Compliance & EthicsProfessional

®

a publication of the society of corporate compliance and ethics www.corporatecompliance.org

February

2017

43Confused

about ethics

Shawn Washington

39How Corporate Social

Responsibility can improve Ethics & Compliance

Craig Thomas

29Reputation and good

governanceRobert Purse

33How to get a career in

ComplianceLaura M. Ellis

Meet Ana-Paola (“AP”) Capaldo

Associate General Counsel

Global Ethics & Compliance

Laureate Education, Inc.

Miami, FL

See page 16

This article, published in Compliance & Ethics Professional, appears here with permission from the Society of Corporate Compliance & Ethics. Call SCCE at +1 952 933 4977 or 888 277 4977 with reprint requests.

+1 952 933 4977 or 888 277 4977 www.corporatecompliance.org 73

Com

pli

ance

& E

thic

s P

rofe

ssio

nal

®

Feb

ruar

y 20

17

by Rosângela Delgado and Rodrigo Santos

The purpose of this article is to provide a general overview of the recent Brazilian Anticorruption Act and to

briefly analyze two of the many controversies surrounding the new legal text.

Considering that the Public Administration and judicial courts have not yet debated the Anticorruption Act more thoroughly, this article is not intended to draw any concrete conclusions, but rather to point out some topics that should be addressed by the legal community in general in order to provide more clarity to companies carrying out activities in Brazil.

Overview of the Brazilian Anticorruption ActOn August 2, 2016, Brazil enacted its first anticorruption law to address corruption practiced by legal entities:

Law No. 12,846/2013 (Anticorruption Act), which became effective as of January 29, 2014.

The Brazilian Anticorruption Act provides that legal entities will be strictly liable for certain acts practiced by themselves or on their behalf against the national or foreign public administration. Foreign legal entities will also be liable if they have headquarters, affiliates, or any type of representation in Brazil, even

» The Brazilian Anticorruption Act provides for joint and several liability between companies belonging to the same economic group.

» The Act also establishes the succession of liability in cases of mergers and acquisitions.

» The Act is not clear on how far up the corporate structure liability can travel.

» In cases of mergers and acquisitions, the Act does not specify which economic group would be liable for acts practiced by the target of the transaction.

» Considering the uncertainties surrounding the Brazilian Anticorruption Act, companies should undertake due diligence procedures before acquiring Brazilian companies.

Santos

The Brazilian Anticorruption Act: Overview and controversies

The Brazilian Anticorruption Act provides that legal

entities will be strictly liable for certain acts practiced by

themselves or on their behalf against the national or foreign

public administration.Delgado

74 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977

Com

pli

ance

& E

thic

s P

rofe

ssio

nal

®

Feb

ruar

y 20

17

on a temporary basis, while Brazilian legal entities will be liable for acts against a foreign public administration, even if performed outside the Brazilian territory.

Strict liability, as set forth by the Brazilian Anticorruption Act, means that it need not be shown that the legal entity had the wrongful intention to practice, or even actual knowledge about, the illegal acts practiced by any of its representatives or employees in the legal entity’s benefit. Under the Brazilian Anticorruption Act, one only needs to show that harmful or corrupt acts have been practiced by representatives or employees of the legal entity to the company’s benefit (even if not exclusively).

Additionally, the Brazilian Anticorruption Act states that controlling, controlled, or affiliated (coligadas) companies will be jointly and severally liable for the payment of fines and compensation of damages related to corrupt acts. In the case of consortium agreements, all companies belonging to the consortium will be jointly and severally liable for the payment of monetary fines related to the practice of corrupt acts and for the payment of compensation of damages in connection with any harm caused by the corrupt acts.

In case of mergers, the liability of the legal entity that succeeds the original legal entity will be restricted to payment of fines and compensation of damages caused by the harmful or corrupt act, which will be limited to the assets (patrimônio) transferred to the

new legal entity. Other penalties foreseen in the Brazilian Anticorruption Act will not be applied for acts performed before the date of the merger. Other types of non-monetary penalties, however, may apply and be extended in cases of succession between entities where sham or fraud can be found.

The Brazilian Anticorruption Act states that the liability of the legal entities will be

independent from the liability of individuals for those harmful or corrupt acts, which means that the liability of legal entities does not exclude the liability of individuals. Any employee, representative, officer, or administrator of the legal entity, as well as any individual who may have participated in

the harmful or corrupt act, may and will be held liable.

Under the Brazilian Anticorruption Act, harmful or corrupt acts are described as any acts that may cause harm to entities of the public administration, either national or foreign, which are practiced against national or foreign public assets (patrimônio), that violate principles of the public administration or that may violate any international commitments undertaken by Brazil.

Legal entities that are considered liable for the acts addressed in the Brazilian Anticorruption Act at the administrative level may be subject to the following penalties:

· Fines ranging from 0.1% to 20% of the company’s gross revenues in the year preceding the year in which the

Any employee, representative, officer, or administrator of the legal entity, as well as

any individual who may have participated in

the harmful or corrupt act, may and will be

held liable.

+1 952 933 4977 or 888 277 4977 www.corporatecompliance.org 75

Com

pli

ance

& E

thic

s P

rofe

ssio

nal

®

Feb

ruar

y 20

17

administrative proceedings is initiated, excluding taxes. The fine will not be lower than the advantage obtained, where such advantage can be assessed. If it is not possible to assess the amount of the total gross revenue of the legal entity, the fine may range from R$6,000 Brazilian reais to R$60,000,000 Brazilian reais.

· Extraordinary publication of the decision which convicts the legal entity.

The penalties do not eliminate the obligation of companies to fully compensate damages caused by the harmful or corrupt acts.

Corporate transactions and the succession of liabilityAs mentioned above, the Brazilian Anticorruption Act provides for specific rules regarding the succession of liability in case of corporate reorganizations, including mergers and acquisitions.

According to Article 4 of the Act, the liability of the legal entity subsists regardless of any statutory changes, amalgamation, merger, or spin-off. Paragraph 2 of Article 4 provides that the controlling, controlled, and affiliated companies (coligadas) are jointly and severally liable for the payment of any fines imposed as a consequence of harmful acts and for the compensation of damages that may have been caused to the Public Administration.

The above provision brings forth at least two questions that are often raised during mergers and acquisitions, but have not been addressed by regulations or by Brazilian authorities: (1) How far up and down the

corporate ladder does such liability go?; and (2) Which “economic group” is to be considered jointly and severally liable, that existing at the time of the alleged misconduct or the economic group in place after the merger or acquisition has taken place? The Anticorruption Act is unclear with regard to these topics; therefore, one must analyze the Act systematically, along with other statutes,

in order to better understand the possible answers to these questions.

According to the Brazilian Civil Code, a company controls another when it has, directly or indirectly, the majority vote in shareholders’ meetings and the power to elect most of its directors/

officers. The Civil Code also establishes that companies are affiliated (coligadas) when a company holds a 10% or more equity participation in the capital stock of the other. Based on the above provisions, it could be possible to infer that liability for harmful acts practiced against Brazilian or foreign administrations could be transferred almost indefinitely up or down the economic group’s corporate ladder.

The above conclusion is in line with the provisions of the Brazilian Competition Act (Law No. 12,529/2011), which legislators have reportedly used as a source of inspiration for the drafting of the Anticorruption Act. The Competition Act, however, uses a different language to establish joint and several liability throughout the corporate structure: It states that all entities belonging to the economic group are jointly and severally liable for the violation of the economic order.

According to Article 4 of the Act, the liability

of the legal entity subsists regardless of

any statutory changes, amalgamation, merger,

or spin-off.

76 www.corporatecompliance.org +1 952 933 4977 or 888 277 4977

Com

pli

ance

& E

thic

s P

rofe

ssio

nal

®

Feb

ruar

y 20

17

As for the second question raised above, it would appear that the legislators’ intention was that the economic group to which the penalized company belongs would be jointly and severally liable. As stated above, the Anticorruption Act does not expressly provide for this interpretation; however, the rule regarding joint liability was placed as a paragraph of Article 4, which refers to the liability of legal entities in cases of changes such as amalgamation, merger, and spin-off.

On the other hand, if one adopts the above understanding, then it would seem that the Anticorruption Act would only provide for joint and several liability between legal entities in cases where mergers, acquisitions, or spin-offs have taken place, since the only article of the law that addresses this topic is the one mentioned above.

Additionally, if joint liability applies only to the economic group to which the company belongs at the time of imposition of the penalty, then the Public Administration would be placing a heavy burden upon all economic groups in succession of others and would be creating incentives for corrupt economic groups to sell companies previously engaged in corrupt practices in order to release the selling economic group from any past liabilities down the road.

Thus, from a purely technical analysis of the Anticorruption Act, it would appear that all entities belonging to the economic group of the company deemed to be corrupt at the time of the penalty imposition

would be jointly and severally liable for the payment of fines and damages arising from the harmful act. However, while interpreting the Act, it would seem more adequate to punish the legal entity along with the companies that belonged to the economic group at the time in which the company carried out the harmful act.

ConclusionThe previous discussions demonstrate that, while it certainly represents a very

important step towards progress in Brazilian business practices, the Anticorruption Act still has many unclear provisions, which are yet to be interpreted by Brazilian authorities.

These omissions have raised serious concerns among companies currently investigated for harmful acts and have created difficulties for companies looking to invest in Brazil through mergers and acquisitions.

The controversies outlined in this article point to the conclusion that anticorruption due diligences are more important than ever in mergers and acquisitions involving Brazilian companies, since potential liability for misconducts carried out before the transaction could possibly affect the entire economic group of the acquiring company. ✵

Rosângela Delgado (rosangela.delgado@veirano.com.br) is a partner at Veirano Advogados, working from the Rio de Janeiro/RJ office, in Brazil.

Rodrigo Santos (rodrigo.santos@veirano.com.br) is an associate at Veirano Advogados, working from the São Paulo/SP office, in Brazil.

…the Anticorruption Act still has many unclear provisions, which are yet to be interpreted

by Brazilian authorities.