Brazil: Arbitration Convention In Corporations' By-Laws

Last Updated: 13 November 2015
Article by Mauro Takahashi Mori and Lilian Rosa Benedetti Malateaux

1. Law 13129/15, which will come into force on July 26, 2015, in addition to amending the law that regulates arbitration, also gives new wording to Law 6404/76 ("Corporations Law") to provide for procedures to include an arbitration clause in the by-laws of corporations.

2. The possibility of electing an arbitration as a means to solve disputes between shareholders and their company, or between majority and minority shareholders is provided for in the Corporations Law since the amendment introduced by Law 10303/2001. Nevertheless, the rules regarding approval of amendment to the by-laws and handling of dissenting shareholders were only addressed in Law 13129/15, almost 15 years later.

3. In accordance with the new law, in order to make the insertion of the arbitration convention into the by-laws valid for all shareholders, the arbitration clause must be approved by the shareholders representing at least half of the voting shares, except if, in the specific case of closely-held companies, the by-laws require a higher quorum. Approval of the arbitration clause will take place at a shareholders' meeting and take effect thirty (30) days after the publication of the minutes of said meeting.

4. The dissenting shareholder will have the right to withdraw from the company upon reimbursement of the amount of his shares, except if:

(i) insertion of the arbitration clause in the by-laws is a requirement to have the securities issued by the publicly-held company admitted for negotiation in a listing segment of the stock exchange or of the over-the-counter market that demands a minimum of 25%-share dispersion of each type or class of shares (i.e., Level 1, Level 2, New Market, Bovespa Mais Nível 21 and Bovespa Mais2; or

(ii) insertion of the arbitration clause has been carried out in the by-laws of publicly-held corporations whose shares have liquidity3 and dispersion4 on the market, in accordance with the Corporations Law.

5. We therefore note that, by establishing that the arbitration clause will be binding upon all the shareholders (if its insertion in the by-laws is approved under the law) and by ensuring the dissenting shareholders the right to withdraw, the new law ended the dispute about the enforcement of said arbitration clause on shareholders that do not vote in favor of it.

6. In general, the new law tried to add effectiveness to the arbitration clause established in the corporations' by-laws, although making sure not to harm minority shareholders' interests.

Footnotes

1. Percentage to be reached within no longer than 7 years as of the beginning of the term of effectiveness of the Bovespa Mais – Level 2 Listing Agreement (Contrato de Participação no Bovespa Mais – Nível 2.).

2. Percentage to be reached within no longer than 7 years as of the beginning of the term of effectiveness of the Bovespa Mais Listing Agreement (Contrato de Participação no Bovespa Mais)

3. There is liquidity whenever the type or class of the share, or of the certificate that represents it is part of a general index of a securities portfolio admitted to negotiation on the securities market, in Brazil or abroad, defined by the Brazilian Securities and Exchange Commission - CVM (article 137, II, "a" of the Corporations Law).

4. There is dispersion whenever the controlling shareholder, the controlling company or any other companies under its control hold less than half of the type or class of the share (article 137, II, "b" of the Corporations 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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