In Brazil, the concept of a publicly held company is both rigid and flexible. It is rigid because the definition of a publicly held company considers the registration of the corporation with the Brazilian Securities and Exchange Commission (CVM). On the other hand, it is flexible because securities are broadly defined as all instruments or contracts that, when offered publicly, grant rights to participation, partnership, or remuneration with returns derived from the efforts of an entrepreneur or third parties.
To clarify these concepts, it is worth mentioning some emblematic situations. For instance, it is perfectly legal in Brazil for a joint-stock company to issue securities without being registered with the CVM, in which case it remains a privately held company. This occurs especially when the corporation issues debt securities offered exclusively to professional investors through an automatic distribution process. This is one of the cases where CVM registration is not required.
Counterintuitively: (i) there can be privately held companies that issue securities; (ii) publicly held companies do not necessarily issue shares as securities; and (iii) publicly held companies may not have a dispersed ownership structure (in fact, most publicly held companies in Brazil have concentrated ownership).
The reasons for these legal and regulatory distinctions are varied and, ultimately, stem from the complexities surrounding the concept of securities. The term “valor mobiliário” in Portuguese originates from French but, in practice, Brazil adopts the American concept of “security” (as defined legally at the beginning of this article).
To understand what constitutes a security, it is necessary to delve into the history of the term. In the United States, after the 1929 Crash, rules were introduced to prevent major financial crises like those seen during the Great Depression. Regulations were implemented to protect investors. Generally, holders of securities do not dictate the terms of the business they are a part of (e.g., they do not draft the company’s bylaws), nor do they typically manage the funds raised (e.g., it is not straightforward strategy to convene a general meeting to replace directors).
In the U.S., extensive debates on securities ensued, and the results of these discussions influenced Brazilian law. Today, Brazil has a broad definition of securities to ensure robust protection for various types of investors in its large-scale capital markets.
As part of investor protection, rules on material facts and acts are outlined in CVM Resolution No. 44/2021. These rules mainly address decisions that can impact securities prices, aiming for the broad disclosure of material information to safeguard investor interests.
This Resolution replaced CVM Resolution No. 358/2002, thus filling the gap for the open-ended penal provision established in Article 27-D of Law No. 6,385/1976. Consequently, the criminalization of insider trading was incorporated into Brazilian law only in 2017 through an amendment introduced by Law No. 13,506.
The legally protected interest justifying this crime varies among the following: investor assets, equality among investors, the interests of the securities issuer, the proper functioning of the securities market, and others. However, it is unanimous that the use of material information leading to the crime must occur in the context of securities trading, as inferred from the law itself.
This penal provision is considered special, as only those who, by virtue of their position or role, have access to relevant market-sensitive privileged information and are obligated to maintain confidentiality can be held liable. Article 8 of Resolution No. 44 lists those bound by this duty of confidentiality, including controlling shareholders, officers, members of the board of directors, audit board members, and members of any technical or advisory boards.
Other professionals may also be subject to this confidentiality obligation under the law, as inferred from the first paragraph of Article 27-D, which states: “The same penalty applies to anyone who discloses confidential information related to a material fact accessed by virtue of their position or role with the securities issuer or due to a commercial, professional, or trust relationship with the issuer.”
While the political-criminal relevance of this offense may be questioned, given the limited number of cases in Brazilian courts, it is worth noting that similar criminalizations exist in other countries, such as Spain and Germany. Moreover, the discussion on the limits and criteria for expanding criminal law to address economic activities, the need for alternative and more effective solutions for such conflicts, and the problematic relationship between criminal law and administrative law in the sector remain subjects of significant legal debate in Brazil.
Corporate Law Department at Franco Advogados with Contributions from Chiavelli Falavigno
