In public limited companies, the controlling shareholder plays a central role in defining the company’s strategic direction. Holding the power to elect the majority of directors and influence company resolutions, this shareholder has a prominent position which, although legitimate, must be exercised within legal limits and in line with the interests and social function of the company as a whole.

However, this power is not always used in a balanced way. In certain situations, the controlling shareholder can go beyond the limits of their actions and act for their own benefit and/or that of third parties, to the detriment of the company or the other shareholders. It is in this scenario that the so-called abuse of controlling power takes place, which is provided for and regulated by the Brazilian Corporations Law (LSA).

Article 116 of the LSA defines the controlling shareholder as the one who, directly or indirectly, exercises the power to direct the company’s activities and guide the functioning of the company’s bodies. This definition shows that control is not necessarily linked to ownership of the majority of shares with voting rights, but rather to the effective exercise of influence over company decisions.

Power can be exercised by a natural person, a legal entity or even by a controlling block, made up of two or more shareholders who act in a coordinated manner. This block can be a majority shareholder, when it holds the majority of the voting capital, or even a minority shareholder, as long as it manages to have a decisive influence on the running of the company. In many cases, this joint action is formalized through shareholder agreements, under the terms of article 118 of the LSA.

The controlling shareholder, individually or as a bloc, tends to directly influence the composition of the executive board and the board of directors, electing people he trusts to strategic positions. In this sense, it can be said that although the controlling shareholder does not directly exercise executive functions, he occupies a position of structural command, significantly influencing the direction of the company, both in the general meeting and outside it.

As Professor José Alexandre Tavares Guerreiro points out:

“With regard to the power of the controlling shareholder, it has its own forum, which is the general meeting, where its vote prevails, but it is undeniable that the exercise of that power also takes place outside the general meeting, through the use of an informal force, insufficiently regulated, which translates into the legislated formula of ‘directing the company’s activities and guiding the functioning of the company’s bodies’.”

Given this privileged position, article 117 of the LSA imposes a series of duties and limits on the controlling shareholder, such as acting loyally and in good faith, guiding their decisions in the interests of the company. However, when this power is misused – for their own benefit or for the benefit of third parties and to the detriment of the company or the other shareholders – this constitutes an abuse of controlling power.

According to this provision, the controlling shareholder is liable for damages caused by acts carried out with abuse of power, which can occur in various ways, such as: directing the company for purposes unrelated to its corporate purpose or harmful to the national interest; favoring another company to the detriment of minority shareholders or the national economy; promoting the liquidation of a prosperous company or forcing corporate operations (such as incorporation, merger or spin-off) in order to obtain an undue advantage; changing the bylaws, issuing securities or adopting decisions contrary to the company’s interests and harmful to shareholders, employees or investors; electing directors or members of the supervisory board who are known to be unfit; inducing or attempting to induce such agents to carry out illegal acts, including promoting their subsequent ratification by the shareholders’ meeting; contracting with the company on favored or unfair terms; approving irregular accounts due to personal favoritism; failing to investigate well-founded reports of irregularities; and subscribing shares with assets that are not related to the company’s corporate purpose. By distorting the institutional function of control, these conducts violate the controller’s duty of loyalty and authorize civil liability.

It is important to note that the characterization of abuse is often independent of the controller’s intention – it is enough that his conduct has caused damage to the company or other shareholders through the irregular exercise of control. In such cases, the LSA imposes on the controlling shareholder the obligation to repair the damage caused and provides for civil liability.

Thus, the abuse of controlling power represents a serious violation of the corporate balance, as it breaks with the logic of the separation between the interests of the controlling shareholder and those of the company, compromising the trust necessary for the healthy functioning of the corporate structure.

The abusive practice of controlling power generates relevant legal effects, both in terms of civil liability and in the very dynamics of the governance of the corporation. According to article 117 of the LSA, the controlling shareholder who acts abusively is subject to the obligation to compensate the company, other shareholders, employees or third parties harmed by his actions. Liability may be joint and several with directors or members of the supervisory board who have collaborated with the illegal acts, or who have omitted their supervisory duties, under the terms of §§ 2 and 3 of the same article.

In addition to repairing damages, abuse of controlling power can have reputational and institutional consequences. In publicly traded companies, for example, abusive actions by the controlling shareholder can trigger investigations by the Securities and Exchange Commission (CVM), resulting in administrative sanctions and, eventually, public civil actions brought by the Public Prosecutor’s Office or the CVM itself. It is also possible for aggrieved shareholders to file individual or collective lawsuits seeking compensation for losses suffered as a result of abusive resolutions or conduct.

In certain cases, repeated abuse can compromise the legitimacy of the controlling shareholder in the eyes of the market, affecting the company’s attractiveness to investors and weakening its governance. For this reason, the accountability of the controlling shareholder is not limited to the legal sphere, but can impact the stability of the corporate structure as a whole, especially when there are no internal containment mechanisms, such as independent boards to oversee performance or clear corporate governance rules.

Clearly defining the duties of the controlling shareholder and holding them accountable for their abusive actions are fundamental instruments for guaranteeing the integrity of corporate decisions, protecting minority shareholders and maintaining a balanced and reliable business environment. In this sense, the conscious and ethical performance of the controlling shareholder is indispensable for the health of corporate governance and for the sustainable development of public limited companies in Brazil.

By: Maria Luisa Carvalho Teixeira
Corporate Law | CPDMA Team

References:

EIZIRIK, Nelson. Commentary on the Corporation Law. 2. ed. São Paulo: Quartier Latin, 2021.

GUERREIRO, José Alexandre Tavares. Sociologia do poder nas S.A. Revista de Direito Mercantil, Industrial, Econômico e Financeiro, São Paulo, n. 77, p. 50-57, 1990.

BRAZIL. Law No. 6404, of December 15, 1976. Provides for joint-stock companies. Federal Official Gazette: section 1, Brasília, DF, December 17. 1976.