Legal and Statutory Liability of Boards and Committees Members in Brazil

Walter Douglas Stuber and Manoel Ignácio Torres Monteiro are founding-partner and partner, respectively, of Stuber - Advogados Associados, and experts in Corporate Law, Banking Law and Capital Markets.

Originally published November 2004

I - Overview

The liability of administrators (Directors and Officers), auditors and consultants has been of great concern, especially after the advent of the Sarbanes-Oxley Act in 2002.

The Brazilian Corporation Law puts Directors and Officers on the same footing to establish the limits of their liability. Thus, members of the Board of Directors or of the Supervisory Committee (Conselho Fiscal) have the same obligations and liabilities as Officers. On the other hand, the members of the Audit Committee, as regards their duties and liabilities, are put on the same footing as the members of the Supervisory Committee, as opinion of the Securities and Exchange Commission on the matter.

Directors must comply with the provisions contained in the By-laws and the laws and regulations in force, acting diligently in the discharge of their duties, subject to being held answerable for any damage caused to the company, to the partners and to third parties.

An administrator's liability may be twofold: (i) indirect liability; and (ii) direct liability.

Direct liability means that the Director is personally liable.

Abuse of power, violation of laws or the By-laws and negligence in the discharge of the duties are direct liabilities of the Directors.

Indirect liability means that a Director is not personally liable, as there is no provision to that effect in current laws and regulations. In this case, the company will answer for the damage caused by the Director, but will have right of recourse against the administrator, that is, it may file action to recover the amount it may have been awarded to pay as indemnification.

Because the Board of Directors is a deliberative collegiate body, only decisions taken at properly called meetings are valid. In this sense, any decision taken individually by any Director is ineffective.

However, omission or lack of diligence of the part of the Directors may sometimes give rise to liability.

The fact that the Board of Directors is a collegiate body makes their members collectively liable. However, joint liability of their members is not presumed.

The law makes provisions on the joint liability of administrators in the event of non-compliance with formalities complementary to the company's incorporation or in the case of failure to record the extinction of debentures on the respective books.

Included in the duties of the Board of Directors is the oversight of the management by the Officers, examining, at any time, the corporate books and documents, requesting information on agreements made or about to the made, and any other act to be performed by the company's Officers.

In this case, the Directors will be joint-liable if they fail to act diligently in the discharge of the supervisory duties as Officers, because they neglect their responsibility to discharge the legally provided duties.

The Directors, however, are not liable for acts of the Officers of which the Directors have no knowledge or that are hardly or even impossible to detect during the regular business of the company. In this case the liability of the Directors may not be presumed.

Officers are elected, and removed, by the Board of Directors only.

Directors cannot be held liable for the unsatisfactory performance of an elected Officer. However, the Directors will be held liable for the election of any unfit Officer, where it is possible to determine such unfitness by way of search of commercial, judicial and other information.

Failure to remove an elected Officer, after his/her incompetence or unfitness is determined makes the Directors liable for damages caused to the company or third parties.

Because the Board of Directors and the Supervisory Committee are collegiate bodies, the Director may, and should include in the minutes his/her vote and the reason of his/her disagreement or description of the matter considered of relevance to the company, as a way to display diligence and exempt from liability. It is important to stress out that any disagreement must be communicated before the deliberations, never after. The minutes of the Meeting of the Board of Directors as drawn up on the Book of Minutes of the Board of Directors' Meetings are, therefore, a very important proof of the administrators' liability.

Should it be impossible for a Director to record his/her disagreement in the minutes, he/she should communicate it immediately and in...