Shareholders' rights in private and public companies in Brazil: overview

A Q&A guide to shareholders' rights in private and public companies law in Brazil.

The Q&A gives an overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.

Contents

Types of limited companies and shares

1. What are the main types of companies with limited liability and shareholders? Which is the most common? Which type do foreign investors most commonly use?

Although Brazilian law provides for several forms of business organisations, the only ones that enjoy limited liability are:

  • Limited companies (sociedades limitadas), governed by Law 10.406/02, as amended (Brazilian Civil Code).

  • Joint stock companies (sociedades anônimas) governed by Law 6.404/76, as amended (Corporations Law).

In both cases, the liability of partners is limited to the amount they contributed to pay up the company's capital. In principle, the partners are not held liable for any amount in excess of those contributions, unless illicit acts have occurred. However, unlike the position with joint stock companies (where shareholders are not held liable for any shares subscribed and not paid up by other shareholders), the partners of limited companies can be held liable for the subscribed and unpaid corporate capital of the company, including that which was subscribed by other partners.

The equity held in joint stock companies is represented by shares and their ownership is evidenced in the share register book. Shares do not need to have a par value and can be represented by certificates. The equity held in limited companies is represented by quotas, and the amount and respective par value held by each quota holder is reflected in the limited liability company's articles of association.

Both types of company are very common and widely adopted in Brazil, by Brazilian residents and foreign investors. The choice between both types will depend mostly on the level of corporate governance required. Joint stock companies offer the opportunity to adopt higher standards of corporate governance, but are also more complex and costly.

Recently, another type of company, called an individual limited liability company (EIRELI) was created in Brazil. The EIRELI is similar to a limited company, but does not require a minimum of two partners. Although the Brazilian Civil Code does not expressly set out that only individuals (but not legal entities) are allowed to be partners of EIRELIs, the administrative regulation on EIRELIs has established this limitation, which in practice has reduced the use of EIRELI. Currently, there are some legal discussions and court decisions allowing legal entities to hold participation in EIRELIs. If it becomes uncontroversial that an EIRELI can be held by legal entities, we believe the EIRELI will be a good alternative for foreign investors that seek a simple and low cost structure to invest in Brazil.

 
2. What are the minimum share capital requirements for companies?

In principle, there are no minimum capital requirements for the incorporation of companies in Brazil, except when the law specifies a minimum amount due to a specific corporate purpose which will be performed by the company (for example, financial institutions, under the Central Bank rules, must be incorporated with a minimum capital).

 
3. Briefly set out the main types of shares typically issued by a company and the main rights they provide. Set out the other main financial instruments (for example, bonds) and participation instruments that can be issued by a company.

Shares can be:

  • Common.

  • Preferred.

  • Fruition.

The type of share will depend on the nature of the rights conferred to shareholders. Common shares entitle each of their holders to one vote in the resolutions of a general meeting. Preferred shares can grant their holders:

  • Priority in the distribution of fixed or minimum dividends.

  • Priority in capital repayment, with or without a premium.

  • Cumulative advantages concerning both items mentioned above.

Preferred non-voting shares will be granted voting rights if the company fails to distribute fixed or minimum dividends for more than three consecutive years.

Common shares in non-listed companies can belong to different classes, depending on:

  • Their non-convertibility into preferred shares.

  • The requirement that the shareholder be Brazilian.

  • The right to vote separately for the election of certain officers of the company.

Preferred shares in listed or non-listed companies can belong to one or more classes, and carry rights that can include the ability to elect certain members for the company's administrative bodies, even if those preferred shares are granted with no other voting rights.

Fruition shares are shares which replace shares (common or preferred) that have been fully redeemed (that is, shares redeemed by payment of the sum that would be due in the case of a liquidation).

Other securities that can be issued by a joint stock company are:

  • Participation certificates (partes beneficiárias). Non-par securities (only issued by non-listed companies) that confer on their holders the right to participate in up to 10% of annual profits.

  • Subscription warrants (bônus de subscrição). Negotiable securities that can only be issued by a company with authorised capital. These securities entitle their holders to subscribe for shares when the capital is increased, subject to the conditions stated on the corresponding certificates.

  • Debentures (debêntures). Securities that give their holders credit rights against the issuing company. Debentures can be converted into shares, and will be necessarily secured by the issuing company. Unless otherwise permitted by law, the total amount of outstanding debentures cannot exceed the capital of the company.

 
4. What is the minimum number of shareholders in a company?

Limited and joint-stock companies must have at least two partners/shareholders, which can be individuals or legal entities. Partners/shareholders do not need to be domiciled in Brazil. These companies may be held by a single partner/shareholder for a short period, provided that the requisite two partners/shareholders are re-established within a particular timeframe.

There are two exceptions to the general rule above:

  • The wholly-owned subsidiary (subsidiária integral), which is a specific type of joint stock company whose total corporate capital is owned by another Brazilian company.

  • The EIRELI, which is a limited company that can be held by a single partner, but faces some practical use limitations (see Question 1).

 

General shareholders' rights

5. What are the general rights of all shareholders? How can shareholders' rights be varied (for example, additional rights attaching to a class of shares, or limitations on shareholders' rights)? Are such variations generally provided in the company's by-laws and shareholders' agreements?

The Corporations Law lists the basic rights of all shareholders, which cannot be deprived by either the company's bye-laws or a general meeting (see Question 6).

The rights of a shareholder vary in accordance with the type and class of shares. Although the types of shares and basic characteristics of each type (as detailed in Question 3) are provided in the Corporations Law, specific details on each class of shares are provided in the bye-laws.

 
6. Briefly set out the rights of minority shareholders and the shareholding required to exercise such rights.

Shareholders' basic rights

These are to:

  • Participate in the profits.

  • Participate in the assets of the company in the case of its liquidation.

  • Monitor the management of the company.

  • Exercise the pre-emptive right in the subscription of shares, participation certificates convertible into shares, debentures convertible into shares and/or subscription warrants.

  • Withdraw from the company in the case of certain fundamental changes in the company.

General minority shareholders' rights

These are to:

  • Request the judicial liquidation of the company if the officers or the majority of the shareholders fail to promote liquidation proceedings, or oppose it in cases where the dissolution of the company is required by law.

  • Call a general meeting if management delays to call such a meeting for more than 60 days, in cases provided for in the bye-laws or by the Corporations Law.

  • File derivative actions against officers for losses caused to the company, provided such an action is not filed by the company within three months of a general meeting decision.

  • Attend meetings of shareholders and discuss any matter on the agenda.

Rights of shareholders representing 0.5% of the total capital

These shareholders have a right to request a list of the addresses of the shareholders to which the company sends proxy solicitations for powers of attorney, to enable them to send them their own proxy request.

Rights of shareholders representing 5% or more of the total capital

These shareholders have a right to:

  • Apply for a court order requiring a complete disclosure of corporate books when acts violate the law or the bye-laws, or in the event of grounds to suspect that management has committed serious irregularities.

  • Request the instatement and elect one member of the audit committee.

  • Request copies of management reports, accounts and financial statements, and opinions of independent auditors, if any.

  • File a derivative action against the company's officers to claim losses caused to the company under a resolution passed at the general meeting, in the event that the general meeting decides not to file such an action.

  • Request that the audit committee furnish information on the matters within its competence.

  • Request the winding-up of the company by court action, provided the company is not achieving its corporate objectives.

  • Sue the controlling company to recover damages caused by breach of its controlling shareholder fiduciary duties.

  • Call a general meeting whenever the officers do not, within eight days:

    • comply with their justifiable request that a meeting be called (indicating the matters to be discussed); or

    • comply with the request that a meeting be called in order to appoint an audit committee.

Rights of shareholders representing 10% or more of the voting capital

Shareholders with at least 10% of the voting capital can request the adoption of cumulative voting procedures in the election of the members of the board of directors, regardless of whether or not such a procedure is provided for in the bye-laws.

Shareholders representing at least 10% of the voting capital can further elect one member of the audit committee and its alternative (replacement).

The holders of at least 15% of the voting capital, or 10% of the non-voting shares (excluding the controlling shareholder) have the right to elect one of the board members (if the necessary number of votes is not obtained by 10% of the share capital in preferred shares, or by 15% of the voting capital, these classes can aggregate their share capital to have the right to elect one board member).

 
7. How influential are institutional investors and other shareholder groups in monitoring the company's actions (for example, corporate governance compliance)? List any such groups with significant influence in this area.

Shareholder activism is not as common in Brazil as it is in other countries, especially because the majority of listed companies in Brazil have a defined controlling shareholder. However, in the last few years, minority shareholders (mainly institutional investors) have been gradually more active, which has contributed to the recent increase in the voluntary adoption of stricter corporate governance practices by listed companies in Brazil. The main groups of institutional investors with influence in this area in Brazil are asset managers and pension funds, and the most active Brazilian association of minority shareholders is AMEC (Association of Investors in the Capital Markets).

 

General meeting of shareholders

Calling a general meeting

8. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved? Which decisions must be approved by the shareholders in a general meeting?

Brazilian joint stock companies are required to hold an annual shareholders' meeting (ordinary general meeting) to:

  • Verify the management accounts.

  • Examine, discuss and vote on financial statements.

  • Elect senior managers and members of the fiscal board (if necessary).

  • Resolve on the allocation of the net profits, distribution of dividends and monetary adjustment to corporate capital.

The ordinary general meeting must take place within four months of the year-end.

The Corporations Law sets out a list of matters that are exclusively within the remit of the general meeting:

  • Amendment to the bye-laws.

  • Electing or discharging the company's management and audit committee members at any time.

  • Receiving the annual accounts of the management and resolving on the financial statements presented by them.

  • Authorising the issuance of debentures.

  • Suspending the exercise of rights by a shareholder.

  • Resolving on the appraisal of assets contributed by any shareholder to the company's capital.

  • Authorising the issuance of participation certificates.

  • Resolving on the transformation, merger, consolidation, spin-off, winding- up and liquidation of the company, electing and dismissing liquidators, and examining the liquidators' accounts.

  • Authorising the managers to admit bankruptcy of the company and to file for debt rehabilitation.

Partners of limited companies are also required to approve management accounts. In the case of a limited company which has more than ten partners, such a resolution must be taken in an assembly, which must take place within four months of the year-end. Other matters that must be subject to partners' approval are:

  • Appointment, dismissal and compensation of senior managers.

  • Amendment to the articles of association.

  • Merger, consolidation and winding-up of the company, or cessation of the liquidation status.

  • Appointment and dismissal of liquidators, and decisions on their accounts.

  • Filing for debt rehabilitation.

 
9. Can a general meeting be held by telecommunication means or written/electronic approval?

Under the Corporations Law, shareholders' meetings must be held live, in the company's headquarters, unless prevented by force majeure. However, in limited companies it is possible to have written resolutions of the partners instead of partners' meetings, if all partners decide in writing on a matter that would be the object of a partners' meeting.

 
10. What are the notice, information, and quorum requirements for holding general meetings and passing resolutions?

Call notice

Call notices must be published in the press on at least three occasions and contain information on the place, date and time of the meeting, as well as the agenda (any proposed amendment to the bye-laws must be expressly identified).

For non-listed companies:

  • The first call of a general meeting must be made at least eight days in advance of the date of publication of the first notice.

  • A second call notice must be published at least five days prior to the meeting.

For listed companies:

  • 15 days' advance notice will apply to the first call.

  • Eight days' advance notice will be allowed for the second call.

The requirement to have a call notice can be waived if all shareholders are present at the meeting (in which case, the meeting will held to be validly called).

Quorum for holding meeting

A general meeting will be opened:

  • On first call, with the presence of shareholders representing at least 1/4 of the voting capital.

  • On second call, with any number of shareholders.

An extraordinary general meeting convened to amend the bye-laws will only be opened on the first call in the presence of shareholders representing at least 2/3 of the voting capital.

Quorum for passing resolutions

As a general rule, resolutions of a general meeting will be passed by a majority of votes, abstentions not being taken into account. The bye-laws of a non-listed company can increase the quorum required for certain resolutions, provided they specify the relevant matters which require higher quorums.

However, the following matters require the approval of shareholders representing at least 1/2 of the voting shares, unless the bye-laws of a non-listed company provides for a higher quorum:

  • Creation of preferred shares or increase in an existing class of preferred shares, without maintaining the existing ratio to the other classes of preferred shares, unless already provided for or authorised by the bye-laws,

  • Change in the priorities, advantages and conditions of redemption or authorisation of one or more classes of preferred shares, or the creation of a more favoured new class.

  • Reduction of the compulsory dividend.

  • Consolidation of the company, or its merger into another company.

  • Participation in a group of companies.

  • Change in the objects of the company.

  • Ending of the state of liquidation of the company.

  • Creation of participation certificates.

  • Spin-off of the company.

  • Dissolution of the company.

The Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) can authorise a reduction of the quorum above in the case of a listed company whose shares are widely held and whose last three general meetings were attended by shareholders representing less than 1/2 of the voting shares.

 

Voting

11. What are the voting requirements for passing resolutions at general meetings?

See Question 10 for the voting requirements to pass a resolution at general meetings.

Each common share grants its holder one vote in the general meeting. The only exception is the cumulative voting procedure which can apply to the election of the members of the board of directors (see Question 6).

Written resolutions of shareholders are not allowed, but shareholders can delegate their vote to other shareholders by means of a proxy.

Shareholders can group their shares. Usually, shares are grouped to:

  • Exercise the right to call a general meeting.

  • Receive information.

  • Initiate the cumulative voting procedure.

 
12. Are specific shareholder approvals/resolutions required by statute for certain corporate actions? What voting requirements and majorities apply?

See Question 8 for the list of matters that are the exclusive authority of the general meeting, as determined by the Corporations Law.

Other matters can be reserved to the shareholders' meeting as established in the company's bye-laws.

See Question 11 for voting requirements and majorities.

 

Shareholder rights relating to general meetings

13. Can a shareholder require a general meeting to be called? What level of shareholding is required to do this? Can a shareholder ask a court or government body to call or intervene in a general meeting?

A general meeting must be called by the board of directors (if any) or the executive officers as determined in the company's bye-laws. General meetings can also be called by:

  • The audit committee, in the cases prescribed by law.

  • Any shareholder, whenever the officers delay the call to resolve on a matter required by law or the bye-laws for more than 60 days.

  • Shareholders representing at least 5% of the capital, whenever the company's officers do not, within eight days, comply with their justifiable request that a meeting be called, indicating the matters to be discussed.

  • Shareholders representing at least 5% of the voting capital, or 5% of non-voting shareholders, whenever the company's officers do not, within eight days, comply with the request to call a meeting in order to appoint an audit committee.

A shareholder can obtain assistance through the courts or the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) to intervene in a general meeting, or cause a general meeting to be held, in specific cases.

 
14. Can a shareholder require an issue to be included and voted on at a general meeting? What level of shareholding is required to do this? Can a shareholder require information from the board about the meeting's agenda?

In principle, any shareholder can require an issue to be included and voted on at a general meeting. However, if the company's officers do not attend to the request of a shareholder to include a determined issue in a general meeting, only the shareholders that have at least 5% of the capital can call a general meeting directly (see Question 13).

Shareholders are allowed to request more information about the meeting agenda from the board.

 
15. Do shareholders have a right to resolve in a general meeting on matters which are not on the agenda?

Shareholders can resolve on a matter not included on the agenda only if all shareholders are present at a general meeting and agree with resolving on the matter that was not included on the agenda.

 
16. Can a shareholder challenge a resolution adopted by a general meeting? Is a certain shareholding level required to do this? What is the time limit and procedure to challenge a general meeting resolution?

Shareholders can challenge a resolution adopted by a general meeting if the resolution does not comply with:

  • The law.

  • The company's bye-laws.

  • A shareholders' agreement.

In these cases, there is no minimum shareholding level required.

The Corporations Law does not establish any specific mechanism for the shareholders to challenge the resolutions adopted by the general meeting, but sets out that the statute of limitations for proceedings to annul resolutions at a general meeting sets a time limit of two years.

 

Shareholders' rights against directors

17. What is the procedure to appoint and remove a director?

The appointment and removal of a director is within the competence of the annual general meeting, which must take place during the first four months of every year, and is approved by the majority of the shareholders present at the meeting (except for the special rights of preferred and minority shareholders to elect one member each).

Except when otherwise provided for in the bye-laws, in the event of a vacancy in a position on the board of directors, a replacement will be appointed by the remaining board members, and will serve until the next general meeting. Should vacancies occur in the majority of positions, a general meeting must be called to hold a new election.

 
18. Can shareholders challenge a resolution of the board of directors? Is there a minimum shareholding required to do this?

The Corporations Law does not establish a specific mechanism for shareholders to challenge the resolutions of the board of directors, but as a general rule, a duly called and convened general meeting is empowered to decide all matters relating to the objects of the company, and to adopt such resolutions as it deems necessary for the protection of the company as an on-going concern.

 
19. Briefly set out the main directors' duties to the company and its shareholders. What is the potential liability of directors to the shareholders? Can their liability be limited or excluded? On what grounds can shareholders bring legal action against the directors?

Directors' fiduciary duties can be summarised as follows:

  • Duty of diligence to fulfil the company's purpose.

  • Duty of loyalty.

  • Duty of confidentiality.

  • Duty to disclose any personal conflict of interest situation.

Under the Corporations Law, a director will not be personally liable for damages caused by acts performed in the normal course of business, in the best interest of the company, and under the provisions of law and the bye-laws. However, if the act performed by the director is not in line with these provisions, he can be held personally liable for the damages caused to the company, to the shareholders and to third parties.

It should be noted that a director will also be held personally liable for the acts performed by his fellow directors if they do not expressly state their disagreement with that director's decision, and if they do not ensure that such disagreement is registered in the minutes of the meeting during which the decision was taken. This liability will also apply where a director does not communicate to the next management level in writing their dissenting vote, or any information with regard to irregularities that are within their knowledge.

By a resolution adopted in a general meeting, the company can bring an action for civil liability against any manager (directors or officers) for the losses caused to the company's property. Any shareholder can bring this suit if proceedings are not instituted by the company within three months from the date of the resolution of the general meeting. Should the general meeting decide not to file a liability suit, it can be brought by shareholders representing at least 5% of the capital stock.

Any damages recovered by a liability suit brought by a shareholder will accrue to the company, but the company will reimburse the shareholder for all expenses incurred (up to the applicable limit).

This liability suit does not preclude any action available to any shareholder or third party directly harmed by the acts of a manager.

 
20. Are directors subject to specific rules when they have a conflict of interest relating to the company? Are there restrictions on particular transactions between a company and its directors? Do shareholders have specific rights to bring an action against directors if they breach these rules?

A manager (director or officer) is prohibited by the law from taking part in:

  • Any corporate transaction in which they have an interest that conflicts with an interest of the company.

  • The decisions made by the other managers on the matter in which they have a conflict of interest.

They must disclose their disqualification to the other managers and must ensure that the nature and extent of their interest is recorded in the minutes of the board of directors or executive office meeting.

Notwithstanding the above, a manager can only contract with the company on arm's length terms. Any business contracted other than in accordance with this rule is voidable, and the manager concerned will be compelled to transfer to the company all the benefits which they may have obtained in such business.

See Question 19 in relation to liability suits against managers.

 
21. Does the board have to include a certain number of non-executive, supervisory or independent directors?

The only rule provided by the Corporations Law in relation to the composition of the board of directors is that only up to 1/3 of its members can also serve as executive officers.

However, in order to be listed in higher corporate governance segments, companies can voluntarily undertake to abide by corporate governance practices and transparency requirements in addition to those already requested by the Corporations Law and the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) rules, which include having at least 20% of the board composed of independent members.

 
22. Do directors' remuneration and service contracts have to be disclosed? Is shareholder approval of directors' remuneration required?

Under the Corporations Law, the general meeting will establish the aggregate or individual amount of the management (directors and officers) compensation, including benefits of any kind and representation allowances, taking into consideration:

  • Their responsibilities.

  • The time devoted to their duties.

  • Their competence and professional standing.

  • The market value of their services.

Listed companies must comply with the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) rules on the disclosure of compensation policy and benefits to its senior management, which in general allows the presentation of compensation information on an aggregate basis. Financial institutions must abide by Central Bank regulations on compensation policy to ensure it is consistent with risk management policy.

 

Shareholders' rights against the company's auditors

23. What is the procedure to appoint and remove the company's auditors? What restrictions and requirements apply to who can be the company's auditors?

Under the Corporations Law, the selection and discharge of independent auditors is a matter reserved to the board of directors.

For listed companies, the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) rules establish the duties and responsibilities of auditors and sets out the activities that cannot be pursued by auditors (such as rendering consultancy services to an audited company) which may result in the loss of its independence and objectivity and holding participation in the audited company or its affiliates. The CVM rules also set out rules for the mandatory rotation of auditors (generally, every five years, with re-appointment allowed only after three years).

 
24. What is the potential liability of auditors to the company and its shareholders if the audited accounts are inaccurate? Can their liability be limited or excluded?

Under the Corporations Law, the company's officers are responsible for preparing the financial statements based on the accounting records of the company. The duty of auditors is limited to the verification of the suitability of accounting statements with regard to the financial standing of the audited company, but it is necessary that those statements prepared by the officers actually represent the financial and equity standing of the company. In other words, the liability of auditors is limited to the issuance of opinions on the prepared statements.

The liability of auditors can be of a civil or administrative nature. The civil liability of auditors is governed by the Brazilian Civil Code and depends on proof of:

  • An action or omission that violates a contractual or extra-contractual duty in a culpable manner.

  • Damage.

  • A chain of causation between the damage and the action or omission that caused such damage.

The administrative liability results from a violation of the administrative rules, such as the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) rules, the Central Bank, and the Federal and Regional Accounting Councils.

There is no specific criminal offence directed to the auditing profession, and therefore any criminal liability will only arise under the usual criminal offences, provided for in the Penal Code and related regulations.

 

Disclosure of information to shareholders

25. What information about the company do the directors have to provide and disclose to its shareholders? What information and documents are shareholders entitled to receive?

All documents related to the matters subject to the approval of the general meeting must be available to the shareholders at the company's headquarters at the time that the general meeting is called.

One month before the date of the annual general meeting, the managers must make available to the shareholders (including "to take" copies):

  • The management report on the company's affairs and major administrative events of the last financial year.

  • Copies of the accounts and financial statements.

  • The opinion of the independent auditors (if any).

  • The audit committee's opinion, including dissenting opinions (if any).

  • Other documents relating to matters included on the agenda.

The company managers (or at least one of them) and the independent auditor (if any) must be present at the general meeting to deal with any request by shareholders for clarification, but the managers cannot vote as shareholders or as proxies on the documents mentioned above.

Should the general meeting require further clarification, it can postpone the resolution and order an investigation. Subject to a waiver by the shareholders present at the meeting, the resolution can also be deferred if a manager, a member of the statutory audit committee or the independent auditor fails to attend the meeting.

Every shareholder is entitled to obtain a copy of the minutes of the general meeting. In addition, any shareholder owning at least 0.5% of the share capital has the right to request the addresses of the shareholders for the purposes of exercising the proxy rights.

In addition to the right to inspect the accounting documents as set out above, at the request of shareholders representing at least 5% of the capital stock, a full disclosure of the company's books can be ordered by the court whenever:

  • Acts contrary to law or to the bye-laws occur.

  • There is a grounded fear of serious irregularities committed by any of the company's management bodies.

 
26. What information about the company do the directors have to disclose under securities laws (where applicable)?

Under Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) ruling No. 358, managers must disclose:

  • Any material fact or act related to the company itself.

  • Their ownership and negotiations involving securities of the company, or of its listed controlling companies or subsidiaries.

The managers will disclose this information to the Investor Relations Officer and the Investor Relations Officer will release this information to the CVM and to the market, as applicable, within the terms provided by law.

There is no exhaustive definition of "material act or fact" and the Investor Relations Officer will determine if certain information should be considered a material fact or act for disclosure purposes. Any act or fact that may cause a material effect to the following matters will be deemed a "material fact or act" and will be subject to disclosure:

  • The market price of the securities issued by the relevant corporation or backed on them.

  • Investors' decisions to buy, sell, or preserve those securities.

  • Investors' decision to exercise any rights inherent to titleholders of securities issued by the relevant corporation or backed on them.

The CVM has provided a (non-exhaustive) list of some examples of materials acts and facts, which include:

  • Execution of agreements or contracts regarding the transfer of the control of the company, even if under conditional provisions.

  • Changes in the control of the company, including execution, amendments to or cancellation of shareholders' agreements.

  • Execution, amendments to, or cancellation of shareholders' agreements in which the company is a party or an intervenient party, or of shareholders' agreements that have been registered in the relevant books of the company.

  • Admission or departure of shareholders maintaining contracts or operational collaboration arrangements regarding financial, technological or administrative issues with the company.

  • Authorisation for listing securities issued by the company in any domestic or foreign market.

  • Decision to go private, or to promote the cancellation of the company's register as a listed company with the CVM.

  • Incorporation, merger or spin-off involving the company itself or linked corporations.

  • Transformation or dissolution of the company.

  • Material changes in the company's assets.

  • Material changes in the company's accounting criteria.

  • Renegotiations of debts.

  • Approval of stock options plans.

  • Changes to the rights and privileges of the securities issued by the company.

  • Splits, reverse splits or the issue of share dividends.

  • Acquisition of shares for the purpose of increasing treasury stocks or for cancellation purposes, and the resale of the acquired shares.

  • Amount of profits or losses and the distribution of dividends.

  • Execution or termination of contracts, or failure to close a deal, when the expectation for the closing is publicly known.

  • A material project's approval, alteration or abandonment, as well as a delay in its implementation.

  • Starting, retaking or suspending the manufacturing or commercialisation of products or of services rendered.

  • Discoveries, changes or developments regarding technology or companies' resources.

  • Modification of disclosed projections of the company.

  • Reorganisation arrangements, bankruptcy, or any lawsuit that materially changes company's financial situation.

In addition, under the Securities Law, the managers of the company must disclose to the shareholders at the shareholders ordinary general meeting, at the request of shareholders representing at least 5% of the corporate capital of the company:

  • The amount of securities of the company (or of companies from the same economic group) that they have directly or indirectly acquired or disposed during the past fiscal year.

  • The stock options purchased or exercised during the past fiscal year.

  • The benefits or advantages received directly or indirectly by the company or by companies of the same economic group.

  • The main conditions of labour agreements entered with managers and high level executives.

  • Any material act or fact related to the activities of the company (including those that may have a material effect or influence on):

    • the company's share price.

    • a decision of the investors with respect to the sale or purchase of company's securities.

    • a decision of the investors with respect to any of its rights as a securities' holder of the company.

Where the managers believe that the disclosure of certain information could be detrimental to the interests of the company, they can decide not to disclose it (though they will still be at risk of being held liable by the CVM for the omission).

Until the release of material acts or facts that managers may have had access to as a result of their positions in the company, managers and their subordinates have an obligation to treat such insider information confidentially.

 
27. Is there a corporate governance code in your jurisdiction? Do directors have to explain to shareholders in the company's annual report if they have not complied with it (comply or explain approach)?

There is no general and mandatory corporate governance code applicable to all listed companies. There are corporate governance codes for certain market segments, for example, the market segment within the Sao Paolo Exchange, formerly known as the BOVESPA, which merged with the Brazil Mercantile and Futures Exchange in 2008 to create the BM&F Bovespa Exchange, the Novo Mercado, has its own corporate governance code, and is regulated by the Novo Mercado Rules. However, these codes are not applicable to companies that have not adhered to these specific market segments.

Nevertheless, there are some codes and governance orientations issued by regulators and other capital market organisations that, despite not being mandatory, have been created for the purposes of creating a better capital markets environment in terms of corporate governance. For example, the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa) (IBGC) issued its most up-to-date edition of its corporate governance code and best practices in 2009, and the Committee of Orientation for Information Disclosure frequently issues several orientations in respect of best disclosure practices for listed companies. Companies usually follow the orientation provided by these entities, but this is not mandatory unless required by company's internal governance rules or by the market segment the company is party to.

 
28. What information can shareholders request from the board about the company? On what grounds can disclosure of company information be refused? Are shareholders entitled to inspect the company's books and similar company documents?

Shareholders are allowed to request clarifications in respect of any aspect involving the company itself or of any measure taken by the management of the company. Where, for any reason, the management believes that the disclosure of certain information could be detrimental to the company, the management can refuse disclosure and its action will be then subject to the evaluation of the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM).

In addition to the right of shareholders representing at least 5% of a company's corporate capital to request copies of management reports, accounts and financial statements, and opinions of independent auditors (if any), the shareholders representing at least 5% of a company's corporate capital can apply for a court order requiring the complete disclosure of the corporate books in the case of a violation of the law or the bye-laws, or in the event that there are grounds to suspect that management has committed serious irregularities (see Question 24).

 

Shareholders' agreements

29. Briefly set out the main provisions of a typical shareholders' agreement.

Shareholders' agreements regulating the purchase and sale of shares, the right of first refusal to acquire shares, the exercise of voting rights or the existing controlling powers will be observed by the company when they have been filed at the company's headquarters.

The chairman of the meeting or of the company's decision-making board must not ratify or count as valid a vote cast in violation of a shareholders' agreement which is on file.

The duration of shareholders' agreements can vary enormously, but usually they have long-term duration (ten to 20 years), or they last for as long as the relevant shareholders continue to own a certain percentage of the company's corporate capital.

 
30. Are there circumstances where shareholders' agreements can be enforceable against third parties?

Commitments or burdens resulting from shareholders' agreements can only be enforced against a third party after the agreement has been duly registered in the register books of the company and on share certificates (if any).

 
31. Do shareholders' agreements have to be publicly disclosed or registered?

Shareholders' agreements of listed companies are publicly available through the Brazilian Securities Exchange Commission's (Comissão de Valores Mobiliários) (CVM's) website. Shareholders' agreements of privately held companies are filed at the company's headquarters and will only be made available to interested parties upon that party making a justifiable request to see them.

 

Dividends

32. How can dividends be paid to shareholders and what procedures and restrictions apply? Is it possible to exclude or limit the right of certain shareholders to dividends? Is the payment of interim dividends allowed?

A company can only pay dividends from the year-end net profits, the accrued profits and the profit reserves. Advances on dividends are not allowed. Without prejudice to criminal prosecution, the management and audit committee members will be jointly liable for reimbursement to the company of the amount distributed as dividends in breach of this rule.

Shareholders will not be required to repay dividends received in good faith. Bad faith is held to occur when dividends are distributed:

  • Without the preparation of a balance sheet.

  • Not in accordance with the results disclosed by the relevant balance sheet.

Any general meeting resolution or provision in the bye-laws that excludes the right of any shareholder to the dividends is void. However, the right to dividends is not specific to a certain percentage of the profits. Therefore, different classes of shares can have distinct dividend related rights. In the case of limited liability companies, the articles of association can allow the disproportional distribution of profits.

Before any other use, 5% of the year-end net profit must be set aside to a legal reserve, which cannot exceed 20% of the company's capital stock. The legal reserve is intended to secure the capital stock and can only be used to offset losses or to increase the corporate capital of the company.

Payments of interim dividends are allowed under certain specific circumstances. For the payment of interim dividends:

  • It is mandatory for the company to prepare specific balance sheets.

  • The company must be authorised (by statutory provisions or by its own bye-laws) to prepare balance sheets comprising the interim periods.

  • The bye-laws of the company must grant powers to the management to declare and pay interim dividends.

The total amount of dividends paid in each semester of a fiscal year must not exceed the amount of the capital reserves of the company. In addition to that, the bye-laws of the company can authorise the management to declare interim dividends from accumulated profits or profits reserves provided in the last annual or semi-annual balance sheets.

 

Financing and share interests

33. Can shareholders grant security interests over their shares?

Yes, shareholders can grant security interests over their shares. The formalities governing the effectiveness of the security interest can vary (depending on the security interest granted and the type of shares), but the formalities usually require the annotation of the security interest in the company's register books.

A pledge of shares will be effective by recording the respective instrument in the shares register book. A pledge of book-entry shares will be effective by entering the respective instrument in the books of the financial institution, and a similar entry must also be evidenced on the deposit account statement provided to the shareholder.

The company or financial institution is always entitled to request a copy of the pledge instrument for its files, and in order to ensure the accuracy of the annotations.

 
34. Are there restrictions on financial assistance for the purchase of a company's shares?

The Brazilian Government enacted Law No 12.249/10 to regulate thin capitalisation in Brazil. Under current Brazilian legislation, the debt/equity ratios to be used for the purposes of determining the limitations for interest payment deductions under the thin capitalisation rules can vary, depending on the place in which the foreign creditor is resident or domiciled, as provided below:

  • Related parties not resident in a tax haven jurisdiction. As a general rule, the debt/equity ratio is "two for one" for loan transactions entered into between a Brazilian legal entity and a foreign related party not resident in a tax haven jurisdiction or favourable tax regime. This test must be made in two steps:

    • with respect to a specific creditor;

    • with respect to all loans with related parties.

  • Foreign parties resident in tax havens and favourable tax regime jurisdictions. As a general rule, the debt/equity ratio is 0.3 to one for loan transactions entered into between a Brazilian legal entity and a foreign party resident in a tax haven or favourable tax regime jurisdiction (irrespectively of not being related to the Brazilian party). In this sense, under the applicable tax legislation, interest payments made to a foreign party resident in a tax haven or favourable tax regime jurisdiction are not deductible for corporate taxation purposes if the debt raised by the Brazilian entity with the foreign tax haven/favourable tax regime parties happens to exceed 30% of the equity value (net worth) of the Brazilian entity (in this case, only the interest applied over the principal amount of the debt that exceeds the "0.3 to one" ratio for all the debt borrowed from parties resident in a tax haven or favourable tax regime jurisdiction is not deductible).

 

Share transfers and exit

35. Are there any restrictions on the transfer of shares by law? Can the transfer of shares be restricted? What are the rights of shareholders in the case of an issue of new shares (pre-emption rights)?

Shares of listed companies can only be traded upon payment of at least 30% of their issue price. Non-compliance with this provision will render the act void. In addition, depending on the corporate governance segment that the company is party to, controlling shareholders and management can have 100% of their shares subject to a six-month lock-up period after the first public issuance of shares upon enrolment with that governance segment, and 40% of their shares subject to additional six-month lock-up during the following six-month period.

The bye-laws of non-listed companies can impose restrictions on the transfer of registered shares, provided that those restrictions are defined in detail and do not preclude their negotiability or subject the shareholder to discretionary decisions of the company's management bodies or majority shareholders. A restriction on the transfer of shares created by an amendment to the bye-laws will only apply to shares whose owners have expressly consented to such a restriction, and must be registered in the shares register book.

Shareholders have pre-emptive rights in the subscription of new shares in proportion to the number of shares they own. The bye-laws or a general meeting will establish a period of not less than 30 days for the shareholders to exercise their pre-emptive rights. The bye-laws of a listed company authorising capital increases can provide for the issuance of shares, convertible debentures or subscription warrants (without granting the existing shareholders the pre-emptive rights, or with an exercise term shorter than 30 days), provided that these securities are placed by means of either:

  • A sale in a stock exchange or public subscription.

  • An exchange public tender offer for the acquisition of corporate control.

 
36. Can minority shareholders alter or restrict changes to the company's share capital structure?

Minority shareholders cannot alter or restrict changes to the company's share capital structure. Minority shareholders can have pre-emptive and withdrawal rights (see Question 39) in the case of certain corporate transactions, but they have no rights to alter or restrict changes to the company's share capital structure.

 
37. When are shareholders required to notify changes to their shareholding to a regulatory authority?

In a listed company, shareholders that reach a 5% stake of a certain type or class of share issued by the company must submit certain information about the relevant shareholder, the securities owned, the purpose of the transaction, among other things, to the Investor Relations Officer, who will submit the information to the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM). The same information must be submitted by shareholders holding 5% or more of a certain type or class of share, each time that their stake changes by an increase or a decrease of 5%.

In addition, the controlling shareholder of a publicly-held company, as well as the shareholders (or group of shareholders) that have elected a board of directors or audit committee member, must make prompt disclosure of any change in the ownership interests that they hold to the CVM and to the Stock Exchanges or organised over-the-counter markets in which the publicly-held company's securities are listed, in the manner and on the conditions established by the CVM to that end.

Shareholders of non-listed companies generally do not have these reporting obligations, except when the changes to their shareholding relate to a transaction which requires the approval of the competition authorities.

 
38. Can companies buy back their shares? Which limitations apply?

As a general rule, companies are not allowed to trade their own shares. This prohibition does not apply to:

  • Redemption, repayment or amortisation operations provided for by law.

  • Shares acquired to be held in the company treasury or cancelled, in an amount up to the outstanding balance of profits or reserves (the statutory reserve excepted), and without entailing a reduction in the corporate capital.

  • The disposal of shares acquired under the second bullet point above, and held in treasury.

  • The purchase of shares when, it being resolved that the capital will be reduced through a cash redemption of part of the share value, their stock exchange price is less than or equal to the amount to be repaid.

Listed companies can purchase shares issued by themselves, for cancellation or holding in treasury for further disposal, if authorised by its bye-laws and provided that the total amount of purchased shares does not exceed 10% of each class of outstanding shares (including existing shares held in treasury by controlled and associated companies).

The purchase price of the shares cannot exceed the market value. While held in treasury, the shares will have no rights to dividends or to vote.

 
39. What are the main ways for a shareholder to exit from the company? Can shareholders require their shares to be repurchased by the company? Can shareholders be required to exit the company in certain circumstances? How are the shares valued in this case?

In listed companies, the main way for shareholders which are not part of the controlling group to exit from the company is by selling the shares in the stock market. For shareholders which are part of controlling groups of listed companies, or shareholders of non-listed companies, the main ways to exit are the exit alternatives built in the relevant shareholders' agreements, such as mandatory IPO-follow-ons or put options. Other than that, the exits are via bilateral transactions with potential acquirers.

There are certain limited circumstances where shareholders can require their shares to be repurchased by the company:

  • In the case of a delisting tender offer filed by the company.

  • Upon the approval by the general meeting of certain transactions in relation to which the relevant shareholder has voted against. These transactions are the following:

    • creation of preferred shares or increase in an existing class of preferred shares, without maintaining the existing ratio to the other classes of preferred shares, unless already provided for or authorised by the bye-laws;

    • change in the priorities, advantages and conditions of redemption or authorisation of one or more classes of preferred shares, or the creation of a more favoured new class;

    • reduction of the compulsory dividend;

    • consolidation of the company, or its merger into another;

    • participation in a group of companies;

    • change in the objects of the company;

    • spin-off of the company;

    • merger of shares.

Under the rules of the Brazilian Civil Code, a quotaholder can be expelled from a limited liability partnership when it puts the continued existence of the partnership at risk through acts of evident seriousness. The Sociedade Simples rules, which can complement the limited liability partnership rules, additionally includes the default of the partner's obligations, supervening incapacity, and when the partner is declared bankrupt as grounds for expelling a quotaholder. In these situations, the value of the partner's quota will be calculated based on the net worth of the partnership on the date of the exit.

The Corporations Law is silent about the reasons to expel a shareholder. However, court precedents and Brazilian scholars accept that expulsion is possible in order to preserve the company's activities. The grounds for expulsion are related to a default of the shareholder's obligations and putting the continued existence of the company at risk through acts of evident seriousness. In addition, the relationship between the shareholders must not only be based on financial interest but must also involve some personal involvement. There is no specific rule about the valuation of the shares and it is assessed on a case-by-case basis.

 

Material transactions

40. What rights do shareholders have in the case of material transactions, such as a sale of all or substantially all of the company's assets, and a company reorganisation such as a merger or demerger?

The main protection that shareholders have in the case of material transactions is the withdrawal right covered in Question 39. This right is available only in relation to the transactions listed in Question 39, except if otherwise set out in the company's bye-laws. The withdrawal right is also subject to certain limitations so that it benefits only the adversely affected shareholders and does not to cover shareholders of listed companies whose shares have liquidity and dispersion in the market.

In addition, shareholders of listed companies can benefit from the mandatory tender offers which are required in cases of delisting, increase of ownership stake by the controlling shareholder and transfer of control.

Other than these statutory rights, shareholders can have other protections built into the relevant bye-laws of the companies, such as veto rights, qualified majorities to approve certain transaction and poison pills.

 
41. What rights do shareholders have if the company is converted into another type of company (consider if applicable, a European Company (SE))?

Under Article 221 of the Corporations Law, the transaction by means of which one company is changed from one type into another is called transformation, and it requires the unanimous consent of the partners or shareholders, except where otherwise provided by the bye-laws or articles of association, in which case the dissenting partner or shareholder will have the right to withdraw its shares. The withdrawal right can be waived by the partners in the articles of association.

 

Insolvency

42. What rights do shareholders have if the company is insolvent?

The shareholders representing at least half of the issued voting capital can approve the dissolution and liquidation of the company in a general meeting.

A general meeting can decide that, prior to completing the liquidation and after all creditors have been paid, the company assets be apportioned among the shareholders as such assets are ascertained. After all creditors have been paid or guaranteed, a general meeting can approve, by the vote of shareholders representing at least 90% of the shares, special conditions for the apportionment of remaining assets by attributing assets to the shareholders at book value or any other value it may establish. Should a dissenting shareholder prove that the special apportionment conditions favour the majority to the detriment of the portion which would have been attributed to him if such conditions did not exist, the apportionment must be suspended (if not perfected) or, if perfected, the majority shareholders must indemnify the minority shareholders for any proved loss.

 
43. Can shareholders put the company into liquidation? What is the procedure to do this?

Yes, shareholders representing at least half of the issued voting capital can approve the dissolution of the company in a general meeting. In the non-listed companies, the bye-laws can establish a higher approval quorum. Except if otherwise set out in the bye-laws, it is within the general meeting's competence to establish the method of liquidation, and appoint the liquidator and the audit committee to serve during the period of liquidation.

 

Corporate groups

44. Is the concept of a corporate group recognised under specific legislation?

The Corporations Law provides that the controlling company and its controlled companies can form a group by an agreement to combine resources or efforts to achieve their respective purposes or to participate in joint activities or undertakings. The controlling company or leader must be Brazilian and must directly or indirectly exercise permanent control over the affiliated companies, by virtue of being the controlling shareholder, or by agreement. The relationship between the companies, the administrative structure of the group and the co-ordination or subordination of the officers of the affiliated companies must be agreed within the group, but each company will maintain a separate legal identity and separate assets and liabilities.

Additionally, Brazilian labour, social security and tax laws provide for a broader concept of corporate group, where the only requirement is for the companies to be under common control or management. In this case, the companies can be considered as part of a corporate and economic group and can be held jointly liable for certain obligations.

 
45. Does a controlling company have any duties and liability to the shareholders of the company it controls? What are the rights of company shareholders if the controlling company carries out actions that are prejudicial to the shareholders?

A controlling shareholder (whether a company or an individual) is an individual or a legal entity, or a group of individuals or legal entities joined by a voting agreement or under common control, which:

  • Possess rights which permanently assure it a majority of votes in resolutions of general meetings and the power to elect a majority of the company directors and officers.

  • In practice, uses its power to direct the corporate activities and to guide the operations of the departments of the company.

A controlling shareholder must use its controlling power to make the company accomplish its purpose and perform its social role, and will have duties and responsibilities towards the other shareholders of the company, those who work for the company and the community in which it operates, the rights and interests of which the controlling shareholder must loyally respect and heed.

A controlling shareholder will be liable for any damage caused by acts performed in abuse of its power. An abuse of power can take any of the following forms:

  • To guide a company towards an objective other than in accordance with its objects clause or which is harmful to national interests, or to induce it to favour another Brazilian or foreign entity to the detriment of the minority shareholders' interests in the profits or assets of the company or of the Brazilian economy.

  • To provide for the liquidation of a viable company or for the transformation, merger or division of a company in order to obtain, for itself or for a third party, any undue advantage to the detriment of the other shareholders, of those working for the company or of investors in the company.

  • To provide for a statutory amendment, an issue of securities or an adoption of policies or decisions which are not in the best interests of the company but are intended to cause damage to the minority shareholders, to those working for the company or to investors in the company.

  • To elect a company officer or audit committee member known to be unfit for the position or unqualified.

  • To induce, or attempt to induce, any officer or audit committee member to take any unlawful action, or, contrary to their duties under the law and under the bye-laws, and contrary to the interests of the company, to ratify any such action in a general meeting.

  • To sign contracts with the company directly, through a third party or through a business in which the controlling shareholder has an interest, incorporating unfair or inequitable terms.

  • To approve, or cause to be approved, irregular accounts rendered by company officers as a personal favour, or to fail to verify a complaint which it knows, or should know, to be well founded, or which gives grounds for a reasonable suspicion of irregularity.

  • To subscribe for shares with payment in assets outside the scope of the objects of the company.

A controlling company will be obliged to compensate any damage it may cause to a controlled company by any acts infringing the duties set out above.

Proceedings for compensation can be brought by:

  • Shareholders representing 5% or more of the capital.

  • Any shareholder, provided he guarantees payment of the legal costs.

If the controlling company is held responsible, in addition to paying compensation and costs, it must pay an indemnity in respect of lawyers' fees of 20% of the compensation awarded and a further premium of 5% to the claimant.

 
46. What are the limitations on owning reciprocal share interests in companies?

As a general rule, the Corporations Law prohibits cross-holdings between a company and its affiliates or controlled companies. However, this prohibition will not apply to the cases in which a certain company holds equity interests in another under the conditions on which the law authorises acquisition of its own shares (see Question 38). In this case, within six months the company must dispose of the shares or quotas exceeding the amount of profits or reserves, whenever these are reduced.

The shares of the controlling company which are owned by the controlled company will have their voting rights suspended. This same rule will apply to the acquisition of shares of listed companies by their affiliates and controlled companies.

When cross-holdings derive from a merger, consolidation or spin-off, or from acquisition by the company of a controlling interest in another company, this fact must be mentioned in the reports and financial statements of both companies and must be eliminated within one year. In the case of affiliates, unless otherwise agreed, the shares or quotas acquired most recently or, when acquired on the same date, those representing a lesser percentage of the capital stock, must be disposed of.

Managers of a company can be held jointly liable for the acquisition of shares or quotas resulting in cross-holdings in breach of the law.

 

Contributor profiles

Alexandre Bertoldi, Managing Partner and Member of the Executive Committee

Pinheiro Neto Advogados

T (+5511) 3247-8568
F (+5511) 3247-8600
E abertoldi@pn.com.br
W www.pinheironeto.com.br

Professional qualifications. LLB, Universidade de São Paulo, Brazil; MBA, University of Glasgow, Scotland

Areas of practice. Mergers and acquisitions; corporate; private equity; capital markets; banking and finance.

Vânia Marques Ribeiro Moyano, Partner

Pinheiro Neto Advogados

T (+5511) 3247-8762
F (+5511) 3247-8600
E vmoyano@pn.com.br
W www.pinheironeto.com.br

Professional qualifications. LLB, Pontifícia Universidade Católica de São Paulo, Brazil; LLM, University of Chicago, USA

Areas of practice. Mergers and acquisitions; corporate; private equity; capital markets and debt restructuring.

Sofia Toledo Piza, Senior Associate

Pinheiro Neto Advogados

T (+5511) 3247-8782
F (+5511) 3247-8600
E spiza@pn.com.br
W www.pinheironeto.com.br

Professional qualifications. LLB, Universidade de São Paulo, Brazil; Graduated in Business Administration by Fundação Getúlio Vargas, Escola de Administração de Empresas de São Paulo, Brazil; MBA, Fundação Getúlio Vargas, Escola de Administração de Empresas de São Paulo, Brazil

Areas of practice. Mergers and acquisitions; private equity and corporate matters.

Roberta Bilotti Demange, Senior Associate

Pinheiro Neto Advogados

T (+5511) 3247-6209
F (+5511) 3247-8600
E rdemange@pn.com.br
W www.pinheironeto.com.br

Professional qualifications. LLB, Universidade de São Paulo, Brazil; LLM (Banking and Finance), Boston University, USA

Areas of practice. Mergers and acquisitions; corporate; private equity; project finance; banking and finance.


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