VASP was one of the biggest Brazilian airline companies during the 1980s and 1990s. On May 12, 1999, a board meeting was held with the objective of deciding upon the signing of protocols and justifications concerning the full merger of the shares of BRATA and the Hotel Nacional into VASP.
The directors unanimously decided to approve the signing with the administrative bodies of the companies involved. There was, however, one detail: BRATA and the Hotel Nacional were companies indirectly controlled by VASP’s controlling shareholder, Mr. Wagner Canhedo Azevedo.
On May 19, one week later, another board meeting was held at which the protocols and justifications signed with BRATA and the Hotel Nacional were presented, despite the businesses of both the companies having no relation to commercial aviation, VASP’s main line of business.
On May 28 of that same year, Mr. Milton Frasson, tax advisor to VASP and representative of the São Paulo State Government, voted against the merger, feeling that the operation ought to be better analyzed, since it would be prejudicial to the minority shareholders due to the unjustified dilution of the State’s share in the company’s capital.
At the VASP EGM (Extraordinary General Meeting) held on June 7, 1999, in addition to ratification of the Board of Directors, Trevisan Independent Auditors was nominated to evaluate the shares of BRATA and Hotel Nacional, and NCV Consultoria Empresarial Ltda. was chosen to undertake the economic and net assets evaluations of VASP. The State Treasury voted against the operation.
The issue price for the VASP shares was based upon the worth of the company’s net assets. The shares of Hotel Nacional and BRATA were evaluated based upon the worth of their net assets on December 31, 1998. A value 70% higher than that of VASP was attributed to BRATA, a small-sized regional company. The Hotel Nacional’s net assets, in turn, were evaluated at 600% greater than those of VASP.
At the VASP EGM on June 21, 1999, the expert evaluation reports on the BRATA and Hotel Nacional shares were approved, as well as the issue price of the VASP shares, with a vote against approval once again being cast by the State Treasury of São Paulo which, on that same day, filed an injunction against VASP and Voe Canhedo S/A (a company controlled by Mr. Wagner Canhedo Azevedo), requesting suspension of the effects of the decisions taken at the assemblies held on June 7 and 21, 1999, as well as restraint of the issuance of new shares.
Despite this, the assemblies decided upon the issue of 203 million new shares for the controlling shareholder, the equivalent of more than seven times the number of shares prior to the incorporation of BRATA and the Hotel Nacional. With this, the equity held by the State Treasury was reduced from 39.99% to 4.61%.
As a result of the common control of Voe Canhedo S/A, BRATA and the Hotel Nacional, it was obvious that there was a conflict of interest, as established in Art. 115, paragraph 1, of Law n.º 6.404/76.
On June 18, 1999, The São Paulo State Treasury Secretary sent an official letter to the President of the CVM, requesting intervention. At a meeting of the Board of the CVM on July 9, 1999, held therefore after the assemblies, it was decided that an Administrative Inquiry should be opened. No precautionary measure was taken by the CVM however against the holding of the respective assemblies.
According to the CVM Report, despite the questions raised by the São Paulo State Treasury, at no point whatsoever had VASP and Voe Canhedo S/A demonstrated that NVC Consultoria Empresarial Ltda. had the understanding, technical capability or qualified professionals to perform a task of such importance. On top of this, the CVM itself stated that the expert evaluation reports presented had not met the requirements of Art. 8 of Law n.º 6.404/76.
As far as the CVM’s Inquiry Commission understood the matter, the exchange ratio between the shares would be altered significantly, and the State Treasury’s share would fall from 39.99% to 37.77%. The report further concluded that the arguments presented to justify the merger and the exchange ratio of the shares aimed to conceal the controlling group’s greater objective, “to take a bite out of the slice of around 88% of the São Paulo State Treasury Secretary’s share in the capital of VASP.”
As a result, in October 2000, the CVM confirmed Mr. Sr. Wagner Canhedo Azevedo’s responsibility for the unjustified dilution of the share the minority shareholders held in VASP, and held the administrative board and the board of directors responsible for the exercising of abuse of power.
The Reporting Officer voted for the partial approval of the Inquiry Commission’s Report and this was unanimously supported by the Board of the CVM. The minority shareholders, on the other hand, filed an action to uphold the effects of the merger decision and this request was preliminarily approved.
Finally, on 10/20/2004, the Appeals Council of the National Financial System – CRSFN – (which serves as the second and final tier of appeal for CVM decisions) also unanimously confirmed the CVM’s decision, once again stressing the occurrence of a conflict of interests due to the fact that the controlling shareholders of the holding were also controlling shareholders in the two companies which were the subject of the merger. This in itself prevents the controlling shareholder’s vote at the company’s EGM which decided upon the expert evaluation reports on the assets belonging to the controlling shareholders and where the company’s shareholding structure underwent radical changes, with an increase in the controlling shareholder’s direct share and the consequent reduction in the share belonging to the minority shareholder.
In the decision on the VASP case, neither the Board of the CVM (on 10/26/2010) or the CRSFM (on 10/20/2004) accepted the defense argument of Voe Canhedo S/A and Mr. Wagner Canhedo that “the Corporation Law would have legitimized the controlling shareholder’s vote, as much in the merger of the subsidiary company as in the hypothesis of a merger of the total amount of the shares of the other company, and to prohibit the direct or indirect controlling shareholder from voting would be to deny the validity of the arrangements set out in Arts. 264 and 136 of Law 6.404/76”.
In conclusion to the case, the São Paulo State judiciary, now at the second level, unanimously confirmed the lower court decision that the assemblies held in 1999 should be annulled. Unfortunately, this was too late to have any significant impact for minority shareholders in VASP, a company which went into restructuring, ceased operations in 2004 and was declared bankrupt in 2008.
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