Winds of change? Confidentiality in arbitration involving publicly traded companies

Rafael Zabaglia and Thais Tenani 13/05/2021

As most companies see it, confidentiality is a great advantage of arbitration over litigation – it avoids public exposure of sensitive information such as trade secrets and business strategies, disagreements with key business associates, and the likes.

That perk is not always available. The Brazilian Arbitration Act (BAA) was amended by a law passed in 2015 to expressly allow the government and its entities to refer certain disputes to arbitration; in exchange, it set forth that publicity must be given to the proceedings, which prompted some domestic institutions to issue internal regulations in that regard.

The hottest ongoing debate over confidentiality stems indirectly from another innovation introduced in 2015, though.

The law that altered the BAA also altered the Corporations Act to provide that all shareholders are bound by an arbitration clause contained in the by-laws. This applies even to dissenting shareholders, which upon approval of a new arbitration clause will be deemed to have consented to it unless they elect to withdraw (if the company is privately held) or sell their shares (if it is public).

The purpose of this change was to put an end to then-existing controversy regarding minority shareholders’ consent to arbitration in corporate disputes and to encourage more companies to opt for arbitration – especially considering that the presence of an arbitration clause in the by-laws is a precondition for companies to be accepted into special (higher corporate governance) listing segments of the São Paulo stock exchange.

A problem emerged for publicly traded companies. Pursuant to capital markets rules, they are required to disclose all information that may materially affect investors’ investment decisions. Transparency is the norm, but this norm is potentially in conflict with the confidentiality of arbitration proceedings.

The Brazilian Securities and Exchange Commission (CVM) opened a public consultation concerning a tentative regulation on the degree of publicity to be given by companies to their corporate disputes. CVM’s draft regulation would require the disclosure of the commencement of the dispute, parties, factual background, relief sought, amount claimed, any interim decisions, awards on jurisdiction and the merits, and any settlement agreements (and even settlement offers). Contributions could be delivered to the CVM until April 2021; most aimed at reducing the reach/breadth of the tentative regulation, but a few sought to increate it, and they are all under CVM’s review.

Will the CVM lean towards protecting transparency over confidentiality? Impossible to know for now, but if it is to take a clear side, this should be confidentiality. The greater the degree of publicity given to corporate disputes – the ones covered by the draft regulation currently in discussion – the more adverse effects to companies and, indirectly, to capital markets themselves and to economy as a whole.

Routinely, disputes will contain information on profit margins, production costs, pricing policies, growth strategy, decision-making process, and so forth. Should companies be required to disclose this kind of critical information just because it is contained in submissions, decisions or evidence produced over the course of arbitration proceedings, it will be available to competitors. Furthermore, this would potentially defeat the purpose of the 2015 legislation, as companies may find it too risky or cumbersome to choose arbitration given the unwanted exposure. Opportunistic behavior may also be a problem, as aggressive investors may threaten the company with frivolous claims, knowing that companies would rather avoid the relevant disclosure.

Absolute confidentially is unattainable for publicly traded companies, and it is obvious that market transparency is desirable. Still, there is a strong reason why confidentiality is a touchstone of commercial arbitration worldwide, and why arbitration is the optimal dispute resolution method for sophisticated companies. The CVM should have that in mind upon issuing its new regulation. Let us hope that the winds of change will blow as smoothly and weakly as possible.


L&S Authors

Rafael Zabaglia

Rafael Zabaglia

Partner
Thais Tenani

Thais Tenani

Associate

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