According to OECD’s 2020 report, Brazil is one of the few countries that uses arbitration as the main way of resolving corporate disputes involving publicly traded companies. This circumstance is a result of the provisions for corporate governance from the Brazilian stock market – B3 – which provides for a mandatory arbitration agreement in the bylaws of companies that wish to be listed before B3.
After the reform of the Brazilian Arbitration Act, in 2015, any shareholder – regardless whether has consented or not with the inclusion of the arbitration clause in the company’s bylaws – is bound to the arbitration agreement. Among with the reform of the Brazilian Arbitration Act, Brazilian Corporations Act was also amended to expressly establish, in its article 136-A, that the inclusion of an arbitration agreement in the bylaws obliges all the company’s shareholders. The shareholder who does not agree with the inclusion of the arbitration clause is entitled to withdraw from the company upon reimbursement of the market value of its shares. Pursuant to §2 of article 136-A, the right to withdraw is not applicable to publicly-traded companies, since, in those cases, the dissenting shareholder can simply sell its shares in the stock market.
The arbitration agreement established in the bylaws can also bind the company’s management – and not only its shareholders. Many scholars support that administrator shall be bound to the arbitration clause if (i) the arbitration agreement already existed by the time they were elected and (ii) the arbitration agreement is included in the bylaws during the term of their mandate and they do not resign. In both cases, administrators will be considered as having tacitly expressed their consent.
Considering this environment, Brazil has recently started to see not only arbitration procedures filed by investors in the stock market, individually, but also arbitration procedures filed by civil associations that collectively represent minority shareholders’ interests seeking indemnification for damages caused by the company’s controller and/or administrator’s acts – the so called “class arbitrations”. Those entities act as extraordinary representatives for the shareholders bound to the arbitration agreement.
Unlike in the United States, where the idea of the class arbitration has already been consolidated, the lack of specific regulation causes insecurity about the use of this type of arbitration in Brazil for the protection of collective rights. Notably, commentators highlight controversies regarding: (i) legitimacy and adequate representation for the admissibility of the arbitration procedure; (ii) consolidation of procedures involving the same claims; (iii) confidentiality in these types of procedures; among others hot topics. The present article aims to provide an overview of the discussions about the so-called "class arbitrations" involving publicly held companies in Brazil.
I) LEGITIMACY TO CLAIM COLLECTIVE RIGHTS
Brazilian Procedural Law – applicable to judicial procedures – establishes that whoever intends to file a lawsuit must comply with the requirements of (i) legitimacy and (ii) interest to sue. In relation to the first requirement, article 18 of the Brazilian Civil Procedure Code clarifies that only the holder of a certain right may claim it "unless authorized by the legal system”. The exception authorized by such provision is called extraordinary legitimacy, in which a third party seeks the judicial protection of another one’s legal right.
Based on this legal provision, the entire Brazilian system of “collective actions” emerges. As major regulatory milestones of the system, it can be mentioned the Consumer’s Defense Code, which establishes important provisions of substantive law, and Federal Law No. 7.347/1985 (“Collective Action Act”), which regulates the so-called collective civil lawsuits. This kind of lawsuit could be seen as the Brazilian equivalent of the class action, in comparison with the North American model.
Normally, the collective action is instrumentalized by Brazilian public authorities, such as the Public Prosecutor or the Security Commission (“CVM”), who uses its extraordinary legitimacy, provided by law, to claim or prevent damages that would be supported collectively by the society. In addition to that, in accordance with article 5, item v, of the Collective Action Act, not only public authorities, but also civil associations have extraordinary legitimacy to file a collective lawsuit. The possibility, in fact, has as its main foundation the constitutional text, which establishes the legitimacy of associations to represent its members when expressly authorized. For such, it has to comply with certain requirements, namely: (i) be incorporated for at least one year before the Public Register and (ii) include, among its institutional purposes, the protection of certain public, collective and social interests.
It is precisely from this extraordinary legitimacy that the Brazilian “class arbitration” has been built in most the recent years. Civil associations formed by minority shareholders of publicly traded companies argue that they would be the appropriate entity to represent investors’ interests in arbitration procedures based on Brazilian Corporations Act against controlling shareholders or administrators. In the majority, it is considered that an association of investors, constituted in accordance with the above-mentioned requirements, may exercise this role. Also, in another less discussed hypothesis, it is admitted that a large investor, with the befitting technical capacity and resources, could also represent the shareholders in a “class arbitration”. Brazil has elected a system with an opt-out model, in which any shareholder can be legally represented by the civil association if such shareholder does not pronounce otherwise.
However, mostly because the provisions of the Collective Actions Act were originally conceived for judicial proceedings, many questions arise about the legitimacy when it comes to the filing of the so-called “class arbitration”. Following the comparison with the North American model, which already refers to concept of class arbitration, one of these questions is whether the association legitimacy should be verified by the arbitrator based on an ope judicis criterion, or the fulfillment of the two legal requirements above mentioned should be enough, instituting an ope legis criterium.
Brazilian scholars Ana Luiza Nery and Nelson Nery Junior understand that the verification of legitimacy should be guided solely by formal aspects of the legal criteria, with no further verification by the arbitrator of the merits of the association’s purpose. In their view, this would be the legislative intent when instituting the requirements set out in the Collective Action Act, regarding any collective lawsuit or arbitral procedure. In another perspective, Marcelo A. Muriel and Aline Dias see the need for the arbitrator to verify whether the association effectively has the capacity and the good faith to claim the right of the group it represents in a collective arbitration. In this case, the judgment would not be on legitimacy as a standing to sue, under the terms of the Brazilian civil procedure code, but on the adequacy of representation, a concept consolidated in the North American reality, however, little discussed in Brazil.
"Adequacy of representation" in an English language expression applicable to US class actions, which means "a quality shown by the representative that will act on behalf of society or of a group in defense of collective interests, with the capacity to efficiently and tenaciously defend the interests involved whether in a societal forum or before administrative or judicial authorities". In the words of Rodolfo de Camargo Mancuso in his famous book about collective lawsuits: “The lawmaker's purpose is understandable: to prevent that associations not sufficiently solid or whose objectives are not consistent with the interest in dispute casually file class actions; indeed, if that casualness indicates 'malicious litigation', the court will punish the association (...)”. Under this concept, it would be lawful for the judge and, therefore, for the arbitral tribunal, to actively verify the adequacy representation of the association based on the circumstances of the concrete case and, therefore, eventually limit the admissibility of these “class arbitrations”.
II) CONSOLIDATION OF PROCEDURES FILED BY DIFFERENT INVESTORS VS CLASS ARBITRATION
Most of the arbitral institutions predicts the possibility of consolidating arbitration proceedings, as long as “a) the parties have agreed to consolidation; or b) all of the claims in the arbitrations are made under the same arbitration agreement or agreements; or c) the claims in the arbitrations are not made under the same arbitration agreement or agreements, but the arbitrations are between the same parties, the disputes in the arbitrations arise in connection with the same legal relationship, and the Court finds the arbitration agreements to be compatible”.
As for the correct interpretation of the Brazilian class arbitration system, it is important to distinguish, on one hand, (i) arbitration procedures filed by different investors with the same scope (for example, identical claims against the company, its managers or its controlling shareholders), which, once consolidated, may lead to a multi-party arbitration; from, on a different hand, (ii) a class arbitration properly said.
As explained above, a class arbitration – as the one filed to protect collective rights under the system of Collective Action Act (Law No. 7.347/1985) – is a case of extraordinary legitimacy in which the right of a group of investors will be claimed by a third party on their behalf, usually a civil association. In a multi-party arbitration, which can be generated by the consolidation of separate arbitration procedures, the legitimacy is ordinary – in the sense that each investor (or each investment fund) will be claiming its own legal rights – or sometimes extraordinary, in the sense that the investor is acting on behalf of the company as specifically established by articles 159 and 246 of the Brazilian Corporations Act.
Even if the different parties are claiming damages to stockholders arising out of the same facts or the same alleged illegal conducts of the company’s controlling shareholders or management, requirements of legitimacy and interest to sue are very different in case of individual claims filed by investors vs collective claims filed by an investors’ association through the so-called “class arbitration”. Arbitrators will have to assess procedural requirements of admissibility separately. In any event, investors may prefer to opt out the “class arbitration” and continue with their own separate individual claims.
III) CONFIDENTIALITY
Confidentiality of the arbitral proceedings, under Brazilian Law, constitutes a contractual obligation between the parties. There is no legal provision that entails the need for the proceeding to remain confidential, meaning that it is exclusively subject to the parties’ autonomy. In fact, if confidentiality was inherent to any arbitral proceeding, it would not be possible for the state to be a party in arbitral proceeding, since it is bound to the principle of publicity – and, as expressly stated in article 1, §1, of the Brazilian Arbitration Act, there are no reservations for the state to participate in an arbitration.
That being said, since confidentiality constitutes a contractual obligation, it cannot be absolute. As any other contractual provision, it cannot overlap obligatory legal provisions. Thus, specifically regarding arbitral confidentiality, it shall be mitigated when it poses an obstacle to the party’s access to Justice or the exercise of a duty to inform.
When it comes to the stock market environment, arbitral confidentiality conflicts with the principle of full disclosure – which is designed to ensure that investors are well informed regarding potential facts that may impact the company’s financial results and can make rational decisions over the negotiation of its shares in the market. Due to this, there are those who argue that arbitral confidentiality is incompatible with interests involving publicly traded companies.
Transparency in disputes involving publicly traded companies may become even more relevant when it comes to class arbitration. The ones that support transparency argue that it is necessary to guarantee that every shareholder is aware of the existence of the collective procedure – if he wants to be part of it, as he may be entitled to receive indemnification for direct damages.
This issue has already been dealt with by the Brazilian Security Commission (CVM) in two separate occasions, in which it concluded that there is no problem for publicly held companies to conduct confidential arbitral proceedings . However, if the existence of said proceeding or any decisions issued therein can influence the shareholders on their investment decisions, it must be disclosed to the market in the form of a “Relevant Fact”, pursuant to CVM’s resolution No. 358.
The need to disclose Relevant Facts, however, does not mean that the entire case files must be opened to the shareholders. As mentioned, the arbitral confidentiality is only mitigated, and not waived. Even if it was to be waived, the shareholders’ right to request information from the company is not unrestricted and is bound to the legal standards. For example, the shareholder cannot request to take part on an arbitral hearing as much as he cannot request to take part on a management’s meeting . For the duty to disclose information to be complied with pursuant to CVM’s resolution 358, the company only has to disclose the information that can actually influence the shareholders’ investment decisions – i.e., the existence, scope/object and value of the arbitration; most relevant decisions and motions; and the parties involved.
Therefore, in the current system, even though a class arbitration may be subject to confidentiality due to the provisions of the arbitration clause in the bylaws (or due to the provisions of the institution administering the procedures), investors and stockholders will likely become aware about the existence of a class arbitration and its scope, as those type of procedure usually encompass relevant information that must be disclosed to the market according to the regulatory rules applied to publicly traded companies.