Keywords: joint venture, oil, merger and acquisitions, Brazil,
Suppliers to the oil and gas industry in Brazil are expected to see substantially increased sales as a result of pre-salt discoveries that can potentially generate significant volumes of oil. In fact, Petrobras, Brazil's national oil company, intends to invest US$142 billion until 2016 in exploration and production to take advantage of this potential. With this expansion, however, come supply-chain challenges, and so the government has established a local content policy that aims to enhance the national industry.
Over the past few years, foreign companies have been entering into substantial joint venture investments in emerging market jurisdictions, including Brazil. The companies enter these joint ventures in order to grow the scale of their business and capture operational synergies (costs or revenues). The investments also allow the foreign companies to diversify their portfolios, establish broad strategic alliances and combine their assets or establish scale platforms in new markets. Meanwhile, the foreign investments bring new capital to existing domestic businesses, and reduce ownership and exposure in certain segments.
Types of Joint Ventures in Brazil
Different joint venture structures offer different levels of influence and ownership. These structures include (from less integration to more): franchise agreements, long-term purchase or supply agreements, distribution agreements, research and development partnerships and licensing agreements, as well as shared equity or nonequity relationships (e.g., joint ventures) and owned-equity relationships (e.g., merger and acquisitions).
Despite the risks of investing in emerging markets, there are certain key benefits to joint ventures with local Brazilian companies: foreign companies are able to enter into the Brazilian market, and local companies can increase local market competitiveness, particularly with regard to price, delivery schedule and quality requirements. Also, Brazil normally has no restrictions on distributing and sending profits, dividends and interest on capital investments abroad.
Joint ventures allow companies to preserve autonomy, share the investment risk and enhance competitiveness. Small companies can increase their market participation, their know-how and their technology, without making greater investments. However, as these joint ventures are complex transactions, they require a careful analysis of each party's aims and objectives. Participants should have clear and common objectives, as well as balanced expertise, investments and power of management.
From the legal perspective, Brazil has no definition of "joint venture." Joint ventures are generally strategic alliances among companies that engage their resources and expertise in order to achieve a specific project or business. In this sense, there a combination of specific know-how among the participants, who share in the enterprise's risks and rewards.
Joint ventures may be corporate or contractual. In the corporate joint venture, the participants create a new, separate corporate entity to execute the project or business, or they acquire equity in an existing Brazilian corporation. Corporate entities in Brazil are basically regulated by the Civil Code and by Law no. 6404 of December 15, 1976 (the "Corporation Law"). There are several types of corporate entities contemplated by these laws, and the most widely used in Brazil are the limited liability company (sociedade limitada or "limitada") and the joint-stock corporation (sociedade anônima or "S.A."). The liability of quotaholders or shareholders both in limited liability companies and joint-stock corporations is generally restricted to the amount that they paid for their quotas or shares. Deciding on which corporate entity to form will depend on the investments that the participants wish to make and the complexity of the venture transaction.
A limitada is required by law to have at least two quotaholders; with a few exceptions, these quotaholders can be individuals or corporate entities, and need not be Brazilian nationals. Quotaholders that do not reside in Brazil must be formally represented by a person residing in Brazil who is authorized to receive service of process.
In the joint-stock corporation, the shareholders can establish terms with regard to the purchase and sale of their shares, preemptive rights for the acquisition of shares and the manner in which the shareholders exercise their voting rights. A shareholders' agreement is recognized under the Corporation Law, which provides that such agreement is binding on the company's management as long as it is duly filed at the company's headquarters.
Contractual joint ventures (or noncorporate joint ventures) are alliances established by a contract that sets forth the rights and obligations of the participants, without creating a corporate entity. A clear advantage of such ventures is the fact that the participants are in equal positions; thus, there is no corporate subordination in pursuance of the common objectives.
In general, implementing a joint venture involves, at the beginning, mutual disclosure of confidential information in order for the participants to evaluate each other. Next, the participants prepare a protocol, or letter of intent, which covers such issues as the proposed entity's structure, objectives and management, the financial contributions and liabilities of the participants, the agreed upon methods of dispute resolution and the ownership of intellectual property. This document sets out the essential elements of the joint venture; however, it is a preliminary document, subject to the satisfaction of determined conditions to achieve the successful execution of the business.
Government Efforts to Enhance the Oil and Gas Industry
The Brazilian government's objectives in developing its local content policy was to benefit local oil and gas suppliers, regardless of their source of investments; local content policy is a mechanism for raising domestic income levels and, as consequence, benefitting the government through an increase in the tax base. The National Agency of Petroleum, Natural Gas and Biofuels (ANP), has established as a criterion in the auction processes commitments to the concessionaires to purchase from local companies. Additionally, Petrobras' purchasing policy includes mandatory demands for minimum local content in the purchasing auctions. Local suppliers also can become eligible for special financing terms from the federal development bank, BNDES.
Notwithstanding these efforts, recent studies show that of the 24 categories of equipment needed for oil and gas exploration and production, Brazilian suppliers are only able to supply material in five of the categories. Brazil's domestic manufacturing sector will have to face the challenge of becoming more competitive with international rivals, particularly with regard to price, quality and delivery schedule. Thus, partnerships between foreign and domestic companies, which stimulate cost reductions and quality improvements, are seen as a reasonable solution to the current challenge of developing the national industry.
The Brazilian government has also been stimulating technology transfers between foreign and domestic companies. These technology agreements must be recorded with the Brazilian Industrial Property Institute (INPI) to be enforceable in Brazil; only after this governmental body's approval do these agreements become binding on third parties. The most recent case was the 33 drilling rigs purchased by Petrobras from national yardships, which were encouraged by the government to have technology participants in order to develop the projects. Participating in technology transfer activities allows foreign investors to share intellectual property with companies that have knowledge of the market, and to obtain royalties from the transfer.
A key factor to doing business with local companies is to develop a personal relationship with the owners and representatives. This is even more important in Brazil, where many of the businesses are family controlled companies. In light of this aspect, besides the financial and legal analysis, negotiators must endeavor to develop a personal relationship with the representatives of these national companies.
Selecting the structure of a joint venture depends on the nature of the project or business, its scope and the participants desired liabilities. To help decide what form of joint venture is best for a company, it is advisable to consider whether the participant wishes to be involved in managing the enterprise. Also, it is important to evaluate what might happen if the venture goes wrong and how much risk the participants are prepared to accept.
It is important to obtain legal advice to help identify the best option because the way that the participants set up the joint venture will affect how it is run, how any profits are shared and taxed, how liability will be shared by the participants.
* Observations in this article about Brazilian law are by Tauil & Chequer Advogados. They are not intended to provide legal advice to any entity; any entity considering the possibility of a transaction must seek advice tailored to its particular circumstances.
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Founded in 2001, Tauil & Chequer Advogados is a full service law firm with approximately 90 lawyers and offices in Rio de Janeiro, São Paulo and Vitória. T&C represents local and international businesses on their domestic and cross-border activities and offers clients the full range of legal services including: corporate and M&A; debt and equity capital markets; banking and finance; employment and benefits; environmental; intellectual property; litigation and dispute resolution; restructuring, bankruptcy and insolvency; tax; and real estate. The firm has a particularly strong and longstanding presence in the energy, oil and gas and infrastructure industries as well as with pension and investment funds. In December 2009, T&C entered into an agreement to operate in association with Mayer Brown LLP and become "Tauil & Chequer Advogados in association with Mayer Brown LLP."
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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.