Brazil’s Clean Company Act (CCA), enacted during a time of mass protests against corruption and impunity, was a major step forward in the fight against corporate crime. While the CCA is best known for its imposition of strict civil and administrative liability on legal entities that commit corrupt acts against public administration, the CCA is also notable for its authorization, in extreme cases, of a “corporate death penalty.” More specifically, the CCA requires the dissolution of a corporation or other legal entity when (1) the legal entity is in fact a “shell company” used to conceal illegal acts (such as money laundering, tax evasion, or procurement fraud), or (2) the legal entity was used on a regular basis to facilitate or promote the performance of wrongful acts. Applying the corporate death penalty to shell companies created for the purpose of facilitating or concealing criminal acts is straightforward and not terribly controversial, especially since these shell companies do not engage in any genuine productive activity. The controversy arises with respect to the second category, which can include productive companies.
Applying the extreme sanction of corporate dissolution might seem like appropriately strong medicine for companies, even productive companies, that have been involved in serious and ongoing illegality. In practice, however, this sanction is not working as intended. A much more effective and realistic sanction, at least in the Brazilian context, would be to compel a persistently corrupt (but productive) company’s shareholders to sell their controlling stake in the company—thus preserving the company as a going concern, but placing it under new ownership and management.
There are two principal problems with the corporate death penalty. First, dissolving a company—even a company that has been involved in serious ongoing criminal activity—can bring more harm than benefits. Dissolving a company may reduce market, particularly in highly concentrated industries, thus harming consumers through higher prices or lower quality. The company may also employ a significant number of workers and pay substantial taxes to the government. Imposing such a draconian sanction therefore might do substantial harm.
Perhaps because of this, Brazilian law enforcers have been extremely cautious about invoking the CCA’s corporate death penalty provision with respect to productive companies, especially large ones. Indeed, in the eight years since the law was passed, the CCA has never actually been used to dissolve a productive company, even though many companies have been involved in serious corruption scandals. This reluctance avoids the concern that the costs of dissolving a company may be excessive, but leads directly to a second problem: Precisely because the owners and managers of companies (especially large companies) know that prosecutors and courts will not be willing to actually apply the corporate death penalty, they do not consider this sanction to be a serious threat, and thus the penalty has minimal deterrent value. In practice, this seemingly harsh sanction has mainly symbolic value.
There is an alternative—a sanction that corporate decision-makers would consider comparably severe to the corporate death penalty, but that prosecutors and judges would actually be willing to impose: Compelling the company’s controlling shareholders—who appoint most of the members of the board of directors and have ultimate responsibility for the corporation’s culture and policies—to sell their shares in the company if the company has engaged in systematic and ongoing wrongdoing. Because this measure preserves the company, it would not cause the same harms to the market and society as dissolution of the company. And for this reason, law enforcers will be less reluctant to apply it. But controlling shareholders would want to avoid this penalty, and so would have powerful incentives to implement measures and policy changes to prevent corruption and other forms of wrongdoing. This penalty would be especially suitable for a country like Brazil, where many big companies are controlled by a small group, often a single family. Thus this sanction, unlike the CCA’s current corporate death penalty provision, would have a powerful deterrent effect. And the sanction, if applied, would replace the controlling shareholders who contributed to illicit conduct with new owners, who would have a strong incentive—especially given the circumstances of the change in corporate control—to strengthen the company’s compliance program and create a better corporate culture.
A reform along these lines has already been proposed in the Brazilian Congress. In 2019, a bill was introduced that would include the compulsory sale of control in the list of sanctions of the CCA. As the bill’s proponents rightly asserted, this provision “has the advantage of applying the necessary punishment for acts of corruption without causing the disproportionate effects to workers and the country.” Those who support making Brazil’s laws against corporate corruption should support the swift passage of this proposal.