Mandatory Arbitration in Issuer-Investor Claims: A Bad Idea
Written by Mauro da Cunha, Skytop Contributor / June 8, 2026
Mauro R. da Cunha has served as an independent director for more than 25 years, He currently is a director on the boards of Hypera Pharma, Klabin, and Tupy, serving as Chairman of the Audit Committee of the latter. He is also the founder of Engage.MC, an advisory firm focused on corporate governance, strategy and stewardship.
We define insanity as doing something over and over again and expecting different results. But it seems the SEC is willing to test the proposition anyway.
The Commission recently issued a policy statement making it easier for companies to add provisions to their bylaws establishing mandatory arbitration. This movement could very easily be included in the ongoing dichotomy between left and right that is defining the American political environment, and as a consequence its regulatory framework. One side espouses more rules to increase transparency, shareholder protections, accountability and tackling externalities. The other defends a leaner regulatory environment, less costs, less frivolous litigation and more certainty for corporate leaders to do what they do best, which is to generate value, jobs and growth.
Relaxing the Current Rules is a Mistake
The use of mandatory arbitration for disputes between issuers and investors is a false idol, poised to make US markets worse, not better. And it is one of the few situations in life where something close to a randomized control trial exists, ready to be analyzed for conclusions.
Brazil, while a much smaller market, provides the US with a cautionary tale.
In the early 2000s, Brazil was struggling with a stock market that fell short of the country’s size, potential and financial infrastructure, especially when compared to other emerging markets. In the last five years of the 20th century, Brazilian firms issued less than USD 10 billion in equity IPOs or follow s. More companies were going private than public. Traded volume was a pittance, and the corporate talking heads could only blame sky-high interest rates for the bleak picture.
But the stars aligned in a different, unexpected way. The stock exchange teamed up with investors and forward-looking corporates and arrived at the conclusion that what was missing was a solid regulatory framework, that upheld investor rights, transparency and fairness. In December 2000, Bovespa (now called B3) launched the Novo Mercado, one of the most successful experiences in capital market reforms in recent decades. The special listing segment comprised voluntary rules that were commonplace in other jurisdictions but not present in a country of archaic laws such as Brazil. Importantly, it opted for a one-share, one-vote model, reducing misalignments between agents and principals.
But one of the defining rules of the Novo Mercado was mandatory arbitration for litigation between issuers, managers and shareholders. The Bovespa assumed that the Brazilian court system was slow and unable to deal modern corporate law – especially considering that the country had a US inspired Corporate Law, but rests on a sturdy continental legal system, and the mixture led to inefficacy. Privatizing litigation looked like a promising idea. In fact, it was even seen as revolutionary, and singled out by those talking heads as a reason the Novo Mercado would not be a success.
It was a success, not because of arbitration, but in spite of it. In the five years to 2022, almost 200 companies raised approximately USD 100 billion in the Novo Mercado.
Arbitration Was Not the Cause
As a matter of fact, arbitration can be considered a major disappointment in the Novo Mercado system. While the arbitration chamber is active, with more than 250 cases initiated since its launch, it has been a major disappointment for investors. In its 26 years of existence, the amount of compensation paid to investors has been precisely zero dollars. Contrary to expectations of faster adjudication, the Arbitration Chamber has taken an average of 36 months to reach a conclusion (or settlement). And this number fails to consider that the most relevant cases have still not been decided, including in landmark situations such as those involving Vale and Petrobras. Some of these cases are still skidding on a quagmire of preliminaries even years after being initiated. And the costs have far outstripped those that participants would incur in court – not to mention at the securities commission level.
The arbitration chamber is involved in deep secrecy. It only publishes macro data such as the ones mentioned above. Worse, there is very little transparency on the decisions per se. Recently the Chamber has started to produce ana Case Law Digest, with summaries of decisions. These fall miles short of anything useful for participants to understand. Besides, it is dominated by procedural decisions. And this lack of transparency managed to allow the importation to Brazil something very detrimental to the integrity of capital markets: green mail, through which companies simply buy off litigants in secret deals. This stimulates rogue behavior by aggressive activists, and severely hurts outside shareholders, such as individuals and pension funds, who end up footing the bill twice – the damages incurred and the ransom paid to greenmailers.
Anecdotal evidence point to a prevalence of decisions favoring incumbents, especially since the whole arbitration ecosystem is dominated by the legal intelligentsia that caters to corporations on a regular basis.
Markets Operate on Trust
A properly functioning capital market is a public good. It is based on trust, which attracts capital. The perception of lower risk – provided by stable, transparent and fair rules – reduces the cost of equity and allows for growth, jobs and productivity. The Brazilian experience shows that privatizing litigation in the public capital markets realm is a terrible idea. It can bring opacity, high costs, uncertainty, bias, green mail and, at the end of the day, make life for officers of listed companies worse, not better.
The SEC decision does not immediately launch a free-for-all arbitration drive. But before the US moves any closer to that mistake, it should look south and learn from the mistakes of Brazilians.