Performance of the administrators during the pandemic

Fiduciary duties provided for in the Brazilian Corporation Law

The COVID-19 pandemic hit several companies around the world during the year 2020, bringing, for many, an unprecedented crisis.

In this difficult context, many company administrators were forced to make decisions and perform acts of extreme importance and relevance for the survival of the companies they manage and for them to be able to fulfill their obligations and continue with their activities. This situation persists in 2021 and, in most cases, the actions of administrators need to be carried out quickly and in a timely manner.

All of this has opened the way for a highly relevant discussion: what is the limit and the extent of the performance of company managers in the context of the crisis generated by the pandemic in face of their fiduciary duties imposed by the Brazilian Corporations Law?

During the pandemic, some regulations emerged that gave encouragement to administrators and their performance. Law No. 14,030/2020, for example, allowed the members of the companies board of directors to decide on urgent matters within the competence of the general meeting (even though these decisions would be subject to a further validation by the shareholders in a shareholders’ meeting).

This made it possible for company officers to practice many acts necessary in the context of the crisis, such as corporate reorganizations, hiring of personnel above the limits defined by the Boards of Directors, etc. However, this also raised the question of what would be the risks that these managers are taking if such acts were not, a posteriori, endorsed and approved by the shareholders?

Even though the business judgment rule is accepted in Brazil – an “imported” rule of the North American law that provides that management decisions will not give rise to liability or indemnity to the company or its partners and cannot be reviewed in court if they have been practiced according to certain rules of conduct and good faith – there is a movement in Brazil prior to the pandemic, supported by the Brazilian Securities Commission (CVM), in the sense of strictly observing fiduciary duties and obeyance to corporate governance rules even if there is a need for quick and immediate decision-making.

Even though certain measures have become more agile, it is not possible to guarantee that these acts will not be reviewed or subject to questioning and making the administrators personal liable. Nor can it be assumed that the business judgment rule and the difficult situation brought about by the COVID-19 pandemic will support an act or decision taken in clear disagreement with the fiduciary duties provided for in the Brazilian Corporation Law.

Therefore, it is essential that officers and directors take extra care and verify that the practice of their acts, even in the current context of the pandemic, has represented or will represent a violation of their fiduciary duties liable to punishment, especially those acts that result in approval of corporate and tax transactions that could have relevant consequences for the company, its shareholders or even third parties.

By Daniel Rodrigues Alves, partner at Candido Martins Advogados