by Gustavo Tavares Borba \u2013 Valor Econ\u00f4mico newspaper, February 9, 2023 \u2013<\/p>\r\n\r\n\r\n\r\n
Case Law Disincentives to Derivative Actions<\/strong><\/p>\r\n\r\n\r\n\r\n Starting from the understanding that, as important as the legal provision of rules on abuse of power would be the stipulation of mechanisms for enforcement<\/em> From these rules, the Brazilian Corporations Law (LSA) created the "derivative action" of article 246. \u00a0<\/p>\r\n\r\n\r\n\r\n The complexity of the capital market and the difficulty in investigating abusive acts necessitated the creation of appropriate incentives so that some agent could investigate these situations and take action against possible inappropriate behavior.<\/p>\r\n\r\n\r\n\r\n For this purpose, extraordinary standing was granted to the minority shareholder to, as a "procedural substitute" for the subsidiary, bring a claim for damages ("derivative") against the controlling shareholder to recover losses resulting from the latter's abusive conduct.<\/p>\r\n\r\n\r\n\r\n The logic behind the legal rule is as follows: a controlled company, subject to the will of the controlling company by virtue of the majority principle, would hardly authorize the filing of a liability lawsuit against its controlling company. Therefore, minority shareholders would have extraordinary standing to file a lawsuit against the controlling company on behalf of the controlled company, reversing the trend of not investigating this type of irregularity.<\/p>\r\n\r\n\r\n\r\n This rule represents a conceptual advancement with positive externalities for the capital market, since, on the one hand, it would be able to reverse expropriatory acts carried out by potentially bad-faith controllers, and, on the other hand, it would have a deterrent effect on new irregular conduct.<\/p>\r\n\r\n\r\n\r\n This action, however, carries risks (loser liability) and requires expenditure of resources (lawyers, expert opinions, court costs, etc.), so the natural tendency would be for minority shareholders to lack interest in filing a derivative action, especially considering that the benefit, if the action is successful, would go to society, not to those who file the action as a procedural substitute.<\/p>\r\n\r\n\r\n\r\n To reverse this situation of little incentive to file the lawsuit, the Brazilian Corporations Law (article 246) provided the rule that the shareholder who filed the lawsuit as a procedural substitute would receive, in case of success of the lawsuit, a bonus of 5% of the compensation amount and, furthermore, that the lawyer who acted in the case would receive fees in the pre-fixed percentage of 20%.<\/p>\r\n\r\n\r\n\r\n This is a monetary incentive (award) for the shareholder to invest time and resources in investigating irregular conduct by the controlling shareholder, as well as to accept the risk of paying any potential legal costs. Without these incentives, it would be irrational to file a lawsuit where the risks are high and the benefits are not directly directed to the shareholder\/plaintiff.<\/p>\r\n\r\n\r\n\r\n The system foreseen in article 246 of the Brazilian Corporate Law (LSA), as defined in the legislation, is balanced and intelligent, as it creates adequate incentives for minority shareholders, who are the main stakeholders in correcting irregular conduct by controlling shareholders, to act as agents promoting the... enforcement<\/em> of the rules regarding abuse of control.<\/p>\r\n\r\n\r\n\r\n These legal incentives, however, have been undermined by decisions of the Superior Court of Justice that compromise their effectiveness, consequently rendering the system unviable. enforcement<\/em> as provided for by law to combat abusive practices in the corporate environment.<\/p>\r\n\r\n\r\n\r\n In the \u201cPetroquisa Case\u201d (REsp No. 745.739\/RJ), for example, it was decided that the incorporation of the subsidiary by the parent company would extinguish the derivative action and preclude the minority shareholder who filed the lawsuit and had their argument accepted from receiving the \u201cpremium.\u201d Since the parent company always has the discretionary power to incorporate its subsidiary (as it decides on \u201cboth ends\u201d of the operation), this decision undermined the incentives provided by law, because even after demonstrating the abuse by the parent company, it could easily render the derivative action unviable through an incorporation, preventing the company from receiving compensation (\u201cmerger,\u201d art. 381 of the Brazilian Civil Code of 2002) and preventing the plaintiff from receiving the premium.<\/p>\r\n\r\n\r\n\r\n More recently, in 2022, in Conflict of Jurisdiction No. 185.702\/DF, another decision prejudicial to the system was issued. enforcement<\/em> Regarding the rules on abuse of power. In this procedural incident, it was decided that the arbitration action for liability filed by the company would extinguish the prior derivative action filed by a minority shareholder, even when the latter (derivative action) was filed first. This, in addition to subverting the rules on lis pendens, disregards the fact that a derivative action against the controlling shareholder does not need to be deliberated in a shareholders' meeting, since the shareholder has unconditional extraordinary standing to file such an action, which was adopted by the legislator as one of the main means of... enforcement<\/em> of the rules protecting minority shareholders against abuses by the controlling shareholder.<\/p>\r\n\r\n\r\n\r\n Thus, in both cases, the STJ's decisions would allow the controlling shareholder, either through a corporate merger or by filing a subsequent identical lawsuit by the company itself, to render the derivative action ineffective.<\/p>\r\n\r\n\r\n\r\n It appears necessary and advisable that the Judiciary delve deeper into the study of the matter, for the purpose of reviewing this jurisprudence (especially in the second case, whose final judgment has not yet occurred), since the current positions make it impossible to ensure the effectiveness of legal mechanisms that were created to guarantee a healthier corporate environment in Brazil.<\/p>\r\n\r\n\r\n\r\n <\/p>\r\n\r\n\r\n\r\n <\/p>","protected":false},"excerpt":{"rendered":" Published in: Valor Econ\u00f4mico newspaper, February 9, 2023<\/p>","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24],"tags":[65],"class_list":["post-1661","post","type-post","status-publish","format-standard","hentry","category-gustavo-tavares-borba","tag-artigos"],"_links":{"self":[{"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/posts\/1661","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/comments?post=1661"}],"version-history":[{"count":3,"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/posts\/1661\/revisions"}],"predecessor-version":[{"id":3392,"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/posts\/1661\/revisions\/3392"}],"wp:attachment":[{"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/media?parent=1661"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/categories?post=1661"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/tavaresborba.com.br\/en\/wp-json\/wp\/v2\/tags?post=1661"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}