Overview of Securities Arbitration in Brazil: Challenges and Developments

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Author: Camila Maceda Simão*

Securities Arbitration
Contractual or Consensual Basis of Arbitration

Recent corruption scandals and improper corporate practices involving Brazilian publicly-held companies[1] have caused a rise in securities arbitrations brought by minority shareholders against the companies and/or the controlling shareholders.[2] While said arbitrations are still a novelty in Brazil, their filings are increasing and have generated various debates and challenges regarding their feasibility and effectiveness.

The Brazilian Corporation Law (Law No. 6,404, of December 15, 1976) allows for securities disputes between shareholders, directors and the company to be decided by arbitration. Article 109, §3 provides that a corporation’s bylaws may establish that disputes between the shareholders and the corporation, or between the majority and minority shareholders may be resolved by arbitration.[3] Article 136-A, in turn, was included in 2015 to confirm that the inclusion of an arbitration agreement in the corporate bylaws binds all shareholders, preserving the dissenting shareholder’s right to withdraw from the company.[4]

Most notably, Brazil’s Stock Exchange (B3), requires all companies listed in certain special corporate governance segments (Novo Mercado, Level 2 of Corporate Governance, Bovespa Mais and Bovespa Mais Level 2) to include arbitration agreements in their bylaws, establishing that disputes between the company, its shareholders, directors and audit committee members shall be resolved by arbitration before B3’s Market Arbitration Chamber (MAC).[5] The MAC considers it better for shareholders to solve their disputes through arbitration as the dispute would be decided by an arbitrator specialized at the matter at issue, which may not always be the case with disputes submitted to domestic courts. Further, the resolution of disputes before the MAC would be faster than before domestic courts. [6]

The validity of arbitration clauses included in the company’s bylaws and its binding effect on shareholders that purchased securities on B3 have been consistently confirmed by arbitration tribunals seated in Brazil and by the United States’ domestic courts. For example, in the class action In re Petrobras Sec. Litig.,[7] Judge Jed S. Rakoff held that claims resulting from shares acquired on B3 were subject to the arbitration clause included in Petrobras’ bylaws and, thus, should be subject to arbitration under the MAC Rules.[8]

As a consequence, shareholders of the approximately 240 companies listed in such segments are required to submit direct and derivative suits pertaining to securities fraud actions to arbitration under the MAC Rules.[9] Currently, there are reports of approximately ten arbitrations brought by investors before the MAC seeking redress against companies and/or their controlling shareholder for alleged fraudulent practices and violation of their disclosure duties. Three of these are class arbitrations, which are not yet regulated in Brazil.[10] These arbitrations were filed between 2016 and 2021, but no final award has been issued.

While there are several advantages to the use of arbitration for redress claims brought by shareholders,[11] the peculiarities of said arbitrations pose various hurdles to their development: (1) the admissibility of the shareholders’ claims and their standing under Brazilian law is debated and case law and doctrine are scarce in this regard; (2) several of these arbitrations involve multiple parties—sometimes over hundreds or thousands of shareholders; (3) proof of share ownership, especially for foreign shareholders, may involve an analysis of a significant amount of foreign documents, legal provisions and corporate structures at the outset of the proceedings; (4) the average arbitration costs are considerably high for minority shareholders;[12] (5) lack of information regarding similar proceedings as the arbitrations are confidential and the only facts available are the ones the companies decide to disclose;[13] and (6) the MAC Arbitration Rules were last modified in 2010 and do not contain enough provisions to deal with the challenges presented by such arbitrations.

Notwithstanding the hurdles mentioned above, it is possible to observe some positive developments to strengthen arbitration as an effective means of investor protection.

On November 18, 2020, the Organization for Economic Cooperation and Development (OECD) published a report titled “Private Enforcement of Shareholder Rights: A Comparison of Selected Jurisdictions and Policy Alternatives for Brazil,”[14] presenting recommendations to address some of these hurdles.[15] These recommendations include establishing legal and contractual rules governing collective arbitration, third-party intervention, constitution of the arbitral tribunal, allocation of costs and third-party funding, as well as establishing rules making arbitration involving corporate litigation non-confidential and requiring proper disclosure of information about the commencement and development of arbitrations.

The MAC has also started publishing summaries of arbitral awards rendered under their Arbitration Rules[16] and statistics regarding the cases it administers.[17] Further, Brazil’s Security Exchange Commission (Comissão de Valores Mobiliários – CVM) is working on an amendment to its Regulation 480/09 in order to create a duty to disclose, among other issues, corporate judicial and arbitral proceedings that involve corporate or stock market regulation, disputes involving the company, controlling shareholders or its directors and disputes involving diffuse, collective, or individual homogeneous rights or interests.[18]

Lastly, in one of the direct arbitrations filed by minority shareholders against a Brazilian publicly-held company seeking redress for the alleged losses suffered because of the company’s violation of its duty to inform, the tribunal reportedly issued a partial award on liability recognizing (1) that the dispute was within the scope of the arbitration agreement included in the bylaws; (2) the admissibility of the shareholders’ claims, (3) the shareholders’ legal standing to seek redress against the company; and (4) the company’s liability to indemnify the shareholders for direct losses incurred (which would be assessed at a second stage). Although this partial award was annulled by the State Court of Rio de Janeiro, the annulment decision is still subject to appeal and the award purportedly “marks a new phase in the evolution of arbitration in Brazil and of Private Law in General”.[19]

Securities arbitration in Brazil seems to be on its way to becoming an effective mechanism to guarantee enforcement of shareholders’ rights. Nonetheless, there are still several procedural and substantive aspects that must be clarified. Naturally, changes in arbitral rules and legal provisions, as well as the rulings of the arbitral tribunals in the direct and derivative proceedings currently in place and of domestic and foreign courts at the enforcement stage, must be closely monitored because all of these elements will play an important role in the development of securities arbitration in Brazil.



* Camila Simão is an LL.M Candidate at Columbia University, ARIA Student Editor and Research Assistant to Prof. George Bermann.

[1] Among the examples of corruption scandals and improper corporate practices, it is worthwhile to mention Operation Car Wash, Operation Bullish, Operation Weak Flesh, the Brumadinho dam collapse and IRB Brasil investigations.

[2] Peter Christian Sester, Transplanting U.S. Securities Fraud Class Actions Into Brazilian Collective Arbitrations, N. Y. L. J., (Jun. 16, 2021), https://www.law.com/newyorklawjournal/2021/06/16/transplanting-u-s-securities-fraud-class-actions-into-brazilian-collective-arbitrations/.

[3] Lei No. 6,404 de 15 de dezembro de 1976, Diário Oficial da União [D.O.U.] de 12.17.1976 (Braz.), article 109, §3, provides: “The corporation’s bylaws 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.”

[4] Lei No. 6,404 de 15 de dezembro de 1976, Diário Oficial da União [D.O.U.] de 12.17.1976 (Braz.), article 136-A provides: “The approval of the arbitration agreement into the corporate bylaws based on the quorum set up in Article 136, binds all shareholders, but such approval preserves to the dissenting shareholder his right to withdraw from the corporation and to be reimbursed for the value of his shares, pursuant to Article 45.”

[5] Segmentos de listagem, https://www.b3.com.br/pt_br/produtos-e-servicos/solucoes-para-emissores/segmentos-de-listagem/sobre-segmentos-de-listagem/ (last visited Nov. 20, 2021).

[6] Perguntas frequentes, https://www.camaradomercado.com.br/pt-br/faq.html (last visited Nov. 20, 2021).

[7] In re Petrobras Sec. Litig., 116 F. Supp. 3d 368, 387 (S.D.N.Y. 2015) (“as a matter of Brazilian law, purchasing Petrobras shares on the Bovespa indicates the purchaser’s consent to be bound by the arbitration clause in the company’s bylaws. But nothing about such share purchases indicates that the purchaser consents to arbitrate different claims relating to different securities purchased in different transactions in another country (the United States). Accordingly, the Court finds that there is no valid arbitration agreement with respect to the Exchange Act claims.”)

[8] Notwithstanding the rulings by Brazilian and U.S. courts, in decisions issued on September 29, 2018 and May 26, 2021, the Rotterdam District Court held that it has jurisdiction over claims brought by shareholders who purchased Petrobras’ securities outside of the U.S. (including in Brazil), holding that the arbitration clause included in the company’s bylaws did not meet the standards to be considered valid and imposed. See Kevin LaCroix, Dutch Court Oks Petrobras Claim Jurisdiction Despite Brazilian Arbitration Clause, the D&O Diary, (Sep. 23, 2018), https://www.dandodiary.com/2018/09/articles/international-d-o/dutch-court-oks-petrobras-claim-jurisdiction-despite-brazilian-arbitration-clause/. See also Kevin LaCroix, Dutch Court Rules Petrobras Collective Investor Action May Proceed, the D&O Diary, (Jun. 06, 2021), Dutch Court Rules Petrobras Collective Investor Action May Proceed – The D&O Diary (dandodiary.com). The main basis of the decision concerned the fact that the English translation of the arbitration clause read that the disputes between the company and the shareholders should be resolved “obeying the rules provided by the Market Arbitration Chamber”, but did not expressly sate “by means of arbitration”. The District Court of Rotterdam, thus, held that the arbitration clause was not valid, as it did not contain an express reference to arbitration. English translation of the District Court of Rotterdam’s decision of September 19, 2018 available at Petrobras Ruling Rotterdam Court, the D&O Diary, https://www.dandodiary.com/wp-content/uploads/sites/893/2018/09/Petrobras-ruling-Rotterdam-Court.pdf (last visited Dec. 05, 2021). -.)

[9] Empresas listadas, https://www.b3.com.br/pt_br/produtos-e-servicos/negociacao/renda-variavel/empresas-listadas.htm (last visited Nov. 20, 2021).

[10] Juliana Schincariol, Investidores iniciam arbitragem contra o IRB, Valor Econômico, (Mar. 18, 2020), https://valor.globo.com/financas/noticia/2020/03/18/investidores-iniciam-arbitragem-contra-o-irb.ghtml. Mariana Durão, Companhias abertas temem avanço de ações e arbitragens coletivas de investidores, O Estado de S. Paulo, (Oct. 29, 2020), https://economia.estadao.com.br/noticias/governanca,companhias-abertas-temem-avanco-de-acoes-e-arbitragens-coletivas-de-investidores,70003493588. Ana Paula Ragazzi, Na JBS, duas arbitragens e uma indenização controversa, Brazil Journal, (Nov. 08, 2021), https://braziljournal.com/na-jbs-duas-arbitragens-e-uma-indenizacao-controversa.

[11] Cláudio Finkelstein, Flexibilidade E Autonomia Da Vontade Em Arbitragem: Aprendendo Com Os Erros, 65 Revista de Arbitragem e Mediação 155, 156 (2020).

[12] Article 7.4 of the MAC Arbitration Rules grant the arbitral tribunal discretion to decide on the allocation of costs. The general practice in Brazil is for winning party to be reimbursed of all of the costs incurred with arbitration (with the exception of contractual attorney fees). In addition, the losing party may also be ordered to pay between 10-20% of the amount in dispute to the winning party’s attorney (this fee is a creation of article 85 of the Brazilian Code of Civil Procedure and its applicability in arbitral proceedings is highly criticized). See, e.g., José Roberto de Castro Neves, Os honorários advocatícios de sucumbência na arbitragem, in 20 Anos da Lei de Arbitragem – Homenagem a Petrônio R. Muniz 639, 646 (CarlosAlrberto Carmona et al ed. 2017). A 5% premium will also be due to the plaintiff in successful derivative suits, as per article 246, §2, of the Brazilian Corporation Law.

[13] Viviane Muller Prado & Ana Paula Ribeiro Nani, A Flexibilização Do Sigilo Arbitral: As Discussões Na Administração Pública, No Mercado De Capitais E No Judiciário, 70 Revista de Arbitragem e Mediação 201, 226 (2021) (reporting that recent studies have shown that there is no uniform standard for publicly-held companies to disclose information about its involvement in arbitral proceedings).

[14] The report is a result of a joint project between the OECD, Brazil’s Comissão de Valores Mobiliários (CVM) and Brazil’s Ministry of Economy and was published at OECD’s website: Private Enforcement of Shareholder Rights: A Comparison of Selected Jurisdictions and Policy Alternatives for Brazil, https://www.oecd.org/corporate/ca/Shareholder-Rights-Brazil.pdf (last visited Nov. 12, 2021).

[15] The report focuses on derivative claims only.

[16] Summaries of Arbitral Awards, https://www.camaradomercado.com.br/en-US/ementario.html (last visited Nov. 23, 2021).

[17] Statistics and casework report, https://www.camaradomercado.com.br/en-US/sobre–estatisticas.html (last visited Nov. 23, 2021).

[18] Audiência Pública SDM 01/2021, http://conteudo.cvm.gov.br/audiencias_publicas/ap_sdm/2021/sdm0121.html (last visited Nov. 23, 2021).

[19] Arnoldo Wald, A evolução Recente da Responsabilidade Societária, 69 Revista de Arbitragem e Mediação 105, 117(2021).