Portuguese law has made several efforts to keep the
country's legislative system abreast of recent developments in
the securities laws of the world's most advanced capital
markets and in particular of those arising from the scandal
surrounding the collapse of Enron. It therefore useful to
compare the most recent US regulations with those of Portugal,
one of the European Union's (EU) smallest capital markets.
In 2002 the Sarbanes-Oxley Act enacted a number of statutory
conditions in the US capital market. As a result, the SEC has
adopted final rules for matters that the Act did not regulate
in detail. These most important of these were:
- Final rules regarding attorneys' obligation to report
evidence of violations of securities law and fiduciary
- Strengthening the Commission's requirements regarding
- Disclosure of off-balance-sheet arrangements and
aggregate contractual obligations
- Auditor communication with audit committees
- Prohibition on insider trades during pension fund
- Disclosures with respect to audit committee financial
- Code of ethics for principal executive officer and senior
- Use of financial measures that do not correspond with US
generally accepted accounting principles (Gaap)
- Retention of records relevant to audits and reviews
- Disclosure of management's evaluation of internal
- Improper influence on conduct of audits
A new Capital Market Act was enacted in Portugal on November
13 1999 which comprises one of the most advanced regulations of
capital markets in Europe, including the latest EU Commission
directives and recommendations. But, of course, the impact of
the Enron case is not directly reflected in that Code because
it was published before the Enron case emerged so that it is
also useful to know which rules have been implemented since
2001 and how the market is absorbing them.
The Portuguese capital market, or that of any of the other
EU member states, has its own specific profile, characteristics
and self-defence weapons which do not have much to do with the
US capital market and corporate laws and regulations. But it is
true that the Enron case brought to the attention of the
authorities within the EU member states the perils that an
apparently relaxed attitude and quasi-blind confidence in the
reputation and independence of auditors brought to the US
capital market and the damage it wrought there.
There are not in Portugal, or in any other EU member state,
any rules concerning duties of attorneys, lawyers, in-house or
external counsels appearing and practising before the capital
market regulatory authorities, to disclose violations of
securities laws and fiduciary duty. Recent EU Directives on the
duty of disclosure by professionals, including lawyers, of any
transaction that is suspected of involving money laundering has
a different scope and purpose.
Auditor independence in Portugal is largely provided for in
the new Act and other recommendations by the Portuguese capital
market regulator the Comissão do Mercado de Valores
Mobiliários (CMVM). These recommendations follow the
publication of the International Organization of Securities
Commissions (IOSCO)'s Principles of Auditor Independence and
the Role of Corporate Governance in Monitoring an Auditor's
Independence as well as recommendations made by the European
The SEC sees an off-balance-sheet arrangement as any
transaction, agreement or other contractual arrangement to
which an entity that is not consolidated with the issuer is a
party and under which the issuer, whether or not a party to the
arrangement, has (or in the future may have) certain
obligations or a retained or contingent interest in assets
transferred that have or are reasonably likely to have a
current or future effect on the issuer's financial condition.
Such off-balance-sheet arrangements in listed corporations must
be disclosed to the public.
Section 248 of the new Portuguese Securities Act contains a
general duty of the issuer to disclose to the public any fact
(facto relevante) which has or may have an impact on its assets
or financial condition or on its ongoing business and may have
an effect on the share value. Infringement may be punished with
escalating fines depending upon the degree of seriousness.
The relationship between the external auditor and the
internal auditing committee is also covered in Portuguese
legislation. The external auditor must notify the issuer and
the internal auditing committee of any fact which may have an
influence on the economic and financial situation of the
audited listed company. The external auditor must also disclose
information to the CMVM on the same subject.
Auditors registered with the CMVM are under its supervision
and control and may be deregistered if any serious violation of
their obligation occurs.
Portugal has yet to adopt a Code of Ethics for principal
executive officers and senior financial officers. The Code has
not been considered a priority because of the small size of the
market and the number of rules laid down both in the new
Capitals Market Act. The CMVM has also published executive
rules which define in some detail officers' statutory
obligations and has implemented EU rules on this matter.
Insider trading is punished with a criminal sanction of up
to 3 years imprisonment for directors, supervising board
members and employees and 2 years when committed by any other
person. In all cases insider trading is understood to be the
use of privileged information about a company where based on
that information, the insider has negotiated or advised someone
to negotiate securities in the capital market. It is not a
requisite for the application of sanctions that there should be
a materialization of any transaction or the existence of any
profit as a result of the infringement arising from the insider
Disclosure and transparency in general are assured by the
registration of a company's articles of association (there is
no distinction between memoranda and articles of association in
Portugal) with the Company Registration Office. The publication
of the articles of association and any further amendment in the
Official Gazette is also a mandatory requirement.
A listed company must publish its annual report and annual
audited accounts, public offering prospects and any notifiable
event that is or may be material for the public concerning the
economic and financial situation of the listed company or its
business. Notification is made with the CMVM and followed by
its publication in a newspaper.
Publication and notification of annual reports and accounts
as well as prospectuses include among other things a business
description, a description of material legal proceedings,
disclosure of the risk associated with the business, and a
detailed description of the envisaged transaction and the
purpose of prospectus as well as the contractual and legal
conditions associated with the transaction.
Other information includes publication of the project for
the amendment of the articles of association and summary of the
minutes where the resolution was passed.
A board member's principal responsibility to the company,
its shareholders, the company's creditors and its employees
means that the board of directors are not allowed to delegate
managerial powers to any person who is not a board member.
Allowing delegation would undermine that responsibility.
The positions of board chairman and chief executive officer
may be held jointly or separately. Joint exercise of the
respective functions is not forbidden.
The Portuguese Company Act allows a public company to adopt
either the format of a board of directors or a supervisory
board and direction (similar in this second option to the
German law system), in addition in both cases to the
Employees have no co-determination right, but they are
entitled to ask for some information about the company's
accounts and other managerial information.
This is a rough outline of Corporate Governance rules
contained in Portuguese laws in connection with the main issues
resulting from the significant events occurred in 2001 and 2002
that have so dramatically affected international capital
markets. Despite being a small market, Portugual has the
instruments necessary to control and avoid the erosion of