Inclusion Of Arbitration Agreement In The By-Laws Of Corporations

Law No. 13,129, dated May 26, 2015 amended the Brazilian Arbitration Act (Law No. 9,307 dated September 23, 1996) largely by enshrining therein the understanding of Brazilian courts on many of its formerly controversial aspects, such as the entering of partial awards, the government's standing to be a party to an arbitration, and the requests for preliminary relief and injunction prior to the commencement of an arbitration.

It also amended the Brazilian Corporations Act (Law No. 6,404 dated as of December 15, 1976 - "BCA") so as to regulate the effects of the inclusion in the by-laws of an agreement to arbitrate disputes upon dissenting shareholders.

Pursuant to novel article 136-A of the BCA, if the inclusion of an arbitration clause in the corporation's by-laws is approved at a shareholders' meeting, then all shareholders are bound thereby, but any dissenting shareholder will have the right to withdraw from the corporation and have its shares redeemed by the corporation in cash (the "Redemption Right", or "direito de retirada").

Article 136-A is based on the understanding of certain scholar authorities rather than being the result of the evolution of case law - which is scarce on this topic. It puts an end to a heated debate on how to reconcile the majority principle that permeates the law of corporations (i.e., minority is bound by the majority vote) with the principle of consent to arbitrate (i.e., a party may not be forced to waive its constitutional right to submit disputes to the Judiciary).

The Redemption Right is an inalienable statutory right under the BCA, and is reserved for key matters the approval of which at the shareholder's meeting may affect the fundamental incentives of the minority shareholder to invest in the corporation. It may only be exercised if the majority of the voting stock has resolved to approve a change in the nature or structure of the corporation (certain corporate consolidations, spin-offs, mergers and acquisitions, change in the corporation's business purpose, and so forth) or the limitation or suppression of certain rights of the shareholders (predefined minimum dividend, preferences attached to the type or class of preferred stock held by the dissenting shareholder, and so forth).

Hence, by setting forth that a dissenting shareholder may withdraw from the corporation if the adoption of arbitration in the by-laws is approved, Law No. 13,129/15 implicitly acknowledges that the right to sue and be sued and...