Federal Government will propose a new package of measures to Congress
Last April 20th, the Finance Ministry presented a series of measures that will be proposed to the National Congress on an urgent basis with the aim of making credit more accessible and cheaper, and, also, strengthening the support for the national capital markets and protecting investors.
Among the measures aimed at protecting investors, the government intends to propose reforms to the Brazilian Corporation Law (Law No. 6,404/76) to change the rules related to lawsuits regarding liabilities of shareholders and managers by creating a mechanism for collective lawsuits to benefit minority shareholders. Such lawsuits may be proposed by investors, for their own benefit and that of other investors, in the event of damages that they may suffer as a result of acts attributable to the controlling shareholder and/or the company’s managers, mainly in the event of fraud and breach of fiduciary duties.
The purpose of this measure is to enhance the mechanisms for execution, supervision and compensation for losses caused to minority shareholders and also to holders of other securities of the companies, such as debenture holders. The inspiration comes from the American model of class actions, which aims to protect investors, facilitating the representation of their interests before companies, without each investor needing to go for an active and proactive individual posture in the defense of their injured rights. This is because collective actions, as a rule, depend on the active and propositional posture of only one of those legally entitled to present and conduct the lawsuit before the courts.
Despite not being mentioned by name, it is known that one of the motivations for the Finance Ministry proposal comes from the recent case involving Lojas Americanas and their accounting inconsistencies that resulted in losses of approximately R$ 40 billion. The possible filing of a class action in the United States by investors and banks against the Brazilian company has even been reported in the media, given that it has shares traded on the American stock exchange.
The Brazilian Corporate Law already provides for the possibility of filing liability lawsuits against controlling shareholders and managers for damages that have been caused to the company, within the corresponding legal provisions. However, lawsuits can only be proposed by shareholders who hold at least 5% of the company’s share capital and the effects of the court decision and compensation for damages are related to the damages suffered by the company.
Thus, an effective indirect compensation for the damages perceived by minority shareholders/investors is not certain, given that the compensation for the losses suffered by the company does not necessarily represent compensation for investors, as in the case of losses arising from the decrease in their assets due to the devaluation of securities from the company.
In addition to lawsuits against management and controlling shareholder on behalf of the company, investors are legally permitted to file civil lawsuits against such persons for damages they directly suffered. In these cases, it is up to the investors, acting together as plaintiff of the lawsuit, or individually in separate lawsuits, to claim what they are entitled to by right. Only to those who actively participated in the lawsuit will take advantage of the court decision and will need to comply with the respective burdens and duties that are applicable within the scope of the lawsuit.
The proposal by the Finance Ministry still has a long way to go before the enactment of the law that will amend the Brazilian Corporation Law., and it will certainly be subject to changes during this process. What is already known is that if the mechanism of collective actions by investors of corporations is approved, we can expect, within the scope of companies, greater rigidity and investment in good practices of corporate governance and in the hiring and preparation of their managers. These managers, in turn, will face even greater pressure in relation to their responsibilities, duties and risks inherent to their positions, which may imply claims for increased remuneration and additional protections for these professionals.
Since this is a measure with well-defined parameters and limits, the so-called Brazilian class actions could contribute significantly to restoring investor confidence and to improving and developing the national capital markets.