Shareholder arbitration: a comparison of American and Brazilian systems
April 2014 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION
The United States and Brazil have very different systems governing shareholder arbitration. The systems are so distant from each other that a comparative analysis should help reveal advantages and risks to be mutually considered.
In the US, shareholder arbitration is almost a myth. Lawmakers and authorities have a clear bias against arbitration. In 1990 a “corporation tried to register its initial public stock offering, disclosing the existence in both its charter and bylaws of a provision that would consign to arbitration all disputes” (Christos A. Ravanides, ‘Arbitration Clauses in Public Company Charters: an Expansion of the ADR Elysian Fields or a Descent into Hades’, 18 Am. Rev. Int’l Arb. 371, 375 (2009)). The SEC, however, declined to accelerate the effectiveness of the registration statement, under the old and archaic belief that arbitration would “weaken […] plaintiff’s ability to recover for serious violations of the law” (Carl Schneider, ‘Arbitration in Corporate Governance Documents: An Idea the SEC Refuses to Accelerate’, 4 INSIGHTS 21, 28 (May 1990)). The SEC did not trust arbitration would provide a good response to shareholder claims, which is an ungrounded bias.
In 2006 the Committee on Capital Markets Regulation presented an interim report with “evaluations of the legal and regulatory underpinning of U.S. public capital markets” (Interim Report of the Committee on Capital Markets at 110, released November 30, 2006). The report contemplated a thoughtful analysis of US capital market regulation and proposed several interesting recommendations. One of the key findings of the group was related to the outrageous costs and hardships of litigation in the US, which has a direct effect on the efficient functioning of local capital markets. In fact, among several other findings, the report was very clear that: “[l]itigation is a factor to be seriously considered”.
As a possible solution to overcome the burdensome US litigation system and improve the capital markets, the report concluded that the “SEC should permit shareholders to adopt alternative procedures for resolving disputes with their companies”, afterwards making a reference to arbitration.
Despite those conclusions, nothing changed. In 2012 there was a new attempt to allow shareholder arbitration. As the Carlyle Group was preparing to launch its IPO, it amended a regulatory filing to require that future shareholders resolve claims against it through arbitration.
A few distinguished authorities sided with Carlyle, like former Chancellor Chandler, from the Delaware Chancery Court. Chandler said that litigation costs were so high that shareholders could benefit from the “reduced threat that companies they have invested in would get stuck with large legal bills” (Josh Friedman and Christian Baumgaertel, ‘Carlyle Lawsuit Ban Deplored by Lawmakers May Entice Followers,’ Bloomberg Businesweek).
Lawmakers and the SEC itself, however, were against Carlyle’s plan. A famous letter from Senators Al Franken, Richard Blumenthal and Robert Menendez to Mary Shapiro, the SEC’s Chairman, urged the SEC to “maintain its longstanding policy of opposing inclusions of provisions requiring mandatory arbitration of shareholders disputes in the corporate documents of public companies”.
After a while, Carlyle gave in to the pressure and “decided to withdraw the proposed arbitration provision”, said Christopher W. Ullman, a Carlyle spokesman (Kevin Roose, ‘Carlyle Drops Arbitration Clause From I.P.O. Plans’, Deals Book).
In Brazil the situation is quite different. Shareholder arbitration is incentivised. The statute that regulates corporations (Lei n. 6.404/76 – Lei das Sociedades Anônimas) has a specific provision, added in 2001 just to confirm that corporations can adopt an arbitration agreement in their charters. Article 109, §3 states that “[t]he corporation’s charter can establish that the conflicts between its shareholders and the corporation or between minority and majority shareholders are subject to arbitration according to the terms specified in the charter”.
Soon after, the Sao Paulo Stock Exchange (Bovespa) “took the pro-arbitration enthusiasm one step further” (Ravanides, pg 438). In fact, Bovespa created in 2001 theCâmara de Arbitragem do Mercado (Arbitral Market Chamber) and then introduced a system of different listing segments for public companies: traditional (tradicional), Level 1 (nível 1), Level 2 (nível 2) and ‘New Market’ (Novo Mercado).
Each segment would correspond to companies undertaking different corporate governance practices and in order to be admitted to Level 2 or in the ‘New Market’ a corporation, among other things, would have to agree to submit all disputes between the company, its shareholders and managers, and Bovespa itself, to arbitration under the auspices of Câmara de Arbitragem do Mercado.
In a nutshell, to receive a higher grade regarding its corporate governance practices, a Brazilian corporation listed in the Bovespa needs to establish arbitration as the primary dispute resolution system to deal with intra-corporate disputes.
This pro-arbitration stance is a result of the fact that Brazil has a “weak public commercial courts” system (Ronald J. Gilson, Henry Hansmann and Mariana Pargendler, ‘Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the United States, and the European Union’, 63 Stan. L. Rev. 475, 493 (2011)). The courts are ill-prepared, sometimes lack specific knowledge over the subject-matter and are not able to provide a fast response to shareholders’ claims. Shareholder arbitration was praised, accordingly, as a reasonable solution to address such problems.
Brazil’s system is not exempt from criticism.
Recently, authorities have been concerned with the lack of transparency caused by choosing arbitration as the dispute resolution mechanism for intra-corporate disputes. For a pedagogical effect on the market, said those authorities, arbitral decisions should be made public.
CVM (Brazil’s equivalent of the SEC), however, on deciding administrative proceeding n. RJ 2008/0713, by means of which an investor asked to be granted access to the records of an arbitration before the Câmara de Arbitragem do Mercado, decided that the confidentiality of the arbitration should be protected and, if relevant information was discussed therein, the company should disclose it according to the Normative Instruction n. 358/02.
In our opinion, although for different reasons, it seems that both markets would benefit from shareholder arbitration. Brazil turned to arbitration as an alternative to its ill-equipped courts and the US could benefit from doing the same, but as a solution to a different problem. Not because of the condition of its courts, but specifically due to the unreasonably high cost of litigation. Arbitration would, therefore, facilitate access to justice and allow shareholders to guarantee their rights.
Nevertheless, the simple possibility of arbitration is not a solution, as it must be accompanied by reliable mechanisms for disclosing important information to the market. The decision in a shareholder arbitration (or litigation) could have a pedagogical effect on the market; therefore, it should be considered a viable mechanism to publicise such decisions. That is currently Brazil’s big challengein this matter.
Diogo Ciuffo Carneiro is a partner at Machado, Meyer, Sendacz e Opice Advogados. Mr Carneiro can be contacted on +55 11 3150 7106 or by email: firstname.lastname@example.org.
© Financier Worldwide
Diogo Ciuffo Carneiro
Machado, Meyer, Sendacz e Opice Advogados