(Mondaq) The Brazilian Securities and Exchange Commission decided to amend again the provisions of CVM Instruction No. 391 of July 16, 2003, which regulates the incorporation, management and operation of the Brazilian Equity Investment Funds, by means of CVM Instruction No. 540 of November 26, 2013.
The FIP, incorporated as a close-ended condominium, is a communion of resources for the acquisition of shares, debentures, warrants, or other securities convertible into or exchangeable for shares issued by privately and/or closely-held corporations, participating in the decision-making processes of the invested company, with effective influence in the definition of its strategic policies and management, particularly by appointing members of the invested company’s Board of Directors.
The FIP´s participation in the decision-making process of the invested company may occur: (i) by holding shares of the controlling block; (ii) through the execution of a shareholders’ agreement; or (iii) through the execution of other arrangements or procedures which guarantees the FIPI’s effective influence in the determination of strategic policies and management1.
The investment in the FIP may be made by means of an investment commitment whereby the investor is bound to pay up the amount of the committed capital as the FIP’s manager calls for payments, pursuant to periods, decision processes and other procedures established in the respective investment commitment.
The existence of an active initial public offerings market is an important source of long-term financing for new projects and for accelerating the growth of small and medium-sized companies, being vital to the existence and continuance of a strong capital market. Companies exposed to the capital market are more transparent and adhere to stricter corporate governance rules. These factors tend to reduce the cost of capital of these companies, increase their competitiveness and improve their performance.
The changes introduced by CVM Instr. 510/2013 reflect two proposals submitted to CVM by the Technical Committee of Smaller Deals (Comitê Técnico de Ofertas Menores)2, with the objective to improve the regulatory environment so that small and medium-size companies are able to access the capital markets and get funding through public issues of shares, without putting at risk or misrepresent the characteristics of FIPs. The Committee proposed and CVM has accepted that the requirement of interference in the management could be dispensed with in the following situations: (i) for investments that are within the limit of up to 35% of the net worth value of the FIP (35% threshold); and (ii) in the case of disinvestment of each invested company (disinvestment).
Designed specifically for the private equity sector, FIPs are required to participate in the decision-making process of the invested companies. Both proposals relate to the relaxation of the requirement that FIPs have effective influence on the definition of the strategic policy and management of the invested companies and assume that the investment be made in listed companies in the segment of market access with more stringent corporate governance standards than those required by law.
The 35% threshold allows the FIP: (i) to hold any stake in the company in an initial public offering that will dilute its equity participation and involves the loss of positions in the company´s administration; and (ii) to invest in a larger number of companies. Such exception only applies to segments intended for the access to the capital market of smaller companies, which precisely because they are still in the process of maturation, tend to have higher growth potential. This is a typical characteristic of investments of FIPs.
This limit will be raised to 100% during the period of application of funds, which has been established in up to six months counted of each of the events of payment of units issued by the FIP provided for in the investment commitment. The FIP´s bylaws shall contain the rules and criteria to determine the deadlines for making the investments, counting from each capital payment, as well as for the refund of the paid up capital or the extension of such deadlines, in case the investment is not made within the provided term. The maximum term specified for capital calls shall not exceed the last business day of the second subsequent month following the initial date defined for the payment of the units.
During this period, if the threshold of 35% had not been relaxed, FIPs that just initiated their operations, when performing their investments in initial public offerings of companies listed in the primary segment focused on access to the market with differentiated corporate governance standards, would not qualify for the purpose of CVM Instr. 391/2003 to the extent that in these cases they would not have influence in the management of the invested companies. Such a possibility could cause FIPs to postpone investments in this segment.
The effective influence on the definition of the strategic policy and management of the invested company is more relevant in the maturation period of the investment. It is understandable, therefore, that this behavior is no longer required when the FIP effectively starts its phase of disinvestment. This procedure would enable the FIP to acquire an equity participation in a closely-held company (invested company), contribute with its strategic policy and management during the maturation phase, promote the initial offering of the invested company and gradually reduce its influence in the company´s decision-making process according to the decrease of its equity participation.
If the FIP fails to comply and exceeds the 35% threshold at the closing of the month for reasons unrelated to the wishes of the manager of the portfolio (desenquadramento passivo) and such situation continues at the closing of the next month, the administrator must: (i) notify CVM immediately on the occurrence of the non-compliance, with the due justifications, as well as a forecast for the compliance; and (ii) inform CVM of the compliance at the time that it happens.