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14 December 2020
The liability of company management is a recurring theme in corporate disputes. A group of shareholders may be dissatisfied with a company's performance and unite against a specific manager, accusing them of performing reckless acts which are unfair or incompatible with social interests. In such situations, the shareholders will usually attempt to remove the manager from their position and hold them liable for damage caused by their alleged actions.
As a general rule,managers are not liable for the obligations incurred in the name of the company or for actions undertaken in the course of their role (Article 158 of the Corporations (S/A) Act). Managers' personal liability for social damages is exceptional and admissible only when the manager:
The first situation is simple to ascertain. The Corporations (S/A) Act and the associated bylaws impose a range of positive and negative obligations on managers, who are personally liable for fulfilling such obligations.
The second situation involves the complex intricacies of fiduciary duties and standards of conduct. With limited exceptions, the duties assumed by managers include so-called 'obligations of means'. Specifically, managers need not make correct decisions, nor must their actions bear fruit for the company. Managers are expected to do their best in order to achieve social goals, paying the same attention and care that a good entrepreneur would when conducting their own business.
Thus, as managers' obligations are classified as 'obligations of means', any analysis of liability depends on their decision-making process (ie, a manager's 'unlawful conduct' does not lie in the practical result of their decision, but rather in the decision-making process itself).(1) This is known as the 'business judgment rule', a theory created by the US courts and adopted by Brazilian corporate law. This rule aims to provide security for managers when taking business risks by preventing state courts and arbitral tribunals from reviewing the merits of business decisions made in good faith and devised to serve the company's best interests.(2)
Articles 153 to 157 of the Corporations (S/A) Act establish the main duties imposed on managers with respect to decision making – namely, diligence, loyalty and information.(3) These fiduciary duties must guide a manager's decision-making process; if managers breach these fiduciary duties, they might be found liable for the resulting damages.
The uncertainties involved in determining the level of care, information and diligence required to make a specific business decision become even more evident when considering the COVID-19 pandemic. This is because the directors and boards of public limited companies have had to make sensitive and challenging situations on a daily basis, which may have an unpredictable impact on the business.
The COVID-19 pandemic has led to considerable financial and operational losses in several economic sectors. Many companies have seen a drop in revenue, with some having to stop their commercial activities, lay off employees and sell company assets in order to maintain cash flow.(4) In addition, many companies have received numerous requests for the renegotiation or termination of previously signed contracts, with some requests leading to litigation.
In this context, it is easy to imagine dispute scenarios involving manager liability – for example, with respect to their adoption of loss-mitigation measures which later result in a loss of revenue. In such situations, it would be difficult to ascertain which losses were actually attributable to the company's managers and which were exclusively a result of the COVID-19 pandemic.
Article 154 of the S/A Law reads as follows:
The manager must exercise the duties that the law and the statute confer on him in order to achieve the purposes and in the interest of the company, satisfied the requirements of the public good and the social function of the company.
Thus, the question arises as to whether decisions to dismiss employees or close production units would go against the requirements of the public good and the social function of the company. If so, is it possible to file a liability action against the manager who made the decision? Further, could a manager be held liable for selling the company's assets during the pandemic at a devalued price, thus doing it more harm than good? Evidently, the current climate has given rise to numerous questions that, for the time being, have no clear answer.
Against this background, the publication of Provisional Measure 966/2020 (MP 966) is notable. MP 966 provides for the accountability of public agents for actions and omissions relating to the COVID-19 pandemic. It dictates that public agents can be held liable for actions or omissions which directly or indirectly relate to the emergency measures to protect the public health and preserve Brazil's economic and social stability only if such actions intentionally harm the company or represent a gross error. According to, MP 966, a mere causal link between a public agent's conduct and the harmful result of said conduct does not automatically result in their liability. Finally, MP 966 provides for the concept of gross errors and includes a list of considerations to be made when assessing the occurrence of such errors.(5)
Although MP 966 applies only to public agents, it may provide guidance in private business disputes. Notably, Justice Luís Roberto Barroso of the Supreme Court has questioned the interpretation of MP 966's provisions on liability, proposing a new definition of 'gross error', which indicates that administrator liability is on the radar of Brazil's main court.(6)
As demonstrated above, in complex situations, such as the current pandemic, managers must be held to higher standards of diligence. Such situations are incompatible with hasty and thoughtless decision making, requiring more thought-out planning and strategising by the company's managers – especially considering the risks of fraud and other unlawful acts. Thus, the level of diligence expected of managers increases alongside the level of severity of the situation in which their decisions are taken.
For example, in simple situations, such as the payment of taxes or low-value labour disputes, managers generally need not make too much effort to fulfil their fiduciary duties. Conversely, the more complex the situation, the more diligent the manager is expected to be.
However, it is important to consider the time available for decision making. For example, managers have a few months to decide whether to extend the payment of certain taxes and can hire accountants and lawyers to assist them in making the decision. Thus, the final choice will be made in a more reasoned manner.
On the other hand, managers had little time to decide whether to close production units to prevent the spread of COVID-19 among employees and were thus unlikely to be able to analyse the available information in depth. Such decisions are also public health issues as, regardless of whether they could seriously harm the company's business, they could not have been postponed.
It is difficult to reach a consensus on how managers should act during the pandemic. The current situation has given rise to a number of questions and forced companies to resolve unprecedented situations with little guidance on how to do so.
However, one thing is certain: diligent decision making which considers all relevant information in the time available will protect managers from liability for any harm caused by their behaviour during the COVID-19 crisis.
For further information on this topic please contact Bernardo Freitas, Guilherme Capuruço or Bruno Viana at Freitas Ferraz Advogados by telephone (+1 410 244 7400) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Freitas Ferraz Advogados website can be accessed at www.freitasferraz.com.
(2) Pargendler Mariana, "Civil Liability of Administrators and Business Judgment Rule in Brazilian Law", available here.
(4) See, for example, "Viação águia Branca confirms the dismissal of 197 workers because of a drop in demand due to the pandemic", "Regina Hospital dismissed 132 employees in Novo Hamburgo", "Bus companies conducted mass layoffs in Recife", "Tramontina closed for production because of the coronavirus" "JBS faces an outbreak of the new coronavirus in its units", "Coronavirus effect forces slaughterhouses to stop units and take collective vacations" and "Vehicle production in Brazil plummets 99% in April, says Anfavea".
For the purposes of the provisions of this Provisional Measure, a gross error is a manifest, evident and inexcusable error practiced with serious fault, characterized by an act or omission with a high degree of negligence, imprudence or malpractice.
In assessing the occurrence of gross error, the following will be considered: I - the real obstacles and difficulties of the public agent; II - the complexity of the matter and the powers exercised by the public agent; III - the circumstance of incomplete information in urgent or emergency situations; IV - the practical circumstances that have imposed, limited or conditioned the action or inaction of the public agent; and V - the context of uncertainty about the most appropriate measures to face the covid-19 pandemic and its consequences, including economic ones.
(6) ADIS 6421, 6422, 6424, 6425, 6427, 6428 E 6431 MC Rel Min Luís Roberto Barroso (available here):
It configures a gross error the administrative act that giving rise to a violation of the right to life, health, a balanced environment or adverse impacts on the economy, for failure to comply with: (i) norms and scientific and technical criteria; or (ii) the constitutional principles of precaution and prevention. 2. The decision-making authority must require that the technical opinions on which it will base its decision deal expressly: (i) applicable scientific and technical standards and criteria to the matter, as established by organizations and entities internationally and nationally recognized; and (ii) compliance with constitutional principles of precaution and prevention, under penalty of co-responsible for possible violations of rights.
Renata Megda, intern, assisted in the preparation of this article.
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