1.1.- Brazil’s privatisation initiatives gained momentum during the current administration
of President Cardoso and have evolved dynamically at both the federal and State
levels. These policies, long required, have been very well received both internally,
where they enjoy strong popular support, and abroad, where they have contributed
to the increasingly favourable foreign investment climate at an institutional
level, as well as promoting concrete business opportunities.

1.2.- For this to be possible, a major legislative effort
was required from both executive and legislative branches of government to create
the legal structure necessary for this endeavour, including constitutional reforms,
which are always difficult to achieve. This effort is far from finished and
some anachronisms remain in Brazilian legislation, many of which are, however,
already being addressed by means of bills currently before Congress. In spite
of these problems, the privatization initiatives have not been hindered [1]
and have, from the perspective of the private sector, (both nationally and internationally),
benefited from a quite efficient legislative infra-structure for business.
Brazil’s 1989 federal constitution has enshrined the principle
of equality in contracts with the public administration, including those dealing
with privatization. [2] However noble the principles and intentions of the drafters
of the Constitution, such equality originally excluded foreign capital, as article
171 made a distinction between Brazilian companies controlled by Brazilians
and those controlled by foreigners. In addition, preference was given to national
capital to the detriment of foreign capital for the acquisition of assets and
services with respect to contracts with the public administration. This preference
was removed by the 6th Constitutional amendment of 15th August 1995, which assured
equal legal treatment to all companies incorporated under Brazilian law, irrespective
of the origin of their capital. [3] Accordingly, the new privatization law [4]
allows foreign individuals or entities to acquire up to one hundred per cent
of assets being privatized, unless a lower percentage is established for specific

2.2.- The 8th Constitutional amendment of 15th August
1995 allowed the government to grant telecommunications services concessions
to the private sector, specifically the so called “Band B” mobile telephone
services, which started in April of 1997. In this particular case, the invitation
to bid presented by the Brazilian government required bidding parties to have
at least 51 per cent of their voting capital held by Brazilians. [5] Preparations
are now underway for the privatization of the National Telecommunications Company,
Telebrás, including its “Band A” mobile telephone services subsidiaries, and
new laws and norms have been recently enacted to regulate this initiative. [6]
It has already been determined that for “Band A”, the same type of format adopted
for “Band B” in terms of Brazilian majority control will be maintained. This
restriction shall be valid for both until 20th July 1999. [7]

2.3.- With respect to oil and gas, the 9th Constitutional
amendment of 9th November 1995 allowed the state to hire private sector companies
for the drilling, refining, international marketing and transportation of oil,
oil based derivatives and natural gas. In August of 1996 [8], the 44 year old
state monopoly of the oil sector was terminated and a new agency [9] created
to act as regulator of the sector. Whilst the Brazilian Commercial Code [10], enacted into
law in 1850 and modelled after French and Italian laws, has the precise legal
institutes corresponding to general partnership (sociedade em nome coletivo)
[11] and limited partnership (sociedade em comandita) [12], these are now rarely
used and have thus fallen into disuse. The basic reason why business normally
eschews these institutes is the unlimited and several responsibility of the
partners. Thus, the usual company types preferred by business, widely utilized
in Brazil are limited liability ones: the company by shares (S.A.) [13] and
the company by quotas (LTDA.) [14]. Accordingly, joint ventures are structured
around these types, as will be pointed out below.

3.2.- On the other hand, the so called “memoranda of
understandings” or “heads of agreement” are best used with extreme caution and
great reluctante, in view of the fact that, under Brazilian law, an obligation
to contract and even a business proposal is binding [15], unless some legally
defined circumstances prevent the transaction from being implemented [16], and
a default under a memorandum of understandings will be subject to damages and
lost profits, to which one should add Court fees and legal costs. Therefore,
it is best to execute a final agreement or else to have a final agreement with
a suspensive condition for implementation at a later date.

3.3.- For joint ventures pertaining to privatization,
it has been common to use “consortia”, a type of contract regulated by the S.A.
law, which consequently do not have legal personality, and to incorporate only
after the objective of the “consortium” has been secured. At the beginning of
the privatization process, some agents of the public administration suggested
to the interested parties that they execute “contracts of association” as an
alternative for non-incorporation, alongside “consortia” [17]. Very quickly,
the legal establishment advised clients against such a path based on the position
that “associations”, rather than being contracts, are legal entities [18] without
profitable ends, duly defined and regulated by the Brazilian Civil Code, and
must be duly incorporated. Unlimited and several responsibility of the partners
derive from “associations” [19]. The legal treatment of “consortia” under Brazilian
law will be discussed below.
4.1.- “Consortia” are contracts regulated by the S.A.
law [20] with the purpose of implementing a given project. Therefore, the “Consortium”
is not a legal entity and the parties to the respective contract are individually
responsible and exclusively liable [21] to the amount of their corresponding
participation in the transaction at hand. Bankruptcy of one “consortium” member
is not extensible to the others; amounts eventually due to a bankrupt member
will be paid in accordance with the terms of the agreement.

4.2.- The formation of a “consortium” requires a written
agreement, which may indicate a name to designate the venture. The object of
the enterprise must be defined, as well as its duration and headquarters. The
obligations of each of its members should be clearly indicated, as well as any
contributions and share of common expenses. In addition, the contract should
regulate how the revenue is to be received and how results are going to be shared.
Of course, the administration of the “consortium” has to be dealt with in the
agreement, as well as the accounting of the same. It is important to define
a system for voting and to establish the necessary quorum for deliberations,
which may vary depending on the nature of the concern. The “consortium” agreement
and its eventual amendments must be filed at the Board of Trade [22] of the
State in which it has its headquarters.

4.3.- A typical “consortium” contract for privatization
purposes would establish as its objective the purpose of bidding for the specific
company or rights, in accordance with a given bidding notice. The mechanics
and quorum for the determination of the bidding price should be established.
Choice of counsel for representation before the bidding commission (and eventually
in Court) should also be made. Contemplated action in case of a victorious bid
would include the incorporation of a company and the basic operational and financial
agreements applicable thereto. It is not unusual to have appendixes in great
detail governing these aspects. Choice of laws and courts should be made bearing
in mind that the company to be eventually incorporated as a result of a successful
bid may be established in a different State from the “consortium”.
5.1.- The S.A. is a company by shares and the most efficient
type of company in Brazil for joint ventures in general, irrespective of the
magnitude of the business, in spite of its relatively higher maintenance cost
deriving from the transparency requirements established by law. Shares can be
common or preferred. Common shares entitle the holder to common shareholders’
rights in addition to voting rights. The latter can be regulated by shareholders’
agreements, as we shall see below. Preferred shares confer upon the shareholder
rights of an economic or financial nature, such as a higher dividend, priority
in the distribution of dividends and/or in the refund of capital. Preferred
shares are usually deprived of voting rights by the by-laws. The S.A. is legally
allowed to structure its capital with a balance of up to two thirds of preferred
shares to one third of common shares. This can be very convenient when structuring
a joint venture between national and international parties, whenever there is
a quantitative restriction on international participation, such as in the telecommunications

5.2.- Depending on its by-laws or on its nature [23],
an S.A. may be managed by a board of directors [24], its executive body, or
by a board of directors and by an administrative council [25], the latter being
responsible for giving general guidelines and electing the board of directors.
The administrative council must have at least three members, whereas the board
of directors must have at least two; all of these without exception, must be
resident in the country. The S.A. must hold an annual shareholders’ meeting
and publish its respective minutes and its annual financial statements in the
local press. The S.A. law provides detailed protection of minority interests
[26] as well as of preferred shareholders [27].

5.3.- The S.A. law contemplates the institution of shareholders’
agreements [28], which has greatly contributed to making the S.A. the ideal
joint venture company form in Brazil. This is because the S.A. law allows for
the specific performance of obligations, in a country where, traditionally,
the default of obligations is resolved by the determination of losses and lost
profits, a slow procedure in the Courts, because of the nature of the proof
required and also an inadequate procedure for most company law situations [29].
Shareholders’ agreements should be in writing, filed with the company’s management
and have a fixed final term rather than an indeterminate one.
6.1.- The LTDA. is the simplest and cheapest type of company
in Brazil and is ideally suited for sole enterprises that forego a diversity
of partner interests. The LTDA. is created by a contract [30] and its capital
is represented by quotas, rather than shares. This distinction is significant
because quotas are not represented by independent certificates; they are simply
referred to in the contract. Because of this characteristic, a transfer of quotas
requires an amendment to be signed by all the quotaholders or at least those
representing the majority of the capital [31]. Management of the LTDA. is incumbent
on the quotaholders and may be delegated to officers, which always happens when
the partner resides abroad.

6.2.- Several attempts in legal doctrine have been made
to transform the LTDA. from a limited liability partnership of personal nature
into a limited liability capital partnership. These attempts have included the
structuring of the LTDA. with a board of directors, with preferred quotas and
with quotaholder meetings, often with more success with the Board of Trade than
with the Judiciary. Brazilian courts have consistently seen the LTDAS. as personal
partnerships and will grant the dissolution of the company upon the application
of any disgruntled or dissenting quotaholder.
7.1.- Given the limited scope of this article, this has
been largely a topical exercise and, accordingly, only some of the most important
aspects of the subject matter have been outlined. Lastly, a word about financial
matters. Brazil still maintains exchange controls, in spite of significant liberalization
in the recent past. Exchange legislation and regulation from the Central Bank
of Brazil is in place and should be carefully considered whenever a venture
in Brazil is considered.