Should Americanas controllers pay the bill? – 01/31/2023 – Bernardo Guimarães

The value of a share will never be negative. Those who bought shares in Lojas Americanas may lose everything they invested, but they do not run the risk of losing their assets to pay off the company’s debts. This is the concept of limited liability, a fundamental institution of modern market economies.

It wasn’t always like this. Limited liability laws spread across the world in the 19th century and were instrumental in the development of capital markets. Fewer people would buy stocks if there wasn’t this loss limit (equal to 100% of what was invested).

Equity markets, in turn, are important for economic growth because they finance companies by sharing risks. They make it possible to carry out innovative but risky projects, which might not get off the ground if the entrepreneur could not share the risk with unknown people.

Therefore, limited liability is part of the infrastructure that enables capital to reach the most productive projects – just as roads and railroads enable products to reach port for export.

However, laws defining limited liability do not reduce a venture’s risks; they only determine that the value of a share cannot be negative. So, if on the one hand this reduces the risk that the shareholder runs, on the other hand it increases the risk of a simple debt contract.

More importantly for the discussion at the moment, limited liability laws can create perverse financial incentives for the owners of a company when the company is on the rocks.

To understand this point, suppose a company’s assets are worth $5 million, but debts total $5 million. For the shareholder, the company is worth zero.

Suppose the company can quickly sell everything it owns for $1 million, destroying the value of the business, and distribute the cash to shareholders. In general, selling something worth R$5 million for R$1 million generates a loss of R$4 million. But, due to limited liability, that BRL 1 million goes to the shareholder’s account, while the creditors lose the BRL 5 million.

A shareholder who prepares and puts on the table a feast for his individual person while lighting another fire and letting everything burn in the legal entity is a problem for the infrastructure that allows the flow of capital to productive projects, just as robbers on the highways are problems for the product transport infrastructure.

Newspapers have reported the battle between the creditor banks of Lojas Americanas and its main shareholders. Everything indicates that the company will not be able to honor its commitments to creditors. So, should shareholders foot the bill?

Law 6404 of 1976 provides for joint-stock companies and begins by stating that the liability of shareholders will be limited to the price of shares. But its article 117 states that the controlling shareholder must respond for damages caused by abuse of power. Examples of this include approving irregular accounts for personal favoritism, or failing to investigate a known denouncement.

It is now up to Justice to determine whether or not there was an unlawful act by any controlling shareholder. That’s what should determine who pays the bill.

For the majority who have no connection with the company, the important thing is that the infrastructure that supports the functioning of the capital markets does not come out of this case damaged. Both limited liability and security against wrongdoing are an important part of this infrastructure.

The proper functioning of the stock market impacts the economy as a whole and, therefore, affects even those who have never bought stocks.

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