International Shareholders' Agreement: Governing Law and Arbitration

An international shareholders' agreement is a contract between the owners of a company tied to more than one country. The governing law and dispute resolution weigh the most. Brazil's LINDB applies to obligations the law of the country where they are constituted (art. 9), and in arbitration the parties choose the rules of law (Arbitration Law, art. 2, § 1).

What does Brazilian law say about a shareholders' agreement?

For corporations, Law No. 6,404/1976 (Lei 6.404/1976, the Brazilian Corporations Law, or "Lei das S.A.") covers the shareholders' agreement in art. 118. It can regulate the purchase and sale of shares, the right of first refusal to acquire them, the exercise of voting rights and the power of control. The company must observe the agreement once it is filed at its head office.

Other points of art. 118 that matter for those with partners in several countries:

• •The agreement's obligations and burdens can be enforced against third parties only after they are annotated in the share registry books and on the share certificates, if issued (§ 1).
• •The agreement cannot be invoked to excuse a shareholder from liability in the exercise of the vote or the power of control (§ 2).
• •Shareholders may seek specific performance of the obligations assumed (§ 3).
• •The chair of the shareholders' meeting does not count a vote cast in breach of a duly filed agreement (§ 8).
• •The bound shareholders appoint, at filing, a representative to communicate with the company (§ 10).

Limited liability company. The Corporations Law has no equivalent rule for quota holders. A limited liability company is governed, where its own chapter is silent, by the rules of the simple partnership, and the articles of association may provide for the rules of the corporation to apply as a supplement (Civil Code, art. 1,053). An agreement between quota holders therefore rests on freedom of contract, exercised within the limits of the social function of the contract (art. 421), and on the possibility of atypical contracts, observing the general rules of the Code (art. 425).

Which law applies to an international shareholders' agreement?

There are two layers, and it is common to confuse them.

The text of art. 9 of the Law of Introduction to the Rules of Brazilian Law (Decreto-Lei 4.657/1942, "LINDB") does not expressly mention a choice of law by the parties. For that reason, simply writing "this agreement is governed by the law of X" does not end the analysis: the contract must be assessed in light of the rules of the partner's jurisdiction, of the company and of the place of performance. The choice of rules of law appears expressly in arbitration (Law 9,307, art. 2, § 1), as long as there is no violation of good morals and public policy.

A foreign shareholder in a Brazilian corporation also has an obligation: a shareholder residing or domiciled abroad must keep a representative in Brazil with powers to receive service of process in lawsuits based on the Corporations Law (art. 119).

Can I choose a foreign court to resolve disputes?

You can, in an international contract, but with limits. The Code of Civil Procedure (CPC) removes the jurisdiction of Brazilian courts when there is an exclusive foreign forum selection clause in an international contract, as long as the defendant raises it in the answer (art. 25). The rule does not apply to the cases of exclusive international jurisdiction in that chapter (art. 25, § 1).

The LINDB says that the Brazilian judicial authority has jurisdiction when the defendant is domiciled in Brazil or the obligation must be performed here (art. 12). Only Brazilian courts hear actions on real estate located in Brazil (art. 12, § 1). If the agreement involves Brazilian real estate, check this rule before choosing a forum.

A forum clause, therefore, needs wording specific to the deal and review by a lawyer from the forum's country and from Brazil.

When is arbitration worth using in a shareholders' agreement?

When the parties want to choose the rules of law, the language, the seat and the arbitrators, and need an award that can circulate between countries. Law 9,307/1996 (Lei 9.307/1996, the Brazilian Arbitration Law) allows arbitration for disputes over disposable property rights, between persons capable of contracting (art. 1).

What the law requires of the clause:

1. •Written form. The arbitration clause must be stipulated in writing, in the contract itself or in a separate document that refers to it (art. 4, § 1).
2. •Autonomy. The clause is autonomous in relation to the contract: the nullity of the contract does not necessarily imply the nullity of the clause (art. 8).
3. •Adhesion contract. In it, the clause is effective only if the adhering party takes the initiative to start arbitration or expressly agrees in writing, in an attached document or in bold, with a signature or initials specifically for the clause (art. 4, § 2).
4. •Applicable rules. Arbitration may be based on law or on equity, and the parties may choose the rules of law that apply (art. 2, caput and § 1).

For a corporation, the bylaws may provide that disputes between shareholders and the company, or between controlling and minority shareholders, are resolved by arbitration, on the terms they specify (Law 6,404, art. 109, § 3).

How is a foreign arbitral award enforced in Brazil?

By recognition (homologation) by the Superior Court of Justice (STJ). Law 9,307 considers an award foreign when it is rendered outside the national territory (art. 34, sole paragraph). It is recognized or enforced under international treaties with effect in domestic law and, in their absence, strictly under the law itself (art. 34). To be recognized or enforced, it is subject only to homologation by the STJ (art. 35).

Brazil promulgated the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards through Decree 4,311/2002. Under the Convention, each signatory State recognizes the award as binding and enforces it in accordance with the rules of procedure of the territory where it is invoked, without imposing substantially more onerous conditions than those applied to domestic awards (art. III). It also recognizes the written arbitration agreement and, when an action on the subject is brought, refers the parties to arbitration, unless the agreement is null and void, inoperative or incapable of being performed (art. II).

Homologation can be denied. The table summarizes the grounds.

The homologation request must be accompanied by the original award, or a certified copy, authenticated by the Brazilian consulate and with an official translation, and by the original arbitration agreement, or a certified copy, also with an official translation (Law 9,307, art. 37). Plan the documentation from the moment the agreement is signed.

What clauses does an international shareholders' agreement usually have?

There is no standard clause fixed by law. The Corporations Law expressly names four subjects for the shareholders' agreement: purchase and sale of shares, the right of first refusal to acquire them, the exercise of the vote and the power of control (art. 118). Everything else is designed by the parties, within freedom of contract and the general rules of the Civil Code (arts. 421 and 425).

In market practice, the topics partners usually negotiate are:

• •Governance: board composition, quorum and matters that require a qualified vote.
• •Transfer of interests: right of first refusal, restrictions on sale and exit rules.
• •Deadlock between partners: how to decide when there is no majority.
• •Information: access to books, records and reports.
• •Dispute resolution: court or arbitration, seat, language and governing law.

These topics are not legal rules. The text and terms of each depend on the type of company, the jurisdiction and what the parties accept. Avoid copying a template from another country without adapting it to the law of the company and the law of the contract.

How do I structure the agreement step by step?

1. •Define the company type and the jurisdiction in which the company will be constituted, since the law of the company follows the State of constitution (LINDB, art. 11).
2. •Separate the law of the company from the law of the contract and record the choice in writing, with analysis by a lawyer from each jurisdiction involved.
3. •Choose between a court and arbitration, and draft the clause with the seat, language, rules and number of arbitrators.
4. •For a Brazilian corporation, file the agreement at the head office and annotate it in the registry books and on the certificates, if issued (Law 6,404, art. 118, caput and § 1).
5. •Appoint a representative in Brazil for shareholders residing abroad (Law 6,404, art. 119).
6. •Gather official translations and documents that will be required if a foreign award must be homologated (Law 9,307, art. 37).
7. •Review the agreement when the structure changes. See how the choice of jurisdiction affects the design in holding or offshore: which to choose and the points of attention in 10 mistakes when setting up an offshore company.

Those with partners or subsidiaries outside Brazil should also look at the tax side, described in the article on CFC rules around the world, and at the personal data side in LGPD and GDPR for companies with a structure abroad. To design the structure, see the services for corporate structures and compliance.