A round-up of major horizon issues for General Counsel doing work in Latin America.
A bill to reform the current anti-trust regime in Mexico is being discussed by its senate, after initial approval by the lower house of congress in April 2010. It is expected that the bill will be passed in late 2010. Anti-competitive behaviour in a number of industries has been regarded as a problem in Mexico for many years.
The proposed reforms include:
Clarification of the type of transactions that will be exempted from formal merger notification to the Mexican anti-trust authority, the Federal Competition Commission (Comisión Federal de Competencia (CFC)). For example, transactions that do not have an impact on the market in which they operate would be exempt.
Changing the institutional structure of the CFC, to increase its transparency, to clarify and strengthen its powers (for instance, to enable it to enforce penalties more effectively), and to enable it to carry out investigations more easily.
Granting the CFC powers to undertake dawn raids.
Establishment of a specialised competition tribunal to hear anti-trust cases.
The penalties that the CFC can impose are also being reviewed, and it has been proposed that fines be aligned with those that are imposed in Europe and the US. Penalties could therefore include:
Increased monetary fines of up to 10% of companies' annual revenue.
More interim measures, such as freezing orders when there is the possibility of a practice that will damage the market.
Criminal prosecutions, and penalties of imprisonment for executives of companies that are found guilty of behaving anti-competitively and colluding on prices.
Companies doing business in Mexico should ensure that they are compliant with current laws and prepare for the proposed reforms by undertaking a full audit of all internal processes and procedures, as well as all commercial practices. They should ensure that there is:
Consistency with current competition law principles in all transactions and procedures.
Training in place for all staff, including those doing sales into and out of Mexico, on current competition legislation provisions, as well as on the potential penalties and liabilities that the company could face if it becomes involved in cartel activities. Training should be carried out regularly, at least once a year.
Full documentation and evidence retained in relation to all meetings and discussions, both internally and with external companies.
Since 2009, there has been a notable increase in the number of cartel investigations carried out by the CFC in Mexico. This trend has resulted from the publication of the CFC's draft guidelines to its leniency programme in November 2009. The draft guidelines clarify what companies involved in cartel activities need to do to take advantage of the leniency programme. In addition, the leniency programme itself, which was not initially legally binding, was incorporated into Mexican law in 2006.
Since the introduction of the draft guidelines, the majority of cartel investigations in Mexico have been initiated because of the leniency programme. More companies have approached the CFC to help with cartel investigations, in exchange for a substantial reduction in the fines they face for their involvement. In addition, some companies operating in Mexico that have been involved in cartel investigations in other jurisdictions, such as Europe and the US, have applied to the CFC's leniency programme to gain the benefits of the programme.
If companies doing business in Mexico are involved in a cartel investigation in other jurisdictions, or in Mexico itself, they should:
Consider reviewing the draft guidelines of the leniency programme, to analyse the possibility of applying for it and obtaining the benefit of reduced fines.
Be aware of the possibility that competitors may already have applied for the leniency programme themselves, and may be operating as whistleblowers.
Brazil and Mexico remain key Latin American jurisdictions for inbound foreign investment in a number of areas, including energy, infrastructure and retail. There are a number of new investment opportunities either available or anticipated in Mexico and Brazil. In Brazil, opportunities of note arise from the recent discovery of deep-sea oil reserves off the coast of Brazil (see below, Energy), and the country's hosting of the Olympics in 2016 and the World Cup in 2014. In Mexico, investment opportunities arise from, for example, Guadalajara's hosting of the Pan American Games in 2011.
As foreign investment grows in these jurisdictions, both countries have improved their corporate governance regimes to be more in step with international standards. In Brazil, corporate governance rules are contained in Articles 1.052 to 1.087 of the Brazilian Civil Code (Law #10.406/200) and the Brazilian Corporation Law (Law #6.404/1976, as amended).
In Mexico, corporate governance rules are contained in a number of acts, including:
The Corporate Business Act (Ley General de Sociedades Mercantiles 1934).
The Commercial Code (Código de Comercio 1889).
The Federal Civil Code (Código Civil Federal 1928).
For listed companies, the Securities and Exchange Law (Ley del Mercado de Valores 2006) and the resolutions of the Mexican Securities and Exchange Commission (Comisión Nacional Bancaria y de Valores) (CNBV).
Companies thinking of investing in Brazil or Mexico, by way of a subsidiary, joint venture or a partnership with a local company, should keep a number of corporate governance and practical commercial issues in mind:
Corporate governance rules in Mexico and Brazil require listed companies to have independent board membership, and independent board members on audit committees. There are well-established head-hunting and placement agencies in these jurisdictions that can help multinational companies locate dependable directors to serve on their boards.
An investigation agency should be involved at an early stage to carry out background checks on potential joint venture partners and their directors.
Minority shareholders are protected under Brazilian and Mexican corporate governance rules, and in Mexico, they can bring damages actions against directors if they think loss has arisen from mismanagement of the company.
Brazilian and Mexican corporate governance rules are converging with the US Securities and Exchange Commission (SEC) regulations in terms of disclosure. The São Paulo Stock Exchange (Bolsa de Valores de São Paulo (BOVESPA)) and the Mexican Stock Exchange (Bolsa Mexicana Valores (BMV: BOLSA)) have listing areas that require companies to adhere to strenuous disclosure rules to trade.
For more information on corporate governance in Brazil and Mexico, see Corporate Governance and Directors' Duties: Brazil and Corporate Governance and Directors' Duties: Mexico.
The US Securities and Exchange Commission (SEC) and Department of Justice (DoJ) have increased their focus on companies infringing the US Foreign Corrupt Practices Act (FCPA) in Latin America. The FCPA prohibits US issuers and their executives from making payments to any foreign government officials to help them get or keep business. Infringements can result in criminal penalties.
Of all Latin American countries, it has been reported that, since 2008, companies doing business in Mexico have been subject to the most FCPA enforcements.
Any companies that have significant operations in the US and Latin America, and which have contracts or business connections with government-owned enterprises, may be vulnerable to the FCPA. This can particularly be the case in countries such as Brazil and Mexico, where government-owned enterprises are often involved in production sharing agreements (PSAs) and contracts with foreign investors. Any payments that go beyond a de minimis gift to an employee of a state-owned enterprise could be viewed as an illicit payment to a government official.
In view of the above, companies operating in the region (and which have significant operations in the US) should carry out a thorough due diligence review and:
Reassess contracts to see what state-owned entities they do business with.
Confirm which members of management liaise with state-owned entities and officials.
Check which regulators the company is governed by.
Draft an FCPA compliance plan if this has not already been done and, particularly in the context of joint ventures, ensure that all staff are briefed and are complying with this.
Put in place contractual provisions, representations and warranties to show that the company is complying with the FCPA.
For more information on the implications of the FCPA, see Article, The Foreign Corrupt Practices Act: US legislation with global implications.
The 2007 discovery of huge reserves of oil and gas deposits off the coast of Brazil has prompted a great deal of regulatory activity in the country.
In June 2010, the Brazilian federal government approved one part of the new regulations, known as the Brazilian Pre-Salt Oil and Gas Framework, regarding the exploitation of these so-called pre-salt reservoirs (as they are buried under a layer of salt). The government-owned oil company Petrobras is set to play a major role.
The other part of the new regulations, if approved, will introduce production sharing agreements (PSAs) and enable Petrobras to be the exclusive operator of the pre-salt fields' exploration. Under the proposed regulations, the Brazilian government could sign agreements exclusively with Petrobras, or with other companies through a bidding process, but with Petrobras remaining the operator of the project.
The new regulations are also expected to state that Petrobras must use 65% "local content", or local manufacturers, in relation to the equipment used for oil exploration. There have been reports that Petrobras has expressed concerns that this percentage of local suppliers is too high, and that local suppliers do not have the capacity to supply such a large operation.
There have also been discussions between the Brazilian power regulator, the National Oil Agency (ANP) and the environmental authorities about increased safety regulations, following the Gulf of Mexico oil spill. Brazil's safety standards are already considered among the strictest in the world.
Petrobras also issued US$67 billion (about EUR48 billion) of shares to raise finance in preparation for the pre-salt field exploration. The stock offering, which was initially scheduled for July 2010, was delayed to late September 2010 so that the ANP could fully assess the size and value of the oil reserves underneath the pre-salt.
Foreign companies looking to invest in the exploration of the pre-salt fields should consider the following issues:
The development of legislation and regulation regarding the exploitation of the pre-salt fields is ongoing, and may be subject to change, depending on the outcome of the October 2010 presidential elections in Brazil.
The new PSA scheme means that foreign investors will need to liaise with Petrobras at every level, and prepare for the specific bidding regulations that Petrobras must comply with when it is contracting out services and entering into partnerships with third parties.
Investors need to establish and incorporate a Brazilian vehicle before they can operate in the Brazilian oil and gas sector.
Companies should be aware of the complexity and rigidity of the current environmental security regulations in Brazil, and bear in mind that they may be subject to change and stricter controls. Currently, companies are liable to third parties and the environmental authorities for any damages that occur to the environment, with no cap on liability. The potential new regulations for environmental protection may be even more rigorous, and create higher insurance costs.
Despite the discovery of oil reserves off the coast of Brazil, the country is keen to promote other renewable sources of energy to diversify its energy output. Projects being developed include wind farms, small hydro-electric plants and biomass projects fuelled by ethanol derived from sugar cane.
In late 2009, the Brazilian government organised and held the first wind power auction. A number of local players and international investors took part, bidding on who would build, generate and supply energy from wind plants. 71 projects were approved in this first auction. More auctions were held in August 2010 for further wind plants, as well as for other renewable energy projects, such as small hydroelectric plants and sugar cane-fuelled biomass plants. Further auctions are expected in 2011.
The renewable energy sector is of major interest to foreign investors in Brazil, particularly as there are no restrictions imposed on foreign investors bidding in the auctions, and participating could earn investors Certified Emission Reduction (CER) credits in the UN's Clean Development Mechanism (CDM) and the EU Emissions Trading Scheme (ETS).
Foreign investors and companies wishing to participate in the development of renewable projects in Brazil, and wanting to take part in future auctions, should be aware of the following issues:
Before bidding in an auction, investors must have incorporated a Brazilian entity, and should already be involved in a renewable energy project in Brazil, which must have been developed to a minimum level for at least one year.
To build up or develop an initial portfolio of renewable energy projects, investors can liaise or partner with a local player who is already involved in the market and has contacts within the local farming communities (who will also be involved in the projects).
Companies looking to compete in the auctions must provide financial details of their company, and submit bonds to participate in the auction and to develop the project. They must also register in an online system and give technical and environmental details of the projects they are putting forward.
Multinational companies with investments in Brazilian subsidiaries or partners need to be aware of two important changes to the Brazilian tax regime regarding thin capitalisation and tax havens.
The changes to thin capitalisation rules in Brazil were first published in December 2009, and codified in June 2010 in Law No. 12,249/10. These new rules limit the tax benefits multinational companies can obtain when funding their Brazilian partners or subsidiaries through inter-company loans. The rules state that a company can only obtain a tax benefit on the interest of its loan to a Brazilian subsidiary if the debt is no larger than twice the amount of its net equity investment in the Brazilian subsidiary. If the company giving the loan is located in a tax haven, the debt can be no larger than 30% of the net equity investment in the Brazilian subsidiary. The new rule aims to ensure that Brazilian companies are not undercapitalised and do not have excessive debts.
In June 2010, the Brazilian tax authorities also published an updated blacklist of tax havens, called favourable tax jurisdictions (FTJs) and privileged tax regimes (PTRs), in Regulation 1037 (Instrução Normativo n. 1037/2010). Brazilian companies that send money to any of these listed jurisdictions or regimes will face an increased tax rate, and will be subject to the new thin capitalisation rules.
FTJs are defined as jurisdictions that either:
Impose no, or less than 20%, income tax.
Do not disclose information about the ownership of corporate entities.
PTRs are regimes that:
Impose no, or less than 20%, tax on domestic or foreign income.
Grant tax benefits but do not require companies to perform a local economic activity.
Do not provide information on the ownership of companies or assets.
An example of a PTR includes the Spanish Entidad de Tenencia de Valores Extranjeros (ETVEs) (or Foreign Securities Holding Company) regime.
Companies and multinationals with investments in Brazilian companies, partners or subsidiaries should therefore:
Carefully review and consider their loan structures to ensure that they are fully tax efficient and do not fall foul of the new thin capitalisation rules.
Check whether any of the entrants on the new lists of FTJs and PTRs are jurisdictions or regimes that they use to channel their funds, and should amend and reorganise their funding structures accordingly.
Over the course of 2009 and into 2010, Brazil's transfer pricing rules have frequently been debated in the Brazilian legislature and congress. Discussions have focused on the way in which companies in Brazil calculate the resale price (known as the Resale Price Method (RPM)) of imported products coming from related companies located outside Brazil. Under current law there are two RPMs: one for the simple resale of imported goods and services (that is, for distributors), and another for imported products that need to undergo some manufacturing or production (that is, for manufacturers). Both RPMs have different specified calculation methods and minimum profit margins.
It was proposed that the law be amended to make the transfer pricing rules more consistent, and to ensure that they were in line with the guidance (or normative instructions) provided by the Federal Revenue (tax authority) of Brazil.
Provisional Measure 478/09 (Medida Provisoria 478 (MP 478)) was issued in late 2009 to amend the current law. MP 478 proposed:
The introduction of a single version of the RPM. Under this, the sale price of an imported product would be calculated in accordance with the product's total cost when sold as a finished product, whether the product was imported as a raw material or as a finished good.
The RPM be calculated to include a set minimum profit margin of 35% on sales of products that were simply resold and those that were subject to further manufacturing.
However, due to other legislative priorities, the Brazilian congress did not approve MP 478 and the dual RPM system remains in place. Lawyers expect that there will be continuing discussion regarding changes to the transfer pricing rules in 2011, following the presidential elections of October 2010.
Companies that are exporting and importing in Brazil should therefore be prepared and:
Reassess their management of imports and exports.
Start planning their tax audits and transfer pricing strategies at the start of 2011, to anticipate, and allow for, any adjustments that might be necessary by 31 December, when transfer pricing calculations take place in Brazil.
For more information on tax issues in Brazil, see Tax on Corporate Transactions: Brazil.
GC Agenda is based on interviews with experts from firms endorsed by PLC Which lawyer?. PLC would like to thank the following experts for participating in interviews for this issue:
Luis Santos
Santos y Ríos Abogados, Santa Fe, Mexico
Luis Gerardo Garcia Santos Coy and José Ruiz
Creel García-Cuéllar Aiza y Enríquez SC, Mexico City, Mexico
Oliver Brahmst
White & Case LLP, New York, USA
Michael Fitzgerald
Milbank Tweed Hadley & McCloy LLP, New York, USA
Paul Schnell
Skadden Arps Slate Meagher & Flom LLP, New York, USA
Claudia Farkouh Prado
Trench Rossi & Watanabe Advogados (Associado a Baker & McKenzie), Sao Paulo, Brazil
Paul Schnell
Skadden Arps Slate Meagher & Flom LLP, New York, USA
Pedro Seraphim
TozziniFreire Advogados, Sao Paulo, Brazil
Ana Karina Esteves de Souza
Machado Meyer Sendacz e Opice Advogados, Sao Paulo, Brazil
Luiz Felipe Ferraz and Glaucia Maria Lauletta Frascino
Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados, Sao Paulo, Brazil
Raquel Cristina Ribeiro Novais
Machado Meyer Sendacz e Opice Advogados, Sao Paulo, Brazil
