Introduction Fourth Region Federal Appellate Court decision Sao Paulo Appellate Court decision Comment
December 14 2016 is already being considered 'D-day' with regard to arbitration and corporate law. Before the Brazilian judiciary's court recess, two important precedents were set on the subject, one by the Sao Paulo Appellate Court(1) and the other by the Fourth Region Federal Appellate Court.(2)
The decisions will likely incite debates on an issue that was seemingly settled with the recent change to the Corporations Law (6,404/76) following the inclusion of Article 136-A.(3) The new article was introduced following the enactment of Law 13,129/15, which provides that all shareholders of a company are mandatorily bound by the company's arbitration clause, except for the right of dissent and appraisal by the dissenting member.
At a glance, the appellate decisions could been seen as incompatible. However, are these precedents really conflicting? Or are they merely different cases, the singularities and particularities of which demand that separate conclusions be drawn?
This update briefly analyses the decisions in order to determine the reasons that led the courts to their respective decisions and attempts to answer the above questions.
Fourth Region Federal Appellate Court decision
The Fourth Region Federal Appellate Court recently addressed an issue which the judiciary has been consistently asked to take a position on – that is, disputes involving Petrobras and its members, particularly after the ramifications of Operation Car Wash.
Recently, in a class action against the state-owned company, a US federal district court confirmed that the shareholders who purchased shares from the company in Brazil were bound to the arbitration clause set out in the company's articles of incorporation.(4)
In parallel with this ruling, the Fourth Region Federal Appellate Court (held before the Bovespa Chamber(5)) found that the members of Petrobras who were seeking damages for the reduction of the value of the company's shares must do so through arbitration, as per the oil company's articles of incorporation, instead of seeking court intervention.
The court ultimately dismissed the case, denying the appeal filed by a member of the company who sought an indemnity for the financial damages stemming from the decline of the equity value of the company's papers.
The claimant had purchased 4,300 shares in the company in 2009, with a par value of Rs42.03 each. In 2013 the unit was worth Rs18.65. The shareholder contended that the reduction of the shares' value had been caused by several managerial acts undertaken by Petrobras's administrative entities, following corruption and maladministration by the company's managers.
The Fourth Region Federal Appellate Court maintained the first-instance decision, which had dismissed the case because of the presence of an arbitration clause in Petrobras's articles of incorporation, according to which all disputes or controversies involving the company, its shareholders, managers and members of the fiscal committee had to be resolved through arbitration.
According to the case's judge rapporteur, even if the member was a minority shareholder (as was claimed), the arbitration clause and the articles of incorporation were public knowledge; therefore, the member could not argue that he had no knowledge thereof or fail to adhere thereto:
"the investor is not obligated to become a part of the company. If he decides to do so, it is presumed that he has evaluated and voluntarily consented to the provisions of the company's articles of incorporation. Also, the fact that such articles of incorporation are registered at the commercial registrar, or listed on the stock exchange or on the over-the-counter market, ratifies the presumption that those rules were fully acknowledged by the shareholders."
Sao Paulo Appellate Court decision
The context of the claim brought to the Sao Paulo court is sui generis, the facts of which are summarised below.
In this case, minority shareholders of the company filed suit seeking annulment of the special shareholders' meeting. The shareholders sought injunctive relief, requesting that the deliberations authorising the insertion of an arbitration clause in the company's articles of incorporation be suspended. The minority shareholders were successful in court. On appeal, the Sao Paulo Appellate Court upheld the first-instance decision suspending the clause's efficacy.
The first point of contention with regard to the appellate court's decision is whether the court had competence to rule on the validity of a shareholders' meeting and, consequently, on the arbitration clause itself, considering the principle of competence-competence as set out in Article 8 of the Arbitration Act. Was this principle violated by the Sao Paulo judiciary?
The judge rapporteur justified his decision on the grounds that the claim objecting to the validity of the shareholders' meeting was filed before the deliberation in dispute became effective. Article 136-A(1) of the Corporations Law provides that an arbitration clause comes into force (when approved by the shareholders) 30 days after the publication of the meeting's minutes.(6)
More controversies arise with regard to the merits per se of the decision. Thus, it must be determined whether the precedents analysed herein are divergent.
Through a summary proceeding, the judge rapporteur found that, based on the particularities of the case, the proposed change to the articles of incorporation of the company was an abuse of the controlling shareholders' control power "because, based on the records, the company [was] going through a moment of great financial struggle, which also justifies the fact that a part of the shareholders intend[ed] to increase the company's capital".
The appellate court's decision was based on the following facts:
- The company was going through financial difficulties.
- The judge rapporteur found it contradictory to establish arbitration as the sole method for conflict resolution since it is "known to be a more expensive proceeding". Thus, the company's conduct fell under the description set out in Article 117(1)(c) of the Corporations Law.
- The minority shareholders' right to dissent with regard to the consequent reimbursement of the value of their shares was "contradictory to the company's interests", considering the economic crisis in which the company found itself.
- The shareholders' meeting deliberation conflicted with the company's duty to execute the company's business purpose and fulfil its social function, as prescribed under Article 116 of the Corporations Law.
Thus, the Sao Paulo court upheld the decision granting injunctive relief and suspended the validity and efficacy of the deliberation with regard to the insertion of the arbitration clause.
On review of both decisions, the doubts initially raised have not been completely eliminated. There is still a question over whether there is a clear divergence between the two courts' understandings with regard to mandatory arbitration clauses in a company's articles of association.
Further, this lack of uniformity in case law (if this even exists) generates legal uncertainty, which adversely affects the flow of economic relationships.
As the questions outlined above remain unanswered, only time and the academic and judicial debates that will take place following these recent decision will be able to resolve them. However, one thing is certain: the judiciary's final decisions in 2016 are likely to cause intense discussions in 2017 on the matters brought to light herein.
For further information please contact Luciano Timm, Marcelo Richter or Isabela Popolizio Morales at Carvalho, Machado & Timm Advogados (+55 11 2872 4760) or email ([email protected], [email protected] or [email protected]). The Carvalho, Machado & Timm Advogados website can be accessed at www.cmtlaw.com.br.
Endnotes
(1) Civil Appeal 2031444-61.2016.8.26.0000, State Appellate Court of Sao Paulo, Judge Rapporteur Caio Marcelo Mendes de Oliveira, judgment on December 14 2016.
(2) Civil Appeal 5009846-10.2015.4.04.7201, 4th Panel of the TRF-4, Judge Rapporteur Cândido Alfredo Silva Leal Junior, judgment on December 14 2016.
(3) Article 136-A. The approval of the inclusion of an arbitration clause in the articles of incorporation, provided that the quorum of Article 136 is observed, binds all members, reserving the dissident member's right to remove himself or herself from the company through reimbursement of the value of his or her shares, under Article 45.
(4) In re Petrobras Securities Litigation, 14-CV-9662 JSR, 2015 WL 4557364 (Southern District of New York, 2015).
(5) BM&F Bovespa is a stock exchange located in Sao Paulo, Brazil.
(6) According to the appellate decision, the shareholders' meeting would have taken place on September 15 2015, and the shareholders objected to its validity on October 9 2015.
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