Lawsuits against Petrobras - Enforcement in Brazil

Hello,

This is a draft article.

It is going to be published at Alternative Latin Investor magazine after it is reviewed.

Plese give me your comments.

Minority Shareholder’s right to sue Directors and controlling investors in Brazil

Brazilian stock market has recently watched the crash of OGX and the ensuing lawsuits filed by its minority shareholders, who claimed compensation for the losses allegedly caused by the company’s directive body.

Now, Petrobras, one of Brazilian largest companies, is involved in corruption scandals that have caused the price of its stock to decline sharply.

Several American law firm, the first being Wolf Popper, are representing holders of Petrobras’ American Depositary Receipts (ADR) in a class action against the company.

In Brazil, investment funds and other minority shareholders are reportedly considering filing a lawsuit against the company.

In this article, I would like to give a brief overview of the legal paths available for investors who own Petrobras shares traded in the Brazilian Stock Market. Also, to comment briefly on the foreseeable consequences, under a Brazilian law perspective, of a hypothetical future ruling in the class action filed in the US.

Brazil and US: different systems for compensating investors

US is famous for allowing a direct compensation of the shareholders in cases where misrepresentation, fraud or management failure has caused losses to investors.

In Brazil, the system is different. Shareholders are not allowed to receive direct compensation for losses caused by bad management or misrepresentation. According to Brazilian rules, the main victims of such acts are not the shareholders, but the company itself.

Thus, any lawsuit should be directed at obtaining a compensation for the company. The company may, in the future, make this compensation flow to the shareholders in the form of dividends. But there is no direct connection between the shareholder’s future dividends and the compensation to be paid to the corporate entity.

The lawsuit can be filed by the corporation itself against its management staff. Minority shareholders representing at least 5% of the shares can also file such lawsuit.

Where the losses have been caused not by the directors, but by a majority shareholder acting in bad faith, minority shareholders are also allowed to seek compensation for the company. The minority shareholder’s that files the lawsuit might receive 5% of the award as bonus compensation. Even so, this is an exception stated in law and does not change the overall system.

Taking those differences in consideration, it is clear that ADR holders have a greater incentive to litigate in the US, where the financial compensation can be received directly.

The class action filed in the US, however, only covers the losses regarding the trading of Petrobras’ ADR. A vast part of the company’s shares is traded in Brazil only, where direct compensation is not available.

Enforcement of foreign rulings in Brazil

I’m not an American lawyer and, thus, cannot comments on the consequences of the class action lawsuit in the USA.  I may, however, speculate on the consequences that a direct ruling against Petrobras (and not against any financial intermediary backing the ADR in the US) would have in Brazil.

Assuming Petrobras, or its Directors or controlling shareholders, were to be condemned to pay compensation for the losses caused to ADR holders, how would this ruling be received by Brazilian courts, in case enforcement against assets located in Brazil became necessary?

Brazilian procedural rules command that any foreign rulings can be enforced in Brazil, as long as they fulfill basic formalities, such as valid citation of both parties and do not conflict with Brazilian public order.

Brazilian Superior Court of Justice (STJ, not to be confused with the Supreme Constitutional Court, known as STF) is the venue responsible for evaluating such formalities.

After the green light by STJ, the ruling would be able to be enforced in Brazil, as if it were a Brazilian issued by a local judge or tribunal.

The most relevant aspect of this simulation is that, in theory, a foreign ruling that is evaluated and homologated by STJ before any other Brazilian lawsuit on the same topic has received a final decision will become the final decision on the matter.

As we have seen, the main cause for litigation is different in each country. In the US the class action seeks direct compensation to shareholders, while in Brazil any lawsuit would mainly seek compensation to the company.

Even so, the matters may be partially superposed, since either lawsuit must investigate corruption accusations, misleading declarations, etc.

Therefore, it may be that the American ruling, in the aspects in which it superposes a Brazilian lawsuit, becomes the valid and final decision in Brazil.

Not to mention, of course, the execution of the indemnity claims, that could become a huge burden for Petrobras’ assets.

Further complications

Petrobras’ statutes say that arbitration should be used as the means for dispute resolution.  This matter will probably be called to the attention of American Courts. It is unclear now if arbitration would prevail over the class action lawsuit.

Also, in case US courts decide that arbitration is not applicable, it is not clear if this would be considered by STJ as a breach of formal requirements. This would put the enforceability of the American ruling in Brazil at jeopardy.

I’m also curious about the production of evidence regarding corruption accusations. Brazilian law offers any plaintiff extensive rights to produce evidence in its favor. Would a lawsuit conducted in the US be able to provide for it?

Finally, one might wonder what would be the consequences in case the controlling shareholder (which is the Brazilian Federal Government) was found responsible for choosing inapt directors (culpa in eligendo). Enforcement of monetary claims against the Brazilian government is legally and historically very difficult. 

Power of Attorney for setting up a company in Brazil

SEE ALSO:

NEW RULES FOR POWER OF ATTORNEY - 2017

Incorporating a Brazilian company, step by step
How to incorporate a Brazilian company through foreign direct investment
List of documents for setting up a company in Brazil


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Dear Mr. Adler 

I have read your blog "List of documents for setting up a company in Brazil" dated 19 November 2012 on the website http://brazilianlawblog.blogspot.nl/2012/11/list-of-documents-for-setting-up.html#uds-search-results.
 
For an assignment at my university in the Netherlands (setting up a LDTA and I have chosen Brazil as country of corporation) I would much appreciate if you could forward me the "power of attorney to a Brazilian representative" referred to in your blog for information, and if possible, please advise which "powers" are mandatory according to Brasilian law.
 
To my understanding two power of attorney's (PoA's) need to be granted to a legal representative resident in Brazil:

·    one for corporate purposes; and

·    one for tax identification number purposes (CNPJ/MF). 

Is this correct?

If so, could you please provide both PoA's?

Looking forward to hearing from you.

Kind Regards,

Lieke

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Hello Lieke, 

Thank you for your contact. 

I don't usually provide models.

Regardin the PoAs, there are two contractual relationships that need attention. The first is the more general one, where the grantor gives the agent powers to incorporate a company. 

Since incorporation of a company involves several agencies in Brazil, this PoA will usually be explicit about powers to represent the grantor before many agencies, including the Brazilian Revenue Service (Receita Federal), where the CNPJ is granted. 

The second Power of Attorney (which is usually granted within the same document) may or may not be given to the same person that receives the first one.

It is mandatory, for the law states that any foreign investor in Brazil must have, permanently, a local representative with powers to receive court summoning. This is mainly to avoid delays in summoning should the foreign investor be actioned in any lawsuit here in Brazil. 

Please draft a template and I will review it for you. 

Good luck in your studies. 

Adler

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Hello Adler,

Thank you for your responding to my email!

Your help is much appreciated, thank you for clarifying.

I hope you don't mind me asking you some more questions.

While searching the internet I came across another PoA - please refer to the following: http://www.sec.gov/Archives/edgar/data/1439746/000114420411056375/v236335_ex10-10.htm.

This other PoA seems to be more broadly written, e.g. to attend and vote for, in the name of Grantor, in all and any meetings + appoint officers + etc.

The differences between it and your mail are a bit confusing. 

Should I indeed assume many sorts of PoA templates are used in Brazil?

If so, how do I know which one should be used in practice?

More importantly; how many and which absolute powers should a legal representative be given (in accordance with Brazilian law)?

OR - do the differences between the two templates relate to:

a) there being PoA's which only relate to powers to incorporate a company; and
b) there being PoA's which relate to powers to incorporate a company AND to grant powers once the company has been incorporated?

If this is stretching your kindness too far, I will completely understand!

Kind Regards,

Lieke

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Dear Lieke, 

Basically, there is no standard template for a Power of Attorney. You will find hundreds of models, covering from very specific acts to virtually all possible powers.

(Actually, it is funny you ask. Only a foreigner would make such a question. In Brazil we are used to not having anything standardized. Not that this is good. In fact, it is very bad for business. But it is a reality.)

I'm forwarding this email to Mr. Nuno, my colleague, who will help you with your other doubts. 

I'd like to ask your permission to post those messages in my blog, since the discussion is getting interesting. 

Regards, 

Adler

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Dear Adler,

Thank you for your response and for forwarding my message to Mr. Nuno.

I would certainly not mind if you post the messages in your blog.

Best Regards,

Lieke

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RELATED POSTS:

Verifying a Brazilian Power of Attorney - Question from Korea

SEE ALSO:

Incorporating a Brazilian company, step by step

How to incorporate a Brazilian company through foreign direct investment

List of documents for setting up a company in Brazil

Power of Attorney for setting up a company in Brazil

Cease and desist letters in Brazil

I have just published an article at The Brazil Business. Please check it here, or follow the link. 


Introduction

The use of cease-and-desist letters is a common practice in many English speaking countries, especially those that adopt common law.

Generally speaking (and keeping in mind that I’m a Brazilian lawyer, writing under a Civil Law perspective), a cease-and-desist letter is a letter demanding that the recipient refrain from initiating or stop performing a certain behavior, under the threat of legal action, civil or criminal.

In common law jurisdiction, notably in the Unites States, sometimes a cease-and-desist letter is a fundamental condition to ascertain a party’s legal standing, and, therefore, must be issued before any claim can possibly be brought before court.

Apart from that, cease-and-desist letters also have broad applications, which are widely known by business people. Its use in patent infringement is particularly popular.

In Germany, cease-and-desist letters (called Abmahnung) are also extensively used where there is a contractual breach by the other party.

What about Brazil? Do cease-and-desist letters exist here? Do they have any legal value?

This articles aims at explaining (however briefly) how these letters work in Brazil, from a business perspective.

Notifications

Cease-and-desist letters would be considered a special kind of notification, according to the Brazilian Civil code and Brazilian Civil Procedure codes.

In Brazil, notifications may be used to ascertain a claim, and also to inform the other party of a perceive breach or wrongdoing that it has performed. They may also be used to request the fulfillment of an obligation, and in many other cases, basically whenever a cease-and-desist letter would be used.

On the plus side, notifications may be used to declare the other party to an agreement as being in breach, thus making a future win in a lawsuit more probable. In addition, the date of receipt of the notification may be used as the first day for the application of interests on overdue payments (in some cases).

But the use of cease-and-desist letters in Brazil is also largely symbolic, in the sense that it is not always mandatory for a party to notify the other before filing a lawsuit. That is, a cease-and-desist letter is not always required in order to determine legal standing.

For example: a specific clause of an agreement that is governed by the Brazilian law may request one party to notify the other before terminating the agreement. In this case, the notification is very important, and it is generally expected that one party will notify the other before pursuing any legal action.

However, where this clause is absent, the party wishing to terminate the agreement may go directly to court and ask for the termination, even without issuing any prior cease-and-desist letter to the party in breach.

In some other cases, notably in the assignment of credits to third parties, the assignor’s creditors would have to be notified of the operation, in order to oppose to it if they see fit. Notifications are mandatory, too, in a limited number of situations related to corporate law, such as the summoning to shareholder’s meetings.

On the other hand, in most intellectual property cases, the party that feels damaged will go to court immediately, without issuing any prior notification.

This is because, being a civil law country, Brazil defines the ability to pursue a lawsuit in different basis than the USA, as the concept of legal standing is not the same. In Brazil, it is more theoretical and related to the infringement of a generic written rule (the Civil Code, etc.). Brazil is closer to Germany in this sense. In the USA, the actual situation and the relationship between the parties are, generally speaking, more relevant.

I’m sure the differentiation above may seem useless for many readers, but they are important under a legal stand point and might have serious implications to your business.

Finally, please note that Brazilian public agencies do not usually issue cease-and-desist letters (as they do in the US). More often than not, Brazilian agencies will send you a penalty notification (an order to pay penalties), without previous warning.

Forms of Notification

In Brazil, there are three kinds of notifications.

Extrajudicial notification

The first one would be a simple correspondence mailed or personally delivered to the other party.

The second and most usual one would be a correspondence issue by a [public notary](, upon formal request.

It works similarly to summoning administered by public notaries in the USA. The one interested in making the notification must present himself to a public notary (/article/notary-public-authenticated-photocopy) to a “Cartório”, as we say in Brazil), pay a fee (usually about one hundred reais), and supply the other party’s address and the content of the notification.

A constable or other public notary representative will personally visit the party to be notified and hand him the notification.

The notification, in this case, is not like a subpoena, because the notified party is not obliged to accept the notification, nor is it obliged to declare anything.

However, if this is the case, the public notary (constable, etc.) shall attest that the notification has been presented and read it out loud to the notified party, and that such party refused to receive it or sign a receipt. This attestation has full public faith and credit, and can be used to prove that the party has been dully notified. This kind of notification is thoroughly used in lease disputes, for instance.

Judicial notification

Finally, the third and less usual kind of notification is a judicial notification (the two above are non-judicial notification, or extrajudicial notifications). In simple words, it is a notification that is issued by a judge, upon request of one of the parties.

It shall not be confounded with a court injunction, which communicates the court’s own decisions. In this scenario, the notification is presented before the judge, who merely forwards it to the recipient. It is not more authoritative than the other ones, only more formal, considerably more expensive, for it requires the payment of lawyer and court fees, which may easily amount to USD 2.000,00.

This notification works similarly to the notary public one, with the difference that it is managed by a magistrate (who can refuse forwarding it, if the claim contained in the notification is absurd). Also, it is conveyed to the hands of the notified party by a court clerk, not by the notary public or its representatives.

The court clerk has the same public faith and credit than a notary public, to the effect of attesting the refusal of the recipient to take the notification.

Apart from the increased level of formality, the judicial notification has another advantage: it can be used to notify a party that cannot be found, or whose address is unknown. This is made by the publishing of the notification in public and private newspapers, in a procedure similar to the American “service by publication and mailing."

Those are just general considerations on the subject. Keep in mind that this article describes the use of cease-and-desist letters, not cease-and-desist orders (also called injunctions) issued by courts.

One should always ask for the help of a Brazilian lawyer whenever he wants to make a notification to a Brazilian party.

About the author:

Adler Martins is a Brazilian lawyer specialized in advising foreigners doing business in Brazil. He can speak English, Spanish, German and some Chinese. Mr. Adler has lectured to audiences in Brazil, England and India about how to invest in and export to Brazil.

Provisional seizure of assets in Brazil - Arbitration or litigation?

How can a foreign company seize assets belonging to a Brazilian debtor? The exchange of messages below may give you some hints. 

__________________

Dear 雄鹰, 

(Note: 雄鹰 [Xióng yīng] is my Chinese name, given to me by my teacher)

I am writing to send my appreciation to your valuable articles about in the Brazilian Law Blog.

Here is a quick question to see if you may offer an opinion. Recently my company ("Fist of the Dragon co.”) is considering to sign a Settlement Agreement to resolve a debt dispute with our customer in Brazil.

Since we still concern that the customer will breach the Settlement Agreement not to pay back the money, we are willing to apply to provisional seizure (that is, we ask the court to freeze the customer’s asset to secure our loan) in the beginning of the legal proceeding.

Base on the provisional seizure strategy, I may need your opinion to tell if a jurisdiction clause in the Settlement Agreement to have arbitration in the arbitration institute or litigation in the court can satisfy said strategy? 

It is highly appreciated if you may offer valuable opinion, and I am looking forward to your reply.

Regards,

Bruce Lee

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Dear  Mr. Lee, 

Thank you very much for your message. It is a great pleasure to know my writings are having a positive impact. 

Unfortunately, I do not see your strategy with good eyes.

The provisional seizure of money does not work that way in Brazil. Before any provisional seizure can be granted by the court, you must first show an executive title (such as a promissory note or check). Then the other party will have time to respond, and only after that the judge might grant seizure. 

If possible, I would ask for a bank guarantee for the settlement. 

It a bank guarantee is not possible, then I believe you should adopt a choice of jurisdiction clause, not an arbitration clause. The jurisdiction should be the city where the Brazilian Company has its main place of business.  (I’m going against my usual advice here, for I usually suggest arbitration. But your case is special)

Please note that, since I haven't had access to the case, this email cannot be considered as a legal opinion. 

I would be glad to help you in this matter. Please tell me how can I help you with this agreement. 

Also, may I post this message in my blog, without mentioning your name?

Warm regards, 

 雄鹰, 

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Dear Adler,

Thanks a lot for your prompt reply with valuable opinion. Your efficiency gives me good impression. And yes, you may post my question to your blog without mentioned my name and the company's nationality. 

(…)

Once again, I appreciate for your opinion.

Regards,

Bruce Lee