Comparable to a high intensity sport, being a shareholder in Brail requires effort and resilience as well as the capacity, leadership, and courage to fight.
These difficulties are so great that shareholders (particularly minority shareholders) have not been able to take an increasingly active stance in the struggle for their rights as their contemporaries in more developed jurisdictions have.
This is a highly positive phenomenon. Corporate activism has shown itself to be an evolutionary force that ends up benefiting the health of the capital market as a whole and encourages companies to increase transparency and adherence to good practices of corporate governance.
The case of the Oi S.A. shareholders, who are outraged at being held hostage to such an absurd situation, would normally be rejected as an unlikely comedy of corporate mistakes.
However this problem is threatening the very survival of the company. It is currently in the process of judicial recovery and is facing the interruption of services and incalculable losses to all its investors, employees, and customers.
Through information widely disclosed by the media, the facts of the case have become public knowledge. These facts unfortunately include suspicions of serious irregularities committed to the shareholders´ detriment, including the alleged diversion of large amounts of financing to electoral campaigns subject to investigation by the authorities.
It is no longer possible to try to ignore the lack of professionalism in the company´s business management. This management was unbelievably obliged to admit the existence of a 6.3 billion mark in its account relating to judicial deposits over which the company had no control. This shows a complete absence of reliable financial information.
The current Board of Directors, who led the company to the greatest crisis in its history, are showing resistance to effective and appropriate measures to solve such challenges, making it more difficult for the company to recover.
In the midst of this desolate picture, the Judicial Recovery Plan unilaterally imposed by the current Board of Directors is absolutely illegitimate, inappropriate, and immoral.
It is illegitimate because it is motivated by the Board of Executive Officer members´ desire to keep their positions. It was conceived by a group that appears to be focused on obtaining immediate advantages rather than real concern about the company´s long-term viability.
It is inappropriate because it is ruinous and unrelated to any consistent project of restructuring or correcting the basic problems that afflict the company. It limits itself to a solution of all evils, many of which have a legal, ethical, and administrative character through a billionaire capital contribution.
It is immoral because said capital increase implies, through the unjustified dilution of contributions made by current shareholders, the participation of the current shareholders in awarding an unjustified privilege to opportunistic creditors and speculative investors and does not reflect the necessary proportionality in the required sacrifices of different stakeholders.
This is an obviously detrimental position for the current shareholders. They have already demonstrated their interest in investing in the company in the long term, which indicates a lack of commitment regarding the fiduciary duties of the managers.
In such cases, it would be appropriate for the Judiciary to remedy the situation. However with all due respect, our legal system is not mature enough and many of our magistrates are not yet prepared to deal with corporate issues of such complexity.
For example in the case of Oi S.A., the Recovery Plan approved earlier his year contains a series of characteristics we consider obviously illegal.
The provisions of the Law on Judicial Recovery (Law 11,101 / 05) do not overlap corporate laws. Therefore it must be applied in a manner that respects them without impairing the basic principles of corporate governance instilled in it. This must be done even at the risk of exacerbating problems of the company whose recovery it is aimed at.
In addition to the above problems, The Judicial Recovery Plan of Oi SA violates a number of provisions of the Brazilian Corporation Law (Law 6404/76) by providing for capital increase outside the authorized capital limit and without approval by the general shareholders. According to our understanding both the complete distortion of the company´s corporate governance system and concentrating all powers in the hand of the Chief Executive Officer during the recovery period are illegal. The latter action renders the Shareholders’ Meetings merely figurative.
As has been seen with increasing frequency in Brazil, the solution lies in the hands of the shareholders. They take a more active stance, begin to react, and adopt the necessary measures to remedy the situation while still awaiting a response from the judiciary (and possibly the arbitrators if there is an arbitration clause in the company statute.)
Fortunately, the indignation also led to the adoption of other concrete acts by the shareholders such as a leniency agreement by Oi S.A. in order to limit the existing risks and to clean up their activities.
The possibility of appealing to the U.S. Judiciary is also being seriously considered. This would be done by filing a class action in which damages are claimed due to the decrease in the value due to infractions committed by the company. (It is worth mentioning Petrobras´ shareholders successfully used this strategy.)
Recent developments in the country against corruption show an irreversible tendency in all quarters, including the corporate one, towards trust, transparency, and legality. Thus the survival of Oi S.A. depends more than ever on a disposition of recognizing its own mistakes, correcting them, and starting a new phase. The shareholders and creditors, as well as the millions of users who depend on the services of Oi S.A., need a solution of the magnitude and importance of the services entrusted to them.
This is another chapter in the broader story of the struggle for the respect of shareholder rights in the Brazilian capital market that is being followed closely by all those who are interested in accelerating this area´s national evolution.
Being a shareholder in Brazil is a sport for the strong.
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André de Almeida, partner of Almeida Advogados. Former President of the Inter-American Bar Association.