sexta-feira, 29 de novembro de 2013

Eike Batista's OGX Austria and OGX Netherlands: left out of bankruptcy, but why do they exist? Also: Brazilian timid take on transnational jurisdiction

READ ALSO:  Has Eike and the "X" group mislead investors? My analysis

As you might have seen, OGX Offshore Units have been Left Out of Bankruptcy Case by Brazil Judge. 

The news is very interesting, specially for those who might have obtained collateral from any of the offshore units. 

But I'd like to start from another angle: Why does OGX has subsidiaries in non-oil-producer  European countries? And why the Netherlands and Austria?  (I'm not sure if OGX's subsidiary in the Netherlands is really excluded from Bankruptcy. The reports vary. I will assume it is excluded).

The answer: Non-double taxation agreements (NDTA). Plus, of course, Dutch benevolent corporate tax laws.

Brazil has precious too few NDTA. Over time, the use of Austria and Netherlands turned into the industry's standard. This is because Austria has a good standing in the European financial market. And because the NDTA with Netherlands allows for a tax planning resembling a "Dutch Sandwich". 

Most companies will direct profits to the Netherlands, use them to increase the capital of the Dutch company, then reduce that capital and repatriate the surplus.

Also, Austria is a beautiful place and I think the lawyers that first advised this kind of structured (back in 1975) enjoyed traveling there. 

Back to the bankruptcy procedure: 

Quick tip: The media has been referring to it as a bankruptcy, but it is actually a judicial recovery, similar to a judicial reorganization or to an arrangement with creditors. 

I only had access to an abridged version of the decision, so I can't lay out all the legal basis the judge has adopted. But I can make an educated guest. 

First, the Brazilian law on bankruptcy does not cover foreign subsidiaries specifically. It has some provisions about debts and credits in foreign currency, and about consolidated debts of the group, but does not go so far as including foreign related companies to the procedures. 

Second, Brazilian general procedural rules are very cautious when dealing with extraterritorial competence. In general terms, only companies with a permanent place of business in Brazil (or, at leas, a fixed representative here) can be included in litigation procedures as if they were nationals.
Third, the judge has claimed that including foreign subsidiaries in the Brazilian bankruptcy would amount to piercing the corporate veil.  He didn't elaborate much, but I think his reasoning was that doing so would be unfair to other foreign partners who might participate in the OGX Austria, for example. Also, the arbitrary inclusion of foreign controlled companies could pave the way for the inclusion of foreign investors in the bankruptcy. This would generate and absurd jurisprudence, that could upset markets and make Brazil an undesired place for the world's money. 

I think the Judge was right. Let's see what the court of appeal will say about it. 

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