The weakness of legal institutions supporting finance is a problem shared by most emerging markets, and indeed many developed markets. Prior scholarship and policy work has emphasised the links between legal institutions and raising arm’s length finance. In a recent paper, we investigate institutional and regulatory changes seeking to improve enforcement capacity for Brazilian corporate and securities laws.
Brazil’s equity markets deliver only a modest proportion of the funding raised by Brazilian public firms. Persuading financiers to commit funds on an arm’s length basis to public companies requires effective corporate and securities laws and associated institutions. A central challenge in Brazil concerns the limitations of the regular courts for adjudicating complex business disputes. Courts’ decisions are often slow to decide the cases, and judges lack relevant expertise.
In our paper, we apply qualitative methods with data collection based on interviews conducted with Brazilian nationals identified as key actors by their peers. The analysis is informed by the notion of ‘institutional layering’ most commonly applied in political science. Institutional change often relates to historical and critical juncture moments, and is often described in terms of breakdown and replacement. Institutional layering offers a more nuanced notion to inform the analysis of institutional transformation and continuity. We apply this framework to investigate the ways in which new arrangements in legal processes and institutions inform improvements in the enforcement capacity for corporate and securities law in Brazil. In this way, regulatory and institutional changes can be seen as ‘layers’ that have redesigned and incremented to certain degree the foundation of such enforcement system. This examination ultimately shows that although these measures are each incomplete, they are mutually reinforcing. Together they appear to facilitate outside investment through the control of tunneling by majority shareholders. We investigated the strategies and interaction of four such institutions in Brazilian corporate and securities law: (i) the growing role of arbitration; (ii) the restructuring of the São Paulo Court of Justice to create specialist panels of expert commercial judges; (iii) a dedicated administrative court operated by the Brazilian securities regulator (the ‘CVM’); and (iv) a recent initiative to create a Brazilian Takeover Panel (the ‘CAF’).
The vast growth of arbitration to resolve commercial disputes clearly aims to counteract challenges in national courts. Arbitration is widely used by commercial parties in emerging markets as a way of sidestepping long delays in the regular courts. But Brazil had no tradition of arbitration until the passage of Arbitration Law in 1996. Since then, its use has grown exponentially, because it permits the selection of decision makers expert in the field and delivers a quicker resolution than the courts. In securities law, arbitration was also chosen to foster the additional standards of corporate governance of the Novo Mercado, a new and well-known listing segment, launched in December 2000, at the Sao Paulo Stock Exchange (Bovespa). Companies listed on the Novo Mercado must include an arbitration clause in their articles subjecting intra-corporate disputes to the jurisdiction of Novo Mercado Chamber of Arbitration. An addition 2001 reform to the Corporations Act permitted companies generally to select arbitration for the resolution of shareholder litigation. These initiatives have paved the way for the use of arbitration in securities law, as well as increasing its role in the country in general. The second institutional layer analyzed was the establishment of a specialist business chamber within the regular courts sitting in Sao Paulo. Judges are selected for these Chambers based on their expertise in business law. And interviewees, specially leading lawyers, were of the opinion that these Chambers have contributed to an increase in legal certainty in the State of São Paulo.
The Brazilian Securities and Exchanges Commission (Comissão de Valores Mobiliários or ‘CVM’) is an independent government agency, linked to the Ministry of Finance, but enjoying financial and budgetary autonomy. The CVM’s role includes a general mandate for promoting the development of Brazil’s securities market. Importantly for our purposes, the CVM has enforcement powers encompassing the whole of securities and corporate law, as well as its own resolutions and any other law under which it is granted supervisory jurisdiction. The CVM has power to investigate, through processo administrativo, illegal acts and inequitable practices of members of publicly-traded companies and other market participants. In principle, processo administrativo runs in parallel with the enforcement of private rights of action in the state courts. It does not rely on them for enforcement, but in contrast is an alternative route to enforce the same underlying rights, at least as respects aspects of corporate and securities laws giving rise to private rights of action. Although the CVM Board publish written decisions, technically speaking, their legal consequences are limited to administrative proceedings and only a court decision renders a matter res judicata for civil proceedings. Yet, because processo administrativo moves more quickly than civil litigation, and the CVM Board have specialist expertise, state courts treat CVM decisions as highly influential.
A fourth ‘institutional layer’ in enforcement may come to be constituted by Brazil’s newly established Mergers and Acquisitions Committee (Comitê de Aquisições e Fusões or ‘CAF’). The CAF, which formally began operations in January 2014, is a self-regulatory initiative aimed at securing equitable treatment for shareholders of publicly-traded companies during tender offers (ofertas públicas de aquisição de ações or ‘OPAs’) and corporate restructuring transactions (operações de reorganização societária). The CAF is an ambitious attempt to create a new institutional layer for control transactions, which has significant implications for minority investors. Staffed by experts, and making public its decisions, the CAF has the potential to become a source of information for parties wishing to order their affairs in relation to control transactions and restructurings.
Each of these developments can be seen as a ‘layer’ based on the foundation of the basic system of corporate law enforced through state courts. But none is able completely to transcend these limitations, and so each is, by itself, an incomplete solution. However, the fact that all four approaches can be pursued simultaneously means that they overlap to a significant degree, especially in relation to areas crucial for facilitating outside investment such as the control of tunneling by majority shareholders. While the most recent political and economic failures in country imply increased uncertainty in general, and perhaps with increased litigation, the additional built-in layered system can eventually be even more valuable during such times.
John Armour is Hogan Lovells Professor of Law and Finance at Oxford University.
Caroline Schmidt is an Oxford University Alumni and a Member of the Brazilian Bar Association.