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Doing Business in BrazilDoing Business in Brazil

Presentationby

Frederico PortoAndrews & Kurth L.L.P.

International Law Sectionof the Dallas Bar AssociationDallas, TexasOctober 15, 2002

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I.I. OverviewOverviewA.A. MilestonesMilestonesB.B. Economic StructureEconomic StructureC.C. Foreign TradeForeign Trade

II.II. Legal SystemLegal SystemA.A. Foreign Capital RegistrationsForeign Capital RegistrationsB.B. Forms of Business OrganizationsForms of Business OrganizationsC.C. AntitrustAntitrustD.D. ArbitrationArbitration

III.III. Political and Economic OutlookPolitical and Economic OutlookA.A. Presidential ElectionsPresidential Elections

*Please note that the information providedin this presentation should not be relied upon as legal advice.

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I. OVERVIEWI. OVERVIEW

Brazil in figures* • Territory: 8,514,215.3 square kilometers

(world’s fifth largest country)• Population: 169.8 million• 26 states plus the Federal District of Brasilia• GDP per capita: $7,510 in terms of purchasing power

parity• 63% of total income went to the riches 20% of the

population and only 2.5% to the poorest 20%• Currency: Real (R$)• Inflation: 7.7% (2001)

*source: IBGE – Instituto Brasileiro de Geografia e Estatistica – January 2002

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A. MilestonesA. Milestones

1. Privatization program started in 1990 2. Extensive import tariff reform from 1991 to 19933. Debt renegotiation completed in 19944. Real Plan

a) Containing chronic inflationb) Promoting fiscal reform

5. 1994 Amendment to the 1988 Federal Constitution, which removed foreign investment restrictions in certain economic sectors, including petroleum, mineral, domestic transportation and local gas services activities

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B. Economic StructureB. Economic Structure

1. Large and diversified industrial sector mainly in the states of São Paulo, Rio de Janeiro and Minas Gerais

2. Industrial sector: automobiles, steel, computers, aircraft, and consumer durables

3. Agricultural products: coffee, soybeans, sugar,oranges, tobacco, coca, livestock

4. Extensive mineral resources (iron, ore and manganese reserves)5. Highly developed financial system 126 of the 50 major Latin

American banks are Brazilian6. Part of the Brazilian production is traded on the Commodities &

Futures Exchanges (BMOF). BMOF currently ranks number 4 in the world in terms of trade contracts (US$ 7.3 trillion a year, with a daily average of US$24 billion)

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C. Foreign TradeC. Foreign TradeMajor exports 2000 % of totalTransport equipment & parts 16.6Metallurgical products 10.7Soybeans, bran & oils 8.1Chemical products 7.4

Major imports 2000 % of totalMachinery & electrical equipment 32.5Chemical products 16.7Transport equipment & parts 13.7Oil & derivatives 8.8

Leading markets 2000 % of total Leading suppliers 2000 % of totalUS 24.3 US 23.3Argentina 11.3 Argentina 12.3Netherlands 5.1 Germany 7.9Germany 4.6 Japan 5.3

*source: IBGE – Instituto Brasileiro de Geografia e Estatistica – January 2002

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II. Legal SystemII. Legal System

• Civil law country• The Brazilian Constitution establishes the structure of the

Brazilian judicial system and provides for a system of federal courts functioning alongside the state courts. The bulk of all litigation occurs in state courts.

• The federal courts have exclusive jurisdiction over matters where the federal government or any of its agencies or quasi-governmental bodies is a party or has interest, as well as over cases involving foreign states or international agencies and cases based on international treaties, immigration matters, crimes committed on board aircraft and ships, matters involving Brazilian Indians. All labor and electoral courts are also under federal jurisdiction.

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II. Legal SystemII. Legal System• Court decisions are based on the application of the laws. Where

there is no specific statutory provision, the courts decide on the basis of analogy and general uses, or by applying general principles of law and public interest.

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A. Foreign Capital RegistrationA. Foreign Capital Registration1. “Circular” 2,997 enacted on August 15, 2000, by the Brazilian

Central Bank (Bacen) regulated the declaratory electronic registration of direct foreign investments

2. Direct Foreign Investments in Brazil must be registered electronically through the Online Information System of Bacen (Sisbacen)

3. Capital Investments, repatriations and profit remittances related to foreign capital duly registered with Bacen can be effect at any time without prior authorization of Bacen, subject to compliance with applicable corporate and tax legislation

4. Individuals and legal entities domiciled in Brazil areallowed to enter into loan transactions with creditordomiciled abroad and the corresponding funds may beremitted to Brazil without prior authorization from Bacen

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B. Forms of Business OrganizationsB. Forms of Business Organizations1. Two main types of companies that are used for most business

operations in Brazil: corporations (“sociedades anônimas”) and limited liability companies (“sociedades por quotas, de responsabilidade limitada”), commonly referred to as a “limitada”.

2. A limitada, which resembles a U.S. Limited Liability Company (LLC), is a company in which the characteristics of each of the partners are given considerable weight and mutual trust. All partners have limited liability and are entitled to manage the company if the articles of association do not indicate the company's manager. It is important to note, however, that the limitada is taxed, in Brazil, on its earnings, whereas an LLC usually is not taxed in the U.S.

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B. Forms of Business OrganizationsB. Forms of Business Organizations3. A “sociedade anônima”, similar to a U.S. corporation, is a

company in which decisions are generally taken by majority vote and in which management is separate from the shareholders. It is a corporate form usually utilized for ventures capable of gathering concentrations of financial resources from a large number of investors.

4. A limitada offers a number of practical advantages, and this corporate form is recommended if the investor desires simplicity and flexibility in the corporate structure, reduced maintenance costs and the inapplicability of several legal formalities, which are mandatory in the case of a sociedade anônima. As a general statement, the limitada is usually appropriate in the case of wholly-owned subsidiaries or restricted joint ventures.

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B. Forms of Business OrganizationsB. Forms of Business Organizations5. Sociedade anônima form may be preferable for ventures having

a larger number or different groups of shareholders. In the event, however, that the company has future plans to issue debentures or other securities, become a publicly held company or admit other groups of investors, then the adoption of the “sociedade anônima” form is mandatory.

6. Joint Ventures are structured through the establishment of a company, taking the form of a Limitada or privately-held S.A. In the establishment of a joint venture, the principal negotiation issues are generally the purchase terms and conditions, object activities, ownership and management structure, know-how and technology transfers, representations and warranties, indemnification, guarantees, confidentiality, non-compete, dispute resolution and termination.

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B. Forms of Business OrganizationsB. Forms of Business Organizations6. Continued

The preliminary understandings of the parties on these and other issues may be recorded in a précontrato (memorandum of understanding), which provides for further exclusive negotiations and due diligence investigations. A memorandum of understanding is binding on the parties, unless the contrary results from the terms of the memorandum, nature of the business or circumstances of the case.

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C. AntitrustC. Antitrust

1. Law 8,884 (Competition Law) sets out the actions that must be submitted to the Administrative Council for Economic Defense (CADE) for its review.

2. Any acts which may (i) restrain or in any way adversely affect free competition or (ii) result in domination of a relevant market for goods or services, must be notified.

3. In addition, a resulting market share of 20% in a relevant market triggers the need to notify irrespective of the turnover of the parties or the value of the transaction. However, if any one of the parties has worldwide turnover in excess of R$400 million, such fact will also trigger notification requirement.

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D. ArbitrationD. Arbitration

1. To be enforceable in Brazil, arbitral awards obtained outside of Brazil must be ratified by the Brazilian Supreme Court.

2. Enforcement of local arbitration decisions has been provided for by specific legislation (Law 9307, of 1996).

3. In May of 2001, the Brazilian Supreme Court upheld the constitutionality of the Brazilian statute validating contractual arbitration provisions, thus removing some lingering doubts in that regard.

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III. Political and Economic OutlookIII. Political and Economic Outlook

• In August 2002, the International Monetary Fund (IMF) agreed to provide a $30 billion rescue package aimed at restoring investor confidence in Brazil.

• The government raised its 2002 primary fiscal surplus target slightly, from 3.75% to 3.88% of GDP.

• A mini-tax reform at the end of August, enacted by decree, could help industry by levying a production tax only on finished products, rather than at every stage of the manufacturing process.

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III. Political and Economic OutlookIII. Political and Economic Outlook

• Policymakers have shown stellar economic management, but significant vulnerabilities with respect to the debt profile contribute to churning financial markets, the IMF said. The Fund sees Brazil's gross domestic product up 1.5% for 2002 and up 3.0% for 2003.

• Over the medium term, the policy goal should be to reduce the country's debt burden through the maintenance of high primary surpluses, accompanied by structural reforms aimed at reducing structural rigidities.

• This should help reduce real interest rates, and strengthen and broaden economic growth. More openness to trade, could also spur the economy.

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A. Presidential ElectionsA. Presidential Elections

1. Candidates at a GlanceLUIZ INACIO LULA DA SILVA, 56, of Workers Party. Burly former lathe operator who rose through union ranks, jailed as subversive for leading strikes protesting 1964-85 military dictatorship. Founded Workers Party and elected to Congress in 1986. Failed presidential bids in 1989, 1994 and 1998. In fourth try, has softened rhetoric and moved toward mainstream, winning backing of important centrist allies. Markets worry he could lead Brazil into Argentina-style debt default, although Mr. da Silva pledges to honor all contracts.

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A. Presidential ElectionsA. Presidential Elections

1. Candidates at a Glance (continued)JOSE SERRA, 60, of governing Brazilian Social Democracy Party. Hand-picked candidate of President Fernando Henrique Cardoso. Cornell trained economist, served in Congress and Senate before joining Mr. Cardoso’s cabinet.

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A. Presidential ElectionsA. Presidential Elections

2. Agenda of the elected presidenta) Brazil's net public debtb) Mercosul c) Free-Trade Area of the Americas (FTAA). On November 1,

2002, Brazil and the United States will take over the joint-chairmanship of the talks for the final phase of bargaining.

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Andrews & Kurth L.L.P.Andrews & Kurth L.L.P.

Frederico PortoDallas, Texas 75201214-659-4447214-659-4839 (fax)fredericoporto@akllp.com