Provisional measures for the enforcement of shareholders’ agreements under Brazilian Law

July 2018 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

Brazilian law develops in pursuit of effectiveness. Establishing an adequate legal framework to ensure parties perform their obligations was, for the last two decades, essential for Brazilian and foreign investors to increase their trust in the country’s capital market and rule of law. The possibility of enforcing shareholders’ agreements – through both arbitral and judicial proceedings – represented a major advance in such efforts.

However, this was not always the case. Brazilian law once lacked the mechanisms to compel the breaching party to comply with its contractual duties – the consequences of a breach of contract contemplated in law were restricted to the payment of damages and termination of contract.

The reforms undertaken through the enactment of the 2002 Civil Code, however, made it possible for the non-defaulting party to request enforcement of obligations as a remedy against breach of contract — which takes preference over payment of damages and is usually referred to as ‘specific performance’.

Other provisions for specific performance are established in specialised laws, notably the 1976 Brazilian Corporate Law Act and the 1996 Brazilian Arbitration Act amended in 2015 – thus consolidating a legislative framework designed to confer practical effectiveness upon contractual law.

Advances also triggered changes in Brazilian Civil Procedure Law, as the 2015 Code of Civil Procedure also addressed the specific performance of contracts by: (i) providing coercive mechanisms to be applied by state courts at the request of arbitral tribunals (including support of court-appointed officials and imposition of pecuniary sanctions); (ii) expanding the power of state courts to implement those mechanisms; and (iii) enacting new rules for the regulation of provisional measures, all to compel defaulting parties to comply with their obligations. In the last case, according to the Brazilian Code of Civil Procedure, a party may seek provisional measures to guarantee the performance of a shareholder’s agreement or prevent it being breached even before initiating judicial or arbitral proceedings.

Brazilian Procedural Law offers yet another option when coercive measures prove inefficient against a breaching party: granting alternative relief that is as close as possible to the perfect performance of the contract.

Considering the above, Brazilian law now allows an aggrieved party – either in an arbitral or judicial dispute, or even before these disputes are commenced – to preserve or anticipate its contractual right through a wide range of legal mechanisms, capable of providing the practical result of effective compliance with the obligation.

Specific performance in shareholders’ agreement disputes

Similarly, under Brazilian Corporate Law, “shareholders may provide for the specific performance of the undertaken commitments”. Moreover, according to Brazilian Procedural Law, parties to a shareholders’ agreement are authorised to establish that the agreement itself will be self-enforceable before state courts.

In that case, the state court will assess the validity of the shareholders’ agreement in accordance with the requirements of procedural law. If the contract’s enforceability is confirmed, the judge will notify the shareholder to comply with the obligation set forth in the contract in the period determined therein (or by the court, if the contract is silent on the matter). If the shareholder fails to comply with such obligation within the designated period, the judge, through coercive power, will impose a pecuniary fine.

In most cases involving specific performance of a shareholders’ agreement, the aggrieved party will request an order for the other shareholder to practice or refrain from practicing a specific action. For instance: A, B and C entered into a shareholders’ agreement to define their voting rights for approval of certain matters at shareholders meetings. If shareholder A votes contrarily to what was agreed, shareholders B and C will have the right to seek, before state courts or arbitration, a relief to replace A’s statement of intent and force the effects of said vote to comply with the terms set forth in the shareholders’ agreement. This is because the shareholders’ agreement, as an instrument designed to predetermine votes in certain matters, contains an obligation to provide a declaration of will pursuant to the previous alignment of the shareholders.

In addition, if shareholder A contractually obliges himself to sell part of his shares to shareholders B and C but refuses to do so, the latter can seek to enforce the contract in order to avoid default by shareholder A; that is, requesting that the court enforce the assignment of shares from A to B and C.

Essentially, such provisions intend to give maximum effectiveness to the agreement, so that non-performance does not lead only to a damages claim – which, in many corporate disputes, is unable to effectively compensate the injured party – but rather, facilitates enforcement of the obligation itself, i.e., the fulfillment of the obligation as a practical result.

Interim relief in specific performance: preserving the effectiveness of judicial and arbitral disputes

Under Brazilian Procedural Law, contracting parties can obtain interim measures or anticipatory relief of the effects of a final judgment on the merits, with the purpose of anticipating, totally or partially, the very solution the plaintiff would obtain with a favourable final decision.

The success of this type of claim is subject to certain procedural requirements, namely, a high probability of the plaintiff’s right and the danger of harm or risk to the practical outcome of the proceeding. First, the judge will consider whether the plaintiff has a possible right, evaluating the claim’s likelihood of success. Second, the judge will assess whether there is a risk that the future decision becomes innocuous if granted later (for example, by means of the merits decision). Therefore, through an injunctive relief, the court protects a plausible right from any immediate harm. If the court understands that these prerequisites are not present at the initial phase, the court may reassess the interim measure at any stage of the proceeding, and even within a final decision, after evidence has been produced.

If the claim is to be resolved by arbitration, the arbitral tribunal is equally empowered to grant provisional measures, subject to the same procedural requirements as state courts. Since the process of constituting an arbitral tribunal may, at times, be long, many arbitral institutions provide alternatives for the parties to address urgent matters (such as emergency arbitrators). In other cases, state courts are an option for seeking interim relief before the arbitral tribunal is appointed.

There is an important difference between state courts and arbitral tribunals in granting interim measures: arbitrators may depend, in some occasions, on the coercive powers of courts to grant effectiveness to arbitral decisions, as the power of arbitrators is limited to rendering a decision, which, at least in theory, should be spontaneously complied with by the other party. If this does not occur, the decision may be enforced with the help of state courts, which hold coercive powers to implement rulings. With the aim of making arbitral awards and decisions more effective against a defaulting party, state courts are entitled to use a wide range of mechanisms, such as ordering police seizure of corporate books, notifying commercial registry and other state departments to comply with a certain order, or freezing a party’s assets, as the case may be.

To improve cooperation among state and arbitral courts, the 2015 reform of the Brazilian Arbitration Act introduced the so-called ‘arbitral letter’. With this instrument, arbitrators were given an official, fast-track mechanism to communicate their decisions to state courts, requesting their enforcement. The arbitral letter will certainly increase the effectiveness of provisional measures rendered by arbitral tribunals.

As a rule, state courts are forbidden from analysing the merits of arbitral letters. Their duty is merely to enforce them. The only case in which the courts can reject enforcement of an arbitral letter is when the letter fails to comply with formal legal requirements. Thus, if the preliminary request is granted and not voluntarily complied with by the respondent, the arbitral tribunal will issue an arbitral letter to the state court – not to decide whether the measure should be sustained, but only to implement it through acts of coercion.

In conclusion, over the last two decades, Brazilian law has established an array of instruments to ensure enforcement of shareholders’ agreements, both as a preliminary measure and as final relief, as provided for in Brazilian Corporate Law, the Brazilian Arbitration Act and the Code of Civil Procedure.

Karina Goldberg and Antonio Pedro Garcia de Souza are partners and Patricia Klien Vega is an associate at Ferro, Castro Neves, Daltro & Gomide Advogados. Ms Goldberg can be contacted on +55 (11) 3053 3300 or by email: karina.goldberg@fcdg.com.br. Mr Garcia de Souza can be contacted on +55 (21) 2519 1900 or by email: antonio.souza@fcdg.com.br. Ms Klien Vega can be contacted on +55 (21) 2519 1900 or by email: patricia.klien@fcdg.com.br.

Karina Goldberg, Antonio Pedro Garcia de Souza and Patricia Klien Vega

Ferro, Castro Neves, Daltro & Gomide Advogados