M&A Litigation 2018

Author:Mr Daniel Tardelli Pessoa, Christian Galvão Davies, Renato Din Oikawa and Júlio César Ferro
Profession:Levy & Salomao Advogados

1 Identify the main claims shareholders in your jurisdiction may assert against corporations, officers and directors in connection with M&A transactions.

The main claims shareholders may assert are:

claims related to any violation of the corporation by-laws or legal provisions that might have occurred in the context of an M&A transaction; indemnification claims against officers and directors for damage caused to the corporation in violation of the by-laws, or as a result of acts or omissions performed with: negligence; recklessness; lack of professional skills; or wilful misconduct; and indemnification claims against controlling shareholders for any damage caused by acts performed by an abuse of power. Minority shareholders may also file a claim in the context of an M&A transaction if it involves a corporate reorganisation (such as a merger, amalgamation or spin-off) and the minority shareholder receives fewer shares in the surviving entity than expected. Minority shareholders may also exercise withdrawal rights (not applicable to publicly traded corporations) and challenge the value to be paid for their shares.

As a principle of law, any individual or entity that caused damage resulting from an action or omission of the corporation is entitled to indemnification for damages.

2 For each of the most common claims, what must shareholders in your jurisdiction show to bring a successful suit?

As a condition to filing a successful claim, a shareholder must show that he or she has standing to sue (ie, he or she was a shareholder prior to the transaction and was affected by it); and a legal interest to bring the claim based on a violation of his or her rights.

In relation to the substantive law and burden of proof, the shareholder must have strong elements to prove that a breach of the company's by-laws or the law has in fact occurred as a result of the transaction, thus causing direct damage to the shareholder.

3 Do the types of claims that shareholders can bring differ depending on whether the corporations involved in the M&A transaction are publicly traded or privately held?

Publicly traded corporations are subject to the supervision of the Brazilian Securities and Exchange Commission (CVM) according to the Brazilian Security Law. Therefore, CVM has power to impose penalties and fines in cases of violation of the applicable law or other rules arising from CVM's normative power. For this reason, publicly traded corporations can be party to punitive administrative proceedings before CVM as a result of a claim brought by shareholders.

Other procedures can be pursued whether the corporation is publicly trade or privately held. Note that shareholders of publicly traded corporations are not entitled to withdrawal rights and any lawsuits deriving therefrom.

4 Do the types of claims that shareholders can bring differ depending on the form of the transaction?

As a general rule, shareholders can bring a claim for indemnification in the case of breaches of legal duties, legal provisions and governing documents by company directors, officers or controlling shareholders in the context of M&A transactions, regardless of the form of the transaction. Shareholders can also bring a lawsuit against their counterparties in the M&A transaction in relation to the transaction documents.

In transfers of publicly traded corporations, disputes about the exercise of tag-along rights by minority and preferred shareholders may also take place.

However, there are certain transaction structures that entail additional rights for shareholders, particularly those involving reorganisations such as mergers, amalgamations and spin-offs. In such case, claims may challenge the exchange rate of shares of the corporation being merged, amalgamated or spun-off for shares in the surviving entity. Another alternative for dissenting shareholders is to exercise the right of withdrawal of the corporation, in which case shareholders may challenge the amount to be paid to the withdrawing shareholders.

5 Do the types of claims differ depending on whether the transaction involves a negotiated transaction versus a hostile or unsolicited offer?

Although unsolicited offers are conceptually possible under Brazilian law, they are very rare in practice. Brazil adopts the mandatory bid rule, whereby the decisions on the offer remain with the shareholders. The board of directors must give an opinion on the success of the offer, but the shareholders have the final word (section 32-D of CVM rule 361).

Unsolicited offers can, in theory, be challenged based on the regularity of the offer under Brazilian law. Potential violations of the regulations preventing competing offers may also give rise to litigation.

Claims seeking indemnification for abuses of controlling shareholders are more likely in negotiated transactions due to the nature of unsolicited offers.

Regardless of the type of transaction, whenever the corporation or its shareholders suffer damage due to acts or omissions of the management, claims for indemnification may be sought against directors and officers.

6 Do the types of claims differ depending on whether the loss is suffered by the corporation or by the shareholder?

Even though the claims for these follow the same proceeding, they are based on different legal grounds.

In the case of a loss suffered by the corporation, as general rule, the legal entity has the standing to file a lawsuit to recover its losses as set forth in article 159 of the Corporate Law. However, if the losses are caused by directors' or officers' acts or omissions, there is the possibility of a derivative suit brought by shareholders on behalf of the corporation according to the third and fourth paragraphs of article 159 of the Corporate Law.

On the other hand, if the loss is suffered directly by shareholders, they can seek an indemnification from the wrongdoer based on the general provisions regarding civil liability set forth in the Brazilian Civil Code. Furthermore, shareholders can bring a claim against directors or officers if they suffered a direct loss caused by the acts or omissions of such management members as provided in the seventh paragraph of article 159 of the Corporate Law.

7 Where a loss is suffered directly by individual shareholders in connection with M&A transactions, may they pursue claims on behalf of other similarly situated shareholders?

Brazilian civil procedure law does not provide for class actions in the same terms as those under US law. There are specific civil collective actions that may be filed by the Prosecutor's Office, agencies, associations and other entities to defend the interest of a group of individuals under the same conditions, but M&A transactions would not fall under such hypothesis if there have been no securities violations. The shareholder him or herself is not entitled to file such collective claim.

Nevertheless, a suit brought by several individuals is allowed under Brazilian law. In this case, all of the individuals are considered coclaimants, and have the same rights and responsibilities in the lawsuit. However, the number of claimants allowed to stand in a lawsuit may be limited by the judge if he or she deems that an excessive number of claimants undermines the expedited resolution of the dispute, or hampers the regular defence of the defendant or the execution of the award.

Recently, groups of Brazilian individuals have been forming associations of minority shareholders of certain large corporations. The underlying rationale is that such associations file for a class or collective action, in which case the indemnification shall revert to the association. This phenomenon is recent, and to date there is no relevant case law on this.

8 Where a loss is suffered by the corporation in connection with an M&A transaction, can shareholders bring derivative litigation on behalf or in the name of the corporation?

Brazilian law does not recognise derivative actions brought by shareholders in the name of the corporation against...

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