Understand the State Law and why it came into Bolsonaro’s sights

The State-owned Companies Law returned to the center of political debate after President Jair Bolsonaro (PL) tried, once again, to replace the president of Petrobras due to dissatisfaction with a fuel price readjustment and its impact on his electoral intentions.

This week, members of the centrão – a group of parties that are part of the government’s allied base – defended the flexibilization of the law to facilitate changes in the command of the company.

“What is intended is a faster solution for replacement when there is a need,” he told Sheet the government leader in the Chamber, Ricardo Barros (PP-PR).

The proposal is also defended by the president of the Chamber, Arthur Lira (PP-AL), who had already asked for changes in the legislation after Bolsonaro’s last resignation in April. At the time, Lira stated that the rules established were made to stop Petrobras.

Since arriving at Palácio do Planalto, in 2019, Bolsonaro has fired three nominees that he himself suggested for the command of the state-owned company. All left after the company announced readjustments.

The difficulty of the government – ​​which is Petrobras’ controlling shareholder – in appointing a president to control fuel prices is related to the State-owned Companies Law. First, because the legislation establishes rules for the appointment of directors and directors. Second, because it has mechanisms that protect the interests of minority shareholders.

See the main points of the law.

What is the State Law for?

The State-Owned Companies Responsibility Law (13,303/2016), sanctioned in 2016 by the then interim president Michel Temer (MDB), was approved in response to a series of investigations that pointed to political use of companies in previous administrations.

The text is broad and deals with aspects ranging from the corporate regime to the standardization of financial statements and bidding procedures.

However, as the intention was to strengthen the governance of state-owned companies, the main novelties concern the mechanisms of shielding against political interference.

How does the State-Owned Companies Law block government appointments?

At the time the law was passed, it was said that one of the main objectives of the project was to professionalize the management of state-owned companies. Therefore, new rules were created for the appointment of directors and counselors, prohibiting the appointment of party leaders or politicians who had contested elections in the previous 36 months.

Another requirement is that the chosen person has ten years’ experience in positions in companies in the sector or four years in similar companies.

The law also prohibits the appointment of ministers, secretaries, parliamentarians and representatives of the regulatory body to which the company is subject. It is also prohibited to appoint people who may have a conflict of interest, for example, signing a contract or partnership with the state-owned company in the last three years.

For Danilo Gregório, manager of the IBGC (Brazilian Institute of Corporate Governance), the requirements and prohibitions are the main protection contained in the State-Owned Companies Law. For this reason, he believes that the easing proposal is targeting exactly these rules.

According to him, the legislation closed the door to party-political appointments, but, like any rule, there is room for loopholes. “At least the most serious cases were prevented, and this is an advance. If it didn’t work, there would be no discussion”, he says.

Gregório also recalls that the State-Owned Companies Law was one of the pillars for Brazil’s accreditation in the OECD (Organization for Economic Cooperation and Development). By advocating change, the government would be sending mixed signals to the rest of the world.

In the view of Bruno Duarte, a specialist in public and regulatory law at Trench Rossi Watanabe, although the text prevents certain appointments, it is common for the choices to be made of a political nature. “That kind of connection has always been there and it’s only natural that it does. [Afinal] is a government-controlled company”, he says.

The difference brought by the State-Owned Companies Law, however, is that before there were no technical criteria for the nominations to be made.

What sanctions is the government subject to?

The State-Owned Companies Law says that the controlling shareholder must preserve the independence of the board of directors in the exercise of its functions. Although it does not specify sanctions, the text mentions the Brazilian Corporation Law (6,404/1976), also known as the Corporation Law.

In it, it is defined that any damage caused or acts contrary to the law can be classified as abuse of power. Among the acts cited is, for example, electing an unfit administrator, morally or technically.

In addition, the Corporation Law also provides for liability for measures that do not have the economic interest of the company and aim to cause damage to minority shareholders.

According to Gregório, from the IBGC, the State-Owned Companies Law does not establish sanctions if the controller infringes any rule. Accountability, he says, depends on the performance of inspection and control bodies – which makes it more vulnerable.

However, in the case of a nomination that does not meet the legal criteria, it is possible for political parties and other interested parties to request its cancellation.

Henrique Frizzo, an expert at Trench Rossi Watanabe, says there may also be an internal administrative process to hold the appointing authority accountable. “But it would work just like any statute violation,” he says.

Should SOEs prioritize the economic interest?

The legislation emphasizes that companies have the social function of realizing the collective interest. Although it protects minority shareholders —especially in the reference to the Corporations Law—, the text does not transform state-owned companies into companies with particular interests, as Frizzo highlights.

“Treating a state-owned company as if it were a private company runs away from the rules we have and even from its very reason for existence. If it is a company with no public or social interest behind it, it shouldn’t even exist”, he says.

In the view of Natasha Salinas, a professor at FGV Law, a state-owned company cannot, under the pretext of being a public company, escape its economic object. “The state-owned company serves two masters: it serves the market, but it also has greater social interests,” she says.

Has the Bolsonaro government violated the State-Owned Companies Law?

The appointment of Caio Mario Paes de Andrade to the presidency of Petrobras was questioned in view of the requirements provided for by the law. According to minority shareholders, there are inconsistencies in his curriculum that are being questioned internally, such as experience in the oil and gas sector and academic and professional training.

His only experience is as a member of the board of directors of PPSA (Pré-Sal Petróleo SA). However, he has held the position since January 2021 – which contrasts with the deadlines determined in the legislation. Compatibility will be evaluated by a specific committee, made up of independent members, this Friday.

The appointment of a name that does not fully meet the requirements is not unprecedented and has already occurred in February 2021, when the government chose General Joaquim Silva e Luna to command the company. Despite having a master’s degree and a doctorate, Silva e Luna did not meet the legal prerequisites for experience in the oil company’s area of ​​activity.

In relation to the successive changes in command of the state-owned company, experts believe that there was no illegality. “It’s not good governance practice, but it’s not against the law,” says Frizzo.

Salinas agrees with the reasoning. In her view, the dismissals were due to lack of political alignment between the administrator and the chief executive.

The professor recalls that Petrobras is a very strategic company and may even make Bolsonaro’s path to reelection difficult. However, changing the State-Owned Companies Law to make appointments more flexible is foolhardy. “The risk of going back to a circumstance like the military regime, where the government had total interference in state-owned companies, is complicated”, she says.

3 YEARS

is the minimum time required for the nominee to have ceased to exercise activities in a political party or in an electoral campaign

25%

is the proportion of independent members that the board of directors must have

​0.5%

is the upper limit that advertising and sponsorship expenses can exceed the previous year’s revenue