The Brazilian Securities and Exchange Commission (“CVM”) published on 09.25.2018 the Guidance Opinion 38, which deals with the fiduciary duties of managers in connection with the indemnity agreements entered into between publicly-held companies and their managers.

In these indemnity agreements, the companies undertake to provide the payments, redemption or advancements of financial resources to pay certain expenses related to arbitration, judicial or administrative proceedings involving acts of their managers in the exercise of their roles.

It is important to note the difference between the indemnity agreements and the Directors and officers liability Insurance (known as “D&O”). In the indemnity agreement, the company takes a portion of the administrator’s individual financial risk related to the investigation, prosecution or liability of which they are subject, subject to the terms and conditions set forth in such agreement. In D&O, the company pays the premium, provided in the insurance policy, in exchange for the indemnity offered by the insurer for the management.

According to CVM, the rationale of regulating these agreements comes from the fact that such agreements brings certain risks that must be considered and mitigated by the managers, especially regarding the potential impacts for the company and the need to align the management’s interests with the company’ in defining the terms of these instruments, as well as in decisions regarding disbursements.

The idea of Guidance Opinion 38 is not to be exhaustive with regard to matters related to indemnity agreements, but rather to address to the market and to the managers relevant issues to be considered doing their drafting, approval and execution, considering the fiduciaries duties attributed to the administrators by the Brazilian Corporate Law.

One of the aims of Guidance Opinion 38 was to list the managers’ acts that should not be subject to indemnification, as well as the main precautions to be observed when defining the scope of coverage. It is important to mention that in this sense, CVM listed the following actions, among others, that are not eligible to indemnification:

1. actions taken outside of their duties;
2. actions committed in bad faith, fraud, gross negligence or fraud; or
3. actions taken in their own interest or of third parties, to the detriment of the company’s interest.

Another matter addressed was the need to implement procedures that ensure that decisions regarding the expenditure of resources in connection with these agreements are taken independently and aiming at company’s best interest. CVM indicated that the company’s management must make sure that the agreement includes clear and objective rules, specifying:

1. which corporate body will be responsible for evaluating whether the act of the manager falls within any of the exclusions mentioned in the paragraph above, which are not subject to indemnification; and
2. the procedures that will be adopted to exclude the participation of the managers whose expenses may be indemnified.

Finally, CVM set forth the information that must be disclosed so that shareholders’ and market in general can know the terms and conditions of the agreement, and evaluate the possible financial consequences for the company.[1]

If you have any question or need further clarifications on this matter, please contact us:

Ivan Iais – ii@zancan.com.br

Jarbas Velloso – jv@zancan.com.br

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1. [1] if there is provision under the bylaws on the indemnity (and, if so, its terms);
2. if the agreement has to provide for a cap on the indemnity offered (and, if so, the amount);
3. the coverage term that may be covered by the agreement;
4. the managers who may enter into an indemnity agreement with the company;
5. indemnity right’ exclusionary hypotheses;
6. types of expenditure which may be paid, advanced or reimbursed based on the agreement; and
7. the procedures related to the decisions regarding the payment, reimbursement or advance of expenses arising from the indemnity commitment, setting forth: (i) the corporate body that will be responsible for the decisions regarding its granting; and (ii) the rules and procedures that will be adopted to mitigate conflicts of interest, ensure the independence of decisions and ensure that they are taken in the company’ best interest.