Brazilian Securities Commission will analyze corruption cases in Public Corporations

Last week, the Brazilian website JOTA published an article about the Brazilian Securities Commission – “CVM”´s intensions to investigate corruption cases in public corporations as breach of fiduciary duties. This news may have great impact in current and future cases involving shareholders and corporations. At this moment, Petrobras could be the first target of the Regulatory Agency.

In one hand, the arbitrations currently running between shareholders and Petrobras are not public, in the other hand we might be able to have administrative precedents available from the Brazilian Securities Commission.

Though CVM is not competent to pursue criminal charges against a corporation it is in charge of analyzing such facts in lights of a fiduciary duties perspective. Last week, one of CVM directors stated to the specialized press that the regulator could act in this case if the criminal behavior falls into a violation of fiduciary duty.

In this sense, if the director of a public corporation divert money from the company to benefit other parties illegally and misrepresent those transactions in the financial statements, it is clear that he violated his fiduciary duties to the company and to the shareholders.

In sum, it is important to point out that a CVM decision is administrative in nature, and it does not automatically creates remedies to the shareholders. CVM may punish the directors and managers who violated their duties with fees and other sanctions, but shareholders who are still interested in seeking any recovery for damages against Petrobras and its directors and managers will need to start an arbitration or join one of the existing cases, if this joinder is still possible.

The link to JOTA in Portuguese: https://www.jota.info/tributos-e-empresas/mercado/cvm-resposta-casos-corrupcao-07062018

Brazil: Superior Court of Justice’s Minister suspends the enforcement of contract because of an arbitration agreement – CASE Brief

Process Number: CC150.830

This was a preliminary decision and it will be decided by the Collective Organ of the court later in the procedure.

Issue:

The issue in this case is whether a Tribunal shall have competence to decide the dispute over a contract that already is in the enforcement stage in a state Court.

Facts:

The parties are the PDG Group, in one side, and the Leal Moreira Family group, in the other. Both groups are composed by many companies.

The parties signed several agreements to operate jointly a construction business in the Brazilian state of Pará. In order to achieve this purpose, the parties to the dispute created many specific purpose companies. Nevertheless, after some problems in the project, they singed a MoU where they kept the joint investment in only five of those specific purpose companies, according to PDG Group. In addition, PDG alleged that it provided a line of credit to the companies, and the Leal Moreira Group failed to comply with that agreement.  

In the other hand, Leal Moreira argues that it is composed by different legal entities and one of those is the construction company hired by the specific purpose entities. The specific purposes entities failed to pay the values they agreed in the contract with one the construction company of the Leal Moreira group, Leal Moreira Engenharia. Regarding the arbitration clause, the Leal Moreira Group argues that the construction company Leal Moreira Engenharia did not sign an arbitration agreement. Leal Moreira argues that the parties signed a choice of forum clause, not the arbitration agreement. The arbitration agreement was signed between the Construtora LM and AGRA in the MoU. Leal Moreira Engenharia was not a party to the MoU. However, these argument was not heard by the Minister by the time of this decision, which will be assessed by the collegial organ of the court.

The Leal Moreira Engenharia started the enforcement procedure of the construction contract signed with the specific purpose entities based on the theory that the contract was an extrajudicial title. In the enforcement procedure, the judge of the entry level court granted an attachment of 26 million of Brazilian Reais and authorized the payment of part of this value directly to Plaintiff (over 5 million of Brazilian Reais).

Reasoning:

First, we need to explain a little bit of Brazilian civil procedure and enforcement. Brazil relies on the concept of judicial and extrajudicial title, which are the two sources of rights that can be directly subject to enforcement procedures in court.

For instance, a contract may become an extrajudicial title if two witnesses who attested the deal sign it. Then, a party can directly start an enforcement procedure, without needing to discuss any merits. Nevertheless, the other party can present a defense against the enforcement based on grounds stated in the Code of Civil Procedure. In fact, the code allows any defense based on the merits, which means, the grounds are almost unlimited. Generally, this defense is judicial.

In the case at hand, this procedure started as the “execution” (the name of the enforcement procedure) of a contract as an extrajudicial title.

Second, Brazilian law avoids conflicting jurisdictions between two courts or a court and an arbitral tribunal. In this sense, parties can seek a judicial determination about who is competent to decide the case, the court or the arbitrators. In fact, this procedure should not happen in arbitration cases, because the law follows the kompetenz-kompetenz principle, but recently, the Superior Court of Justice started admitting this procedure in order to decide jurisdictional issues between arbitration and judicial court.

The reasoning of the Superior Court’s Minister was that this kind of procedure to solve the question of competence is admissible. In this sense, parties may seek a Superior Court order when a local judicial court state it has jurisdiction over a matter that is also submitted to an arbitration procedure by one of the parties.

On the merits, the Minister found that the evidence indicates that the parties had an arbitration agreement in their contracts. Therefore, when a party to the contract and a third interested party challenge the direct enforcement procedure started by the other side, the arbitral tribunal must be in charge of the decision on the merits of the case. Therefore, the judicial enforcement procedure should be suspended until the Court makes its final decision about jurisdiction.

Holding:

The arbitral tribunal is competent to decide the subject matter of disputes over the validity of an extrajudicial title. Thus, the judicial proceeding must be suspended.  

New era for ADR in Brazil - the new code of civil procedure

We can argue that the new Brazilian Code of Civil Procedure should have done more to encourage settlements or ADR, in order to reduce the gigantic number of cases in court. Nevertheless, the ideal changes would come with great resistance from the legal community itself and from the population.

In any case, the new rules encourage parties not to rely solely in court litigation. The movement for ADR became relevant in 1996 with the arbitration law. The development of this law in the jurisprudence was remarkable and Brazil is definitely a pro arbitration jurisdiction (regarding business disputes). Recently, Brazil enacted a mediation law. Finally, the code of civil procedure created new rules in favor of ADR.

It is not even newsworthy anymore the fact that companies are relying in arbitration to solve their biggest disputes in Brazil. After the Supreme Federal Court declared the arbitration law constitutional, lower courts started to enforce the majority of arbitration agreements. Parties need only to make a clear choice for arbitration in their contracts to avoid judicial interference. In these sense, lawyers should avoid providing clauses stating optional arbitration if they really desire to rely on arbitration and have judicial courts enforcing their agreements.

Mediation was also allowed by Brazilian law, but seldom used in business disputes up until now. Recently, the legislator enacted the mediation law. Even more recent is the mediation requirement before a case continues in the courtroom. This was a creation of the new Code of Civil Procedure.

There is more. Lawyers never had discovery in order to prepare their cases. The old code of civil procedure allowed to request documents from the other parties in limited circumstances. This was rarely used. In addition, parties could only produce evidence before filing a suit only when there was a risk to lose the evidence by deterioration. Now, the procedural law provides that parties can start a proceeding for the limited purpose of producing evidence. Thus, parties can seek evidence just to inform themselves about the case, in order to decide whether to pursue litigation, ADR, settlement, or even conclude that they have no case at all. Although this is still very far from what discovery does in the American legal system, this new provisions can prevent litigation, as parties will be able to make informed decisions on their strategies.

Finally, the new code created some financial burdens to parties, increasing the judicial fees to a higher level. It is not ideal yet, but it is something. As mentioned earlier, the ideal change would not be possible at this moment, because would be a drastic change that the current legal culture would resist.

In sum, this can be the beginning of a new era for ADR in Brazil.

Petrobras case and new Brazilian jurisprudence on corporate arbitration

The end of 2016 and the beginning of 2017 brought some news in Brazilian arbitration law. Two Courts, a state court from Sao Paulo and a federal court, decided two cases involving arbitration clauses in corporations’ bylaws and the decisions had opposing results. The Court of Appeals of Sao Paulo held against an arbitration clause in a private company case, while the Federal Court of Appeals of the 4th Region enforced the arbitration clause in the major Petrobras case.

Court of Sao Paulo held arbitration clause invalid when imposed by a majority if there is an ongoing dispute between shareholders

The State Court of Appeals of the state of Sao Paulo provided a surprising solution in the case of a family held corporation. The decision is surprising because it did not applied the article 136-A from the Federal Law of Corporations. It is one of the first precedents interpreting this article.

Article 136-A provides that the majority can impose an arbitration clause in the bylaws of a corporations and it binds all shareholders. In the other hand, this law creates appraisal right the minority shareholders who disagreed with the inclusion of the arbitration agreement.

In the case at hand, however, the Court of Appeals of Sao Paulo found it was contradictory that the majority shareholder decided to include the arbitration agreement in the bylaws exactly when the corporation was facing major economic setbacks. The court said that arbitration is more expensive method of dispute resolution than the judiciary and it would be strange for the company to prefer this kind of dispute resolution. Moreover, it is also strange that the company would prefer the appraisal remedy to the minority in this scenario of economic crisis. Finally, the court annulled the arbitration agreement based on the existence of many disputes between the shareholders, and the change in the bylaws were an act of abuse of power, which is impermissible by the Law of corporations’ regime.

Federal Court of appeals says that Petrobras corporate disputes involving devaluation of shares shall go to arbitration

This is the second important decision regarding arbitration and the Petrobras Case. First, as we commented in previous posts, a New York Court held that Brazilian shareholders could not litigate their case in New York because of the arbitration agreement. Now, a Brazilian Federal Court applied the same reasoning in the lawsuit initiated by a minority shareholder.

Many minority shareholders of Petrobras were trying to avoid the arbitration agreement based on the old argument of unconstitutionality. This precedent is important, because it made stronger the law in favor of arbitration in corporate disputes even in publicly traded companies. Furthermore, the court accepts the possibility of corporate arbitration against the Government as a controlling shareholder.

In sum, the Petrobras Case indicates that arbitration law is getting stronger, even though there are some peculiar situations where the court intervenes and annul arbitration agreement, as the precedent from the Sao Paulo Court.

Conclusion

Recent developments of Brazilian law showed the maturity of Brazilian judiciary regarding arbitration. The Petrobras’s decision is a good example of that maturity. However, the reasoning of the State Court of Sao Paulo deserves attention. The factual scenario must be considered before we create an abstract interpretation of article 136-A of Law of Corporations. For instance, it is not reasonable to make a rule stating that the fact of bigger costs imposed by arbitration would determine if the arbitration agreement is void when the company faces an economic crisis. If so, this would generate apprehension in many deals in distressed companies, who adopted arbitration agreements to encourage suppliers to get into new contracts. Therefore, the context is very important, and this case must have limited application to abuse of shareholder power situations.   

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