Arbitration in M&A and Corporate Disputes in Brazil Nelson Eizirik 1
Introduction 1. Introduction The Brazilian Corporate Law (Law n. 6.404/1976) was amended by Law n. 10.303/2001, which introduced a series of important changes in order to improve the Brazilian securities market. Paragraph 3 in Article 109 of Law n. 6.404/1976 allows companies to have arbitration clauses provided in their bylaws, applicable to the disputes between the company and its shareholders or between minority and controlling shareholders. 2
The New Market 2. The New Market In December 2000, BM&FBovespa (Brazilian Stock Exchange) created the New Market and the listing levels of corporate governance for the shares negotiated in the Stock Exchange, in order to adopt the best corporate governance practices, beyond the scope of the Brazilian Corporate Law. Corporations that decided to have their shares listed in one of those segments should comply with the rules of each listing level. 3
The New Market The set of protections imposed by the New Market Rules is considered to increase the attractiveness of companies to the Brazilian Stock Exchange. In order to adhere to the New Market, compliance with the following rules is required: 1) maintenance of free-float of at least 25% of the total capital; 2) improvements in disclosing information to the market and investors in general; 3) all shares must be voting shares; 4) when there is a transfer of control, tag along right must be granted to all minority shareholders, who must receive the same price paid to the shares held by the controlling shareholder; and 5) adherence to the Arbitration Chamber of the Stock Exchange for solution of corporate disputes. 4
The New Market Article 13.1 of the New Market regulation specifically establishes that BOVESPA, the Company, its Controlling Shareholder, Senior Managers and Audit Committee members agree to refer to arbitration any disputes related to these Listing Rules, the New Market Agreement, the Arbitration Clause, particularly regarding their enforcement, validity, effectiveness, construction, violation and related effects, before the Market Arbitration Chamber, under the Arbitration Rules. At the present moment, 129 corporations are listed in the New Market. 5
Mandatory Arbitration Clause in bylaws 3. Mandatory Arbitration Clause in bylaws The companies that wish to be listed in the New Market have to adhere to the Market Arbitration Chamber, the institution created by BM&FBovespa in June 2001. The Market Arbitration Chamber is the forum to settle both corporate and stock market disputes. It was initially designed for the resolution of disputes arising out of an environment where the companies from the New Market operate. Nevertheless, anyone willing to settle conflicts whose core is related to corporate issues or the stock market can use it, whether BM&FBovespa-listed or not, institutional investors or not. 6
Mandatory Arbitration Clause in bylaws In order to improve the quality of the proceedings held before the Market Arbitration Chamber, in 2011, the Chamber s rules were modified, in an effort to consolidate arbitration as the best way to solve corporate matters. The current rules allow the joinder of third parties (Art. 6.1) and the consolidation of proceedings involving issues of fact or law in common with proceedings that were already under way (Art. 6.2). The 2012 ICC Arbitration Rules, as well as the 2012 Lewiatan Court of Arbitration Rules, for example, have also established the possibility of joinder of third parties and consolidation (see artt. 7 and 10 of the 2012 ICC Arbitration Rules and 20 and 28 of the Lewiatan Court of Arbitration Rules). 7
Objective and Subjective Arbitrability 4. Objective and Subjective Arbitrability The question of the arbitrability of a dispute arises in two situations. The first refers to the possibility of certain individuals or entities to be considered able to submit their disputes to arbitration because of their status or function, which is known as subjective arbitrability or arbitrability ratione personae. The second situation is present when there is a discussion regarding the subject or the manner submitted to the arbitral tribunal, known as objective arbitrability or arbitrability ratione materiae. 8
Objective and Subjective Arbitrability Objective Arbitrability The Brazilian Arbitration Law established that arbitration disputes are to be related to freely disposable patrimonial rights. As the publicly held companies main purpose is to make profits and share them among shareholders, all corporate matters, in principle, refer to patrimonial rights, being, therefore, subject to arbitral proceedings, if the corporate bylaws contain arbitral clauses. All issues related to decisions made in the shareholders meetings can be considered as arbitrable, since the shareholders meeting has the power to change its own previous decisions. So, everything that can be validly decided by the corporation is arbitrable, as it is within the corporation s private autonomy. 9
Objective and Subjective Arbitrability Subjective Arbitrability If the arbitral clause is included in the corporate bylaws when the company is constituted, all shareholders will be bound by it. The same with those that become shareholders at a later stage. The problem arises when the corporate bylaw is modified to include the arbitration clause. Considering that arbitration is connected to the principle of parties autonomy, in our opinion, it would not be possible to force shareholders that expressly voted against the inclusion of this clause. In this case, the arbitration clause will only have effect upon those who have agreed to it, those who have abstained or those that were not present in the general shareholders meeting that decided about the inclusion of the arbitral clause in the bylaw. 10