The Delaware-Inspired Next Step Toward Brazil Becoming the South American Leader in Corporate Law: Making Public Company Arbitrations a Matter of Public Record

Caio Machado Filho is a Partner at Chediak Advogados, Francisco Rüger Antunes Maciel Müssnich is a Partner at Ferro, Castro Neves, Daltro & Gomide Advogados, and Leo E. Strine, Jr. is the Michael L. Wachter Distinguished Fellow at the University of Pennsylvania Carey Law School; Senior Fellow, Harvard Program on Corporate Governance; Of Counsel, Wachtell, Lipton, Rosen & Katz; and former Chief Justice and Chancellor, the State of Delaware. This post is based on their recent paper.

One of the most important functions that corporate and securities laws play is in encouraging capital formation that can promote greater wealth for the well being of society as a whole.  At the core of this important role of law is ensuring that investors in companies are ensured that their legitimate expectations of fair treatment by corporate managers and controlling stockholders are met, that there are limits on self-dealing and opportunistic behavior, and that investors are provided with reliable information to exercise their rights and hold corporate managers accountable for fulfilling their legal and fiduciary duties.  For this role to be accomplished in companies with publicly listed shares, the regulatory system must not only function, it must do so credibly and with disclosure to the investors affected by adjudication of cases affecting their interests.  Not only that, the learning about best practices that emerge from public decisions in corporate and regulatory cases helps encourage better corporate governance and convergence toward more trustworthy approaches that encourage investment.

Brazil is South America’s leading domicile for listed public companies and has enjoyed substantial economic growth in the last generation.  But it remains a nation constrained by limited resources to address all of its challenges and opportunities.  Because of this reality, Brazil has chosen to use arbitration as the method to resolve disputes between the stockholders of public companies about critical issues such as the fairness of interested transactions and other claims for breach of fiduciary duty or compliance with statutory law and securities laws.  Likewise, important commercial disputes involving public companies are also resolved in arbitration.  This is problematic in one hugely important way:  Brazil has not yet recognized that arbitration of this kind that affects public companies, their stockholders, and other stakeholders is distinct from purely private arbitration.  As a result, the arbitration process for public companies lacks the accountability and integrity that accompanies public adjudication and also fails to create a body of decisional law that provides a basis for the evolution of sound corporate governance best practices and that encourages arbitrators to base their decision on principled and coherent interpretations of commercial, corporate, and securities law. Recognizing that one of the primary reasons Delaware has emerged as an international leader in corporate and commercial law is that its system of adjudication resolves cases promptly, expertly, and publicly, and provides practitioners, academics, regulators, stockholders, corporate leaders, and the public with reasoned decisions about important determinations affecting public companies, in our paper entitled The Delaware-Inspired Next Step Toward Brazil Becoming the South American Leader in Corporate Law:  Making Public Company Arbitrations a Matter of Public Record,, we argue that features of Delaware’s approach could be usefully employed within Brazil’s system of public company arbitration.  We thus support and encourage recent reforms in Brazil to open up the system of public company arbitration, and make these specific, Brazilian-specific suggestions for making the new movement toward public arbitration in public company cases effective:

First, the evidentiary record in arbitration proceedings involving public companies should be presumptively a matter of public record.  Absent the sort of legitimate reasons for sealing certain aspects of judicial proceedings — because it might reveal a trade secret or a recognized privilege such as attorney-client advice — the evidence and other aspects of the record on which a public company dispute is decided should itself be public or, at least, redacted only so much as is necessary to protect a well-justified privilege, personal information, or trade secret, as is the approach in Chancery in Delaware.

Second, any stockholder bringing a corporate law claim that affects other stockholders should owe a fiduciary obligation not to engage in self-interested behavior inconsistent with the best interests of all stockholders as stockholders, or the use of litigation leverage to extract value for themselves particularly, but instead to act to ensure that the company’s duties to all stockholders have been fulfilled, and that all similarly situated stockholders benefit from the litigation.  In this sense, stockholders bringing a claim should themselves be regarded as having duties like a fiduciary and the arbitration should bind the company and all its stockholders, so that there is only one definitive answer to a particular transaction or corporate decision alleged to be wrongful, and any challenge to the arbitrators’ resolution should be by way of proper appeal, and not other collateral attacks.

Finally, and most importantly, the arbitrators’ rulings on all matters, both in terms of ruling on applications for interim relief and determining the scope of the proceedings and evidentiary issues, but critically in terms of issuing their decisions and award on the merits, should be public, and the Brazilian stock exchange (known as “B3”) or the CVM (Brazil’s equivalent to the Securities and Exchange Commission) should create a register of all such rulings that is kept current and easily searchable by the public, and one that will provide a basis for use in future arbitrations, scholarship and commentary on corporate law, and consideration by lawmakers in the process of evaluating potential amendments to the corporate code and securities laws.

Consistent with these recommendations, arbitrators not only may, but should be encouraged, to cite to prior arbitration rulings where the reasoning and circumstances are relevant to the case before them.  This does not mean that a current arbitration panel deciding a specific case is bound to adhere to prior decisions, but the panel should have to take into account prior interpretations of Brazilian statutory and fiduciary duty law and justify their decisions.  By means of this explanatory approach, good governance practices will tend to emerge that will promote the best interests of companies and their stockholders, and limit incentives to litigate when corporate managers follow these practices.  This richer body of decisional law will not only facilitate better corporate conduct, but it will also provide the CVM and Brazilian legislators a more robust informational basis for determining when they should engage in regulatory reform.

By capitalizing on the speed and expertise that can be brought to bear by arbitration but combining it with credibility- and consistency-enhancing features of the kind we advocate, Brazil can further its ambitions to be an international leader in the market for incorporation and better encourage investment in its economy.

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