Paris Court of Appeal, No. 15/23187

Paris Court of Appeal, First Pole, First Chamber, 29 May 2018, No. 15/23187

COMPANHIA BRASILEIRA DE DISTRIBUICAO

WILKES PARTICIPACOES S.A

Vs.

MORZAN EMPREENDIMENTOS E PARTICIPAÇÕES LTDA

Globex Utilidade SA (Globex) is a listed company in Brazil, specializing in the distribution of electronic products. Its controlling shareholders, subsequently grouped within the Brazilian company Morzan Empreendimentos e Participações Ltda (Morzan), have, by a contract of 7 June 2009 called SPA, sold all of their shares to a Brazilian company Mandala Participações SA, a 100% subsidiary constituted for the occasion by the company Companhia Brasileira de Distribuição (CBD), Brazilian leader in distribution. The signatories of the SPA were, in addition to Morzan and Mandala, CBD and its majority shareholder, the Brazilian company Wilkes Participações SA (Wilkes), as ‘consenting parties’.

Wilkes is a company that the Brazilian Diniz Group and the French Casino Group formed in order to organize their joint control of CBD, with the Diniz and Casino Groups also holding shares in CBD through subsidiaries that were not signatories to the SPA.

The SPA provided that the payment of the price for the Globex shares would be made either exclusively in cash, or according to a formula combining a payment in cash and a credit for the acquisition of 12,404,849 of the 16,609,046 shares to be issued by CBD to be issued through a capital increase. The issue price of R$40 was higher than the share price at the time of the conclusion of the SPA, but had fallen below by the issue date. Subsequently, CBD’s shares were valued at over R$90 in May 2012.

When CBD announced its capital increase to the market, Morzan signed a subscription form for 12,404,849 shares. As the subscription was reserved for CBD shareholders, the SPA provided that Wilkes would transfer all of its preferential subscription rights to Morzan. The SPA further provided that if CBD’s minority shareholders exercised their pre-emptive rights under Brazilian law and if Morzan was thereby deprived of the possibility to use its entire credit facility to subscribe for shares, the unused amount of the credit facility would be paid to Morzan in cash by CBD.

Subscription to the capital increase took place in two rounds. In the first round, Wilkes, via Mandala, sold part of its subscription rights to Morzan, with another part going to minority shareholders of Globex. In the second round, the remaining shares were subscribed for by minority shareholders of CBD as well as by companies in the Diniz and Casino groups. Overall, Morzan subscribed 3,630,824 shares in the first round and none in the second round. The balance of the unused credit facility for the purchase of shares, i.e. R$350,961,006, was paid to it in cash on 2 October 2009.

Morzan considered that it had been prejudiced by its inability to acquire all of the 12,404,849 shares provided for in the SPA and, on the basis of the arbitration clause in the SPA, Morzan initiated arbitration proceedings with the International Chamber of Commerce. Its application, filed on 30 May 2012, was directed against CBD (Defendant 1), Wilkes (Defendant 2), Via Varejo (Defendant 3) and the shareholders of CBD belonging to the Diniz and Casino groups (Defendants 4 to 14).

In a partial award rendered in Paris on 20 January 2014, the arbitral tribunal composed of Messrs. de Magalhaes and YZ, arbitrators, and Mr. X, president, decided that it did not have jurisdiction over defendants 4 to 14, non-signatories of the SPA, and reserved its decision on jurisdiction in respect of Via Varejo. No appeal has been lodged against this decision.

In a final award rendered on 14 August 2015, the arbitral tribunal declared that it did not have jurisdiction over Via Varejo and ordered Wilkes and CBD to pay Morzan R$212,460,000, plus interest as compensation for its damages, as well as part of its arbitration and advisory costs. The arbitrators found that Wilkes had breached its obligation to transfer its pre-emptive rights in full to Morzan, and that Wilkes and CBD had breached their obligation to subscribe for shares on behalf of Morzan in the second round as well as their duty to prevent the shareholders of the controlling group from interfering with the subscription for Morzan shares.

Wilkes and CBD brought an annulment appeal of this award on 17 November 2015 (file RG n° 15/23187).

On 18 and 19 September 2015 Wilkes and CBD submitted requests for rectification of the award on the merits, relating, on the one hand, to the calculation of the amount of damages and, on the other hand, to the amount of arbitration and advisory costs.

By an addendum dated 26 January 2016, the arbitral tribunal partially granted the request for a reduction in the amount awarded to Morzan for arbitration costs and rejected the remaining requests.

On 14 April 2016, Wilkes and CBD filed an annulment appeal against the the addendum (file RG n° 16/8822)

By an order of 24 November 2016, handed down in case no. 15/23187, the pre-trial judge (in French conseiller de la mise en état) rejected the dismissal raised by Morzan, on the grounds that the opposing parties would have agreed to the award.

By submissions notified on 18 July 2017, Wilkes and CBD asked the court to annul the award of 17 November 2015 and, consequently, the addendum, and to order Morzan to pay them the sum of 90,000 euros pursuant to Article 700 of the Code of Civil Procedure. They maintain, firstly, that the final award disregards French international public policy, since, by relying on alleged collusion between themselves and companies in respect of which it had declared itself as not having jurisdiction in the partial award, the arbitral tribunal rendered incompatible decisions. Secondly, they show that the arbitral tribunal failed in its task by failing to give reasons for its decision on the existence of an agreement with the Casino and Diniz groups in order to deprive Morzan of its rights, on the one hand, and for its decision on the damage suffered by Morzan, on the other.

By submissions notified on 25 January 2018, Morzan asked the court to join the actions for annulment of the award on the merits and the addendum, to dismiss them, and to order Wilkes and CBD jointly and severally to pay the sum of 40,000 euros pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the junction:

Considering that it is in the interest of the proper administration of justice to join the files registered under numbers RG 15/23187 and 16/8822;

On the first ground of annulment based on the violation of international public policy (Article 1520-5 of the Code of Civil Procedure):

Wilkes and CBD argue that the final award fails to take into account French international public policy, since, in holding that certain companies of the Casino and Diniz groups had participated ‘in concert’ with CBD and Wilkes in a plan to enrich the ‘control group’, after having declared itself incompetent with respect to those same companies on the ground that they had not participated in the execution of the SPA, the arbitral tribunal issued a contradictory decision on the merits with regard to its jurisdiction.

Considering that the authority attached to res judicata in the same proceedings is of international public policy;

Considering that, in this case, the arbitral tribunal was seized on the basis of the arbitration clause contained in a contract, known as the SPA, relating to the sale of shares in Globex by the majority shareholders of Globex, subsequently grouped in the company Morzan, to Mandala, a wholly-owned subsidiary of CBD; that the signatories of the SPA were, in addition to Morzan and Mandala, CBD and its majority shareholder, the company Wilkes; that the consideration could be paid, at Morzan’s option, exclusively in cash or partly in the form of a subscription to a capital increase by CBD;

Considering that Morzan, which considered that it had suffered prejudice because it had not been able to acquire all the CBD shares to which it was entitled to subscribe under the SPA, and which attributed this prejudice to the fault of Wilkes, which had not transferred all its preferential subscription rights to it and had not subscribed for any shares on its behalf, as well as a wrongful concert between Wilkes, CBD and the other companies of the Diniz and Casino groups, which had joined together to increase their preferential subscription rights, initiated arbitration proceedings against Wilkes and CBD, which had signed the SPA, and against the companies of the Diniz and Casino groups, which had not signed it (defendants 4 to 14 in the arbitration proceedings);

Considering that in its award of 20 January 2014 on jurisdiction, the arbitral tribunal retained: ‘There is no evidence of the direct participation of the Defendants Diniz and Casino in the negotiation, conclusion or execution of the SPA' (Award on jurisdiction, § 278); Given that there is no indication that the parties to the SPA intended this contract to be enforceable against Defendants Diniz and Casino, after analysing the facts and circumstances relating to the negotiation, conclusion and execution of the SPA and the legal form of Defendants 4-14, in accordance with the requirements of the substantive rules of French international arbitration law, the Tribunal decides that it does not have jurisdiction over Defendants 4-14" (Award on jurisdiction, § 285);

Considering that CBD and Wilkes infer that the arbitrators could not, without disregarding the partial award’s res judicata, condemn them to damages in the final award on the ground that Morzan ‘had a legitimate expectation, on the basis of the terms of the SPA and the standard of behaviour required by good faith, that the indirect shareholders of CBD (the Casino and Diniz groups) did not participate in the subscription of the shares’ (award on the merits, § 362), and that Wilkes and CBD had ‘participated together with three other non-operational companies controlled by the Diniz and Casino groups (i.e. Segisor, Stanhore and Swordfish) in a plan to enrich the Control Group, privantainsi [Morzan] with the shares which had been promised to it. ' (Award on the merits, § 368);

Considering, however, that in deciding in its first award that it did not have jurisdiction over the companies of the Diniz and Casino groups that did not sign the SPA, the arbitral tribunal limited itself to drawing the consequences of the fact that these companies were not parties to the arbitration agreement and that the latter could not be extended to them; that it did not in any way rule on the question of whether these companies, as third parties to the contract, could have been guilty of complicity in the wrongful non-performance of the SPA by the parties themselves; that there is no contradiction between the decision on jurisdiction and the final decision which finds that Wilkes and CBD violated their obligation to execute the SPA in good faith by participating in a plan to enrich the control group and thus depriving Morzan of the actions promised to it;

Considering that the ground can only be dismissed;

On the second ground of annulment based on the arbitral tribunal’s failure to abide by its mission (Article 1520-3 of the Code of Civil Procedure):

Wilkes and CBD argue that the Arbitral Tribunal failed in its task by failing to give reasons, on the one hand, for its decision on the existence of an agreement with the Casino and Diniz groups to deprive Morzan of its rights, and, on the other hand, for its decision on the prejudice suffered by Morzan.

On the ground taken in its first branch:

Considering that the requirement to state the reasons for the decision is contained in the Rules of Arbitration of the International Chamber of Commerce to which the parties and the arbitrators have agreed to abide by; that failure to comply with this obligation therefore constitutes, in this case, a breach by the arbitral tribunal of its mission;

Considering, however, that the review of the judge of annulment can only relate to the existence and not to the relevance of the reasons;

Considering that in the present case it is not for the court to examine whether the arbitral tribunal has characterised a collusion between Wilkes, CBD and the companies of the controlling group, i.e. to assess the soundness of the reasoning followed by the arbitrators, but only to ensure that their decision to order Wilkes and CBD to compensate Morzan for the prejudice suffered by the company as a result of its failure to subscribe to the total number of shares covered by the SPA is lacking reasoning;

Considering that the arbitral tribunal has set out, in paragraphs 267 to 318, the relations between CBD and the controlling group, as well as the efforts of Wilkes and CBD to conceal from Morzan the terms of the capital increase while the companies of the Casino and Diniz groups consolidated their subscription rights in three non-operational companies which, although collectively hold 3% of CBD’s shares, had been able to subscribe for 31.4% of the new shares; that the arbitrators set out in paragraphs 346 to 369 of the award the rules of law on which they relied, in particular the principle of good faith, as well as the provisions of Brazilian law relating to promises in respect of third parties’ acts, and that after analysing the provisions of the SPA, they concluded that Wilkes and CBD had the possibility and the duty to prevent any interference preventing Morzan from subscribing for the number of shares provided for in the SPA; they have thus set out the considerations of fact and law which led them to declare that ‘Wilkes and CBD [had] violated the SPA, jointly and indivisibly, by allowing the acquisition of the Class B shares by the companies of the Diniz and Casino groups. ' (Sentence, § 369);

On the ground taken in its second branch :

Considering that Wilkes and CBD state that the arbitral tribunal described in paragraphs 392 and 410 of the award the method it intended to follow in assessing the harm; that, however, the result it arrived to was not the result of applying that method but the pure and simple repetition of a figure put forward by Morzan’s expert; that the arbitral tribunal, when asked to rectify the error, stated that, even if the method had been presented in a defective manner, its intention had been to confirm the expert’s calculation, so that there was no need for rectification; that the appellants conclude that the arbitral tribunal failed to carry out the due diligence required to verify the expert’s calculations;

But considering that the arbitral tribunal, declaring the expert’s valuation proposed by one of the parties and discussed by the other, to be its own, did not fail in its mission;

Considering that the ground, in its two branches, can only be dismissed;

Considering that it follows from the foregoing that the action for annulment must be rejected;

On article 700 of the Code of Civil Procedure:

Considering that the appellants, who are not successful, would not benefit from the provisions of article 700 of the code of civil procedure and will be condemned, on this basis, to pay Morzan the sum of 40,000 euros.

FOR THESE REASONS:

ORDERS the junction of the saved files under n° 15/23187 and n° 16/8822.

REJECTS the appeal for annulment of the judgment delivered in Paris between the parties on 14 August 2015 and of the addendum of 26 January 2016.

ORDERS jointly and severally Wilkes Participações SA and Companhia Brasileira de Distribuição to pay the costs and the payment of 40,000 to Morzan Empreendimentos and Participações Ltda pursuant to Article 700 of the Code of Civil Procedure.

THE CLERK THE PRESIDENT