Speech given at American Bar Association, Atlanta, Georgia, EUA, August 09, 1999.
1.2. Hypothetical Fact Pattern
1.3. The Judiciary in Brazil
1.4. Competition Law
1.5. Foreign capital restrictions:
1.6. Distinction of target company type
1.7. Structure of acquisition: assets vs. stock
1.8. Preliminary Legal Issues – Shareholder and Other Approvals
1.9. Consideration: Cash or shares
1.10. Letters of intent; confidentiality agreements and due diligence investigations.
1.11. Short Notes on the History of Brazil
1.2 Hypothetical Fact Pattern
1.2.1 Our panel today will respond to several basic questions that any U.S. practitioner must know in order to structure cross border acquisitions between the United States and Argentina, Brazil, and Mexico. These are “big picture” questions, and if you know the answers to these questions, you know where to start in structuring your acquisition.
1.2.2 In order to focus our discussion, we have developed a hypothetical fact to be used as a base for questions to each of the lawyers on the panel, so that we can learn about the specific laws and legal issues affecting cross border acquisitions in each company.
1.2.3 For purposes of our discussion today, we are assuming that the buyer is a large U.S corporation with several billion dollars U.S. in annual revenues, strong profits, and a desire to expand its business globally. The buyer is in the business of manufacturing telecommunications equipment and providing certain telecommunications services. I currently does not have any operations in Argentina, Mexico, or Brazil, and it intends to enter these markets through the acquisition of an existing business in each country. Each target company is also in the telecommunications manufacturing and services business and has revenues of $250 million to $750 million U.S. Each target owns real estate, operates manufacturing plants, and employs a significant workforce. Each target company is privately held and has not made a distribution of securities to the public. Buyer intends to terminate employment of approximately 10% of the workforce of each target company after acquisition.
1.2.4. The chief executive officer of the buyer has consulted buyer’s U.S. counsel concerning the “big picture” issues which will affect the structure and negotiation of the transaction. The U.S. counsel has engaged special counsel to buyer in each of Argentina, Brazil and Mexico to address these issues. Each special counsel has been presented and
Acquisition Questionnaire, in the form set our in Section B of your written program materials, to provide information to the buyer and its U.S. counsel about certain major legal issues in each country.
1.2.5. The chief executive officer of buyer, the buyer’s U.S. counsel, and special counsel in Argentina, Brazil, and Mexico are engaging in a preliminary discussion designed to provide the buyer and its U.S. counsel, who has limited familiarity with the legal system of each country, with a basic overview of “big picture” issues that must be dealt with in each jurisdiction.
1.3. The Judiciary in Brazil
1.3.1. Brazil’s legal system has its roots in Roman law, with strong influence from various European sources, such as Portuguese, French, German and Italian legislation. Some elements of US inspiration can also be found in the areas of competition; securities; and environment law; as well as in taxation. Following the redemocratisation of Brazil in 1986, a new constitution was enacted in 1988, dividing the Judiciary in ordinary and specialised courts. As Brazil is a federation, the ordinary court system is established at the state and federal levels. The ordinary courts comprise civil and criminal benches and the specialised courts attend to labour, military and electoral cases. Appeals may be filed to second and third instances. At the top of the pyramid, there is the constitutional court, the Federal Supreme Tribunal (STF). The Superior Tribunal of Justice (STJ) is the court of last resort for non-constitutional matters. All last resort tribunals are based in Brazil’s capital, Brasília.
1.3.2. Following the adoption of the 1988 Constitution, Brazil became an increasingly contentious country. In 1998, the specialised labour courts alone tried 2.3 million suits. It is estimated that more than 4 million cases were filed in the Brazilian courts in 1997. The STJ alone decided in 1996 the staggering number of 32 thousand cases with published opinions. In spite of such numbers, the Brazilian judiciary has only approximately 10 thousand first instance judges and 200 thousand active lawyers for a population of 150 million people. Those judges are all civil servants subject to a public examination for qualification. Brazilian judges now benefit from continuing legal education programmes and generally enjoy a good reputation as to independence and honesty. More sophisticated judges and courts tend to be found in the federal states more developed economically. At present, cases normally take from 3 to 5 years before
conclusion. Discovery is extensive. Litigation is often expensive. The discomfited party will have to pay full court fees and reimburse for legal costs up to 10 to 20% of the value of the case.
1.3.3. Brazilian courts have jurisdiction oven defendants domiciled in Brazil and on disputes resulting from obligations to be performed in Brazil, as well as on matters arising from acts occurred in the Brazilian territory. Foreign companies having a commercial presence in Brazil are deemed to be domiciled there. Election of foreign law to govern local obligations is possible whenever there is not a violation of Brazil’s public policies.
1.3.4. Foreign sentences are ratified in Brazil by the STF upon the fulfilment of five requirements, as follows: 1) foreign court having personal and matter jurisdiction; 2) proper summons; 3) final judgement; 4) legalisation and sworn translation; and 5) compliance with basic principles. Ratification will be denied if Brazilian courts have exclusive jurisdiction on a matter, which occurs in case of property located in Brazil and probate of assets in the country. Defendants resident in Brazil must be properly summoned by means of rogatory letters. An affidavit will have to be presented to the effect that no appeals are possible in the country of origin of the judgement. The decision must be legalised by the Brazilian consulate having jurisdiction over the area and translated by a sworn translator in Brazil. The judgement cannot violate Brazil’s national sovereignty, public order or morality.
1.3.5. Until very recently, for foreign arbitration awards to be enforced in Brazil, ratification by the local courts and ratification by the STF were necessary. This ensured that arbitration was eschewed in the country. On December 27, 1995, Brazil ratified the Panama convention on arbitration, which eliminated the necessity of ratification of an award by the local courts in most cases. Furthermore, in accordance with new legislation on arbitration (Law 9307 of November 24, 1996), international awards are dependent on ratification by the STF only. Summons are allowed in accordance with applicable international treaty or foreign law. The award may be based on submission clauses, whose validity will survive the relevant agreement. In spite of these positive developments, arbitration remains only exceptionally used in Brazil, partially as a result of tradition; ingrained habit; good reputation of the local courts; and fear of the unknown.
1.4. Competition law
1.4.1. The competition law regulatory framework in Brazil is set forth in the Federal Constitution, several federal statutes and agency regulations. Law 8.884 of June 1994, partially amended by Law 9.096 of 29 June 1995 (is equivalent to the U.S. Sherman and Clayton Acts).
1.4.2. The law creates the Administrative Counsel for Economic Defense (Conselho Administrativo de Defensa Econômica – CADE) as an administrative body with quasi-judicial functions.
1.4.3. Brazil also has the Secretariat for Economic Defense (Secretaria da Defensa Econômica – SDE) which is roughly equivalent to the U.S. Federal Trade Commission.
1.4.4. Acts such as agreements, mergers or incorporations, constitution of a holding company to serve as a vehicle for the exercise of control or any other form of company groupings that involve some form of economic concentration be submitted to CADE if
a) the act results in a 20% (twenty percent) share or more of a relevant market for products or services or
b) if either of the participants has registered annual gross sales equivalent to R$400 million (Article 54 of Law 8.884/94)
1.4.5. CADE will authorise an act (i.e. agreement, merger, acquisition or joint venture) that is subject to the reporting requirement if it can be shown that:
a) the transaction will increase productivity, quality of goods and services, or efficiency and technological or economic development;
b) the benefits will be justly distributed among consumers and producers;
c) competition will not be substantially reduced in the relevant market; and
d) the transaction will be undertaken to accomplish solely the stated goals.
1.4.6. The parties to an acquisition transaction should request authorisation by CADE at
a) any time prior to the effective date of the transaction or
b) within fifteen days thereafter. (Article 54).
1.4.7. Upon presentation of the relevant documents to SDE, this agency shall
a) pronounce thereon within thirty days and then
b) send the case and related documents to CADE which shall make its decision within sixty days. (Paragraph six of Article 54)
1.4.8. If CADE does not come to a decision within the above-mentioned period the transaction in question will be deemed automatically approved. However, these terms of thirty and sixty days may be stayed if clarifications and documents considered essential for review of the case by CADE or SDE are not submitted by the interested parties as requested.
1.4.9. If CADE approves the transaction it may define performance commitments to be assumed by the interested parties so as to ensure compliance with the conditions mentioned above.
1.4.10. Failure without good cause to comply with performance commitments shall cause CADE approval to be revoked and the opening of an administrative proceeding for the adoption of the applicable measures.
1.4.11. CADE approval may also be reviewed “ex officio” or at SDE request if the approval was based on false or misleading information rendered by the interested party in the event of default on an obligation assumed under the performance commitment or if the intended benefits have not been attained.
1.4.12. A decision by CADE cannot be appealed through administrative channels but only directly through the courts.
1.4.13. Resolution 15 – enacted to discipline the formalities and the procedures for the application for authorisation of the acts prescribed in Article 54 (Resolution 15 of 19 August 1998).
126.96.36.199. Under Resolution 15, the application should contain
a) the justification for the act and it should also
b) be accompanied by a number of documents pertinent to the transacting parties and relevant market information.
188.8.131.52. Resolution 15 introduced the possibility of two phase procedure:
a) summary procedure, the rehearing of an act to which approval was not granted, and
b) negotiation wherein the companies may reformulate their original proposal so as to comply with CADE recommendations for making the transaction a viable one was also maintained from the previous resolution.
184.108.40.206. Resolution 15 defines the countdown for the fifteen day mandatory notification period as starting from the signing of the first binding document between the parties, that is to say from the date when the parties effectively ceased competing or commenced collaboration.
220.127.116.11. Failure to comply with reporting requirements may subject the parties to fines
a) enforceable through direct judicial proceedings (Articles 60 and 62 of Law 8.884/94) and
b) prosecutable as criminal activity pursuant to Article 4 of Law 8.137 of 27 December 1990 in certain cases.
18.104.22.168. CADE may subject matter jurisdiction over acts practiced outside of Brazil:
a) CADE Resolution 10 of 29 October 1997 provides in Article 25, II that: “All interested parties may consult CADE on the legitimacy of acts susceptible to causing restriction to competition or economic concentration” and
b) Article 2 of Law 8.884/94 grants extra-territorial powers to CADE to question any act or manifestation that produces or may produce effects within the Brazilian national territory.
1.4.15. CADE may also be said to have personal jurisdiction over a foreign company. A foreign company is reputed to be located in the national territory if it has an affiliate, branch, agency, office, establishment or representative located in Brazil.
1.4.16. CADE has recently entered into non-confidential information sharing agreements with antitrust authorities at the U.S. Department of Justice, the Office of Fair Trading in Great Britain, the European Commission and other entities of the European Economic Community, whereupon they are to be continually informed of merger and acquisition activity which may have bearing on Brazilian antitrust concerns.
1.4.17. CADE has also stated that it plans to pursue a policy of energetic prosecution of those entities (both foreign and domestic) which knowingly refuse to comply with its reporting requirements.
1.5. Foreign capital restrictions:
1.5.1. Brazil had a history of restrictions and abuse to foreign capital. Fortunately, this situation has been reddressed in the past few years. Most restriction inserted in the Brazilian constitution as well as in ordinary legislation have been lifted and abusive behaviour on the part of Central Bank officers has been discontinued. Foreign capital participation is prohibited in the following areas:
a) atomic energy production;
b) publication, television and radio ownership/management;
c) rural area property ownership;
d) ownership of areas in the international borders;
e) the fishing industry;
f) postal and telegraph services; and
g) airlines with domestic flight concessions.
1.5.2. Additionaly, there are restrictions to majority participations in financial institutions and insurance companies, which may be lifted on a case by case basis, depending on national interest. There are also restrictions for control of telecommunications companies by foreign capital.
1.5.3. Thus, the main restriction to foreign capital today in Brazil is actually the horizontal measure of exchange controls, which adversally affects equally foreign and domestic capital, as well as compromises the overall business climate and reduces the international competitiveness of Brazilian based companies. Very important legal consequences derive from this situation, which require careful analysis.
1.6. Distinction of target company type:
1.6.1. The S/A
22.214.171.124. Governed by Law n. 6.404 of 15 December 1976 (modified by Law n. 9.457 of 05 June 1997) – the “Corporation Law.”
126.96.36.199. Organised by at least two individuals or legal entities, resident in Brazil or otherwise.
188.8.131.52. Managed in accordance with its By‑Laws, by the Administrative Council and the Board of Directors, or by the Board of Directors alone. Administrative Council is mandatory if publicly held or of authorised capital.
184.108.40.206. Securities may be traded on the market; can be a public or closed corporation.
220.127.116.11. Capital stock structure as a paid up capital S/A or an authorised capital S/A; shares may be voting and non-voting common and preferred stock.
18.104.22.168. Must publish its financials – 1 year reporting period; closed companies with > 20 shareholders not required if properly recorded at the Board of Trade (auditing statements also optional).
22.214.171.124. Minutes of the Ordinary General Meetings and other documents of interest to shareholders and third parties — must also be published.
126.96.36.199. Special General Meetings may be called at any time; to amend the By‑Laws, at least 2/3 of the voting shares must be present and/or represented at the meeting upon first call; at least 1/2 on matters including consolidation, merger or spin‑off.
188.8.131.52. Shareholders Agreement as to purchase and sale of shares, the right of first refusal, exercise of voting rights; does not integrate into the By‑Laws; specific performance may be requested before the Brazilian Courts.
184.108.40.206. Minority shareholder progressive series of rights depending on the percentage of participation in the S/A’s capital:
a) Article 141 — shareholders representing at least 10% of the voting capital can request the adoption of multiple voting procedure in the election of the members of the Administrative Council, regardless of whether such procedure is provided for or not in the By‑laws;
b) shareholders representing at least 20% of the voting share capital have the right to elect one of the members of said Council in the event that it is composed of less than five members (Art. 141, paragraph 4).
220.127.116.11. Acquisition of the target through purchase of securities traded on the market (not the case in the instant hypothetical) – the Securities Market Law (Law n. 6.385/96); public issuance, trading and purchase registration with the CVM.
1.6.2. The LTDA
18.104.22.168. Governed by Decree n. 3.708 of 10 January 1919.
22.214.171.124. Incorporation may be commercial or civil.
126.96.36.199. Administration — very flexible, may be performed by managing‑quotaholders, delegate‑managers, or by a Board of Directors as in an S/A; quotaholders can establish administrative control on specific corporate matters by amending Articles of Association; decisions are made on a majority basis, one vote to each quota (an Articles of Association clause can set a minimum number of votes); withdrawal possible as well as reimbursement in case of disagreement (value ascertained according to the last-approved balance sheet).
188.8.131.52. Publication of the minutes of quotaholders’ meetings, of the balance sheet and/or any relevant act that affects rights or obligations of third parties vis‑a‑vis the commercial LTDA not mandatory; summary publication of the Articles of Association and amendments required if a civil LTDA.
184.108.40.206. No device similar to the Shareholders Agreement applicable in the case of a LTDA; no obligations created by a “Quotaholders Agreement” would be enforceable before the Brazilian Courts.
220.127.116.11. Existence, title and assignment rights to quotas — depend on specific Company Contract provisions, assignment possibly subject to pre-emptive rights.
18.104.22.168. Pledging of quotas — no specific Brazilian provision applicable; not recognised; other forms of collateral should be used or transform the LTDA into an S/A.
1.6.3. For joint-venture purposes, the corporate vehicle to be utilised will undoubtedly be the S.A., as only the S.A. allows for the measure of specific performance of obligations under shareholders agreements. Judicial injunctions with respect thereto may be obtained before or after an event, which allows for greater stability of shareholding relationships, particularly in a country where traditionally the non-performance of obligations is resolved by damages. This exception allowing for specific performance of obligations under shareholders’ agreements was introduced by the Brazilian company law of 1976, and has been extensively applied by the Judiciary.
1.7. Structure of acquisition: assets vs. stock.
1.7.1. In Brazil, the structure of a transaction in the guise of purchase of assets, rather than shares, will not eliminate the buyer’s eventual liabilities with respect to third
parties in general and commercial creditors, consumers, labour creditors, tax and social security creditors and will not in any way minimise eventual responsibilities under the environmental law statutes. Brazilian courts have applied liberally the fraud against creditors and fraud against execution of our code of civil procedure. As a result, an acquisition structured under the framework of the purchase of assets will require due dilligence attention even more thorough than a simple share purchase, as there are serious criminal repercussions for frauds.
1.8. Preliminary Legal Issues – Shareholder and Other Approvals.
1.8.1. Potentially, there are numerous filings to be made in Brazil for our hypothetical case of a joint-venture with Brazilian partners in order to operate in telecommunications. Initially, the approval of ANATEL, the telecommunications agency should be sought. Simultaneously, probably filings would have to be made with CADE, the competion authority. Depending on how the Brazilian partners would be structured, filings with CVM, the securities commission, would be necessary. Once the clearings are obtained, within a time-frame of approximately 60 days, and the apposite agreements are executed, notarial registration of the same is required. After the funds pertaining to the investment have been sent to Brazil, then registration as foreign capital will have to be applied for before the Central Bank of Brazil within 30 days.
1.9. Consideration: Cash or shares.
1.9.1. Normally, consideration for acquisitions in Brasil is cash, which does not mean that shares as a means of payment is void by law. For large transactions, shares have been used as a means of payments, by Brazilian as well as by multinational companies already established in Brazil. For new investors, there are repercussions with respect to the foreign capital legislation that may adversely affect a merger structure with consideration in shares.
1.10. Letters of intent; confidentiality agreements and due dilligence investigations.
1.10.1. Letters of intent are not to be utilized in Brazil, as they may be construed as binding documents under the relevant articles of the Brazilian civil code, the breach of which will probably result in the payment of damages. An alternative to letters of intent
has been to have the final agreements signed with a suspensive condition. Conversely, confidentiality agreements are very important and are normally used in connection with negotiations pertaining to mergers and acquisitions. Due diligence investigations can be time consuming in Brazil due not only to the arcane nature of the legal system, but to regional differences as well. Limited due diligence investigations can be dangerous, as it is very difficult for the foreign investor with restricted experience in the country to fully appreciate the risks involved.
1.11. Short Notes on the History of Brazil
1.11.1. I have been asked to comment on the cultural specificities of doing business with Brazil and particularly on the differences with the USA. I have endevoured to address the nature and particularities of the Judiciary and the legal professions in Brazil in other part of this presentation but, in view of several requests, I have agreed to make available a paper on the cultural differences within the country itself and its history, as a result of some impromptu comments I made during the panel.
1.11.2. Brazil was discovered by the Portuguese 500 years ago next April 22. When Portuguese navigator Pedro Álvares Cabral arrived in the shores of what is now the state of Bahia, he found that the country was inhabited by numerous indigenous peoples. It is now estimated that, at that time, there were approximately 5 million native Brazilians, divided in numerous tribes of different ethnic groups. The indigenous tribes called their land “pindorama”, or land of the palm trees. They spoke different languages, but the predominant one, used in most of the coastal areas and deep into the interior up to the Amazon and what is now Paraguay, Uruguay and parts of Argentina was the tupi-guarani, known in some areas in this language as “nhennhen-gatu”, or general language.
1.11.3. The Portuguese settled along the coast-line of Brazil and promptly tried to impose their culture, including religion and laws, on the native population, as well as attempted to enslave it to be put for economic use. There was obviously a major shock of cultures, not the least in terms of the legal framework, as the native Brazilians sanctioned ilegal behavior with social penalties, the ultimate of which was exclusion from the tribe. The tupi-guarani vocabulary has lexics for lawyer, court, court-house, defense, sentence and other terms indispensable for the functioning of society. The native population almost immediately started a movement of civil resistance against the new order, by means of moving further inland. They resisted slavery to such extente that they
did not hesitate to suicide immediately after capture. There are many extraordinary written accounts of how native Brazilians would die in such circumstances, including various after pronouncing the formula “I die” three times.
1.11.4. As a result of the inadequacy of the native population for slave labour and of the small number of inhabitants of Portugal, already over-extended by the discoveries and with approximately 80% of its males in overseas territories, the Portuguese resorted to African slavery from its possessions in Africa, in what is now the countries of Angola, Mozambique and Guinea/Nigeria. African slaves were brought in such great numbers that they soon exceeded the numbers of indigenous peoples. They were introduced predominantly in the northeast of the country, where is now the states of Pernambuco and Bahia and where Rio de Janeiro is located. Today, Brazil has the highest population of African origin outside of Africa. The Africans spoke several languages and dialects, but two in particular prevailed and became general languages, the kinbundo from Angola and Yoruba, from Nigeria. Kinbumdo was spoken in Pernambuco and Rio de Janeiro and Yoruba was spoken in the middle of the two pockets, in Bahia.
1.11.5. At the same time, tupi-guarani remained the general language of southern Brazil, including São Paulo, where only one person in three spoke some Portuguese up to the first half of the 19th century. Thus, 150 years ago, of the four general languages in the country, the predominant was indigenous, followed by two African tongues and lastly by the Portuguese. In 1807, General Junot invaded Portugal under the orders of French Emperor, Napoleon. The Portuguese court fled to Brazil assisted by the Royal navy, at the price of the execution of the infamous treaty of navigation and commerce of 1810. It was the first time in history that a reigning European monarch crossed the line of the equator. The the king and court remained in Brazil for more than 10 years after the defeat of the French troops and it was the first instance in history of a colony transformed in colonial power. In 1822, in view of the implications of a liberal revolt in Portugal, independence was declared in Brazil by the Portuguese crown prince, who became the first emperor of Brazil.
1.11.6. Towards the middle of the 19th century, Brazil started receiving massive European immigration, particularly from southern and northern Italy. The Italians came in such numbers that they soon overtake the local population in numbers. Today, there are approximately 37 million Italians living in Brazil and the city of São Paulo alone has more Italians than the combined populations of Rome and Milan. The only reason why
Italian did not become the predominant Brazilian language is that it still did not exist as such, as the Italians spoke different regional dialects not mutually understandable, such as the ones from Venice and Naples. Curiously, it was the Italians who assured the survival of the Portuguese language, as they resorted to it as the simplest of the tongues in use. However, even today, the Portuguese language spoken in São Paulo and in south Brazil has a very strong influence of Italian pronunciation, grammatical usage and vocabulary.
1.11.7. The republic, somewhat inspired by the United States of America, was declared in 1889 following a military revolt, the first of many in the century to follow. Brazil adopted an artificial federalist regime and immediately had one of the major economic crisis of its history. In 1914, Brazil sided with Britain and France in the European conflict, sending a medical mission to the fields of Europe. In 1942, Brazil declared war on the Axis powers, as a result of internal popular pressure as well as external pressure on its facist government. As a result, Brazil lost approximately 98% of its merchant navy. A Brazilian expedicionary force about 60 thousand strong was sent to Italy to fight alongside English and US troops. Redemocratization followed the end of the conflict, only to be curbed again in 1964 and again restored in 1986.