Brazil Should Rethink the Corporate Death Penalty for Corrupt Acts

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.

15 thoughts on “Brazil Should Rethink the Corporate Death Penalty for Corrupt Acts

  1. Thanks so much for your thoughts and ideas on this, Rafael! I was wondering how you define productive activity in this context? I can imagine a situation where corruption occurring in a specific company is actually more harmful to market and workers and so might not actually be “productive.” But again, this turns on how you define productive activity.

    In general, I really like your proposal as an alternative to the “corporate death penalty.” As you note, it seems that complete dissolution, combined with a lack of enforcement, really calls for a new solution to corporate corruption. Would love your thoughts on how you think the 2019 Brazilian Congressional proposal will play out.

    • Thanks for your comment, Devon.

      In the text, a productive company is any company that engages in meaningful economic activity. For instance, a big infrastructure company, which generates jobs, pays taxes and provides an important service to society.

      A non productive company would be a shell company, used only as a legal device to perpetrate an illicit activity. For instance, in a public procurement process, the participants of a fraud may create companies just to participate in the bid and give it the appearance of a competitive process. When, in reality, those companies just exist on paper and do not have any employee. Another example is a shell company that is used only to hide the assets of a corrupt public official or entrepreneur.

      I believe that the proposal shall pass somewhere in the future. However, this future is not near. In light of the current political moment in Brazil, the political class is concentrated in other issues: covid-19, economic crisis, elections, and so on.

  2. Terrific post, Rafael.

    I am wondering if there would be other measures to replace the corporate death penalty, like government intervention. In some cases, applying a sanction of compulsory sale of control or shares would be difficult, because of the nature of the company (family-based one, for example) or the lack of interested buyers. Moreover, corruption scandals could decrease companies’ market value or even lead them into bankruptcy. Do you have any thoughts on how to address these issues?

    • Thanks for your comment, Marcelle. You bring a lot of interesting and relevant concerns.

      (1) As you mentioned, there are some risks, such as the lack of interested buyers and loss of attractiveness on the company caused by harms in its reputation after corruption scandals. In cases, where the compulsory sale of control is not possible, government intervention can be used as a subsidiary measure. Because this measure requires more expertise from the State and is a direct interference into private markets, I think it should be used when other alternatives are not possible. Everything should be analyzed on a case-by-case basis.

      (2) Brazil is characterized as a country with concentrated ownership and family-controlled businesses. In my opinion, this facilitates the implementation of the measure, because one can easily identify the figure of the controlling shareholder, who failed in his duties. In cases of dispersed ownership, the measure would not be possible. For such cases, maybe individual penalties against Directors could generate the appropriate deterrent effect.

  3. Very interesting. Apologies if the answers to my questions are in the article you linked to or in the text of the bill itself (I only saw it in Portuguese).

    This seems much more straightforward if the company is already publicly traded; you can just force a sale on the open market. If privately traded, would there be restrictions on who the buyers had to be? (If not, one family member could sell a stake to another. On the other hand, if a competitor wanted to swoop in and buy it, you could face the same market-shrinking problems as a death penalty.) Maybe there would be some kind of court-appointed corporate monitor/receiver in charge of selling the controlling stake?

    • Kees, thanks for your comment and valuable inputs.

      Yes, a change of ownership raises several matters , such as regulatory and antitrust issues. In the particular case of Brazil, in my opinion, it would be desirable to have a sale process structured and monitored by government agencies. For instance, the company may belong to a strategic sector (telecom, energy, transports, etc.) and may be of public interest to carefully implement the measure.

      The reform proposed in 2019 is of limited scope. It only deals with publicly traded companies and the procedure is yet to be defined. If the proposition is approved, the Executive Branch will have to issue a regulation to describe the procedural steps involved in the measure.

      Particularly, I would propose the implementation of compulsory sale of ownership to other business structures, such as limited liability companies. The bill is still under congressional appreciation. Therefore, some amendments can be proposed during the process.

      • Very interesting points Rafael. I was wondering how the government would proceed in the event that no one wanted to buy the shares of the company? Maybe in this case a dissolution or government takeover could be acceptable.

        • Thanks for your comment, Ella.

          In case of lack of interested buyers, I believe the best solution is government takeover.

          Regarding the compulsory dissolution, I think this is an open problem yet to be solved. I think it is necessary to clarify in which circumstances the dissolution would be justifiable. The provision in the Clean Company Act is generic and vague and leaves a lot of discretion to law enforcers. During the Car Wash Operation, auditors and prosecutors opted for applying rehabilitation mechanisms such as leniency agreements and let those companies operate, despite their systematic participation in corrupt activities. Certainly, the economic factors involved in a potential dissolution played a key role in their decision.

  4. Fascinating post, Rafael! Your recommendation reminds me of the Purdue Pharma case in the US. Although it is not a corruption case, it also concerns corporate egregious violations of the public trust. Instead of liquidating and shutting down the company, the government decided to convert the company into a government-owned “public benefit company” designed for the public good and to function entirely in the public interest. Could this be another potential direction? I’m also curious if, under your proposal, the government would be entitled to the proceeds from the equity sales?

    • Thanks for your comment, Emma.

      The Purdue Pharma case is very relevant. It was a family-controlled business that committed significant harms to public health. The spirit of the penalty applied in that case is the same as the compulsory sale of control. Firstly, it replaces the controlling shareholder who contributed to the illicit outcome or failed in his/her duty of maintaining an ethical business environment. Secondly, the new controlling shareholder will have the incentives and mechanisms to create a better corporate culture.

      However, I think that direct government intervention is more drastic and should be used as a subsidiary measure. If, for any reason, the compulsory sale of control or ownership is not possible, a direct government intervention shall be applied.

    • Just complementing my answer. In my opinion, the proceeds of the sale (or part of it) should be entitled to the government as a form of sanction. It would produce an additional deterrent effect.

  5. Interesting, Rafael. In fact, I also find rather interesting that in the biggest corruption scandal in history (the case Odebrecht – https://www.theguardian.com/world/2017/jun/01/brazil-operation-car-wash-is-this-the-biggest-corruption-scandal-in-history), a company which had a specific department to pay kickbacks or bribes was not sanctioned with the provision of a compulsory dissolution.

    This said, if the biggest corruption scandal in history is not enough for this kind of compulsory dissolution, the legal provision of this sanction may have turned into dead letter.

    • Thanks for your comment, Victor. You made a very good point.

      Some academic writing in Brazil still regards the corporate death penalty as a serious threat. However, as we could realize, it became an empty threat because law enforcers will be cautious on applying the measure.

      The case of Odebrecht, cited by you, is very illustrative. In a textualist interpretation of the law, the company could be framed in the provision of compulsory dissolution (incapacitation). However, in that case, law enforcers chose rehabilitation by means of leniency agreements, because it was the best economic solution. Odebrecht (now called Novonor) is a big infrastructure company with a lot of important contracts in Brazil and across the world, and it has thousands of employees. Therefore, it was economic beneficial to the country to keep the company alive.

      The compulsory sale of ownership or control (depending on the situation) can accomplish deterrence and rehabilitation without causing the harms of compulsory dissolution. That is the point of my current research in the field.

  6. Fascinating post, Rafael! I really like the idea of using alternative sanctions to change corporate culture, deterring the shareholders that have some ability to prevent wrongdoing and ultimately profit from corporate misdeeds. I’m curious, however, whether prosecutors and judges would actually be more willing to impose this penalty. It’s true that it wouldn’t lead to the same market harms, but I wonder if prosecutors would be reluctant to punish shareholders––it seems like the potential penalties could disincentivize investment in the first place.

    • Thanks for your comment, Mayze. You raised a very relevant concern.

      Law enforcers will have to resort to a case-by-case analysis to assess the possibility of applying the compulsory sale of control. The idea is to focus on the controlling shareholder, who failed in his/her duties of maintaining an ethical corporate culture.

      In some circumstances, the compulsory sale of control can be beneficial to minority shareholders. Suppose a situation where a company suffered a major reputation harm due to corruption scandals and that its market price suffered a severe devaluation. Once the penalty is applied, a new controlling shareholder will be in charge. This fact can raise the trust that people and the market have on the company and allow it to emerge from the ashes.

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