The question posed in the title of this article concerns an issue faced by the Special Court of the STJ, on February 13 of this year, while reviewing REsp 2.072.206/SP: the Superior Court established the legal principle that the denial of a motion to pierce the corporate veil—resulting in the partner not being named as a defendant in the lawsuit— gives rise to the award of attorneys’ fees in favor of the lawyer who was unduly compelled to litigate in court.
However, with this ruling, the STJ tips the balance in favor of partners when their interests conflict with those of the company’s creditors.
To better understand what is at stake in this technical dilemma, we will present the problem within the context of agency theory.
Three generic agency problems arise from the way corporations are structured. Here, we focus on the single-entity corporation, since agency problems become more complex in corporate groups, which is beyond the scope of this text.
Returning to the initial perspective—that of the standalone corporation—we find that the first type of problem involves the conflict between shareholders and managers. Here, the shareholders are the principals and the managers are the agents (the interests of shareholders or quota holders versus the interests of those who can dispose of the company’s assets). This problem lies in ensuring that managers act in the shareholders’ best interests rather than pursuing their own personal interests.[1]
The second type of agency problem involves a conflict between controlling shareholders and non-controlling shareholders. Here, non-controlling shareholders can be considered the principals and the controlling shareholders as agents (those who directly or indirectly manage the company’s business), and the challenge lies in ensuring that the former are not expropriated by the latter. Although this problem is most evident in tensions between majority and minority shareholders, it arises whenever a subset of shareholders controls decisions that affect the class as a whole.
The third type of agency problem involves the conflict between the corporation itself—including, in particular, its shareholders—and the other parties with whom the corporation establishes relationships, such as creditors, suppliers, employees, and customers. Here, the difficulty lies in ensuring that the corporation (or its shareholders), as an agent, does not behave opportunistically toward these various other interests—such as, for example, defrauding creditors, exploiting workers, or misleading consumers.[2]
When we view the law from a historical perspective, we realize that its changes have operated in different ways at various times: sometimes protecting one group in a dispute and disadvantaging the other. This is also true when we analyze this dynamic in light of the three types of agency problems, much like a Foucault pendulum: at times, the law emphasizes the protection of partners at the expense of the interests of managers; at other times, it favors minority and preferred shareholders at the expense of the interests of controlling shareholders; and at still other times, it prioritizes the company or its partners over the interests of corporate creditors—or in the opposite directions for all three scenarios.
The metaphor serves well to highlight these historical shifts. This was the case when the law began to permit the attachment of partners’ shares in limited liability companies. Alongside discussions regarding the nature of this corporate form—whether it is a partnership, a corporation, or a hybrid, which are more closely aligned with research specific to corporate law doctrine—on a pragmatic level, the pendulum began to swing toward the group of the shareholders’ creditors, ceasing to protect the interests of the parties to the articles of incorporation (the shareholders).
And now, faced with the dilemma posed by the STJ’s case law—whether or not to award attorneys’ fees in cases where an IDPJ claim is dismissed—the same question arises: which way will the pendulum of the law swing? Will it protect the interests of the members or those of the company’s creditors? The STJ has chosen the winning side in this game: the partners and corporate officers.
If the prevailing view had been that attorney’s fees should not be awarded in IDPJ cases, the pendulum would have swung in favor of the company’s creditors. This shift is illustrated by the ruling handed down in REsp 1845536/SC, published on June 9, 2020, according to which “[a]warding attorneys’ fees in a procedural motion is not appropriate, except in exceptional cases. In the case of a motion to pierce the corporate veil, the inappropriateness of awarding legal fees stems from the absence of an exceptional legal provision, and it is irrelevant to determine who was at fault or who lost the case in the final judgment of the motion.” Or the single-judge decision rendered by Justice Marco Buzzi in the case REsp 2054280/SP, published on April 27, 2023: “[a]s can be seen, the appealed judgment diverges from this Court’s understanding of the matter, according to which, due to the absence of a statutory provision, the imposition of attorneys’ fees is not applicable in a proceeding for piercing the corporate veil.”
On the other hand, since the prevailing argument is based on procedural doctrine asserting that, despite the terminology used by the legislature, the procedure for piercing the corporate veil is legally classified as an incidental action—with parties, a cause of action, and a claim— the STJ’s current position ultimately benefits the interests of corporate partners and managers.
Alongside the discussions involving the doctrine of procedural law, we wish here to address the practical consequences of adopting one legal argument or the other (the pragmatic perspective).
There are undoubtedly social benefits resulting from the separation of assets made possible, primarily, by the existence in law of the rule limiting the liability of partners—depending on the type of corporation established—and by asset autonomy. Notably, this results in savings on transaction costs arising from uncertainties or risks to which investors would be exposed if such segregation of assets did not exist.
However, this separation between the corporate assets and the individual assets of the partners should not be absolute, as is the case when the legal personality itself is used as a tool for abuse, triggering the rules on piercing the corporate veil, which allows partners or corporate officers to be held liable for the legal entity’s obligations.
Legal norms—whether statutory or based on case law—that restrict the application of the doctrine of piercing the corporate veil, such as the Economic Freedom Act, which amended the statutory provision set forth in Art. 50 of the Civil Code—have the effect of more vigorously protecting the interests of partners when they are in dispute with corporate creditors.
Similarly, a judicial precedent that makes the handling of a motion to pierce the corporate veil more costly—by requiring the losing party in the motion to pay the prevailing party’s legal fees when the motion is dismissed—favors the interests of shareholders and disadvantages the interests of corporate creditors, when those interests are in dispute (first solution). If the rule is interpreted in the opposite sense, it will reduce the costs of pursuing the motion, thereby favoring, in this context, the interests of the company’s creditors (second solution). As can be seen, the pendulum metaphor applies.
This logic stems from economic reasoning that clearly explains the behavior of the parties involved in the dispute: if there is a risk of being ordered to pay the losing party’s costs should the petitioner be defeated, their behavior is restrained in light of the costs arising from the risks and uncertainties inherent in the procedural model. If, on the other hand, there is no such risk (with only the risk arising from the main claim), the transaction costs borne by the creditor would be reduced.
Thus, the solution adopted by the STJ ultimately favors the group of partners when they are in dispute with the company’s creditors, since the creditors bear high economic costs. The alternative solution (now rejected by the Special Court of the STJ) would, in the short term, favor the group of the company’s creditors, since there would be incentives for creditors to challenge the abuse of legal personality (the economic costs involved would be reduced).
However, the effects arising from the different solutions do not affect only the interests of the parties to the main proceeding and the related incidental proceeding. There are repercussions for civil society that impact the so-called social costs arising from externalities (those borne by the community and which contrast with private costs, internal to economic agents) resulting from the conduct of economic activities.
With regard to voluntary creditors—those who deliberately enter into legal relationships with the corporate debtor —the current solution adopted by the STJ places them at a disadvantage in that they must bear greater risk and, consequently, higher transaction costs, in cases where they seek to challenge the abuse of legal personality. The law, therefore, functions by curbing such behavior and, consequently, providing greater protection to the group of shareholders.
However, the situation is exacerbated in this scenario for involuntary creditors who do not choose to establish legal relationships with the debtor. These are recurring cases involving victims of damages caused by legal entities, who—not infrequently, in the face of the debtor’s abuse of corporate personality—resort to piercing the corporate veil in order to hold shareholders and directors liable.
In such cases, these creditors incur significant costs in pursuing a liability action, which may be compounded by additional costs arising from the risk of being ordered to pay attorneys’ fees to the winning party’s lawyer if the claim is dismissed.
From the perspective of social consequences, this scenario influences the calculations of economic agents when it disrupts (hinders) the effectiveness of redress mechanisms and, consequently, creates an economic disincentive for such economic agents to adopt preventive measures aimed at internalizing social costs.
In this dynamic, the interests of shareholders on one side are pitted against the interests of corporate creditors on the other. The pendulum has swung—in favor of the interests of shareholders and corporate managers. But the consequences are broader and affect interests beyond the specific interests of corporate creditors: civil society will bear the costs (the externalities).
- ARMOUR, John; HANSMANN, Henry; KRAAKMAN, Reinier. Agency problems, legal strategies, and enforcement. 2009.
- ARMOUR, John; HANSMANN, Henry; KRAAKMAN, Reinier. Agency problems, legal strategies, and enforcement. 2009.