Five months after this year’s annual meeting of Petrobras, the Brazilian oil giant 50.2% controlled by the Brazilian government, minority shareholders and foreign institutional shareholders have publicly denounced Petrobras’ handling of the nomination and election process of board seats designated for minority shareholder representatives.

In May 2012, Glass Lewis wrote about the events that took place at Petrobras’ annual meeting. In case you missed the details of the election drama, it went a little something like this: minority shareholders, led by BlackRock and Brazilian hedge fund Polo Capital, attempted to appoint two independent-minority-shareholder-representative directors to Petrobras’ board. In spite of Article 141 of Brazilian Corporation Law, which prohibits a controlling shareholder from filling board seats reserved for minority shareholder representatives with their candidates, Brazilian state-sponsored pension funds and government financing and development institutions Petros, Previ, Funcef, BNDES and BNDESpar, which own approximately 15% of Petrobras’ common shares and 27% of its preferred shares, used their voting power to easily defeat the proposed BlackRock/Polo Capital initiative. Instead, they filled the minority-shareholder designated board seats with two of their own candidates, whom were well-connected to the government no less.

In a letter dated August 29, 2012 addressed to Petrobras’ chairman, Guido Mantega, and CEO, Maria Silva Foster, the Brazilian Association of Capital Market Investors (“AMEC”) argued on behalf of foreign institutional shareholders that “it is widely understood that these institutions [Petros, Previ, Funcef, BNDES and BNDESpar] fall under considerable influence by the government. As such, they cannot be regarded as legitimately entitled to speak for independent minority investors and should not be in a position to vote on these two seats.”

According to Brazilian news outlet, Valor Econômico, the Petrobras annual meeting is currently being investigated by the Brazilian securities commission (“CVM”). Pursuant to Brazilian law, shareholders must refrain from voting on resolutions in which the shareholder and the company, or majority and minority shareholders have conflicting interests. AMEC’s letter gives the CVM something to consider: a rights issue, which they claim triggered a value destruction to Petrobras’ shareholders of approximately US$208 billion, was approved by the minority shareholder representatives on the board at the time “who were elected in the same manner as that witnessed at the March 19, 2012 meeting,” inferring that the Petros, Previ Funcef, BNDES and BNDESpar board representatives voted in line with the Brazilian government, and not in the best interest of shareholders.

Voting rights of shareholders in conflicts of interest has always been a contentious issue for the CVM and precedents have been set in the past with respect to conflicts of interest relating to takeovers between companies belonging to the same corporate group and valuation reports for corporate transactions that disenfranchise minority shareholders (such as the case of Brasil Telecom which also involved BNDES, Funcef, Petros and Previ as the controlling shareholder group). However, a decision by the CVM regarding the permission or prohibition of pension funds and other government entities voting for minority-shareholder board representatives in the case of Petrobras could set a unique precedence for minority and foreign shareholders of Brazilian state-owned entities. We agree with AMEC that “it is of critical importance that the nomination process for these seats be conducted in a manner that is seen as credible, transparent and genuinely in line with the interests of minorities.”