An extract from The Mergers & Acquisitions Litigation Review, 2nd Edition

Shareholder claims

Some M&A transactions may give rise to disputes involving shareholders that are not necessarily positioned as buyer or seller, but rather minority shareholders of a company that may have a claim against officers, directors or the controlling shareholder. However, except for a few examples that occasionally hit the news and according to a report issued in October 2019 by a working group composed of members of the CVM, the Organisation for Economic Co-operation and Development and the Ministry of Economy, it is 'still relatively uncommon to see minority shareholders filing lawsuits or arbitral claims in order to seek redress from managers or controlling shareholders'.8

i Common claims and procedure

There are virtually no significant non-confidential precedents on claims raised by shareholders in the context of M&A transactions. The main claims that can be asserted by shareholders in the context of an M&A transaction in Brazil include the following:

  1. claims related to a breach of the company's by-laws;
  2. shareholders' agreements or legal provisions that have occurred in the context of an M&A transaction; and
  3. claims against officers, directors and controlling shareholders for damage suffered by the company or directly by the shareholders in the context of an M&A transaction.

Minority shareholders may have a claim in the context of an M&A transaction involving a capital increase or corporate reorganisation that results in unjustified dilution, or if the transaction is contrary to lock-up provisions, pre-emptive rights, rights of first refusal or first offer, as well as tag-along and drag-along rights established in the company's by-laws, shareholders' agreement or by law.

The procedure varies according to each type of dispute. As described above, the dispute may be subject to an arbitration agreement or, alternatively, may be filed with any state court having jurisdiction over the dispute.

In the case of claims asserted by shareholders against officers and directors for breach of their fiduciary duties, in violation of the company's by-laws or as a result of negligence or wilful misconduct, the Corporations Act provides for both derivative and direct actions.

A shareholder or group of shareholders may file a derivative action against officers or directors for compensation for damage suffered by the company. The filing of a lawsuit against officers and directors requires the approval of the shareholders in a shareholders' meeting. If approved, the company shall file the lawsuit or the request for arbitration within three months. If the company fails to do so, any shareholder is entitled to take such initiative on behalf of the company. However, if the decision to file a lawsuit is not approved at the shareholders' meeting, the shareholder or group of shareholders owning a minimum percentage of shares issued by the company have a standing to sue the officers or directors on behalf of the company in a derivative lawsuit.

The Corporations Act provides that shareholders owning shares corresponding to at least 5 per cent of the company's outstanding shares are entitled to file a lawsuit on behalf of the company. However, in June 2020, the CVM issued a new rule (Normative Instruction No. 627/2020) that establishes minimum percentages from 5 to 1 per cent, depending on the company's total capital stock. This rule applies exclusively to publicly held companies, as per the table below.

Publicly held company's total capital stock (in reais)Minimum share ownership (% of outstanding shares)
From zero to 100 million5
From 100,000,001 to 1 billion4
From 1,000,000,001 to 5 billion3
From 5,000,000,001 to 10 billion2
Above 10 billion1

Besides the derivative lawsuit that shareholders may file on behalf of the company, any shareholder may file a direct action against officers and directors for direct damage suffered by themselves, as per Article 159, Paragraph 7 of the Corporations Act. The Superior Court of Justice has ruled that a devaluation of the company's shares does not amount to a direct damage to the shareholder, but rather a direct damage to the company, and therefore the shareholder is not entitled to compensation.9 However, a recent and unprecedented arbitral award deviated from such understanding by finding that Petrobras was liable for direct damage caused to its shareholders as a consequence of corruption scandals and misleading information that inflated its share price and caused losses once they were uncovered. Petrobras filed a motion to vacate the arbitral award at the courts of Rio de Janeiro and the award was partially overturned, but the decision is still subject to appeal and the proceedings are under seal.10

The direct action does not depend on the ownership of a minimum percentage of shares. According to the same provision, third parties that are not shareholders may also have standing to sue officers and directors for direct damage inflicted on them.

Similarly, the Corporations Act expressly provides for derivative and direct actions against controlling shareholders for abuse of controlling power.

The derivative action filed by shareholders on behalf of the company against the controlling shareholder is also subject to the above-mentioned minimum percentage of 5 per cent (with the same reductions that have been recently enacted by the CVM in the case of publicly held companies). However, any shareholder, regardless of how many shares it holds, may also file a claim on behalf of the company against the controlling shareholder, provided that it offers a security for costs and lawyers' fees in advance. This is aimed at preventing strike suits and frivolous litigation by minority shareholders.

If a shareholder or group of shareholders is successful in a derivative claim against the controlling shareholders for damage caused to the company, the Corporations Act provides that, on top of the damages paid to the company, the controlling shareholder must pay a bonus of 5 per cent of such damages to the shareholder who filed the claim and a bonus of 20 per cent to the lawyer who represented the plaintiff shareholder in court or arbitration.

This incentive for shareholder activism, however, has recently caused disputes among the shareholders themselves. In 2018, two groups of minority shareholders filed lawsuits against the controlling shareholder of a large Brazilian conglomerate claiming billions of reais in damages due to alleged unlawful acts investigated by Operation Car Wash, a major investigation by Brazilian prosecutors of white-collar crimes with impacts on the politics and economy of Brazil and other Latin American countries. However, the minority shareholders also engaged in a parallel dispute to determine which of them should be considered the plaintiff for the purpose of receiving the percentage bonus.

The Corporations Act contains specific provisions that may apply in the case of a breach of a shareholders' agreement. Article 118 of the Corporations Act sets forth that shareholders' agreements regulating the purchase and sale of shares, preference to acquire shares, exercise of voting rights and exercise of corporate control are binding not only in relation to the signatory parties, but also the company and its officers and directors, provided that it is duly filed at the company's head office. The same provision sets forth that a shareholders' agreement is enforceable against third parties when duly entered in the register books and on the share certificates, as applicable.

Finally, when an M&A transaction is subject to approval by the shareholders' meeting or by the board of directors, shareholders may also assert claims related to the validity of decisions taken at these meetings when they have been invalidly called or installed, or if the votes were cast in conflict of interests or contrary to a shareholders' agreement provision.


ii Remedies

Depending on the nature of the dispute involving an M&A transaction, the shareholder may be entitled to different kinds of remedies.

First, as a general principle of Brazilian law and regardless of the subject matter of the dispute, any individual has the right to seek injunctive relief aimed at preventing an imminent loss or preserving the successful outcome of a lawsuit. This right is subject to two requirements: likelihood of success on the merits of the claim and risk of irreparable harm.

At the early stages of M&A disputes, parties often battle for court injunctions seeking to prevent or complete a transaction or to stay its effects. As a general rule, courts are not allowed to modify the terms of the deal, but only to review its validity and effects. On the other hand, if an M&A transaction is subject to prior approval by the antitrust authority, the antitrust authority may request the modification of certain terms of the deal and disposal of assets to comply with antitrust regulations.

Claims against officers and directors, either asserted by means of derivative or direct actions, are generally aimed at compensation for damage, as per Article 159 of the Corporations Act.

As to claims grounded on rights provided for in shareholders' agreements, the Brazilian law on contractual liability allows the aggrieved party to seek specific performance, without prejudice to compensation for damage. Specific performance as the chief remedy for breach of contract is reinforced in cases involving a shareholders' agreement, because Article 118 of the Corporations Act expressly provides that 'subject to the terms of the agreement, shareholders may seek specific performance of the obligations undertaken therein'.

Hence, shareholders may seek equitable relief for breaches of shareholders' agreements, such as the annulment of an M&A transaction that is contrary to its provisions. If specific performance is found to be impossible or unfeasible in light of the actual circumstances of the case, it may be converted into compensation for damage, which may include actual damage and loss of profits (unless excluded by the parties).

Certain shareholders' rights may be affected by the structure of an M&A transaction, particularly those involving corporate reorganisations such as mergers, amalgamations and spin-offs. In such cases, shareholders that are not directly involved in the transaction 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 in privately held companies and certain publicly held companies is to exercise the right of withdrawal, in which case they may challenge the amount to be paid in exchange for their shares.

Finally, certain M&A transactions involving publicly held companies (in particular, transactions involving tender offers) may be subject to approval by the CVM, and the CVM has the power and authority to impose penalties and fines in cases of violation of the applicable laws. For this reason, publicly traded corporations subject to a transfer of control or other M&A activity could be party to punitive administrative proceedings undertaken by the CVM.

iii Defences

The internationally well-known business judgement rule is recognised by Brazilian law and enshrined within Article 159, Paragraph 6 of the Corporations Act. It is usually raised as a defence by officers and directors to prevent liability for the adverse consequences of their business decisions, provided that they acted in good faith, in accordance with their fiduciary duties and with the goal to fulfil the greater corporate interests.

iv Advisers and third parties

Although shareholders may bring claims against third-party advisers that assist in M&A transactions, in practice this is not common. Third-party advisers such as lawyers and consultants have a duty of care regarding their work. They are bound to act diligently and apply their technical skills properly, but they cannot be held liable if they fail to reach the intended outcome.

However, when third-party advisers fail to act with the required diligence, the aggrieved party will most likely be the company. The shareholders do not have standing to sue a third party for damage caused to the company, even by means of derivative action, which is only allowed against officers, directors and controlling shareholders. Nevertheless, if a shareholder suffers direct damage that can be attributable to a third-party adviser, such shareholder will be entitled to claim damages on its own behalf, based on general principles of tortious liability.

v Class and collective actions

Brazilian law allows class and collective actions in specific cases and subject to certain requirements, usually in relation to diffuse and collective rights.

The way class and collective actions work in Brazil is different than other jurisdictions. For example, only a few entities have standing to sue for such claims, namely, the federal government, states and municipalities, state owned companies, foundations and mixed capital corporations, the public prosecutor's office, the public defender's office and associations that have been incorporated for at least one year and whose institutional goals include the protection of rights that are the subject matter of the class action.

In theory, it is possible to have a class or collective action in the context of an M&A transaction. The legal framework includes Federal Law No. 7,347/1985, which applies to class actions in general, and Federal Law No. 7,913/89, which applies specifically to securities class actions, defined as those related to damage caused to investors in the capital markets.


Although Federal Law No. 7,913/89 has been in force for over 30 years, class and collective litigation related to securities and M&A litigation has been used sporadically. Most disputes are initiated by individual or small groups of shareholders and submitted to confidential arbitration.

According to a study published in October 2019, only 11 shareholder-related collective actions had been filed by 2018,11 usually related to breach of duty to disclose and unrelated to M&A transactions.

Potential explanations range from possible lack of shareholder activism when compared to other jurisdictions. and to the public prosecutor's office's limited resources compared to its broad constitutional mandate.

In any event, decisions rendered in class actions are not limited to the individual interests of shareholders or companies that are part of the proceedings; they are rather aimed at protecting the regular functioning of the economy and the capital markets. The effects of a decision may benefit shareholders that have not participated in the proceedings but can join the procedure at a later stage to have their damage quantified and indemnified.

vi Insurance and indemnification

Because of Operation Car Wash, the demand for directors' and officers' liability (D&O) insurance has significantly increased. Consequently, the Superintendence of Private Insurance, the governmental authority responsible for the supervision and control of the insurance, open private pension funds and capitalisation markets in Brazil, regulated the minimum requirements for the underwriting of D&O policies (Normative Instruction No. 553/2017).

Brazilian D&O policies mainly cover:

  1. officers' and directors' losses arising from lawsuits relating to allegations of wrongful acts;
  2. companies' losses due to wrongful acts of officers or directors; and
  3. companies' losses related to claims filed with the CVM, including the payment of penalties.

In relation to M&A transactions, insurance companies began offering insurance for representations and warranties in 2014, and there was an increase of 30 per cent in the number of issued policies for this type of insurance in 2018 when compared to 2017. In addition, in June 2020, insurance companies in Brazil issued the first policy replacing an escrow account. Reportedly, this type of insurance could potentially unlock up to 60 billion reais currently held in escrow accounts.

Indemnification agreements and provisions for the benefit of officers and directors may be entered into and have been recognised by the CVM as generally valid, so long as certain limits apply.

vii Settlement

Parties to an M&A dispute may settle their dispute at state courts or arbitral tribunals, in which case the settlement can be approved (homologated) and will have the same effects as a judicial decision. Alternatively, the parties may reach an out-of-court settlement via amicable negotiation or mediation.

It is also possible to settle disputes with the CVM for breach of regulations. In this case, the dispute is settled by entering into a commitment term. As per Federal Law No. 6,385/76 and CVM Normative Instruction No. 390/01, commitment terms, in which parties pledge to provide relevant information regarding their business, as well as to fulfil certain obligations, may suspend the administrative inquiry that investigates unlawful acts performed by companies, its managers or controlling shareholders.

viii Other issues

There are some recent examples of securities class and collective actions in Brazil involving the stock drop of listed companies in the oil and gas, mining and insurance markets. However, these disputes are subject to confidential arbitration and are not related to an M&A transaction, but rather to alleged failures to comply with fiduciary duties, including the duties of disclosure.