Articles 27/05/2019

Actions and reactions

By André de Almeida


On May 10, 2017, shortly before the release of recordings of leniency and collaboration agreements by JBS shareholders and their accomplices, JBS’ share value was at R$11.30 and the Ibovespa index was trading at 67,000 points.

After JBS shareholders confessed to various crimes committed, JBS and Ibovespa shares declined 31.4% and 8.8%, respectively (as of May 22, 2017, and May 18, 2017). That reaction also shows the extent of damage caused by JBS to the Brazilian stock market.

The very high extent of corporate delinquency at companies such as Petrobras and JBS continues to generate strong reactions from both institutions and individuals.

For many years, we have observed up close the development of legal responses by minority investors on the stock market to all sorts of abuses committed by business operators who, despite having their own securities in the financial market, continue to hurt investors through their illegal actions.

Particularly in the United States, various Brazilian companies were held responsible for having caused damages based on illegal acts, such as including untruthful and misleading information on their balance sheets. The result made a mockery of the principle of transparency, a pillar of good corporate governance.

Those companies experienced a vigorous reaction from foreign investors who, utilizing more developed legislation, sought payment of abrupt losses generated from investments in securities of Brazilian companies traded abroad, including the class action against Petrobras in New York, which resulted in an approximately 3 billion dollar settlement and remains up to now the most emblematic case.

Recently, the excesses committed by Brazilian companies that generated serious and harmful systemic effects impacting the valuation of the entire Brazilian stock market, and not just companies involved in the scandals, have brought about increasingly assertive reactions from local investors.

As local legislation makes it difficult to bring collective lawsuits such as U.S.-style class actions, many investors opt to seek justice locally through arbitration which, when applicable, offers the advantages of speed, confidential judgments and well-prepared arbitrators generally more accustomed to complex business law matters.

One recent relevant development to this effect was the position adopted by local investors who brought an arbitral proceeding against JBS S.A. and its holding company. This move is seen as an additional step towards developing actual protections for minority investors in Brazil.

However, JBS S.A. must recover not only direct damages incurred by its shareholders, equivalent to depreciation of the value of its shares, based on the disclosure of acts of corruption admitted by the company. Above all, those companies must assume any and all losses that investment funds, pension funds and all types of investors incurred as a result of systemic losses following the disclosure of scandals.

If the entire market decreased in value as a result of damaging acts admitted by JBS S.A., fairness dictates that the company must pay damages for all losses caused. Thus, it remains insufficient to pay a shareholder for the value of depreciation of JBS S.A. shares. It must also pay all losses experienced by stock portfolios after acts of fraud were disclosed that generated systemic losses for the Brazilian capital market.

No more fair solution exists than for all funds whose positions and portfolios were decimated by JBS S.A.´s acts to receive a fair and adequate indemnity payment from the company for all systemic losses caused.

For every action, a reaction. Let´s hope that´s how it works.