Brazil: Stock Option Plans And Arbitration: Is It Possible Under Brazilian Law?

1. Introduction

Following the dynamism of the economic relations and the increasing practice of the stock markets, it became quite common throughout the corporative world the offering of options to employees to purchase shares of the employing company under pre-established price and conditions, the so-called stock option plans.

Another increasing trend in the corporative world, notably in Brazil, is the use of arbitration as a method for conflicts resolution instead of the judiciary system. The agility, flexibility and efficiency with which conflicts are resolved throughout arbitration proceedings are indeed very attractive elements.

In this context, a question commonly made is whether employing companies in Brazil can attach arbitration clauses to its stock option plans. Is it possible to join both mechanisms under the Brazilian legislation?

The answer depends on the given circumstances, as analyzed below.

2. 'Arbitrability' in Brazil - Disposable Patrimonial Rights

Arbitration in Brazil is recognized as an appropriate and legitimate method for dispute resolution, provided for in Federal Law no. 9.307/96 (Brazilian Arbitration Act), which is based on the UNCITRAL (United Nations Commission on International Trade Law) model law.

In 2001, the constitutionality of the Brazilian Arbitration Act was confirmed by Brazilian Supreme Court and the use of arbitration was ruled constitutional, as a way of private resolution of disputes and waiving of state jurisdiction, except to the extent that support for enforcement is needed and/or nullity of the arbitration proceeding is claimed, hypothesis in which the state jurisdiction can apply.

According to article 1 of the Brazilian Arbitration Act, Arbitration can only apply for resolution of disputes involving the so-called "freely disposable patrimonial rights":

"Art. 1. Persons capable of entering into contracts may settle through arbitration disputes related to freely disposable patrimonial rights."

In this regard, the Brazilian jurist Carlos Alberto Carmona, one of the co-authors of the Brazilian Arbitration Act, explains that:

"It is said that a right is disposable when it may or may not be exercised freely by its owner, without having any cogent rule imposing the compliance with such principle, under penalty of the committed act being considered null or void. Thus, those properties which are in a position to be freely sold or negotiated are transferable ("disponire", from Latin: to dispose of, to put in many places, to regulate), as they are clear, whereas the seller has full juridical capacity to do so." (In Arbitragem e processo, 2nd ed. São Paulo: Atlas, 2004, p. 56).

As one can see, in short, for a right to be considered disposable under the Brazilian law, it is necessary that (i) there is no mandatory (cogent) rule that imposes the compliance with such principle; and (ii) the owner of the right is in juridical conditions to exercise such right. Without both these requirements, a right is not freely disposable and, therefore, cannot be subject to arbitration in Brazil.

Turning back to the topic of this article, it is necessary to analyze then whether the rights involved in a stock option plan qualify as "freely disposable patrimonial rights", in order to be subject to arbitration.

A consensus over the answer is somehow difficult, as some consider that rights related to stock option plans have labor nature and, because of that, would not be subject to arbitration under the perspective of an individual right.

3. The (un)arbitrability of the labor rights

In Brazil, labor rights can be divided into individual and collective rights.

Collective labor rights are those related to a class or group of employees, usually negotiated, claimed and protected by unions under bargain agreements, being subject to arbitration according to Article 114, § 1 and 2, of the Brazilian Constitution.

On the other hand, individual labor rights are those directly provided by law and, in principle, not subject to arbitration, in view of the protective and mandatory nature applied, which prevents them from qualifying as "freely disposable patrimonial rights".

It is worth to report a decision of the Brazilian Superior Labor Court, which confirms the differences above as to the arbitrability of collective and individual labor rights:

"1. The opinion followed by this Superior Court is to the effect that the arbitration is applicable only in this Specialized Court, to settle collective conflicts, as the individual conflicts involve individual employee rights, which are undisposable and irrevocable. Precedents of this Superior Court."

(AIRR - 269-71.2011.5.18.0052, Rapporteur Justice Guilherme Augusto Caputo Bastos, judged on 20/06/2012, 2nd Panel, published on 29/06/2012)

In view of the above, if an arbitration clause is inserted in an employment contract, such clause is likely to be challenged, based on the fact that an employment contract contains individual labor rights, which do not qualify as "freely disposable patrimonial rights".

However, two remarks must be made.

First, that there is doctrine supporting the thesis that some individual labor rights can be considered "freely disposable patrimonial rights" and, so, subject to arbitration.

The supporters of this theory claim that some individual labor rights have patrimonial characteristics and are already negotiated and/waived in lawsuits and mediation proceedings carried out at the labor courts. So, if such rights can be waived or subject to mediation at the labor courts, this means that they are not mandatory and, therefore, could be equally subject to arbitration.

Second, that there are two types of employment contracts in Brazil. One is the ordinary employment contract, provided for in the Code of Labor Laws (Federal Decree-Law no. 5452/1943), which has labor and mandatory nature. The other is the statutory employment, very common to the category of officers of the company, in which the person is deemed to be employee by statute, under a civil and commercial perspective.

This second form of contract can be subject to arbitration, as it has civil and commercial nature, not being bound to the mandatory rules provided for by labor laws. Arbitration will not only apply if the civil and commercial nature of the contract is disregarded and labor laws are applied to rule the employment relationship.

But apart from those circumstances, any challenge regarding arbitrability can be put aside, if the rights related to stock option plans are not qualified as labor rights.

4. The nature of the rights related to the stock option plan

In Brazil, the stock option agreement is legally provided for in Article 168, § 3 of the Brazilian Corporations Act since 1976 (Federal Law n. 6404/1976).

There is a controversial in the Brazilian doctrine and case law related to the nature of the stock option agreements. Some understand that it is a kind of income and part of the employee's salary, in which case it is characterized as a labor contract, while others claim that it is does not qualify as income, but an independent commercial agreement, entered into by the parties under the auspices of the civil law.

This second position tends to prevail, based not only on the fact that the stock option plan represents a structure in which the employee will actually own part of the company, but also because this hypothesis may never occur, not having a certain amount to be included in the employee's salary, as the structure is subject to the variations of stock market. See case-law from the Brazilian Superior Labor Court:

"Stock Options. The plan by which employers offers to employees the right to purchase shares (defined in the Brazilian Corporations Act, n. 6404/76, Art. 168, § 3) does not provide the employee with a benefit of legal wage. This is because, although the possibility of making the business (purchasing and selling of shares) arises from the employment contract, the worker may or may not earn profit, subject to variations in the stock market, having the profit commercial juridical nature. The right, therefore, does not bind to the labor force, and does not hold a bilateral basis, being not possible to say that it is a benefit included in the legal wage concept." (RR - 217800-35.2007.5.02.0033 Date of Judgment: 17/11/2010, Justice Rapporteur: Mauricio Godinho Delgado, 6th Class, Date Published: DEJT 03/12/2010)

We had ourselves the opportunity to discuss this matter in a case involving a multinational software company. In the end, the commercial nature of the stock option plan prevailed and the labor court remarked that stock option plans are not part of wages:

"Stock option plan. Commercial nature. The exercise of the option to purchase shares by the employee involves risks, because it can earn as much as losing the operation. It is therefore financial transaction in the stock market rather than salary. There is no payment by employer to the employee as a result the provision of services, but risk of business. Therefore, they cannot be considered as wage" (São Paulo's Regional Labor Court - Ordinary Appeal no. 20010255561, Published on 02/28/2003)

Following this rationale, even if one considers that individual labor rights are not subject to arbitration, this would not represent an obstacle in having arbitration clauses inserted into stock option plans, as these qualify as a commercial contract.

4. The arbitration clause must be reasonable and expressly accepted

As noted above, arbitration clauses can be inserted into stock option plans (i) if one considers that such plans qualify as a "disposable right" that could be waived even before a labor court; (ii) if such plans refer just to statutory employees' that are not subject to the mandatory provisions of labor laws; or (iii) if one considers that such plans have mere commercial nature and are not part of employees' wages.

In any event, in order to avoid challenging and also to strengthen enforceability, it is important to pay attention to the content and form of the arbitration clause, so that it does not characterize a failure in regard to its acceptance or any type of imbalance between the parties.

First, bearing in mind that it cannot be imposed, the arbitration clause inserted in a stock option plan must be expressly accepted, not only by signing the contract itself, but also by signing or initiating the clause separately.

One shall consider that, as a rule, stock option plans come as a type of "adhesion contract" and, as such, Article 4, paragraph 2, of the Brazilian Arbitration Act establishes that the clause, itself, must be specifically accepted by the parties:

"§2 – In adhesion contracts, the arbitration commitment clause will only be effective if the adhering party takes the initiative to institute arbitration or expressly agrees with its institution, provided that this consent is in writing in attached document or in bold typing, with a signature or approval specifically for this clause."

Doctrine and case law in Brazil considers that adhesion contracts can lead to imbalance situations, marked by the fact that one party is given the opportunity to predefine the contract terms, while the other is not given the option to debate nor familiar with the terms of the agreement. This is why an express consent in regard to the arbitration clause is imposed by law.

Second, although under the Brazilian Arbitration Act it is possible to freely choose the seat of arbitration and the applicable law, one must pay attention that the imposition to an individual resident in Brazil the obligation of taking part in an arbitration proceeding abroad, ruled by foreigner laws, can qualify as an abusive and imbalance provision, especially if the individual shows that he/she does not have economic conditions to litigate abroad, nor did he/she fully understand the legal context that he/she was adhering to. The imposition of an arbitration clause establishing the seat of arbitration abroad and under foreign law can be interpreted as limitation of the right of action (access to justice), when the party is personally or financially unable to litigate under said conditions.

In light of the above, if arbitration is elected as the method for dispute resolution in a stock option plan, the arbitration clause must be written carefully. It is necessary to keep a balance between the parties, in their own situations and conditions, on a case-by-case basis. If needed, depending on the individual with whom the clause is contracted, it should reflect balance with the definition of the seat of arbitration in Brazil and Brazilian law.

5. Conclusion

In short, arbitration clauses can apply to stock option plans in Brazil, provided that (i) one considers that such plans qualify as a "disposable right" that could be waived even before a labor court; or (ii) such plans refer just to statutory employees' that are not subject to the mandatory provisions of labor laws; or (iii) one considers that such plans have mere commercial nature and are not part of employees' wages.

In order to avoid challenging and to strengthen enforceability, it is important to pay attention to the content and form of the arbitration clauses, so that no failure in regard to its acceptance or imbalance between the parties is characterized. It is recommended that the clause be expressly signed or initiated. The imposition of a seat of arbitration abroad and foreign law can be interpreted as limitation of the right of action, when the party is personally or financially unable to litigate under said conditions. If needed, depending on the individual with whom the clause is contracted, it should reflect balance with the definition of the seat of arbitration in Brazil and Brazilian law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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