1
I INTRODUCTION
Over the past years, Brazil has been facing constant and significant development of its equity and debt capital markets’ regulatory framework. Such legal framework has been subject to various amendments and updates, in an attempt by local regulators to simplify and modernise rules, promote higher standards of efficiency regarding public offers, promote the adoption of better corporate governance and foster access to the capital markets by Brazilian issuers and investors.
Despite the current economic crisis, from the second half of 2014 until this moment, a number of public offerings have been implemented in the local markets, including registered equity offerings (Telefônica Brasil SA and FCP PAR Corretora de Seguros SA offerings) and registered debt offerings (among which the public offering of debentures by Cielo SA and Vale SA). The local market also verified a large number of restricted public offerings (‘476 offerings’, which are granted with automatic registration provided that the securities are only offered to a limited number of qualified investors), in an amount totalling approximately 28 billion reais, if considering only 476 offerings of debentures in 2015.
The number of debt securities offerings may be explained by recent local rules enacted to foster access to the capital markets for the long-term financing of infrastructure projects of local companies and the development of the debt securities secondary market (as per the provisions set forth by Law 12,431, enacted on 24 June 2011, which created the ‘infrastructure debentures’). In recent months, a number of companies have relied on public offerings of these types of infrastructure debt instruments to obtain their required funding for infrastructure projects, such as CCR, Vale, EDP, Arteris, among others.
1 Ricardo Simões Russo is a partner and Gustavo Ferrari Chauffaille and Luiz Felipe Fleury Vaz Guimarães are associates at Pinheiro Neto Advogados.
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Notwithstanding the current crisis affecting the Brazilian economy, the current scenario of the local capital markets evidences that companies with a need for long-term financing (and investors with a demand for adequate investments) now have all the necessary tools and mechanisms – and are indeed relying on such instruments – to use the local equity and debt capital markets for their funding and capital needs.
i Current legal framework
The Brazilian financial and capital markets system is a highly regulated sector and is essentially composed of regulatory bodies, such as the National Monetary Council (CMN) and the National Council of Private Insurance; and supervisory bodies, such as the Central Bank of Brazil (the Central Bank or BACEN) and the Brazilian Securities and Exchange Commission (CVM), which supervise, regulate and inspect, as the case may be, publicly held corporations, financial institutions, stock exchanges, among other entities.
According to Brazilian securities law (Law 6,385, of 7 December 1976, as amended), the CVM regulates, develops, controls and inspects the securities market. The CVM is also responsible for regulating the examination and inspection of publicly held companies, the trading and intermediation of the securities and derivatives markets, the organisation, functioning and operation of stock markets, commodities and futures markets, as well as the management and custody of securities.
Typically, federal laws applicable to the capital markets in Brazil contain general provisions and their main purpose is to establish what Brazilian capital markets comprise, who may be the agents of the market, the different independent agencies that have powers to oversee it and the limits of their authorities. The regulations that set forth the specific set of rules that each player and transaction has to comply with are the CVM’s instructions, Central Bank circulars and CMN resolutions. This system benefits the Brazilian capital markets as the enactment of laws is a very bureaucratic procedure that cannot keep pace with the constant changes financial and capital markets suffer and the enactment of Central Bank, CMN and CVM regulations involves a more quick and effective way of regulating such markets.
Most of the relevant capital markets regulations have been issued recently by the CVM, in an attempt to update and modernise the Brazilian market. Among such regulations, it is worth mentioning:a Instruction No. 358, of 3 January 2002, which contains rules on the disclosure
and use of relevant information regarding publicly held corporations, and restrictions on the trading of securities;
b Instruction No. 361, of 5 March 2002, with rules on tender offers;c Instruction No. 400, of 29 December 2003, which sets forth the rules applicable
to public offerings of securities in the local market;d Instruction No. 476, of 16 January 2009, which contains rules applicable to
automatic registration of public offerings to qualified investors (restricted offers);e Instruction No. 480, of 7 December 2009, with provisions on the registration as
a publicly held corporation in Brazil;
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f Instruction No. 559, of 27 March 2015, with provisions on the approval of depositary receipt programmes of Brazilian securities, to be negotiated abroad; and
g Instruction No. 560, of 27 March 2015, with provisions on the registration, requirements and disclosure of information regarding foreign investors.
The structure of the Brazilian financial and capital markets is also composed of a self- regulatory agency called Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais (ANBIMA), which created a set rules with increased corporate governance for its associates (banks, underwriters, brokerage firms, investment banks, among others) to comply with. Currently, ANBIMA has a partnership with the CVM, in order to expedite the registration of follow-on offers. By means of such partnership, ANBIMA is responsible for examining and making demands as regards offering documents (ANBIMA’s time limit to make demands is much shorter than the CVM’s on a regular public offer) and after ANBIMA is satisfied with the documents, they are subjected to the CVM for its final approval of the public offering.
Brazil currently has one registered stock exchange that allows companies to publicly trade their shares, which is BM&FBOVESPA. It is worth mentioning that, in addition to the set of regulations provided by the CMN, the CVM and the Central Bank, publicly held companies that wish to trade their shares on the stock exchange must also comply with BM&FBOVESPA’s regulations (which contemplate, among others, regulations on minimum corporate governance requirements that must be observed by listed corporations). In terms of debt securities (commercial papers, debentures, among others), typically the trading of publicly offered securities is verified in authorised custody and settlement entities, such as CETIP SA – Mercados Organizados (or simply CETIP), which also sets forth rules and regulations to be complied with by all participants of its electronic trading system.
II THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
Foreign investments in Brazil and depositary receipts Foreign investments in local capital and financial markets must be duly registered with the Central Bank of Brazil. On September 2014, the National Monetary Council enacted Resolution 4373, which updated and simplified provisions regarding the registration of foreign investments in Brazil. This new rule also brought provisions regarding the implementation of depositary receipt programmes by Brazilian companies. The intention of local regulators with the enactment of this new regulation is not only to modernise and simplify the rules applicable to foreign investments and depositary receipt programmes, but also to implement new mechanisms to increase the volume of foreign investments in Brazil and new mechanisms for Brazilian companies to access foreign markets.
One of the most emblematic changes set forth by Resolution 4373 (which became effective in March 2015) involves the possibility for depositary receipts to have as underlying securities not only equity securities (shares or other securities that represent equity rights issued by publicly held companies in Brazil) but also debt securities (also
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known as global depository notes (GDNs)). In other words, Brazilian publicly held companies may rely on depositary receipts issued in foreign markets that represent, among others, debentures, notes and certificates of real estate receivables, all of them issued in Brazil. An important aspect of this regulation is that Brazilian companies may access foreign capital while foreigners do not necessarily have to acquire securities traded in Brazil, but merely invest in a foreign stock exchange where the depositary receipts are traded.
Upon the effectiveness of Resolution 4373, the CVM enacted regulations to supplement and provide further details on this resolution (in terms of procedures for the registration of foreign investors, requirements for the approval of depositary receipt programmes, among others). In this regard, on 29 November 2014, the CVM enacted Instruction No. 559, with provisions regarding depositary receipt programmes, and Instruction No. 560, with provisions regarding information to be provided and registration that need to be obtained by foreign investors that are willing to invest in the local financial market.
Another innovation brought by Instruction No. 559 is the increase of the term for calling a shareholders’ meeting for companies with depositary receipt programmes that have as the underlying assets shares with voting rights. Generally, under local corporate laws, a call notice must be published within 15 days prior to shareholders’ meetings of listed corporations; such term is now of 30 days for companies with sponsored depositary receipt programmes.
New general regulatory framework for investment fundsOn 17 December 2014, the CVM enacted Instruction No. 555 in order to modernise and update the general regulatory framework for investment funds. Some of the provisions included a new regulation aimed at including the CVM’s decisions and opinions (case law) in the past few years, which were already a consolidated precedent and a market understanding.
The main changes introduced by Instruction No. 555 were:a the CVM rationalised the volume and the method of required disclosures by
investment funds. For instance, a supplementary information form was created, in which funds must disclose (among other aspects) risk factors regarding the funds’ portfolio, as well as a description of applicable fees and taxes that are charged from investors. Upon the use of such form, other documents that contained this type of information will only refer to such form;
b the CVM increased the level of disclosure regarding service providers, including the disclosure of fees, as well as establishing new methods to calculate and charge certain fees, such as the administration and performance fees;
c it promoted changes on the concentration limits for investments on foreign assets and custody rules for such assets, among others;
d it altered the classification of investment funds rationalising and simplifying the classification (which, from now on, is focused on the underlying assets that compose the portfolio of the fund); and
e it is considering the introduction of the concept of the professional investor (as described below) and established certain exceptions to such investors.
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Classification of qualified investorsOn 17 December 2014, the CVM enacted Instruction No. 554, which changed the definition of qualified investors in Brazil and introduced a new classification of investors, known as ‘professional investors’.
Professional investors are, among others: financial institutions; insurance firms and special savings companies; supplementary pension entities; individuals or legal entities with financial investments over 10 million reais that state in writing that they are in fact professional investors; investment funds; and foreign investors.
Qualified investors are, among others: professional investors and individuals or legal entities with financial investments over 1 million reais that state in writing that they in fact are qualified investors.
The goal in creating the different types of investors is to allow the CVM to focus the supervision of the capital markets, enhancing its protection over common investors and decreasing bureaucratic and unnecessary requirements and regulations for highly qualified investors, that can better assess the risks involved on their investments. In that sense, the CVM updated several of its rules to reflect such approach, among which investment funds destinated exclusively to professional investors will have more flexibility, for example, in relation to the establishment of an alternative method of calculation of service providers fees, among other matters; and securities subject to restricted 476 offerings can only be offered to qualified investors and are granted with automatic registration.
Additionally, Instruction No. 554 promoted changes in the rules regarding suitability (mandatory verification, by securities advisors and underwriters, as to whether the securities being offered are suitable for their clients). The new provisions establish, among other changes, that no suitability verification must be made if the investor is a qualified or professional investor (except if the investor is a natural person, deemed as professional or qualified investor due to the amount of investments held); is a state-owned company; or has its portfolio managed by a securities portfolio manager registered with the CVM.
Commercial papersOn 31 July 2015 the CVM enacted Instruction No. 566, which has compiled, modified or even revoked the content of several other rules in order to provide a single treatment to the provisions applicable to offerings of commercial paper in Brazil.
It is now clear that commercial paper offerings may be issued by limited companies and not only by joint-stock corporations. The term for the expiry of commercial paper for any issuer has been increased to up to 360 days. Restricted offerings of commercial paper issuances (implemented under Instruction No. 476) in which a fiduciary agent is involved (representing the rights of all commercial paper holders) are exempted from complying with this maximum term of expiry.
The CVM’s goal with the enactment of this new rule was not only to provide better access by local corporations to this short-term type of debt instrument but also to simplify and provide better access to the stock market by small and medium-sized companies.
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Mergers, consolidations and spin-off transactions involving publicly held companiesOn 15 June 2015 the CVM enacted Instruction No. 565, which regulates mergers, consolidations and spin-off transactions involving ‘category A’ publicly held companies.2 Among the improvements introduced by Instruction No. 565 it is worthwhile mentioning: the content of the company’s disclosure to the market regarding mergers, mergers of shares, consolidations or spin-off transaction transactions; officers and directors of publicly held companies’ fiduciary duties regarding the quality of the disclosed information; and criteria and content of the required appraisal reports to be prepared in connection with these corporate reorganisations.
Corporate governance for state-owned companies programmeIn Brazil, state-owned companies have an important role in several business sectors. However, there is a perception on the market that publicly held state-owned companies do not have the highest standards of disclosure and that the decision-making processes may be overwhelmingly influenced by the government’s public policies in detriment of other shareholders’ interests.
In that sense, BM&FBOVESPA created, on 30 September 2015, the ‘Programa de Governança de Estatais’, which comprises a great number of corporate governance mechanisms, divided into four categories: transparency, internal controls, management and commitment of the state controlling shareholders. The objective of this programme is to assist in the process of regaining trust from the market by state-owned companies listed in the stock exchange and consequently lowering the cost of capital for such companies.
An interesting point of the programme is that there are two categories for the companies that join it. The first category is for companies that adopt all of the corporate governance mechanisms provided for in the programme, while the second category is for companies that adopt six mandatory corporate governance mechanisms and a minimum punctuation among the optional corporate governance mechanisms. No state-owned company is currently able to adhere to the first category, which will only be possible with some regulatory improvements. In other words, the government itself will change its way of dealing with state-owned companies in the pursuit of the best corporate governance standards.
Transactions with shares owned by the company itselfOn 17 September 2015, the CVM enacted Instruction No. 567 and Instruction No. 568, which revoked former rules regulating transactions made by publicly held companies, or their associated or controlled companies, involving shares issued by the company itself (either with the purpose of keeping the shares in treasury or cancelling such shares).
The changes were introduced in order to update, simplify and add CVM consolidated understandings that were not present in former rules. These new instructions set forth, among other provisions, that transactions with derivatives linked to shares
2 ‘Category A’ publicly held companies are those allowed to publicly offer any kind of securities – being the only category allowed to publicly offer shares.
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issued by a company are now regulated and limited to 10 per cent of the company’s free float; that the approval by a shareholders’ meeting is required in certain cases, in order for the company to be allowed to negotiate with its own shares (formerly, the board of directors could authorise all such transactions); and an increase of the term for the settlement of authorised transactions (from up to 365 days to up to 18 months).
Infrastructure debenturesAlthough enacted in 2011, Law 12,431 (which created infrastructure debentures) was subject to certain amendments during 2011 and 2012 and it was only from 2013 to 2014 that public offerings of such instruments began to take place.
These debt instruments may be issued by local companies that have infrastructure projects deemed as relevant by local authorities in the following sectors: energy, telecommunications, transportation, urban mobility, aviation, science and technology, among others. The minimum requirements for these securities include a minimum term of four years; indexation based on local price indexes; interest to be paid at least every 180 days; offer proceeds to be used exclusively for the purposes of the infrastructure project; among others. In order to foster the use of such long-term funding alternatives by local companies, the federal government created tax exemptions applicable to investors of infrastructure debentures (such as zero per cent withholding income tax on interest paid to individuals and foreign investors).
Recent public offerings were implemented by utility concessionaire companies (CCR Via Lago and Autopista Planalto Sul, which implemented offerings in the amount of 250 million reais together), MRS Logística (336 million reais), Salus Infraestrutura (320 million reais), among others.
ii Cases and dispute settlement
A recent ruling by a federal judge from New York is very important for Brazilian capital markets, as it discussed the appropriate jurisdiction to have competence to rule over discussions involving Brazilian companies with arbitration clauses in their by-laws (as is the case of companies registered at the higher corporate governance levels of the BM&FBOVESPA, once the inclusion of such provisions is mandatory).
In this regard, several Petrobrás investors recently initiated class actions in foreign courts, claiming alleged irregularities and breaches to Brazilian and US securities laws in connection with findings derived from corruption investigations involving the company that are being conducted in Brazil. Such investors ignored the fact that Petrobrás’ by-laws established that any claims regarding the Brazilian Corporations Law, the company’s by-laws, rules enacted by the Central Bank, the CMN and the CVM, among others, involving the company should be settled by a Brazilian court of arbitration, namely the Câmara de Arbitragem do Mercado da BM&FBOVESPA (CAM). In these claims, investors requested the declaration of annulment of the arbitration clause established in Petrobrás’ by-laws. The main arguments for such annulment were that irregularities were verified on the call notice and procedures adopted on the general shareholders’ meeting that approved the inclusion of the arbitration clause in the company’s by-laws; and the company included the arbitration clause when CAM’s regulation determined
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that only shareholders that signed an instrument of consent were entailed and subject to arbitration jurisdiction.
The ruling issued by this foreign court determined that the arbitration clause was valid and mandatory for all Petrobrás’ shareholders, stating that Brazilian laws and regulations, at the time of the inclusion of the arbitration clause, expressly allowed arbitration as a way for settling disputes between companies and its shareholders, as provided by the Brazilian corporations law; that it is not possible to require that the inclusion of an arbitration clause on a company’s by-laws, in order to entail all shareholders, must be approved unanimously by all shareholders, as Brazilian corporation law does not list such resolution as requiring unanimous approval; and that the call notice for the shareholders’ meeting that approved the inclusion of the arbitration clause was sufficiently clear as to the resolutions to be decided on such meeting.
This decision has been very important in reinforcing the effectiveness of arbitration clauses included in the by-laws of Brazilian companies, making it mandatory that claims be settled by the appointed court of arbitration.
iii Relevant tax law
On 31 August 2015, the Federal Revenue Offices (Brazilian IRS) enacted Normative Ruling No. 1,585 of the Brazilian Federal Revenue (IN 1,585), aiming at updating and consolidating rules regarding the taxation of income and gains recognised by local and foreign investors on financial transactions carried out in the Brazilian markets.
Before the introduction of IN 1,585 it was common that investors contributed their equity interest on corporations to investment funds and, whenever such corporations paid dividends, they were paid directly to the quotaholders of the funds, such amounts being exempted from income tax, as the legal nature of said payments would remain as dividends (which are exempted from income tax under the current tax regulations).
According to this new regulation – the lawfulness of which in respect to this specific provision is debatable – the direct on-payment of dividends by investment funds whose portfolios are focused on equity interest to its quota holders would be treated as a legal act equated to a redemption or amortisation of quotas and, therefore, the withholding income tax would apply at the general 15 per cent rate.
Specific rules for new types of investmentOn 5 September 2013, the CMN issued Resolution No. 4,263 (CMN Resolution 4,263), regulating the issuance by Brazilian financial institutions of a new funding instrument: structure transaction certificates (COEs). COEs are ‘certificate(s) issued against initial investment, representing a single and indivisible set of rights and obligations, with a remuneration structure presenting characteristics of derivative financial instruments’ and may be issued exclusively by multiple banks, commercial banks, investment banks and savings banks, in book-entry form and upon registration in registry and settlement systems authorised by the Central Bank or the CVM.
According to IN 1,585, COEs’ profits are subject to income tax at a regressive tax rate starting at 22.5 per cent until 15 per cent. If the settlement of the COE occurs through the delivery of the assets, including shares, the acquisition cost of the asset can be deemed as the acquisition cost of the COE. Losses arising out of COE investment cannot
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be compensated with profits on equity transactions by a natural person; nevertheless, legal entities can deduct such losses from their taxable profits.
Tax exemption of income tax on capital gains of a natural person on investments on various securitiesFormer regulation exempted certain debt securities (real estate letters of credit (LCIs), agricultural letters of credit (LCAs), agricultural receivable certificates (CRAs), real estate receivable certificates (CRIs), certificates of agricultural deposit or agricultural warrants (CDA/WAs), agribusiness credit rights certificates (CDCAs) and rural product certificates (CPRs)) from income tax, nevertheless they were not exempted from tax over capital gains. According to the provisions of IN 1,585, such investments are exempted from tax over capital gains – a positive change that has been requested by the market for a long time.
III OUTLOOK AND CONCLUSIONS
Brazil has a comprehensive legal framework in terms of securities laws and regulations applicable to investors and issuing companies, and requirements that must be observed by each type of equity or debt security. In recent years local regulators have enacted a number of rules completing and updating this legal framework to provide better access to the capital and financial markets by local companies and detailed guidance and transparency to local and foreign investors that are willing to acquire securities issued in Brazil.
This effort – that has been verified in recent months with the enactment of the set of rules described in this chapter (such as CMN Resolution 4373, which created GDNs in Brazil and CVM Instruction 555, which updated the rules applicable to the investment funds industry) – is recognised by the market players. In fact, its results have been verified in practical terms: in spite of the current economic crisis affecting Brazil, a number of securities public offerings (mainly debt securities) have been observed in the local market over the past few months, evidencing that both investors and issuing companies are increasingly relying on the capital markets for their (short as well as long-term) funding and capital needs.
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Appendix 1
ABOUT THE AUTHORS
RICARDO SIMÕES RUSSOPinheiro Neto AdvogadosRicardo Simões Russo is a partner at Pinheiro Neto Advogados’ corporate department, practising in the São Paulo office. He advises corporate and investment banking clients on public and private financing transactions, securities offerings and listings, and M&A transactions, with particular experience in financing and restructuring transactions. He also provides advice on corporate governance matters and corporate and securities law and regulation. Ricardo is acknowledged as having built a prominent reputation in both the DCM and private financing markets and has been recognised as a leading corporate finance lawyer by a number of industry publications.
GUSTAVO FERRARI CHAUFFAILLEPinheiro Neto AdvogadosGustavo Ferrari Chauffaille is an associate in Pinheiro Neto’s corporate department, practising in the São Paulo office. He advises corporate and investment banking clients on securities offerings and public listings, mergers and acquisitions and corporate finance transactions generally.
LUIZ FELIPE FLEURY VAZ GUIMARÃESPinheiro Neto AdvogadosLuiz Felipe Fleury Vaz Guimarães is an associate in Pinheiro Neto’s corporate department, practising in the São Paulo office. He advises corporate and investment banking clients on securities offerings and public listings, mergers and acquisitions and corporate finance transactions generally.
About the Authors
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PINHEIRO NETO ADVOGADOSRua Hungria1100 São PauloBrazilTel: +55 11 3247 8720Fax: +55 11 3247 [email protected]@[email protected]