The International Journal of Public and Private Arbitration
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The Arbitration Review of The Americas 2008
Section 2: Country Overviews
Arbitration of Corporate Disputes
After some years of stagnation, in 2004, Brazilian companies resumed initial public offers on the São Paulo Stock Market (BOVESPA).1 There were seven IPOs in 2004, nine in 2005, 26 in 2006, 56 between January and October 2007,2 and many other companies have already presented requests for issuing stocks to the Brazilian Securities Commission (CVM).
Almost all the companies that began to trade on the BOVESPA since 2004 have undertaken to comply with levels of corporate governance that impose the inclusion of arbitration clauses in their by-laws. At present, out of the 434 companies traded on the BOVESPA, 113 companies have undertaken to submit conflicts concerning them, their controlling shareholders, officers and directors and members of the audit committee to arbitration. Some of these companies are the most traded, such as Petrobras, Banco do Brasil, Bovespa Holding, Cosan (sugar and ethanol producer), Embraer (aeroplane industry), TAM and Gol (Brazil's main airline companies), Cesp and Light (electrical sector) and Natura (cosmetics).
So far, no conflict has been submitted to the BOVESPA Market Arbitration Chamber, the institution to which all these companies have undertaken to submit the arbitrations. But it is certain that this is a new area in which arbitration will develop in Brazil, and scholars have already established a broad debate with respect to the subjective and objective effects of arbitration clauses included in companies' by-laws.
Below, we summarise the origin of this new trend and the concerns raised by Brazilian scholars on this matter.
History of the debate
The concept of submitting corporate disputes to arbitration is not new in Brazilian Law. The Commercial Code of 1850 already provided that all the corporate disputes arising among shareholders during the existence of a company, its liquidation and winding up should be submitted to arbitration (article 294).
This provision was heavily criticised for obliging parties to submit themselves to arbitration, because, according to legal scholars, the concept of compulsory arbitration was incompatible with the Brazilian legal system of that time (it is still incompatible today). In 1866, this rule was revoked by Law No. 1.350, which still allowed parties to submit corporate disputes to arbitration, but on a voluntary basis.
Since then, for almost 150 years, the development of the use of arbitration in Brazil faced difficult obstacles. Although the legal system recognised arbitration as a method of dispute resolution, Brazilian courts concluded that arbitration clauses were not binding, because a party could not renounce the right of submitting a future dispute to the judiciary before even knowing what the object of such dispute would be.
In 1996, the Brazilian Arbitration Law entered into force, reflecting the modern principles that govern arbitration around the world and expressly asserting the enforceability of arbitration clauses. This statute is a milestone in the development of arbitration in Brazil.
Although, theoretically, parties could include enforceable arbitration clauses in companies' by-laws since then, it was not a common practice.
The situation only began to change in 2000, when BOVESPA adopted a new regulation creating special trading segments, according to the principles of corporate governance applied by the companies (ie, level 1, level 2 and new market). According to the BOVESPA rules, a company can only have its shares traded in level 2 or in the new market segments if it includes an arbitration agreement in its by-laws. The rationale behind this regulation is that the higher the principles of corporate governance applied by a certain company, the higher the price that investors will be willing to pay for its shares.
In 2001, another stimulus was given to the inclusion of arbitration clauses in companies' by-laws. The Brazilian Corporations Law was amended by Law No. 10/303/01, with the addition of a third paragraph to article 109, expressly providing that by-laws could contain arbitration clauses:
The corporation's by-laws may establish that any disputes between the shareholders and the corporation, or between the majority shareholders and the minority shareholders may be resolved by arbitration under the terms specified by it.
The BOVESPA regulatory requirement, together with the express provision in the Corporations Law, led to a broad adhesion to this practice. Nowadays, more than 25 per cent of companies traded on the BOVESPA already have arbitration clauses in their by-laws. All the companies that carried out IPOs since then, even when their stocks are not traded in level 2 or in the new market, included arbitration clauses in their by-laws.
Brazilian scholars do not challenge the arbitrability of corporate disputes as a whole, a discussion held in the past in other countries, such as the United States, where, until 1987 when the Supreme Court issued the opinion on Shearson/American Express Inc v McMahon, disputes related to the Securities Act could not be submitted to arbitration.3 In Brazil, the debate concerns the subjective and objective effects of an arbitration agreement included in the by-laws.
The interpretation of article 109, section 3, of the Corporations Law
One of the first issues raised by Brazilian scholars with respect to this subject was the correct interpretation of article 109, section 3, of the Corporations Law.
This provision states that "by-laws may establish" that disputes "may be resolved by arbitration [...]" A literal interpretation of the text could lead to the conclusion that by-laws could not contain an arbitration agreement that would compel parties to submit disputes to arbitration, but only recommend or maintain arbitration as an optional means of dispute resolution.
Such interpretation has been rejected by Brazilian scholars, because it would render the provision of the Corporations Law useless.4 There is no sense in establishing an arbitration agreement if it is not binding. One of the main achievements of the Brazilian Arbitration Law was exactly the recognition that arbitration clauses were binding, therefore, such literal interpretation would constitute a step backwards in the development of arbitration in Brazil.
In addition, before the amendment of the Corporations Law, there was nothing to prevent shareholders from including a binding arbitration agreement in the companies' by-laws, thus such reading was not compatible with the Brazilian legal system.
It should also be noted that there are many other provisions in Brazilian statutes in which the word ﾑmay' has been interpreted to signify obligation, not option.
Parties bound by the arbitration agreement
After concluding that by-laws arbitration clauses would be binding, scholars argue with respect to what parties would be bound to submit their disputes to arbitration. The subjective effects of the by-laws' arbitration agreement is probably the most contended issue in this matter.
The essence of the discussion is whether a party that has not expressly conveyed its will to submit certain disputes to arbitration can be bound by an arbitration agreement included in a company's by-laws.
It is not disputed that the company and the shareholders that have agreed with the inclusion of the arbitration agreement in the by-laws are bound by the provision.
The problem is whether the arbitration agreement binds the shareholders that: (i) cast their vote against the inclusion of the arbitration agreement in the by-laws; (ii) attended the shareholders' meeting that approved such insertion, but declined to vote; (iii) did not attend the shareholders' meeting; and (iv) acquired the shares when the by-laws already contained an arbitration agreement. Some of the most authoritative scholars have completely opposite opinions on this issue. Paulo Salles de Toledo sustains that an arbitration agreement included in the by-laws of the company would bind all the shareholders, who, by holding the shares of such a company, would tacitly express their agreement with the arbitration agreement.5
Other scholars that sustain this position argue that, in a corporation, the vote of the majority of the shareholders reflects the corporate interest and, therefore, the minority shareholders must abide by it. They also claim that the inclusion of the arbitration agreement does not cause any harm to the shareholder.6
Modesto Carvalhosa and Nelson Eizirik do not agree with this position. In sum, they argue that arbitration agreements in by-laws only bind the shareholders who expressly convey their agreement with the arbitration agreement, because, otherwise, the by-laws would be providing for compulsory arbitration, which is not compatible with the Brazilian legal system.
The main arguments that support their conclusion are the following. First, the by-laws could not prevent shareholders from submitting their disputes to the judiciary, because the Brazilian Constitution states that the "law shall not exclude any injury or threat to a right from the consideration of the Judicial Power".
In addition to that, they argue that article 109 of the Corporations Law deals with the "inherent rights of the shareholders." Section 2 of article 109 of the Corporations Law states that "the means provided by law to shareholders to enforce their rights cannot be overridden either by the by-laws or by any general meeting."In view of the Constitutional provision and the rule reflected in article 109, section 2, of the Corporations Law, the shareholder's right to have his dispute resolved by the judiciary could not be set aside by a shareholders' meeting deliberation and there could not be a presumption of a tacit renunciation of an inherent shareholder right.
The BOVESPA Market Arbitration Chamber Rules
Although the debate with respect to the subjective effects of bylaws arbitration agreement has not yet settled, there might be a pragmatic solution to this matter.
Arbitrations deriving from arbitration agreements included in by-laws of companies whose shares are traded at BOVESPA will follow the rules of the Market Arbitration Chamber. Item 2.1 of these rules establishes the following:
These Rules are equally binding on the following participants in the BOVESPA Special Listing Segments: (i) BOVESPA; (ii) the companies; (iii) the Controlling Shareholders; (iv) the Senior Managers; (v) the Fiscal Council members; and (vi) the Investors, provided that they have voluntarily consented to these Rules by signing a Statement of Consent, as per section 5.2.2 of these Rules.
In addition to that, item 5.2.2 of these rules states:
An Investor may adhere to these Rules, at any time, through a Statement of Consent to be entered into with the Secretary's Office of the Arbitration Panel or a BOVESPA member brokerage firm.
In view of the above-mentioned clauses, it is possible to argue that the shareholders who approve the inclusion of an arbitration agreement in the by-laws of the company, with reference to the Market Arbitration Chamber Rules agree that such arbitration agreement binds them and the company, but will only bind other present and future shareholders if they sign the statement of consent provided in item 5.2.2 of the Market Arbitration Chamber Rules.
Corporate disputes that can be submitted to arbitration The objective limits of the by-laws arbitration agreement have generated less debate between Brazilian scholars, who, after some hesitation, have agreed on the object of the disputes that can be submitted to arbitration.
The focal point of the debate is the rule reflected in article 1 of the Brazilian Arbitration Law, which establishes that the parties can submit to arbitration any dispute related to freely negotiable patrimonial rights. It should be noted that article 109, section 3, of the Corporations Law does not impose an objective limitation, establishing that "any disputes" can be submitted to arbitration.
One of the issues raised by scholars was whether the reference to patrimonial rights in article 1 of the Brazilian Arbitration Law would forbid shareholders from submitting to arbitration disputes related to political rights, such as the right to elect a member of the board of directors.
It seems there is no dispute that issues related to corporate political rights can be submitted to arbitration. First, because the correct interpretation of article 1 of the Brazilian Arbitration Law leads to the conclusion that parties can submit to arbitration any right they have the power to freely negotiate and renounce, as it is the case of corporate political rights. Second, because corporate political rights have a clear patrimonial value.
Brazilian scholars also raised some concerns with respect to whether corporate disputes involving rules of public order could be submitted to arbitration (for examples, claims alleging that certain acts practised by the company are completely null). Actually, this discussion goes beyond the niche of corporate disputes, because the issue arises in disputes of all kinds in Brazil and abroad.
The conclusion reached follows the domestic and international trend in this matter, according to which the mere fact that claimants or defendants raise arguments based on rules of public order should not interfere on the analysis of whether the dispute is arbitrable or not. The objective arbitrability of the dispute depends on whether the object of the arbitration, the claim and the respective relief sought involves patrimonial rights that a party can freely negotiate and renounce.
The scope of the objective arbitrability with respect to corporate disputes is also difficult to establish because there are some rights and, consequently, some claims that a shareholder has standing to sue, which directly affects the rights of other shareholders (eg, a claim for nullification of a certain deliberation taken in a shareholders' meeting).
Modesto Carvalhosa and Nelson Eizirik address the issue thoroughly. First, they argue that the classic concepts related to bilateral agreements should not be applied to define the objective arbitrability of corporate disputes, owing to the associative nature of the relationship among the shareholders. Then, they mention that shareholders meetings may alter a deliberation previously taken, when they are null, in order to correct the defect of such deliberation.
Taking all of this into consideration, they consider it reasonable to sustain that all that can be validly deliberated by the company could be submitted to arbitration. According to this conclusion, a shareholder could commence an arbitration seeking the nullity of a certain deliberation of the shareholders meeting and, if successful, the consequences of the arbitral award would also affect rights of other shareholders.
Conclusion
As mentioned in the introduction, the insertion of arbitration agreements in companies' by-laws is something recent in Brazil. No dispute has been submitted to the Market Arbitration Chamber so far and, therefore, there are no judicial precedents on these matters.
However, the trend to adopt arbitration agreements in companies' by-laws shows that arbitration will prevail as the means of resolving corporate disputes in Brazil.
Notes
- BOVESPA is currently the only Brazilian stock market.
- Information available at www.bovespa.com.br
- Nelson Eizirik, 'Some Remarks on arbitration in Corporate Law', Arbitration Law of Brazil: Practice and Procedure, Juris Publishing Inc, Joaquim de Paiva Muniz and Ana Tereza Palhares Basílio (org).
- Daniela Bessone Barbosa Moreira, in Arbitragem Interna e Internacional (International and Domestic Arbitration), Renovar, Ricardo Ramalho Almeida (org).
- Paulo Fernando Campos Salles de Toledo, Sociedade Anônima, 30 anos de Lei No. 6.404/76 (Corporations, 30 Years of Law No. 6.404/76), Quartier Latin.
- Pedro A Batista Martins, 'A Arbitragem Nas Sociedades Limitadas' ('Arbitration in Limited Liability Partnerships'), Reflexões Sobre Arbitragem, Pedro Batista Martins and José Maria Rossani Garcez (org).
Escritório de Advocacia Sergio Bermudes
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Sergio Bermudes Law Firm was founded in 1969. The firm currently has 74 lawyers, four consultants and 84 interns in its offices in Rio de Janeiro, São Paulo and Brasília. They have extensive experience in different areas of law, many of them holding masters degrees from leading universities in Brazil, the United States and Europe. The firm strongly encourages its members to develop their academic careers and many of them lecture parttime at major Brazilian Universities, on a diverse range of areas (contracts, civil procedure, commercial law, bankruptcy, administrative and private international law). The firm is internationally recognised as the Brazilian leader in litigation, commercial arbitration and insolvency law (Chambers and Partners, Legal 500 and Whoﾒs Who Legal). It has a reputation for excellence based on its years of experience in representing clients in high profile domestic and international arbitration and transnational litigation. The firm has been working on international arbitration since 1986. Some of the cases in which the firm has been engaged during these 20 years involved claims worth more than US$200 million. It also has expertise in insolvency and debt restructuring procedures, in which it has acted for several major national and international clients since 1980. The firm represents clients operating in a wide variety of activities: banking, insurance, oil and gas, energy, telecommunication, leasing, information and technology, shipping, ports, mining, construction, etc. The firm offers a wide range of services to domestic and foreign clients relating to contract, corporate, commercial, administrative, constitutional, international, insurance, insolvency, antitrust, electoral and environmental law. |