Recently, I got a little surprised with a severe criticism to arbitration in the article of one of the most important jurist in the field of corporate law and securities regulation in Brazil. The newspaper Folha de Sao Paulo interview Professor Erica Gorga about the case involving the minority investors of Petrobras in the recent scandal that this company has been involved .
Thus, one of the questions answered by Gorga was about if the minority shareholders` case could be submitted to arbitration. The Professor was very critic on her point and stated that arbitration was unconstitutional in securities market. She said that arbitration was too costly. This fact prevents investors to seek recovery or a legal remedy against the controllers. Additionally, she argued that arbitrators are usually committed to the controllers, since they are commonly asked to provide legal opinions in their behalf. Regarding constitutionality, the author defends that arbitration is not possible in public companies, because it would waive the rights of the shareholders to sue in collective judicial demands. Finally, she argued that arbitration was illegal in this situation, because companies have the duty of disclosure, keeping the market informed about relevant facts of the corporation.
Although the opinion comes from a very respectful Jurist, I understand that arbitration has all opposite qualities of what the Professor stated. Arbitration has the potential to increase corporate governance and confidence in the stock market. First of all, Brazilian law does not have an efficient collective remedy as the American class actions, and the collective suits in Brazil imposes many limitations that makes it so hard to be used by investors. This fact was admitted by professor Gorga in the interview. Secondly, the collective suit falls into a slow judicial system that may take up to 10 (or more) years to reach a conclusion, which is very ineffective for the interests of investors and for the development of a strong stock market. Third, Brazilian judges does not have familiarity with the subject (except for a few courts), which creates risk of a poor decision and it can retard even more the solution of the case.
In grounds of constitutionality analysis, it is noteworthy that the issue was resolved long time ago by the Supreme Court about the constitutionality of the arbitration law in general. Furthermore, there is no reason for a different conclusion about arbitration in corporate law. The first argument against arbitration in this topic is the lack of consent of the minority shareholder. Nonetheless, the corporate law is based on the majority principle, in order to assure “governability” of business organizations, otherwise companies would be dissolved all the time. In addition, the companies’ bylaws are public documents, and investors know in advance about arbitration agreement when they buy stock of a company in the market. Also, if a shareholder disagrees with the inclusion of a new arbitration clause, she can sell the shares in the market, because Petrobras’s shares are very liquid and easy to trade (if it weren’t, the new law of arbitration provides appraisal rights from now on). Another aspect is about the partiality of arbitration. There are almost no cases of this kind of fault in arbitration cases, and even when the arbitrator is partial, the party may seek the annulment of the award. Therefore, the parties may control and seek remedies against those types of flaws in the procedure. Regarding the cost of arbitration, now, we may find different solutions for the problem of an investors not being capable of paying the arbitration fees; for instance, there is external funders or the companies themselves could separate resources for those contingencies. Moreover, many studies had shown that the benefits of arbitration are superior to the costs it produces. Finally, it is noteworthy that, even in the U.S., where the class actions are very powerful tools used by the shareholders, courts are accepting arbitration with the waiver of the class actions rights, because arbitration is as effective as the judicial remedy .
In conclusion, Petrobras’s shareholders have a lot to benefit from an arbitration suit, because they will have a faster and more technical solution to their claims. I see that the future of the shareholders` protection in Brazil will be by the creation of the class arbitration, substituting all types of collective actions. This idea is already being tested in some countries .
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