class actions under argentine law: evolution, present status and perspectives

Latin American Regional Forum Newsletter of the International Bar Association Legal Practice Division

Vol 2 no 2 october 2009

Save the date: 3–8 October 2010

Images courtesy of Tourism

Vancouver

To register your interest, please contact:

International Bar Association10th Floor, 1 Stephen Street London W1T 1ATTel: +44 (0)20 7691 6868 Fax: +44 (0)20 7691 6544www.ibanet.org/conferences/Vancouver2010

Vancouver is a dynamic, multicultural city set in a spectacular natural environment. As both a vital centre of international trade and business, and a home to Canadian culture, sport and outdoor activities, Vancouver promises to be another perfect venue for the International Bar Association’s Annual Conference in 2010.

What will Vancouver 2010 offer?• The largest gathering of the international legal community in the world – a meeting

place of more than 3,500 lawyers and legal professionals from around the world

• More than 150 working sessions covering all areas of practice relevant to international legal practitioners

• The opportunity to generate new business with many of the leading firms in the world’s key cities

• Registration fee which entitles you to attend as many working sessions throughout the week as you wish

• Continuing legal education and continuing professional development

• A variety of social functions providing ample opportunity to network and see the city’s key sights

• Integrated guest programme

• Excursion and tours programme

LAtIN AmeRICAN RegIoNAL FoRum NeWSLetteR oCTobER 2009 3

International bar Association10th Floor, 1 Stephen StreetLondon W1t 1At, united Kingdomtel: +44 (0)20 7691 6868Fax: +44 (0)20 7691 6564www.ibanet.org

© International Bar Association 2009.

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, or stored in any retrieval system of any nature without the prior permission of the copyright holder. Application for permission should be made to the Head of Publications at the IBA address.

Contributions to this publication are always welcome and should be sent to the editor at the address on page 6.

In this issueFrom the Co-Chairs 4

Obituary: Rogelio de la Guardia 5

Forum officers 6

IBA Annual Conference – Madrid,

4–9 October 2009: Our forum’s sessions 7

conference reportsMergers & Acquisitions in Latin America:

trends and challenges

18–20 March 2009, Bogotá, Colombia 9

Chile-Colombia-Peru lawyers meeting

7–8 May 2009, Lima, Peru 10

Feature articlesManaging FCPA issues in an international era:

trends, challenges and implications arising from

global anticorruption enforcement actions 11

Revisiting the SAPI – a corporate entity

whose time has come 18

Competition law enforcement in Brazil

and the fight against cartels 20

Control of economic concentration

in M&A transactions in Uruguay 22

Class actions under Argentine law:

evolution, present status and perspectives 26

Chilean provisions for close out netting of

‘connected obligations’ in relation to derivative

transactions entered into by Chilean banks 30

Brazilian oil and gas sector trends 32

Recent changes to Brazilian corporate law and

accounting rules and their effects on taxation 34

Uruguay’s Personal Data Protection Act 37

The abuse of dominant position in Argentina 39

This newsletter is intended to provide general information regarding recent developments in the Latin American Region. The views expressed in this publication are those of the contributors, and not necessarily those of the International bar Association.

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INTERNATIoNAL bAR ASSoCIATIoN LEgAL PRACTICE DIVISIoN4

FROM The CO-ChAIRS

Although the world financial crisis started to manifest itself in 2007 in the countries of its origin, it was only in the last year that its effects

have reached even the furthest and strongest economies and industries including those of our region.

Despite the great difficulties faced, businesses have adapted accordingly with the changes. Legal practitioners have adjusted their practices to meet the new needs of clients that are now more focused on restructuring projects with lower budgets. Bearing in mind that crisis not only means difficulties but also presents opportunities to show creativity and the capacity to transform, we would like to encourage our members to explore other markets and offer innovative alternatives.

This invitation implies that members have to be more informed as to the trends of the practice and this is why this year’s IBA Annual Conference in Madrid will be a very enriching experience. Madrid promises to be an exciting venue for the conference not only because of its beauty and cultural value, but also because it offers a unique opportunity for Latin American Regional Forum (LAF) members to network with Latin America’s major commercial partners and contacts. This, in the current climate, is essential to overcome the challenges imposed by the world economic crisis.

We extend an invitation to all LAF members, and especially to new members to whom we give a warm welcome, and encourage active participation in the panels sponsored or co-sponsored by the LAF. The Forum’s events are: a workshop on Iberian investments and disinvestments in the

Region; Banking in Spain and Latin America; Real estate; Special aspects of M&A deals; Concessions in the utility and infrastructure sector; and Fighting corruption and best practices in the mining sector.

In August it was Costa Rica’s turn to host the IBA/ICC Arbitration in Latin America CAFTA, FTAs, BITs and Commercial Arbitration Involving States Conference, which was followed by an Arbitration Conference in the Dominican Republic. In addition some recent conferences undertaken by the LAF include: the 2nd Annual US Latin American Tax Planning Strategies Conference in conjunction with ABA and IFA, a Trilateral Meeting among Colombian, Chilean and Peruvian attorneys which took place in Lima last May which strengthened the relationships and networking among law firms from countries with continuous crossed-investments and transactions, a Mergers and Acquisition Conference held in Bogotá last March and a Global Investments in Real Estate held in Miami in February.

The forthcoming events, to which all Forum members are invited, are: the regional conference that will be held in Santiago, Chile in March 2010, a conference on intellectual property that will take place in Mexico and other conferences in diverse topics such as law firm management.

Finally, we believe that the positive growth trend of the LAF is the result of the legal practitioners’ interest to more actively participate on the building of regional identity and directly intervene on the course of our region. For these reasons, we invite you to become a member of the LAF and help construct our Forum’s future.

Jaime herreraPosse, Herrera & Ruiz,

bogotá

jaime.herrera@

phrlegal.com

Daniel del Riobashman Ringe y

Correa, Mexico DF

daniel.delrio@

bashman.com.mx

A difficult year with upcoming opportunities


OBITUARy

the IBA has suffered the sudden loss of Rogelio de la Guardia, who passed away

at the end of June.

Rogelio, a very enthusiastic member of the Latin American Regional Forum,

was its Chair from 2003–4. He formed part of the generation of Latin lawyers

who, over the last 15 years, had been most supportive in promoting the IBA throughout

the Latin American region – resulting in the creation of the Latin American Forum itself.

Rogelio undertook the enormous task of organising, with great success, the 5th Regional

Conference that took place in Panama City in March 2004.

He also worked with Jack Batievsky, (who died in December 2002), in the organisation

of the Cuzco Regional Conference.

A very good friend to many of us at the IBA, Rogelio was a leading corporate tax lawyer

in Panama at the law firm Arias Fabrega & Fabrega. Under his leadership and afterwards,

Rogelio put a lot of effort in the development and proliferation of the successful activities

of the IBA throughout the region, including the Taxes Committee.

Rogelio was a very loving husband and father. Married to Debbie, the couple had

two children of whom he was very proud . He enjoyed all outdoor activities, as well as

travelling and learning about different cultures. He also enjoyed fine food and was a very

good chef.

We shall miss Rogelio and we are thankful for having the opportunity of knowing and

sharing moments with this wonderful human being.

remembering rogelio de la GuardiaDaniel del Riobashman Ringe y Correa, Mexico DF

[email protected]


FORUM OFFICeRS

Forum officers

co-chairs

Daniel del Rio

basham Ringe y Correa SC

Mexico City, Mexico

Tel: +52 55 5261 0400

[email protected]

Jaime Herrera

Posse Herrera & Ruiz

Carrera 7 No 71-52, Tower A, Floor 5

bogotá, Colombia

Tel: +57 1 312 3172 Fax: +57 1 325 7313

[email protected]

Senior Vice chair

Claudio undurraga

Prieto y Cia

Avenida El golf 40, piso 13,

Las Condes, Santiago, Chile

Tel: +56 (2) 280 5012 Fax: +56 (2) 280 5001

[email protected]

Vice-chairs

maría teresa Quiñones

Rodrigo Elias & Medrano Abogados

Av San Felipe 758, Lima 11, Peru

Tel: +51 1 619 1935 Fax: +51 1 619 1919

[email protected]

eduardo Sanguinetti

Sanguinetti Fodere bragard

Ituzaingó 1377 pisos 3, 4 y 5, Edificio Constitución

Plaza Matriz, Montevideo, Uruguay, CP 1000

Tel: +598 (2) 915 01 01 Fax: +598 (2) 915 01 01

[email protected]

Secretary

Lisandro Allende

brons & Salas

Maipú 1210 5ºPiso (C1006ACT)

buenos Aires, Argentina

Tel: +54 (11) 4891 2716 Fax: +54 (11) 4311 0399

[email protected]

Website officer

eugenio Hurtado Segovia

Capin Calderon Ramirez y gutierrez-Azpe SC

galileo 55, 1st floor, Col Polanco, 11560

Mexico City, Mexico

Tel: +52 (55) 5280 9193 Fax: +52 (55) 5281 0851

[email protected]

newsletter editor

Pablo Iacobelli

Carey y Cia Ltda

Miraflores 222, piso 24

Santiago, Chile

Tel: +56 (2) 365 7321 Fax: +56 (2) 633 1980

[email protected]

Membership officers

Florencia Heredia

Holt Abogados

Av Santa Fe 1592 piso 4°

buenos Aires, Argentina

Tel: +54 11 5235 0200 Fax: +54 11 5235 0235

[email protected]

marcela Hughes

Hughes & Hughes Abogados

25 de mayo 455, 2º piso, 11000

Montevideo Uruguay

Tel: +598 2 916 0988 Fax: +598 2 916 1003

[email protected]

Ricardo Veirano

Veirano Advogados

Av das Nações Unidas, 12.995 - 18o. Andar

04578-000 São Paulo, brasil

Tel: +55 11 5503 3719 Fax: +55 11 5505 3990

[email protected]

Young lawyers liaison officer

Arturo H Banegas masiá

Palacios, ortega y Asociados

Calle guaicaipuro, Torre Forum, Piso 6

Urb El Rosal, Caracas 1060

Venezuela

Tel: +58 (212) 951 3333 Fax: +58 (212) 951 2851

[email protected]

lPD Administrator

Kelly Savage

[email protected]


IBA AnnUAL COnFeRenCe – MADRID, 4–9 OCTOBeR 2009: OUR FORUM’S SeSSIOnS

4–9 October 2009

I n t e r n a t i o n a l B a r A s s o c i a t i o n C o n f e r e n c e

latin American regional ForumCouncil Liaison OfficersDaniel Del Rio Basham Ringe y Correa SC, Mexico City, Mexicomoira Huggard-Caine TozziniFreire Advogados, São Paulo, Brazil

Co-ChairsDaniel Del RioJaime Herrera Posse Herrera & Ruiz Abogados, Bogotá, Colombia

Investing in bricks. Is real estate still a good investment? how is the financial crisis affecting the real estate market and the emergence of new opportunities?

Joint session with the Real Estate Section.

The old paradigm that the value of real estate never drops has been destroyed. The bubble created by the construction of more homes than real demand, relying on heavy indebtedness and massive purchase of land, has led to the bankruptcy of construction companies in Spain and other European countries. The horizon looks gloomy; however, the winds of change in the real estate business are blowing. The panel will focus on topics such as refinancing of debt of heavily indebted companies; the participation of banks in the real estate sector; the transfer of liabilities from construction companies to individuals as a mean to diversify risks; comparisons of different real estate scenarios in the framework of the credit crunch; the role of governments; the management of the crisis up to a recovery time; acquisition opportunities; the unclearness of the question of capital availability; and the new real estate opportunities in housing and tourist projects in different parts of the world such as India, brazil, Mexico, Panama and Russia.

The analysis will be carried out by key players in the Spanish real estate industry as well as by attorneys with expertise in their particular jurisdictions.

MOnDAy 1000 – 1300Bogotá/Caracas, 2nd Floor, Right

Workshop on Iberian investments and disinvestments in Latin America: lessons to learn

Iberian investment, and more specifically Spanish investment in Latin America, has been very intense in the last decades. This panel will focus on the most common problems and challenges that companies have faced when disembarking in Latin America and how they have dealt with them. Furthermore, because many cases finally ended in a disinvestment, the panel will also explore the reasons for such a decision, whether it was voluntary, government-oriented or government-imposed, and the most relevant issues that arise in the disinvestment process. general counsel of Spanish companies will also share their major concerns when facing legal problems in Latin America and how they have been affected by the changes in legal, institutional and political trends in Latin America.

TUeSDAy 1000 – 1300Brussels, 4th Floor, Left

A LUnCh will be held for conference delegates.

Velada Hotel

Transport will depart from the Palacio Municipal de Congresos at 1300.

Price: €50 (€43.10 + €6.90 Spanish VAT @ 16%)

TUeSDAy 1300 – 1500


IBA AnnUAL COnFeRenCe – MADRID, 4–9 OCTOBeR 2009: OUR FORUM’S SeSSIOnS

Special aspects of M&A deals in Latin America Joint session with the Corporate and M&A Law Committee.

The Latin American market has always shown peculiarities in its deal-making, mainly due to the diversity of cultures and economic significance of its players in the various jurisdictions, where the largest and most sophisticated deals go along with very small but still extremely complex solutions. Although M&A deals in Latin America traditionally implied the landing of foreign companies in that jurisdiction, the situation later changed and we saw the participation of Latin American companies interacting within the region without the intervention of those traditional out-of-region players. but now some of the Latin American companies are taking the lead in some deals and are participating in some of the largest bids around the world. It is, therefore, important to keep an eye on these new actions and strategies, to see how those players are participating in their new role. A team of experienced panellists will shed light on the latest transactions and bids, and will refer to some of the solutions found for them, commenting on their individual experiences and personal cases in a very interactive session where the audience will be invited to participate and comment as well.

TUeSDAy 1500 – 1800 Auditorium, Lower Level -4

Developing international best practice regulatory models for the international mining industryJoint session with the African Regional Forum, the Mining Law Committee and the Public Law Committee.

Mining is a high-risk, capital-intensive industry, in which security and continuity of tenure are said to rank immediately after geology in assessing the viability of new mining projects. In the developing world, high levels of administrative discretion, coupled with an outbreak of resource nationalism during the recently ended commodity boom, potentially undermine these principles. A multidisciplinary panel examines how a best practice regulatory model can be developed for the international mining industry which promotes objective decision-making and secure rather than precarious tenure.

TUeSDAy 1500 – 1800Santo Domingo, Lower Level -2, Right

Banking in Spain and Latin America: market, new deals and legal structures, and the impact of insolvencies and restructurings

Joint session with the Banking Law Committee.

The following will be discussed:• wheredobanksstandinthecurrentcreditmarket–themarketpicture;• thenewdealsandlegalstructuresusedbybanks’renegotiationsandrestructurings;• twocreditscenarios–avoidingthebankruptcyandrecoveringthebankruptcompany;• sourcesofsupport–centralbanks,bankregulators,state-ownedbanks,stateagencies,andinternationalfinancial

organisations; and• differentmarketsandrealities–realestate,corporate(big/small),publicentities,local/internationalfinancings,

acquisition financing and project financing.

WeDneSDAy 1000 – 1300novotel C, The novotel hotel

Corporate and outside counsels initiatives for fighting corruption in Latin AmericaJoint session with the Anti-Corruption Committee and the Corporate Counsel Forum.

In this session, senior in-house counsel of major international companies will present recent corporate programmes and industry trends in fighting corruption; senior partners of major law firms in Latin America will comment on recent international client demands for corporate accountability and legal compliance work; and experts will discuss possible initiatives for upholding the Rule of Law, fighting corruption and demanding high ethical standards from legal service providers.

ThURSDAy 1000 – 1300Toronto, Lower Level -4

Concessions of public works and services: a critical analysis of contracts and their consequences

Concessions of public works or services are not always exempt from problems of a diverse nature. The panel will analyse real cases of concession works that have faced serious difficulties through contractual deficiencies, the causes of these deficiencies, as well as the ways of solving them. Additionally, the panel will discuss the causes by which certain concessions have totally failed, and the subsequent effects of such failures.

ThURSDAy 1000 – 1300Madrid, 1st Floor, Left


COnFeRenCe RePORTS

the Mergers and acquisitions conference on Latin American trends and challenges was held in Bogotá, Colombia on 18–20 March 2009 and

was presented by the IBA Latin American Regional Forum and the IBA Corporate and M&A Law Committee of the IBA Legal Practice Division. More than 200 delegates attended the conference and had the opportunity of participating in a variety of interesting panels and meet colleagues at the social events held on some of the most attractive spots of Bogotá.

After an opening speech by the Conference Co-Chairs Jaime Herrera and Carlos Umaña, the first day of the conference started with a half-day panel on ‘The financial crisis and M&A: lessons learnt in Latin America and elsewhere’, in which its speakers analysed how the present financial crisis has affected M&A transactions. Using an interesting case study involving a Latin American company acquiring companies in the region, panellists discussed matters such as heads of terms, memorandums of understanding, letters of intent, structure of the transaction, financing agreements, among others, and also clauses that are particularly relevant during crisis time, such as MAC clauses.

After lunch, there was a panel on relevant issues regarding ‘Antitrust and Free Competition’ in the region. The main conclusion that came out of the presentations given by panellists from several of the Latin American jurisdictions were that: i) merger control is growing in the region; ii) antitrust enforcement is erratic in most Latin American jurisdictions; and iii) the interpretation of the law by the authorities is sometimes ambiguous. There was no consensus on whether there is a convergence or a divergence on the way antitrust laws are enforced but there was a consensus on the need to further study the potential effects of the global economic crisis in the way antitrust law should be enforced.

This session was followed by the ‘Due Diligence and limitation of liability in M&A transactions: “hot” items and various caveats’ session in which the panellists examined the scope of liability by sellers and purchasers in M&A transactions, applicable statute of limitation on liability, hidden effects and others,

together with a case study that allowed the speakers to recognise relevant matters in these transactions, such as post-closing issues, analysis of purchase agreements and the limits of legal liability under these agreements or contracts.

The third and final day of the conference was initiated with a session on ‘Labour issues affecting M&A transactions’ in which issues like labour substitution, collective labour agreements and the application of labour conventions were discussed. This was followed up by ‘The Pandora box of taxes’ session in which anomalous types of taxes that may affect and surprise M&A transactions were recognised. During the afternoon in the ‘Post-acquisition litigation’ session a series of outstanding experts from the US, Chile, France and Mexico, debated on the most frequent current issues arising after some deals are cut or just as a consequence of such deals failing to close. A quick but ample review on typical reps and warranties provisions, due diligence reports, viewpoints of interpretation, disclose of confidential information, etc, showed the audience that there are very common concerns widely spread no matter what jurisdiction the deal takes place in. As one of the co chairs indicated, in a panel like that, it is expected that there would be more questions than answers, which always help, of course. The day finished with a ‘Roundtable of chief legal officers (CLOs) with jurisdiction in Latin America’ in which CLOs of relevant multinational companies that operate in the region addressed matters regarding legal counselling in the region, criteria that a CLO should apply when selecting counselling on M&A transactions and common issues between CLOs and their outside counsel when elaborate transactions occur.

Sessions were combined with some social events. The first day of the conference, the sponsors and the Host Committee offered a cocktail reception in El Chicó Museum, an 18th century colonial house located in the heart of Bogotá. The second day ended with a visit and cocktail at the Gold Museum and a dinner offered by the Host Committee in the Jockey Club of Bogotá. Finally, delegates will likely never forget the closing dinner party at Andrés Carne de Res, a unique place and probably one of the IBA’s most memorable closing events in years.

Pablo IacobelliCarey y Cia, Santiago

[email protected] & Acquisitions in latin America: trends and challenges18–20 march 2009, Bogotá, Colombia


COnFeRenCe RePORTS

with a keynote speaker presentation on the geopolitical and economic framework of the three countries made by Mr Roque Benavides. The next day, five panels analysed the business perspectives, in the short and medium term, for mining and energy, infrastructure and utilities, banking, retail, industry, and free trade agreements.

Panellists were of the highest level, including representatives of industries from all three countries, high officers of the industry and trade associations, as well as authorities from the governments and foreign service. In the presentation on Peru’s FTAs and foreign commerce perspectives of the Peruvian Vice-Minister of Foreign Commerce and Tourism, Mr Eduardo Ferreyros, made special reference to the importance of discussing these matters with representatives from the most important law firms of three Andean countries, since lawyers are active players in the economic relations among our countries.

Delegates also had the opportunity of networking at social events which included a dinner at Casa Hacienda Moreya, in the heart of Lima, and a closing cocktail at Museo Larco. The delegates expressed their high satisfaction with the content and the level of the speakers, as well as with the social activities programmed for this trilateral meeting.

María Teresa QuiñonesRodrigo Elias &

Medrano Abogados,

Lima

mtquinones@

estudiorodrigo.com

chile-colombia-Peru lawyers meeting, 7–8 May 2009, lima, Peru

Given the successful precedents of the Chile-Argentina, and Argentina-Brazil meetings held in 2005 and 2006, respectively, this

year the LAF scheduled a trilateral meeting among Chilean, Colombian and Peruvian lawyers, which took place last May, in Lima, Peru. The organisation of this event was entrusted to representatives from all three countries participating.

From the 52 registered delegates that participated in the meeting, nine were from Colombia, 12 from Chile, and 31 from Peru. It is noteworthy that almost all relevant firms from those countries were present.

Considering that this kind of activity is aimed at strengthening the relationships and networking among law firms from countries with continuous crossed-investments and transactions, the first day programme provided time for visiting local firms. In addition, a list of contacts and data from all IBA members in Lima was circulated to registered delegates, with the intention to facilitate the arrangement of appointments with them. Likewise, information relating to foreign registered participants was circulated to Peruvian local firms that registered to the event.

The programme’s content was quite ambitious, starting in the evening of 7 May,


FeATURe ARTICLeS

Introduction

The past several years have witnessed an explosion of Foreign Corrupt Practices Act (FCPA) enforcement actions brought by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). This trend is continuing unabated as aggressive US enforcement is coupled with enhanced international cooperation arising from heightened international anti-bribery standards and active parallel investigations in foreign jurisdictions.1 As a result, US companies doing business abroad now face the greatest level of government resources to combat bribery since the passage of the FCPA more than 30 years ago.

Among the formidable challenges facing US companies doing business abroad is determining whether their business operations have properly addressed corruption risks. The question is no longer whether, but how, a US company, in the form of subsidiaries, branch offices or third party distributors, manages the FCPA risks engendered by its business operations.

Increased FCPA enforcement has significant consequences for US companies and their officers and directors. A substantial percentage of recent deferred prosecution agreements (‘DPA’) involve violations of the FCPA. Many of these DPAs have resulted in the use of an independent monitor with wide latitude to review business operations and report its findings to the government.2 The rise in FCPA cases has also resulted in unprecedented corporate fines,3 and increased prosecution of individual corporate executives with attendant terms of imprisonment.4

The purpose of this overview is to identify key provisions of the FCPA and specific strategies to manage the FCPA risks associated with recent FCPA enforcement trends.

The FCPA’s anti-bribery provisions

The FCPA criminalises the bribery of a foreign official to secure business. In particular, the FCPA prohibits the payment, offer or authorisation of payment of money or anything of value to a foreign official for purposes of influencing any act or decision or securing an improper advantage to obtain or retain business. See 15 USC § § 78dd-1–3.

The FCPA’s anti-bribery provisions apply to: (1) ‘issuers’ (any company, and its agents, with a class of securities registered with the SEC or required to file reports with the SEC) (2) ‘domestic concerns’ (any company, and its agents, with a principal place of business in the US or organised under US law and any other US citizen or resident alien); and (3) ‘other persons’ (foreign persons acting within US territory).

Business leaders surely recognise that the FCPA prohibits the suitcase of cash going to a foreign ministry official to secure a government contract. Yet, it may surprise many business executives to learn that the FCPA more broadly applies to an almost limitless, far less culpable, set of circumstances involving administrative and regulatory matters. To protect against FCPA liability, business leaders should have a firm understanding of the recent enforcement trends involving the following elements of the FCPA: ‘foreign official,’ ‘anything of value,’ and ‘obtain or retain business’ and ‘any acts within the territory of the United States.’

Foreign official

Under the FCPA, a foreign official does not have to be an elected official or even someone appointed to a government ministry or agency. Individuals can be deemed ‘foreign officials’ even though they are not considered foreign officials under local law.

The FCPA’s definition of a public official is very broad. It includes ‘any officer or

Managing FcPA issues in an international era: trends, challenges and implications arising from global anticorruption enforcement actions

Jonathan n RosenShook Hardy & bacon,

LLP, Washington DC

[email protected]

Luis A PerezShook Hardy & bacon,

LLP, Miami

[email protected]


FeATURe ARTICLeS

employee of a foreign government or any department agency, or instrumentality thereof… or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality… ’ 15 USC § § 78dd-1(f)(1) et seq. In other words, a person may also qualify as a public official by virtue of his employment with an ‘instrumentality’ of government – a term which is neither defined by the FCPA itself or its legislative history. Once a foreign company is deemed an instrumentality of a foreign government, every employee of that company is a ‘foreign official’ under the FCPA.

As a general matter, businesses must audit their internal operations for any interaction with the host governments and/or state-owned or state-controlled enterprises (SOE). An entity may become an ‘instrumentality’ when the government holds the majority of the enterprise’s subscribed capital, controls the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise’s administrative or managerial body or supervisory board. An entity may also be deemed a state instrumentality if that entity performs a ‘public function.’ A public function may be inferred from preferential subsidies or other privileges which show that the entity is not functioning on a normal commercial basis.

Dangers involving work with SOE employees particularly exist for pharmaceutical and medical device companies who make payments to doctors employed by state-owned hospitals. In June 2008, after voluntarily disclosing and cooperating with government investigators, AGA entered into a three-year deferred prosecution agreement with the DOJ and agreed to pay a $2 million criminal penalty in connection with improper payments made by AGA’s Chinese distributor to physicians employed by Chinese government owned or controlled hospitals. See DOJ News Release, No 08-491 (3 June 2008). Diagnostic Products Corporation agreed to settle an FCPA enforcement action in connection with improper payments to physicians and laboratory personnel employed by government-owned hospitals in China. See DOJ News Release, No 05-282 (20 May 2005) and SEC Litigation Release No 51724 (20 May 2005). In another case, the SEC filed a settled civil injunctive action against Monty Fu, the founder and past chairman of Syncor

International Corporation, in connection with improper payments made to doctors in state-owned hospitals in Taiwan. See SEC Litigation Release No 20310 (28 September 2007). As these cases illustrate, any company doing business in China must determine whether it is doing business with an SOE. See United States v SSI International Far East Ltd, No 3:06-cr-00398 (D Ore 2006) (defendant company enters into DPA with DOJ for payments made to managers of government-owned steel mill in China).

A similar issue can arise where a company conducts business with someone who has both private and public duties. In that case, the company should:•documentthatitscontractualrelationship

with the individual is based on that individual’s private capacity;

• confirmthatthereisabonafideneedforthe services being provided;

• confirmthatanypaymentunderthecontract is commensurate with fair market value; and

•documentthattheserviceswereinfactprovided.

Given the broad definition of ‘foreign official,’ every company should inquire whether its business partners are employed by an SOE or otherwise perform any public duties for a foreign country.

Anything of value

FCPA liability does not simply require a suitcase filled with cash. While undefined by the FCPA and its legislative history, ‘anything of value’ has been broadly construed to include political contributions, entertainment, travel, meals and lodging. It even includes intangible benefits, such as the enhanced prestige associated with a charitable contribution.

What qualifies as ‘anything of value’ is malleable. FCPA liability is not triggered by some objective, threshold amount received by the foreign official. What determines whether ‘anything of value’ has been offered or conferred is the personal valuation of the receiving official. For example, an ostensibly routine business trip to the United States to visit a factory may become the trip of a lifetime to the foreign official if Las Vegas and Disneyworld are also on the itinerary.

The outer reaches of ‘anything of value’ are highlighted in an enforcement action involving a charitable donation. In the matter of Schering-Plough Corp, File No 3-11517 (9 June


FeATURe ARTICLeS

2004), the US government took the position that a donation to a bona fide charitable organisation established to restore castles and other historic sites violated the FCPA. In that case, a Polish subsidiary made payments to a foundation whose founder became director of a government health fund. The donations constituted a thing of value to the official because they were subjectively valued by the official and provided him an intangible benefit of enhanced prestige. The Schering-Plough case shows that even payments to bona fide charities that do not pass directly or indirectly to a government official may violate the FCPA.

More routine expenses, like travel and lodging expenditures, may also violate the FCPA. On 21 December 2007, the SEC and DOJ filed and settled charges against Lucent Technologies, Inc, which spent over $10 million in travel, lodging, entertainment and related expenses for approximately 1,000 employees of a Chinese SOE from which Lucent was seeking business. See DOJ News Release, No 07-1028 and SEC Litigation Release, No 20414 (21 December 2007). The trips were primarily for sightseeing and leisure rather than business purposes and resulted in expenses being recorded as ‘factory inspections’ in locations where no factory existed. Id.

The FCPA contains an affirmative defence for expenditures relating to the ‘promotion, demonstration, or explanation of products or services’ or the ‘execution or performance of a contract.’ 15 USC § § 78dd-1(c)(2). However, a company must show that the expenses are ‘reasonable’ and ‘bona fide’ and ‘directly related’ to a business purpose.

The Schering-Plough and Lucent cases alert business leaders to the fact that FCPA enforcement will subject a wide variety of business practices to review. To avail itself of an affirmative defence with respect to business expenditures, companies must ensure some control over the expenditure of funds to ensure that they relate to a legitimate business purpose.

Obtain or retain business

A common misperception of the FCPA is that improper payments must relate to securing government contracts. In fact, the FCPA is more broadly focused on payments that result in an improper advantage over competitors, regardless of whether a government contract is, in fact, in play. As a result, business leaders

must know the administrative and regulatory practices of the foreign countries in which they do business.

United States v Kay, 359 D3d 738 (5th Cir 2004) was the seminal decision which clarified the breadth of the FCPA’s obtain or retain element. In Kay, the Court held that payments to lower corporate taxes and custom duties could violate the FCPA. In other words, the FCPA is not limited to securing government contracts.

Since the Kay decision, there have been several FCPA enforcement matters involving improper payments to obtain various foreign government licences, permits and certifications. In July 2007, for example, Delta & Pine Land Company agreed to settle an FCPA enforcement action for making approximately $43,000 in improper payments between 2001–2006 to officials of the Turkish Ministry of Agricultural and Rural Affairs in order to obtain various governmental reports and certifications needed to conduct its business in Turkey. See SEC Litigation Release No 20214 (26 July 2007). In February 2007, the Dow Chemical Company agreed to settle FCPA charges that it made approximately $200,000 in improper payments and gifts to officials in India who had discretionary authority in registering and inspecting company product for sale in India. See SEC Litigation Release No 20000 (13 February 2007). In January 2005, Monsanto Company settled an FCPA enforcement action for its payment to a foreign environmental official in an effort to repeal certain environmental regulations. See SEC Litigation Release No 50978 (6 January 2005).

Business executives must be aware of the FCPA risks associated with routine business activities such as exporting products into a foreign market. The following is a list of relevant questions:•Doeslocallawrequirethelicence,permit

or certification?• Isthecompanyrelyingonathirdparty

to obtain the various licences, permits or certifications? If so, has there been due diligence to ensure compliance by that third party with the FCPA?

•Whoisinteractingwiththeforeignofficial to obtain the licence, permit or certification? Are there any unusual reimbursement requests by that employee?

• Isthepaymentbeingmadetothelicensingagency or to the individual official? Is there an invoice and supporting documentation from the licensing agency?


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Any acts within the territory of the United States

In 1998, several amendments empowered the Foreign Corrupt Practices Act to assert jurisdiction over foreign businesses and nationals. As a result, a foreign business or individual is subject to the Foreign Corrupt Practices Act if they cause, directly or through another, an act to further a corrupt payment to take place inside of the US.

Recently, the government has aggressively pursued FCPA liability against foreign persons and entities for their incidental use of US bank accounts involving prohibited payments. In the Siemens and Halliburton/KBR cases, for example, the government charged foreign subsidiaries with FCPA violations based, in part, on US dollar-based wire transfers between foreign bank accounts which cleared through correspondent accounts in the United States. The government made similar jurisdictional claims in a forfeiture action relating to Singapore funds associated with the Siemens case. See DOJ News Release, No 09-020 (9 January 2009).

The jurisdictional claims in the Siemens and Halliburton/KBR cases reflect an expansive interpretation of the territorial nexus required to prosecute non-US persons under the FCPA. In particular, notwithstanding the absence of more traditional jurisdictional facts, including US-based telephone calls, meetings or money transfers, the government may claim jurisdiction to prosecute foreign nationals or entities for FCPA liability based on a far more fleeting connection to US territory.

Improper payments by thIrd partIes

Another area of aggressive FCPA enforcement concerns improper payments by third parties. Business leaders cannot shield their companies and themselves from FCPA liability by relying on foreign subsidiaries, agents and business partners. The FCPA has a very broad third party payment provision, which includes the making or authorisation of improper payments indirectly through third parties while ‘knowing’ that all or a portion of such money or thing of value will be passed on to any foreign official. See 15 USC § § 78dd-1(a)(3) et seq.

As a result, business executives must know how their products or services reach their end users in each foreign market. Does the business rely on any third parties, eg, foreign distributors or some other agent, to assist in securing business? If so, business leaders must

ensure that a vetting process is in place to protect against the FCPA violations of these third party intermediaries.

The knowledge standard

The government will impute knowledge to business leaders even if they do not have actual knowledge of an improper payment by a third party intermediary. In particular, the government will pursue FCPA liability if it finds ‘willful blindness’ to any ‘red flags’ that should reasonably alert a company’s management to a ‘high probability’ of an FCPA violation.

The government will likely construe a breakdown in internal controls as an effort to adopt a ‘head in the sand’ approach to FCPA compliance. In an enforcement action against York International, several improper payments were made by a foreign subsidiary to third-party agents under circumstances that demonstrated that the company failed to conduct adequate due diligence to assure itself that payments were not being passed to SOE officials. See DOJ News Release, No 07-783 (1 October 2007).

In the Halliburton case, the SEC charged the company, in part, with a civil violation of the FCPA’s anti-bribery provisions without alleging that Halliburton had any knowledge of the bribe payments at issue. Halliburton’s liability was premised on its failure to conduct sufficient due diligence of the foreign agent who, while working on behalf of Halliburton’s joint venture, had made the prohibited bribe payments. See Complaint, SEC v Halliburton Co and KBR, Inc Civ Action No 4:09-399 (SD Tex) (11 February 2009) at 31.

Vicarious liability

The following enforcement actions highlight the broad application of the FCPA’s third party payment provision, including liability for foreign subsidiaries, distributors and sales agents:•On31October2007,Ingersoll-Rand

entered into a three year DPA with the DOJ based on improper payments made by Ingersoll-Rand’s Italian and Irish wholly-owned subsidiaries foreign subsidiaries to the Iraqi government in connection with contracts under the United Nations Oil for Food programme. See SEC v Ingersoll-Rand Company Ltd (No 07-cv-1955) (DDC 2007).

•On3December2004,DOJenteredintoa DPA with GE Invision, Inc for FCPA


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violations arising from improper payments made by its distributors in China to foreign officials to secure the sale of airport security screening machines. See DOJ News Release, No 04-780 (6 December 2004).

Due diligence and red flags

While a comprehensive review of due diligence is beyond the scope of this overview, it is imperative that business leaders conduct a risk assessment based on an informed understanding of that company’s business strategy entering a foreign market. Third parties should be vetted according to the following two general criteria: (1) the nature and frequency of an intermediary’s contact with a foreign official; and (2) the amount and type of an intermediary’s compensation. Particular attention should be paid to intermediaries, like sales staff, who are paid on a purely commission basis.

Given that resources are limited, business leaders may employ a tiered approach to distinguish between high-risk and low-risk intermediaries. At a minimum, however, business leaders should consider whether:• abusinessjustificationexistsforentering

into the relationship with the intermediary;• ahistoryofcorruptionexistsinthecountry

in question;• theintermediaryisagovernmentofficial,is

related to a government official, works for a company owned in part by a government official or is recommended by a government official;

• afairmarketvaluationexistsforanyserviceto be performed by an intermediary;

• theintermediaryrequestsexcessivelyhighcommissions, unusual discounts, mid stream, up-front or cash payments;

• theintermediaryobjectstoanticorruptionstandards and representations, audit rights, and termination rights in the contract;

• theintermediaryisnotcompetentto perform the requested service, eg, the intermediary lacks the necessary qualifications or resources;

• thereisalackoftransparencyinaccountingand expense records or the intermediary has requested that the company prepare false invoices or any other type of false documents;

• theintermediaryrefusestodiscloseowners,partners or principals;

• theintermediaryusesshellorholdingcompanies that obscure ownership without credible explanation; and

• therearepressreportsofimproprietiesconcerning the intermediary.

FCPA’s expansive books and records provisions

Another area of aggressive FCPA enforcement involves the FCPA’s books and records provisions. These provisions reinforce the government’s expectations that companies will implement compliance programmes and auditing procedures to deter and identify FCPA violations in their overseas operations.

The FCPA requires that issuers ‘make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.’ See 15 USC § 78m(b)(2)(A). The FCPA also requires that issuers ‘devise and maintain a system of internal controls sufficient to provide reasonable assurances that transactions are executed in accordance with management’s general or specific authorisation.’ Ibid at § 78m(b)(2)(B)(i).

The purpose of these provisions is to ensure that shareholders receive an accurate assessment of the company’s expenditures by preventing the accounting fraud associated with improper payments. A company facing an FCPA enforcement action may, therefore, also be sued in a civil action under securities law by shareholders claiming to have purchased their shares at an inflated price and in derivative actions brought by shareholders to recover for alleged wrongdoing by officers and directors.

The FCPA’s book and records provisions only apply to issuers and require no proof of a US territorial nexus. Given the expansive reach of the FCPA accounting provisions, business leaders should recognise the increased risks of a parent company for the accounting practices of its foreign subsidiaries.

Strict liability

A US parent is liable for the accounting fraud of its foreign subsidiary whether or not the parent has knowledge of the accounting fraud. There is no scienter requirement nor is there a materiality requirement.

For example, in its settlement with the government, Siemens acknowledged that it violated the FCPA’s book and records provisions when it incorporated the books and records of several of its subsidiaries that participated in the United Nations Oil for Food Programme into its own books and


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records. The subsidiaries falsely characterised kick-back payments to the Iraqi government as ‘commissions’ on their books and records, which were later entered into the books and records of the parent.

The mere consolidation of a subsidiary’s bogus entries into a parent’s own books and records is sufficient to establish FCPA liability. Dow Chemical Co settled a civil action with the SEC for allegedly violating the FCPA’s books and records and internal control provisions. See SEC Litigation Release No 20000 (13 February 2007). Dow consented to pay a $325,000 civil penalty in connection with improper payments by one of its foreign subsidiaries to public officials in India. The improper payments were made through third party intermediaries of the foreign subsidiary and without the knowledge of the US parent.

Increased risks of parent company for foreign subsidiary’s books and records and internal controls

The following high profile FCPA enforcement actions underscore the government’s leverage to demand exorbitant fines from a US parent for a breakdown in its financial and audit controls over a foreign subsidiary:•On30October2007,Ingersoll-Rand

settled an SEC books and records enforcement action by agreeing to pay disgorgement of profits of $1,710,034 plus pre-judgment interest of $560,953, and a further civil penalty of $1,950,000 in connection with improper payments by foreign subsidiaries to an Iraqi public official. See SEC Litigation Release No 20353 (31 October 2007);

•On1October2007,YorkInternationalsettled an SEC books and records enforcement action by agreeing to the disgorgement of $8,949,132 in profits, plus $1,083,478 in interest, and a $2,000,000 civil penalty in connection with improper payments made to an Iraqi public official by an intermediary of a foreign subsidiary. See SEC Litigation Release No 20319 (1 October 2007); and

•On26April2007,BakerHughessettledan enforcement action with the SEC and DOJ by agreeing to pay a record $44.1 million in connection with alleged bribery payments by its foreign operations in Kazakhstan, Nigeria, Indonesia, Uzbekistan, Russia and Angola. The SEC complaint alleged FCPA violations under

circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials or whether these payments would be accurately recorded in Baker Hughes’ books and records. See DOJ News Release, No 07-296 (26 April 2007) and SEC v Baker Hughes, 07-cv-1408 (SD TX 007).

Each instance signifies the government’s aggressive enforcement of the FCPA based on questionable accounting practices in the foreign operations of issuers subject to the FCPA. In each case, the inadequacy of the issuer’s internal controls provided the government with an aggravating circumstance to enhance the penalties.

Importance of internal auditors

The expansive reach of the FCPA accounting provisions presents formidable challenges to businesses with non-US operations. While the varied elements of an FCPA compliance regime are beyond the scope of this overview, business leaders must ensure that internal auditors are trained to identify the forensic evidence necessary to establish an FCPA violation in its foreign operations.

The role of compliance cannot be limited to training for management or third party intermediaries. Nor can it be limited to periodic independent audits by outside counsel and auditors. The day-to-day gatekeepers overseeing a company’s expenditures must also be trained in FCPA compliance.

To be more than a ‘paper programme,’ FCPA compliance must focus on identifying the ‘at-risk’ expenditures which could finance an improper payment. Towards that end, internal auditors should establish accounting controls for such items as charitable contributions, gifts and cash expenditures. Back-up documents must be retained along with strong cash controls to minimise the presence and access to cash accounts. Financial personnel must maintain regular account reconciliations for petty cash. Moreover, transaction process controls should also identify the ‘who, what and why’ of any gift or cash expenditure.

Financial and audit personnel should closely review the bona fides for any expense booked as a consulting, licensing or promotional payment to an intermediary. Personnel in business operations should look for the following red flags:


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• paymentrequestedincashortoanumberedaccount or the account of a third party;

•paymentrequestedinacountryotherthanthe intermediary’s country of residence or the territory of the sales activity, and especially, if it is a country with little banking transparency;

•paymentrequestedinadvanceorpartial-payment immediately prior to a procurement decision;

• reimbursementrequestsforextraordinary,ill-defined or last minute expenses;

•paymentrequestlackssupportingdocumentation; and

•paymentrequestisexcessiveinlightofpastpayments for similar services.

Conclusion

In today’s global marketplace, business leaders face a Herculean task of managing the FCPA risks in their foreign business operations. Notwithstanding this challenge, the government expects that a corporation will conduct the appropriate due diligence and implement the necessary internal controls to identify and remedy the danger of FCPA violations. Given the dramatic increase in FCPA enforcement against both companies and senior corporate executives, business leaders must educate themselves and their employees on the industry-specific FCPA risks attendant to their non-US business operations.

Notes1 The global investigations involving Siemens AG and Azko

Nobel are illustrative. In December, 2008, Siemens, a German company, and three of its subsidiaries pleaded guilty to FCPA violations brought by DOJ and SEC. See DOJ News Release, No 08-1105 and SEC Litigation

Release, No 20829 (15 December 2008). In its press release, DOJ acknowledged the assistance of the Munich Public Prosecutor’s Office, which also brought charges involving corrupt payments to foreign officials against Siemens. Id. As a result, the Siemens case is the first ever simultaneous resolution of domestic and foreign anticorruption charges. In settling its FCPA enforcement action against Azko Nobel, the government acknowledged the cooperation from the Dutch Public Prosecutor and even gave credit for fines to be paid by Azko Nobel to the Dutch authorities in a separate settlement agreement. See DOJ News Release, No 07-1024 (20 December 2007).

2 For example, as part of settlement agreements with the SEC and DOJ, the following companies have all agreed to the appointment of monitors or consultants to companies to ensure FCPA compliance: Siemens, Halliburton/KBR, AG, Ingersoll-Rand, York International, Paradigm BV, Baker Hughes, Vetco International, Schnitzer Steel, Statoil, ABB, Diagnostic Products Corporation, DPC (Tianjin) Ltd, InVision, Micrus, Monsanto, and Titan.

3 Siemens agreed to pay $800 million in combined civil and criminal penalties to settle its case with the government. On 11 February 2008, Halliburton/KBR agreed to pay $579 million in combined criminal and civil penalties to settle its case with the government. In 2007, three subsidiaries of Vetco International agreed to pay $26 million, while Chevron agreed to pay $27 million to various enforcement bodies, in addition to a $3 million civil penalty.

4 The recent increase in charges brought against individuals has generally followed settlements with cooperative corporations. The disclosures to the government which are attendant a corporation’s cooperation make it far easier for the government to prepare a case against a corporate executive. Thus, Syncor and its subsidiary settled FCPA charges with the government in 2002 while the government thereafter filed charges against Syncor’s former chairman, Monty Fu (see SEC v Fu, No 1:07-cv-01735 (DDC September 2007)). In addition, on 16 October 2006, Schnitzer Steel agreed to a DPA with the government which thereafter filed charges against the former chairman and CEO of Schnitzer Steel (see SEC v Philip, No 07-cv-1836 (D Ore 13 December 2007). On 24 September 2008, an Alcatel executive, Christian Sapsizian, was sentenced to 30 months in jail in prison after pleading guilty to an FCPA violation arising out of 2.5 million in payments made to a Costa Rican official in order to obtain telecommunication contracts.


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As Mexico and the rest of the world come to grips with the global financial crisis, it has become abundantly clear that efficient

corporate organisation and management is a matter of life or death. With financing sources increasingly hard to come by and credit committees insisting on greater transparency from borrowers, companies that can respond quickly to changes in the market place and that have embraced improved corporate governance practices will be more likely to attract the capital needed for future growth. In recognising the need for flexible corporate structures and greater transparency, in 2005 Mexico enacted the Securities Market Law (Ley del Mercado de Valores) in which it created a new corporate entity, the investment promotion corporation (sociedad anonima promotora de inversion) which is better known by the Spanish acronym ‘SAPI’.

What is a SAPI?

A SAPI is a Mexican stock company organised as a ‘sociedad anonima’ that voluntarily submits to the rules set out in the Securities Market Law. A SAPI has several distinguishable features from that of a traditional sociedad anonima. First SAPIs provide a greater level of protection to minority shareholders than a traditional sociedad anonima. The shareholders of a SAPI may enter into a shareholders agreement wherein the parties may establish share transfer restrictions, the rights of exiting shareholders, and, the rules and procedures for the repurchase of shares. In addition, the shareholder may enter into non-compete agreement to protect their investments in the event of a hostile takeover as well as voting agreements. Under the General Corporations Law (Ley General de Sociedades Mercantiles), the shareholders of a sociedad anonima are prohibited from entering into these types of agreements.

These features of the SAPI allow for greater flexibility in establishing the capital structure of the company and allow minority shareholders greater protection for their investments. By providing clear rules for exiting a SAPI, private equity investors will be encouraged to participate in SAPIs as they will have the liberty to negotiate exit terms with the other shareholders.

Another attractive feature of the SAPI is the possibility of adopting management and surveillance provisions similar to those of publicly listed companies (eg, establishing best corporate practices, executive and audit committees to assist the board of directors’ surveillance functions, having an independent external auditor examine the financial statements). To serve as a basis for the implementation of the company’s corporate governance practices, the company may adopt a charter of Best Charter of Best Corporate Practices (Codigo de Mejores Practicas Societarias) as well as an Ethics Charter (Codigo de Etica). By adopting such governance provisions at formation, a SAPI has the added advantage of being able to convert itself into a publicly traded company either as a sociedad anonima bursatil (SAB) or as a sociedad anonima promotora de inversion bursatil (SAPIB) without having to undergo the costly and time consuming process of implementing the Mexican Stock Exchange (Bolsa Mexicana de Valores) corporate governance requirements that are otherwise not required under the General Corporations Law. In this sense, the SAPI has the ability to adapt to the changing needs of the shareholders pursuant to the growth of its business.

Given the SAPI’s greater transparency and flexibility it is considered to be the preferable corporate entity for private equity transactions and mergers and acquisition deals. As the global market continues to change forcing businesses to become more efficient the SAPI provides shareholders with

revisiting the SAPI – a corporate entity whose time has come

Mariana Romero CasillasChadbourne & Parke,

SC, Mexico DF

mromero@

chadbourne.com


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a more agile corporate structure for meeting these changes and satisfying the transparency requirements of equity investors and lenders.

Common misconceptions regarding SAPIs

As a relatively new corporate entity, there are a number of common misconceptions that have developed concerning SAPIs which require clarification.

First, SAPI are not subject to the supervision and reporting requirements of the Mexican securities regulator, the National Banking and Securities Commission (CNBV). It is commonly assumed that since the Securities Market Law established the legal framework for the SAPI and corporate governance practices are required the SAPI is subject to CNBV supervision. This is not correct. SAPI are non-public companies and are not subject to inspections or supervision by the CNBV.

A second commonly held belief is that SAPI’s are subject to an unfavourable tax regime. A SAPI is subject to the same tax regime applicable to any other corporation established in Mexico.

Much of the hesitation to embrace the SAPI stems from the failure of many investors to understand the advantages provided by a SAPI. Many investors do not fully appreciate the benefits of implementing exit mechanisms such as ‘tag-along’ and ‘drag-along’ procedures for minority shareholders

nor the desirability of having methods for resolving voting deadlocks.

There is also a widely held belief that corporate governance is only for public companies and that it is more of a burden than a benefit. While this may be true in the short-term, the benefits of corporate governance in the form of attracting investors, access to capital and improved overall performance outweigh the pain of implementing such practices.

At its essence, a SAPI can be described as a traditional corporation with additional benefits.

Conclusion

Mexico continues to present many opportunities for both foreign and domestic investors and the SAPI is an excellent corporate entity for conducting business in a challenging business climate. As a result of tightening credit markets and the demand for greater vigilance of corporate activities by investors, the SAPI addresses these concerns by requiring a greater degree of transparency and governance. It is anticipated that private equity funds will play an increasingly important role in financing business ventures in the current environment where ‘cash is king.’ Due to the SAPI’s greater flexibility and the protection of minority shareholders, the use of a SAPI as an investment vehicle meshes well with the short to medium term exit strategies employed by most private equity funds.


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investigative powers are some examples of Brazil’s current legal framework on competition enforcement.

SDE is the authority in charge for investigating and initiating the administrative proceeding that will analyse if the conduct of defendants may be deemed as violation to the Competition Act.6 SDE has powers to conduct the prosecution and can, for instance, with judicial authorisation, conduct seek and seizure procedures, to obtain direct evidence such as objects, papers of any nature, commercial books, computers and files from the company or individual.7 Besides, SDE may request information from authorities and third parties, request hearings and, in general, seek for evidence of the conduct by any means admitted by law.

By the end of the investigation, SDE will issue a report where it concludes its work and suggests CADE condemn the parties or, alternatively, it will decide the withdrawal of the accusations, case in which CADE shall confirm SDE’s decision.8

In cases of cartel, CADE may condemn the involved companies into fines from one to 30 per cent of their gross revenue in the year before the initiation of the administrative proceeding.9 The company’s executives directly or indirectly involved in the conduct may be fined from ten to 50 per cent of the fine applied to the company.10 There are other penalties that may be applied, such as, for example, prohibition to deal with financial entities and to pay fiscal debts in installments, as well as prohibition to participate in bid promoted by the government for at least five years.11

Although the Competition Act has been in existence for the past 15 years, cartel prosecution only increased in the last five years. Fines applied to cartels reached 22.5 per cent of the gross revenue of some companies involved in the cartel in the sand extraction market.12 As mentioned above, fines applied by CADE in the last 15 years already exceeded R$500 million, considering that in one only case CADE fines that totalised R$345 million.

the prosecution of cartels in Brazil gained an extraordinary attention in the last few years. Brazilian and foreign companies and also

their officers have already been subject to investigations and penalties in Brazil for cartel practices. Fines applied by the Administrative Council of Economic Defence (CADE) in cartel cases have already totalised more than US$250 million in the last years and many individuals have already been condemned.

According to the Secretariat of Economic Law (SDE), from the Ministry of Justice, cartel is an explicit or implicit agreement among competitors mainly to fix prices or production quotas, client or market allocation.1 Cartel agreements involve the main aspects of competition, which are price, quantity, quality and market.2 Through this agreement, competition among companies is significantly limited and even eliminated in order to increase profit through a monopolistic price. According to estimates of the Organisation for Economic Cooperation and Development (OECD), cartels raise prices in ten to 20 per cent of the price practiced in a competitive market.

The Brazilian Competition Act3 provides that every act that may cause the limitation of free competition, the domination of a given market, an arbitrary increase of profit or the abuse of dominance, may be considered as a violation to the economic order.4 Among the conducts that are subject to penalties, there are: (i) to fix or practice, in agreement with a competitor, prices and sales conditions or services; (ii) to obtain or influence the adoption of a uniform or concerted commercial conduct among competitors, and (iii) to allocate market or clients or suppliers.5 All conducts must be able to lessen competition. Thus, the analysis and decision on whether a certain practice constitutes the formation of a cartel (or restrictive practice) shall be determined on a case-by-case basis.

The Brazilian Competition Act and its enforcement have improved in many aspects since its enactment in 1994. The new merger guidelines, the leniency (amnesty) programme and the establishment of stronger

competition law enforcement in brazil and the fight against cartels

Ricardo Inglez de SouzaDemarest e Almeida,

São Paulo

rsouza@

demarest.com.br


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In 2008, the administrative proceedings involving cartel accusations reached 13.5 per cent of the total of administrative proceedings analysed by SDE.

Type of conduct analysed by SDe at administrative proceedings in 2008

Source: SDE’s management report 2008

In the private security company’s cartel,13 CADE condemned the companies to a total amount of fines equivalent to, approximately, R$38 million. The trade associations and unions involved in the case were each fined in an amount of R$160,000. The individuals involved in the conduct were fined by amounts that totalised approximately R$4.5 million.

Another important case judged by CADE is the crushed stone cartel.14 In this case, the fines reached 20 per cent of the gross revenues of some of the involved companies. The trade associations were condemned to more severe fines, which reached approximately R$300,000.

Although these figures may not be considered very high if compared to the billionaire fines applied in the US and by the Commission in Europe, they show a new paradigm in Brazil and they tend to grow in the near future. Currently, there are more than 200 cartel cases under investigation by SDE and being judged by CADE.

The problems for the involved parties in a cartel case are not limited to the administrative field. Besides being fined by CADE, cartel is also a crime penalised with a two to five-year imprisonment or a pecuniary fine.15

As a result from the crushed stone cartel, for instance, a Public Prosecutor in Brazil accused 17 officers of the involved companies. According to estimates from SDE, the number of individuals that face or already faced criminal prosecution is significant and exceeds 100. For instance, during 2008 approximately 50 individuals were preventively or temporarily imprisoned.

Besides those penalties, there is also civil responsibility of companies and individuals, which could be subject to damage actions for the illicit conducts.

Finally, Brazilian authorities (CADE and SDE) have expressly affirmed that their top priority is the fight against cartel in Brazil.

Once a company is involved in an antitrust violation in Brazil, there are only a few ways out. One alternative is to try an agreement with the authority to avoid or minimise the legal consequences – leniency.16 Another alternative, in case the leniency agreement is not feasible or interesting, would be to negotiate an agreement of commitment to cease the practice.17 Besides the restrictions inherent to those instruments, none of them guarantees total immunity, at least civil liability will always remain.

Obviously, the best idea for companies and administrators is to invest in the prevention of any competitive violation. The best instrument to guarantee this is an efficient compliance programme. A compliance programme educates companies, entities and administrators about the concepts and limits imposed by the Competition Act, besides giving practical orientation for daily tasks. The number of companies with an effective compliance programme in competition laws is increasing, however it is still far from ideal. Currently, only one entity had its compliance programme approved by SDE,18 the Brazilian Association of Importers of Popular Products (ABIPP).

Although the competition law enforcement became rigid in a relatively short period of time, the prosecution of cartels gained a multi-millionaire dimension. Besides, such dimension is not only pecuniary and involves also criminal liability for individuals (including foreign citizens). In the current global economic scenario, it is likely that some companies try to save costs and take some fast track trails within the marketplace. It is important to bear in mind that Brazil is not a safe place for those not in full compliance with competition rules.

Discriminatory and/or exclusionary practices: 19.2%

Cartel: 13.5%

Price abuse: 63.5%

Predation: 3.8%


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Notes1 Information available at SDE’s website at www.mj.gov.br/

sde/data/Pages/MJ9F537202ITEMIDDEB1A9D4FCE 04052A5D948E2F2FA2BD5PTBRIE.htm (last accessed on

22 May 2009).2 See C Salomão Filho, Direito concorrencial – as condutas. 1st

ed 2nd tir. São Paulo: Malheiros, 2007, p 262.3 Law No 8,884, of 11 June 1994 (Competition Act).4 See Article 20, of Law No 8,884/94.5 See Article 21,items I, II e III, of Law No 8,884/94.6 See Article 32 and following of Law No 8,884/94.7 See Article 35-A, of Law No 8,884/94.8 See Article 40, of Law No 8,884/94.9 See Article 23, item I, of Law No 8,884/94.10 See Article 23, item II, of Law No 8,884/94.

11 See Article 24, of Law No 8,884/94.12 See Administrative Proceeding No 08012.000283/2006-66

(Defendants: Sociedade dos Mineradores do Rio Jacuí – SMARJA and others).

13 See Administrative Proceeding No 08012.001862/2003-10 (Defendants: Associação das Empresas de Vigilância do Rio Grande do Sul – ASSEVIRGS and others).

14 See Administrative Proceeding No 08012.002127/2002-14 (Defendants: Sindicato da Indústria de Mineração de Pedra Britada do Estado de São Paulo and others).

15 See Law No 8,137, of 27 December 1990.16 See Article 35-B, of Law No 8,884/94.17 See Article 53, of Law No 8,884/94.18 It is not mandatory to have the compliance programme

certificate by SDE.

control of economic concentration in M&A transactions in Uruguay

héctor FerreiraHughes & Hughes,

Montevideo

hferreira@

hughes.com.uy

Uruguayan antitrust law

Until 1999, Uruguayan law had just a general antitrust rule embodied in the Uruguayan Constitution (Section 50), according to which government should control commercial and industrial antitrust behaviours. This rule was extremely general and its application was difficult without statutory law.

Between 1999 and 2001 Uruguay introduced in its legislation three Acts1 that directly faced the issue of whether or not certain events should be avoided in a healthy market, passing not a general antitrust law but several statutory rules which were, at that point, revolutionary for the Uruguayan legal system.

Finally, on 30 July 2007, Uruguayan Congress passed Act 18.159 (hereinafter the ‘Act’) which embodies, in only one statute, the general rules regarding Antitrust Law.

Notwithstanding the foregoing, the essence of the old system survived although improved by the Act which is wider in its scope and in the issues covered.

As the Act sets forth in Section 1, its purpose is to promote the welfare of consumers ‘by means of the promotion and defence of competition, the stimulation of economic efficiency, freedom and equal access conditions of companies and products to markets’.

The Act also laid down in its Section 2, the general principle of free competition stating that ‘all markets are subject to the principles and rules of free competition’ with the exception of the ‘limitations set by law due to reasons of general interest’.

As a corollary of this general principle, the Act forbids certain practices which could affect competition.

The second paragraph of Section 2 deems as forbidden practices: ‘the abuse of a dominant position, as well as all practices, behaviours or recommendations, either individual or coordinated, which have as effect or purpose to restrict, limit, hinder, distort or obstruct the current or future competition in the relevant market’.

In this context, one of the biggest innovations of the Act was the creation of a government control mechanism in M&A transactions, which intends to avoid economic concentrations that can lead to antitrust behaviours. This kind of control had been in existence in the United States since the Sherman Act of 1890 and in different countries of Latin America as well as, recently, in Europe. However, given both the lack of antitrust regulation Uruguay had for most of its history and the existing international patterns, some kind of government control in M&A transactions was deemed necessary and ultimately created in 2007.


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This brief article purports not to raise the issue of the government control in itself, since it is blatant in the Act, but to contextualise it in the M&A practice and to briefly explore the effects of not complying with the Act.

Section 9 of the Act refers to a special event in which economic concentration can lead to a ‘Monopoly in Fact’, ie, just one company emerges, in the relevant market, after the transaction. In this case, different rules will apply. This article will not discuss this special case.

Brief analysis of the US control mechanism of economic concentration

In the United States there is a long tradition in terms of Antitrust Law, but currently most mergers are reviewed under Section 7 of the Clayton Act. The scope of the section that was originally restricted to stock acquisitions covers also after 1950 asset acquisitions.

Moreover, after 1950 amendment, the referred section made clear that the statute applied to horizontal, vertical and conglomerate mergers. As Gavil, Kovacik and Baker stated, the distinguishing characteristic of the anti-merger prohibitions of the Clayton Act is its objection to mergers that ‘may substantially lessen competition’. The word ‘may’ also furnishes basis for challenging mergers before they can lead to actual anticompetitive effects, which means that they can be challenged even before they are consummated.

The other relevant statutory reference is the Hart-Scott-Rodino Antitrust Improvements Act passed in 1976, which created a system of pre-merger notification. Mergers today typically are challenged upon their announcement, before any possible adverse competitive effects can occur. Before 1976, it was more common for mergers and acquisitions to be challenged only after consummation. Hence, merger review in hindsight typically remedies an insoluble problem, because it requires a court decision that has to deal with an already closed transaction.2

The idea of ‘structural presumption’ is a traditional solution which predicts anticompetitive effects based on significant increases in market concentration. This presumption, which is the subject of the Brown Shoe case,3 can be conceived as a legal device for making predictions about the competitive effects of mergers in an environment of uncertainty.4

The US Court ruling in Philadelphia National Bank5 set forth a legal presumption of anticompetitive effect from a horizontal merger that would increase market concentration.

As a consequence, the Legislative, in order to avoid harmful concentration, changed the antitrust review of mergers from an ex post review of their actual effects, to an ex ante review of their probable future effects. Antitrust Law’s focus on future effects was enhanced by the pre-merger notification requirements enacted in 1976.

Another crucial step in merger analysis was the Justice Department’s 1982 Merger Guidelines, which adopted the structural presumption from Philadelphia National Bank and other relevant Supreme Court precedents, but also reaffirmed the idea that the structural presumption can be rebutted by considering factors that might contribute or frustrate the anticompetitive effects of mergers.6

The merger guidelines were written as a guide to the exercise of the prosecutorial activity, but they have also influenced merger judicial analysis. It intends to reduce the uncertainty associated with enforcement of the antitrust laws. The mechanical application of certain standards may avoid misleading answers companies may have.7

Two recent horizontal merger cases ruled by the US Court of Appeal for the DC Circuit, ie, Baker Hughes (1990)8 and Heinz (2001),9 reaffirmed that the structural presumption remains being the controlling precedent. While Baker Hughes emphasises how that presumption can be rebutted, Heinz heightened its importance when market concentration is too high.10

Regarding some of Uruguayan neighbours, in a brief overview, both Brazil and Argentina followed the US system. Argentina struck down Act 22.262 and passed Act 25.156 which not only tried to avoid abuse of dominant position but also to control economic concentration when it can affect competition, by requiring pre-merger authorisations. Brazil has also followed the US system before (Acts 4137/62 and 8884/1994) asking for pre-merger authorisations.11

Brief analysis of the european model

The European system, originally, did not control economic concentrations and just antitrust behaviours. The general rule in the Treaty of Rome of 1957 was to admit the


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dominant position, as something natural, and just to punish the abuse of such position.

After World War II, Europe had to face and compete with American firms and to do so, it created firstly an economy of scale and then, once obtained, a mechanism to control the monopolies.

The European model is more linked to the so called ‘National Champion’, which means that the countries foster the development of one important company in a certain field and, ultimately, this champion will be the one prepared to confront the global market. According to Professor Martinez Blanco the supporters of the theory of the ‘National Champion’ have maintained that the countries in Europe had been living, knowingly, without pre-merger authorisations for more than 20 years. Once Europe developed ‘strong players’ to perform in the global market, then they chose a stricter interpretation of the Treaty of Rome and set pre-M&A authorisations.12

The control of economic concentrations was regulated by Decision EC 139/2004 according to which the European Union tried to control concentrations that could substantially lessen competition in the Market.

Uruguayan control mechanism

The Uruguayan Congress largely discussed which of the two models regarding M&A authorisations/notifications applied in the world (ex ante or ex post), fit better in the Uruguayan characteristics. There were supporters of both sides and no one could overcome the other’s position. In light of this dichotomy, the solution was neither that the control should be made ex ante nor ex post. A hybrid solution emerged from the discussion of the bill since it is neither a typical pre-merger authorisation nor an ex post facto resolution. The Uruguayan Act called for a ‘notification’ that must be made in certain specific cases.

According to the Act there is an obligation of notifying the Commission of Promotion and Defence of Competition (the ‘Agency’) of acts of economic concentration, like mergers and acquisitions, ten days before such acts are executed by companies, provided that such acts fulfill any of the following requirements:(i) When as a consequence of the

transaction, concentration becomes equal or above 50 per cent of the

relevant market. (ii) When the gross annual invoicing in

Uruguayan territory of the participants in the transaction is equal or above, approximately, US$62,000,000 in any of the last three financial years.

Notwithstanding, Section 8 provides four exceptions in which there is no obligation of notifying, even when some of the above referred conditions occur. They are the following: (a) the acquisition of companies in which the buyer already had at least 50 per cent of its shares; (b) the acquisition of bonds, debentures, obligations, any other security issued by the company, or shares with no voting rights; (c) the acquisition of only one company by only one foreign company which previously did not possess assets or shares of other companies in the country; and (d) acquisitions of companies, bankrupted or not, which have not registered any activity within the country in the previous year.

Consequently, Uruguay approved a particular ex ante notification which is neither a pre-M&A authorisation nor an ex post proceeding that cannot jeopardise the M&A transaction, in itself, since no authorisation is expected after the notification. Even though it is an ex ante notification, the control that can eventually occur, will be an analysis of the effects (ex post) of the concentration (which is not deemed as illegal in itself).

A pure ex ante mechanism has been seen by some part of the lawmakers as something inconvenient for a small country like Uruguay. An ex ante mechanism would conspire against the possibilities of Uruguay to obtain foreign investments since the necessity of a pre-M&A authorisation, which can take time, would discourage investors.

On the other hand, it was deemed by the majority of the Uruguayan lawmakers that the efficiency of an ex post notification would be very slim, since when the notification is made the whole transaction is finished.13

Challenging the transaction, after consummation, creates uncertainty for the merged entity and its employees for a substantial period of time. On the other hand, reviewing it with the benefits of hindsight, in theory permits courts to judge mergers based upon their actual effects.14

Furthermore, Professor Cabanellas stated that an ex post mechanism can create huge costs, uncertainty and generally it is not possible to remedy the antitrust effects of the concentration once it was performed.15


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In light of the referred above, the Uruguayan Act introduced a solution which is hybrid and has two prongs:a) It is not a typical pre-merger

authorisation, because the merger or the acquisition does not depend on the government authorisation;

b) It is not an ex post authorisation because the notification does not request an authorisation that can affect the merger or the acquisition.

The Act created an ex ante notification, which must be made ten days before the transaction, but the government is not intending to approve it before closing. The idea of the notification is just that the government will be aware of the concentration and can wait and see if due to the merger or the acquisition antitrust behaviours are performed. In this case the situation will be considered under the same rules as any other case regulated by the Uruguayan Law. The notification was referred to by one lawmaker as a ‘yellow light’.

Consequences of not complying with the notification

If the companies, which are being part of an M&A transaction that triggers Section 7, do not notify the agency within the ten-day period granted by law, the transaction will not be void or voidable. It will be completely enforceable.16

However, the agency can impose administrative sanctions to the companies

that have not, in a timely manner, complied with the notification.

Finally, in order to avoid the referred sanctions, Uruguayan Law (Section 19 of the Decree 404/2007) allows the filing of a preliminary proceeding by which the companies that are planning an M&A, which can be covered by Section 7, can ask the agency whether or not they need to perform the notification.

Notes1 Act 17.188 passed on 8 September 1999; Sections 13, 14

and 15 of Act 17.243 passed on 29 June 2000 and Sections 157 and 158 of Act 17.296 passed on 21 February 2001.

2 Andrew I Gavil, William E Kovacic and Jonathan B Baker, Antitrust Law In Perspective: Cases, Concepts And Problems In Competition Policy (2002).

3 Brown Shoe Co v United States, 370 US 294, 82 S.Ct. 1502, 8LEd2d 510, (1962).

4 Gavil, supra note 2.5 Philadelphia Nat Bank v United States, 374 US 321, 83 SCt

1715, 10 LEd 2d 915 (1963). 6 General Dynamics Corp v United States, 415 US 486, 94 SCt

1186, 39 LEd 2d 530 (1974).7 US Department of Justice and the Federal Trade

Commission, Horizontal Merger Guidelines (Revised 1997). 8 Baker Hughes Inc v United States, 908 F 2d 981, 285 US App

DC 222 (DC Cir 1990).9 FTC v HJ Heinz Co, 246 F 3d 708, 345 US App DC 364 (DC

Cir 2001). 10 Andrew I Gavil, supra note 2.11 Jaime Berdaguer, Estudios Sobre Defensa De La

Competencia y Relaciones De Consumo (2008). 12 Camilo Martinez Blanco, Manual De Derecho De La

Competencia (2007).13 Ibid.14 Andrew I Gavil, supra note 2.15 Guillermo Cabanellas De Las Cuevas, Derecho

Antimonopolico Y De Defensa De La Competencia (1983).16 Jaime Berdaguer, supra note 11.


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Introduction

The initiative of the Argentine Supreme Court of Justice as it passed judgment in re Halabi, Ernesto v Poder Ejecutivo Nacional – ley 25.873, decreto 1563/04 s/ amparo ley 16.986 (Halabi) dated 24 February 2009, is of great significance for Argentine law and for the development of class actions regarding individual homogeneous interests.

This judgment represents the culmination of a period of debate between the courts on collective rights that were included in the Argentine Constitution in 1994, and on the collective claims to enforce them.

The above considerations express what Argentine courts have long held: ‘where there is right, there is a legal remedy’. This is so because the Argentine Constitution rights exist and protect individuals per se, irrespective of the existence of laws that regulate them.

As we will further analyse, the Supreme Court did not just rule mere statements. On the contrary, given the lack of regulations by the Argentine Congress, it set forth the basic guidelines for the procedure that will guide courts and individuals in the group claims filed to enforce collective rights regarding homogeneous individual interests or, as the Supreme Court stated, ‘rights or in rem rights derived from harm to the environment and to competition, rights of users and consumers, as well as the rights of those discriminated against’.

This article analyses the evolution of collective actions, the highlights of the judgment as it creates a new procedure within our law, its inclusion in the legislation of certain Latin American countries, and finally we share some perspectives and our opinion on what should be the main takeaways of this ruling.

Certain definitions necessary for our analysis

As the United States Supreme Court held in Supreme Tribe of Ben Hur v Cable,1 a class action is a procedural untraditional tool that enables a person to represent a group of individuals affected by the infringement, or a threat of infringement, of a right, provided that the subject matter ‘be of common or general interest to such a big number of people that it makes it impossible to bring all of them before the court’.

This action, given the nature of the rights at stake, implies that the judgment on a given case that sustained the plaintiff’s claim, benefits not only him but also all those who share certain circumstances that serve as requirements for the case to proceed. Hence, the judgment will be enforceable against the defendant by those who, despite not having been parties to the trial, share the same legal or factual standing with the plaintiff. This new procedure aims to achieve celerity, procedural economy and access to courts, providing effective court protection to rights.2

Amendments to the Argentine Constitution in 1994: its Article 43, and the background of Halabi

‘Any person shall file a prompt and summary proceeding regarding constitutional guarantees, provided there is no other legal remedy, against any act or omission of the public authorities or individuals which currently or imminently may damage, limit, modify or threaten rights and guarantees recognised by this Constitution, treaties or laws, with open arbitrariness or illegality. In such case, the judge may declare that the act or omission is based on an unconstitutional rule.

class actions under Argentine law: evolution, present status and perspectives‘Where there is right there is a legal remedy to enforce it, since constitutional rights exist and protect individuals just for being included in the Constitution and irrespective of its supplementary laws, whose limitations cannot make up an obstacle towards its effective validity’

Juan Pablo De LucaRattagan Macchiavello

Arocena & Peña

Robirosa Abogados,

buenos Aires

[email protected]

Patricio AbalRattagan Macchiavello

Arocena & Peña

Robirosa Abogados,

buenos Aires

[email protected]


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This summary proceeding against any form of discrimination and about rights protecting the environment, competition, users and consumers, as well as about rights of general public interest, shall be filed by the damaged party, the ombudsman and the associations which foster such ends registered according to a law determining their requirements and organization forms…’ (Argentine Constitution, Article 43; emphasis added).

The protection of three categories of rights grants the standing to sue and these are: (i) individual; (ii) collective; and (iii) individual homogeneous rights. Of these categories, two already had legal means established for their defense before Halabi.

Individual rights are protected by the traditional injunctive relief measure (Acción de Amparo) that was also a creation of the Supreme Court in the leading cases Siri 3 and Kot 4 and was later adopted by law No 16.896.

Collective rights (ie, rights for the protection of goods that belong to the community as a whole, goods that are indivisible and do not admit exclusion), were also already recognised by the courts and the legal commentators previous to Halabi. The defence of these rights can be led by the Ombudsman (Defensor del Pueblo de la Nación), consumer associations or the individual. For the claim to proceed, it has to fulfill two requirements: its object has to be the protection of a collective good, and it has to be focused on the collective effects despite the individual damages that might have emerged from the infringement.

As for individual homogeneous rights, Consumer Defence Law No 24.240 (as modified by Law No 26.631), had already admitted the protection of the rights declared in such body of law through collective actions.

Despite the abovementioned, this law could not fill the legislative void because it did not establish any substantial provisions for this type of proceedings. Although it did provide more elements for the protection of these rights, it left without mention basic procedural issues and without clearing the uncertainties for the potential affected individuals and for the judges as interpreters and the ones in charge of enforcing the law.

Halabi and the establishment of class actions in the Republic of Argentina

Fortunately the Supreme Court intervened; it held from the outset that group rights are fully operational, that it is a judge’s

duty to guarantee their effectiveness when they are infringed and the right to access the courts by the right’s holder is severely restricted, and that, as was said, where there is a right there is an adequate legal remedy. Therefore, with the ruling in Halabi the Court granted full operational effectiveness to Article 43 of the Constitution.

Apart from such an important initiative, Halabi was the first case in which the Supreme Court declared a law to be unconstitutional erga omnes (‘against all’) reinforcing in that way the ‘equal under the law’ principle stated in Article 16 of the Constitution. The Court fulfilled in that way its mandate to be the head of the branch of government in charge of restoring the validity of the Constitution once it has been infringed. The head of the judicial branch did not violate the principle of separation of powers with this ruling; in fact it strengthened the Constitution by acting according to the purpose of such body of law and that is: to do what the Constitution orders or allows.5

We shall now highlight the relevant features of this creation of the Supreme Court, features that, as was mentioned, shall not only serve as guidelines for the judges and the parties in a case but also for lawmakers when drafting the law for the regulation of these proceedings.

Regarding standing to sue, the Court said it is ‘perfectly acceptable’ for an individual affected, the Ombudsman or certain associations to file a collective claim on behalf of the class.

It was stated that it is of the essence for this kind of proceedings to have a unique or complex deed causing damages to a substantial plurality of individual rights. Furthermore, the claim has to be focused in the common effects, not in the individual ones; hence, the existence of a cause or controversy is related to the homogeneous elements that the plurality of individuals have by being affected by a single deed.

Moreover, this type of action was created to prevent situations were the right to access the courts is restricted given the lack of economic incentives caused by the high costs of legal fees and of evidence gathering.

The collective action shall also proceed in those situations in which matters related to issues, such as the environment, consumption, health or damages to groups that have traditionally been neglected, become more relevant. This is because under certain circumstances the nature


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of these rights – despite their singularity – exceeds the individual interest while at the same time showing a strong interest of the state for its protection.

We have already highlighted the erga omnes effect given to the res judicata, which is inherent to the nature of the collective action in virtue of the significance of the rights that are seeking protection (with the exception of the proof of the damages, which shall be determined in special proceedings or judgment enforcement proceedings).

A number of procedural requirements were established for the claim to move forward:1. the identification of the affected group;2. the adequacy of that who intends to

represent said group;3. the claim has to revolve around

factual and legal issues, beyond any individual matter, that are common and homogeneous for the whole group;

4. an adequate procedure to guarantee the appropriate notice of all of those who might have interest in the outcome of the trial, in such a way that they can choose whether to ‘opt-out’ or to join the plaintiff or defendant side; and

5. the proper implementation of publicity measures to avoid the multiplication or overlapping of collective actions that have the same object which also helps to prevent the danger of contradictory rulings over the exact same factual and legal issues.

Comparative law: the situation in Brazil and Chile

The Brazilian Constitution, in Article 5, states that it is a duty of the state to protect consumer rights. Consistent with that provision the Consumer Defence Code was enacted in 1990 which allows for the collective protection of diffuse, collective and homogeneous individual interests or rights.

In Brazil the class decree in class actions for damages is limited to the declaration of the defendant’s liability and each individual class member must bring an individual class action to prove causation and the amount or extent of the individual damages suffered.6

The Attorney General’s office, the Federal, State and Municipal Governments and the Federal District, are vested with the standing to sue on behalf of private plaintiffs in collective actions of any kind, regardless of the private or public nature of the claims. Other party representatives – like consumer

associations – can also intervene on behalf of claimants. These other representatives must fulfill several requisites, in order to ensure that they represent the class in a fair and proper manner. The CDC also enables the filing of claims against multiple defendants, by allowing plaintiff to pierce the corporate veil of different entities and consolidate claims against them in a single suit. In order to allow potential victims to opt-in, the CDC established a public notice system.

The CDC grants res judicata effects of the decision rendered in the declaratory phase to the general population or to any potential members of the group, class or category of plaintiff. The effects in class actions for the protection of diffuse or collective rights shall not adversely affect the individual interests and rights of the members of the class. And in the case of the class actions for the protection of homogeneous individual rights the absent members who did not intervene in the class action as co-parties may file individual damage actions.

Chile passed a reform to its 1997 Consumer Law (Law No 19,995 of 2004) expanding the protection of consumer rights with the establishment of three types of remedies: actions on behalf of the collective interests of a defined group of consumers linked to the defendant by a contract, actions on behalf of diffuse interests, and individual actions.

The collective and diffuse interest actions may be brought by the National Consumer Service (SERNAC), by a consumer association duly organised under the Consumer Law, or by a group of no less than 50 individuals. The Chilean consumer statute does not require the intervention of lawyers in the proceedings. However, when counsels are present, the statute gives the presiding judge power to require the plaintiffs to appoint one of them as the lead counsel. In terms of opportunities to intervene, the statute establishes an ‘opt in’ procedure for those who were not part of the original group of claimants, and also allows for the organisation of plaintiffs in different sub-classes.7

Conclusions

Without a doubt this initiative of the Supreme Court is of great significance, not only for creating the collective actions but also because it shows again the preponderant role of the Court as a guarantor of the rights established in the National Constitution.

Regarding the collective actions as an


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extraordinary procedural tool for the protection of individual homogeneous rights, it is expected that the Supreme Court will confirm the criteria adopted in Halabi.

It may have the chance to do so soon in a case related to in rem interests in which a consumer association has moved to have certain clauses declared ineffective. These clauses are part of the contract of adhesion drafted by a prepaid medical care company that is signed by its customers and allow said company to increase the value of the monthly payments at its discretion. We are referring to in re Padec v Swiss Medical SA s/ nulidad de cláusulas contractuales, in which the Attorney General has already passed judgment supporting the criteria adopted in Halabi.

It is certainly nice to point out the development of institutions that clearly aim towards increasing society’s wellbeing.

In this sense it is also expected that the Legislative Branch understands the clear message sent by the Supreme Court and

once and for all regulate, as Brazil and Chile have already done, the class actions, using as models some bills that were introduced some time ago or the Model Code of Collective Proceedings for Latin America (Código Modelo de Procesos Colectivos para Iberoamerica), drafted by the Latin American Institute of Procedural Law (Instituto Iberoamericano de Derecho Procesal ).

Notes1 Supreme Tribe of Ben-Hur v Cable, 255 US 356 (1921).2 Sabsay, Daniel Alberto ‘El derecho a la intimidad y la

“acción de clase”’ LA LEY 2009-B, 401.3 Fallos 239:459.4 Fallos 241:291.5 Bidart Campos, Germán J, ‘Tratado Elemental de

Derecho Constitucional Argentino’, t II (El Derecho Constitucional del Poder), p 366, Buenos Aires, 1991.

6 Antonio Gidi, ‘Class Actions in Brazil: A Model for Civil Law Countries’ 51 Am J Comp L 11 (2003).

7 Manuel A Gomez, Class Actions, Group Litigation and Other Aggregative Procedures in Latin America: A General Overview, FIU Legal Studies Research Paper Series (2009).


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the Chilean Central Bank has recently issued rules with the purpose of clarifying the concept of connected obligations, in relation to the netting of

derivative transactions in the event of insolvency of Chilean Banks. This concept has also been extended by the new law on netting and settlement systems for financial instruments and the emergence of finality legislation in Chile.

On 5 June 2007, the Chilean Bankruptcy Law and the Chilean Banking Law were amended by Law No 20,190 known as the ‘Capital Market Law II’ (MKII). Among other modifications, the MKII amended article 136 of the Banking Law referred to the effects of the forced liquidation of a Bank. MKII established a legal authorisation to set off connected obligations existing among a Chilean insolvent bank and its creditors, when originated in derivative transactions. These connected obligations were defined by Article 69 of the Chilean Bankruptcy Law as ‘those that, even being in different currencies, rise from derivative transactions, such as futures, options, swaps, forwards or other instruments or derivative contracts entered into between the same parties, in one or more opportunities, under Chilean or foreign law, under the same master agreement duly recognised by the Chilean Central Bank and that includes netting provisions in case of bankruptcy or forced liquidation’.

Based on attributions granted by MKII, the Chilean Central Bank, hereinafter (ChCB), has issued the following resolutions with respect to netting of derivative transactions: i. Resolution No 1385 issued on 17 January

2008, by means of which the ChCB recognised the ‘1992 ISDA Master Agreement’, in its forms ‘Local Currency – Single Jurisdiction’ and ‘Multicurrency-Cross Border’, and the ‘2002 ISDA Master Agreement’, for close-out netting in case of insolvency of a Chilean counterparty.

This resolution limited its application to corporate entities subject to the Bankruptcy

Law and excluded, therefore, any banking institution subject to a forced liquidation procedure provided for in the Chilean Banking Law, that caused the reaction of Chilean banking entities.ii. Resolution No 1427 dated 7 August 2008

extended the recognition of the referred ISDA Master Agreements for netting purposes to Chilean banks subject to forced liquidation procedures and ruled special early termination events that would be allowed by the ChBC for netting when one of the parties involved in a transaction is a Chilean Bank and limited the scope of such early termination events to: (a) forced liquidation or cancellation

of licences by the regulator; (b) voluntary termination of the bank’s

operations, prior consent of the regulator; and

(c) default in payment of a material obligation under a derivative contract governed by the ISDA Master Agreement.

iii. Then, on 22 January 2009, the ChBC issued Resolution No 1457 in which it recognised that parties may freely agree any other early termination event on any of the Master Agreements recognised by the ChCB.

Notwithstanding the foregoing, netting as a consequence of early termination events different from the ones referred to in number (ii) above and their effects, will be suspended and not enforceable in the event that any of the sanctions or measures that we will specify below, are imposed to a Chilean bank as long as the same are in force.

In the case of Chilean Banks incorporated in Chile, the sanctions and measures (different from the resolution that revokes its authorisation of existence or orders a forced liquidation proceeding) are the following: a. Any of the limitations or prohibitions

stated in Article 20 of the Chilean Banking Law for financial hardship or

chilean provisions for close out netting of ‘connected obligations’ in relation to derivative transactions entered into by chilean banks

elena yuberoCarey y Cía, Santiago

[email protected]

Juan FernándezCarey y Cía, Santiago

[email protected]


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deficient administration,1 ie, measures that the Superintendent of Banks and Financial Institutions is entitled to impose, by means of a grounded resolution, and for the maximum period of six months, renewable inspector delegado once only for the same period; as well as the designation or renovation of the or the provisional administrator in the terms of Article 24 of the Chilean Banking Law.

b. Any measure imposed to the Chilean Bank in the event of insolvency, different from forced liquidation, such as: b.1. Preventive capitalisation, until the

shareholders of the Bank do not agree the corresponding capital increase;

b.2. Financial composition, until the creditors of the Bank do not approve the proposals;

b.3. Capitalisation of a Bank, until the corresponding authorisation granted by the regulator is not issued; and

b.4. Measures imposed in case the Bank incurred in a breach of its minimum paid-in capital or presents a deficit in its technical reserves in the event of a financial composition.

Finally, on 6 June 2009, Law 20.345 on netting and settlement systems for financial instruments was published in the Official Gazette. The provisions of this new law are applicable to netting and settlement of financial instruments, to financial instruments administrators ie, clearing houses and central counterparties; to participants, to guarantees granted by the latter and to the netting instructions regarding the operation of that system.

According to the provisions of this law, netting will be performed by means of bilateral or multilateral mechanisms, while settlement will be by means of accounts annotations at the relevant registry for dematerialised securities or pursuant to the regulations applicable to the specific financial instrument.

One of the important issues of this new law is that it recognises the ‘strength principle’ or what in other jurisdictions is known as finality legislation, ie, upon the acceptance of an instruction by a system it is irrevocable and cannot be cancelled, annulled or modified by the parties of the underlying transaction. Once a netting instruction has

been accepted, both the instructions and the liabilities that might arise on the same will be definitive, that is, legally demandable and unopposable to third parties, and they cannot be annulled, unexceptionable or ineffective. Hence, any provisional measure, prohibition, attachment, vindication or other limitation will not impede the netting and settlement and no annulment, not enforceable, challenge or suspension originated or triggered by a bankruptcy proceeding or any other cause will affect the strength of the netting and settlements performed by a system. And what is really an issue, is that the law recognised and accepted that all these measures must be notified in person to the legal representative of the system and can only have the appropriate effects on the netting instructions entered from the next business day, so the payment system will be safeguarded and settlement sessions not affected by these reasons.

Another important issue of this law is that it widened the scope of the concept of ‘connected obligations’. Article 42 states that obligations caused in the acceptance of netting instructions by a system and other obligations originated in the functioning rules (the ones that rule the participation of the relevant members in the systems) will be connected obligations for the applicability of the provision of the bankruptcy law previously referred to in the first paragraph of this article.

In conclusion, the Chilean Central Bank granted the necessary protection to safeguard Chilean and foreign parties in the event of netting caused by an early termination event in an insolvency scenario.

Note1 The granting of new loans to any individual or legal entity

related, either directly or through third parties, to the ownership or management of the Chilean bank; 2) The renewal of any loan for a period over 180 days; 3) The release or the establishment of a limit to the guarantees of outstanding loans; 4) The acquisition or disposition of tangible or intangible assets that correspond to the fixed assets or to the financial investments of the Chilean Bank; 5) The transfer of assets of the loan portfolio of the Chilean Bank; 6) The granting of unsecured loans; 7) The performance of certain acts or the entering into certain agreements or conventions or the renewal of those then in force with the persons indicated in number 1) above; 8) The granting of new loans or the acquisition of financial investments, if the growth of the aggregate of the loans and financial investments, with respect to the month immediately preceding, exceeds the variation of the Unidad de Fomento during the same period; and 9) The granting of new powers of attorney that provide authority to execute any of the acts indicated in the preceding numbers.


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the Brazilian oil and gas market was a State monopoly from the creation of Petrobras in 1953 until 1995, when the Brazilian Constitution

was amended allowing private and public companies to perform activities in the sector. The following step occurred in 1997, when the Petroleum Law effectively opened the Brazilian oil and gas market by regulating the participation of foreign and Brazilian companies.

Since the market opening, the national production of oil has increased by more than 75 per cent while, in general terms, the petroleum industry in Brazil registered a growth of more than 300 per cent between 1997 and 2006. Brazil, which had been historically a net importer of oil and gas, became self sufficient in petroleum in 2006 and is now aiming at becoming one of the world’s major oil exporters, which has already resulted in invitations for the country to join OPEC.

The dawn of a new era in E&P activities in Brazil began on 11 July 2006, when Brazilian state-owned oil company Petrobras issued a statement informing that its consortium with BG and Petrogal had found light oil in ultra-deep waters in a new exploratory frontier in the Santos basin, which later become known as the ‘pre-salt area’.

The ‘pre-salt area’ is located 275km off the southeastern Brazilian coast measuring approximately 800km in length and 250km in width. The oil, found beneath 6,000m of water, sand and rock, is also trapped by an additional layer of salt, which can reach up to 2,000m of thickness, making extraction technologically and financially challenging.

According to Petrobras CEO José Sérgio Gabrielli, the discovery is believed to contain between 70 and 100 billion boe, consisting mainly of good quality light oil, representing one of the major discoveries in the last decades and potentially elevating Brazil from the 24th to the ninth or eighth position in the world rank of oil proved reserves, surpassing major oil exporters such as Venezuela and Nigeria.

Considering the prospects appointed by the first surveys in the area, the government removed several blocks in the region from the ninth round bid held on 8 November 2007 for the selection of exploration and production concessionaires, until a comprehensive study on the region is released, better clarifying its full potential. For this purpose, the government created an ‘Interministerial Commission’ in July 2008 in order to conduct said studies, aiming at presenting proposals of a new regulatory framework to better suit Brazil’s new position in the oil and gas industry, as well as increasing the government’s revenues without losing attractiveness to the international oil companies.

This Commission is composed by the Brazilian Minister of Mines and Energy, the Minister of Planning, the Secretariat of State, the Minister of Finance, and the Presidents of Petrobras, the National Agency of Petroleum, Natural Gas and Biofuels (ANP) and the Brazilian National Development Bank (BNDES).

Although the proposal has not yet been finalised and presented by the Commission, the government confirmed that the new legal framework will be submitted to the National Congress still in 2009 and shall be voted in an expedite term. Recent government statements indicate that the Commission focused on two specific proposals: a production sharing model and the creation of a 100 per cent state-owned company to manage the pre-salt oil reserves.

The production sharing proposal under discussion comprises the adoption of a new regulatory model for the unexplored pre-salt blocks, in which the government would maintain the ownership of the hydrocarbons exploited, sharing part of the production with the oil company responsible for its exploration and production.

Additionally, clearly inspired by the Norwegian regulatory model, a fully state-owned company would be created to manage the oil reserves in the region through partnerships with oil companies,

brazilian oil and gas sector trends

Luiz Antonio Maia espínola de LemosTozziniFreire

Advogados,

Rio de Janeiro

llemos@

tozzinifreire.com.br


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including Petrobras. The revenues, or at least a portion thereof, are likely to be destined to a sovereign wealth fund to be created by the government.

Even though none of the information regarding the new regulatory framework has been officially confirmed by the government, it is always important to underline that in numerous opportunities the government has clearly stated that the rules governing the sites previously auctioned are not to be affected by this upcoming legislation, which will be applicable only to the new pre-salt area blocks. However, considering that some pre-salt blocks are already being developed under the concession agreements provided for in the 1997 Petroleum Law, new rules will have to be established in cases of unitisation between new areas to be explored under the new framework and the areas which are already being explored.

Meanwhile, in view of the imminent boost in the oil and gas industry after such discoveries, the Brazilian government seeks possible uses of these expected revenues to stimulate other sectors of the economy, thereby avoiding a disproportionate dependency on the oil and gas sector.

A potential problem to be tackled is the great inflow of currency into the market as a consequence of high oil exportations, leading to inflation and also decreasing competitiveness of other sectors of the economy, also known as ‘Dutch disease’.

In this sense, the new sovereign fund which the government intends to create would be an interesting tool in preventing such potentially harmful side-effects, by managing the capital flow resulting from the exportation of the pre-salt commodities to achieve financial objectives and to implement several investment strategies and welfare state policies, as learned from the international experience.

The pre-salt also presents an unmatched opportunity for the establishment of an oil and gas cluster in Brazil, inspired by the Norwegian experience, aiming at providing a stronger structure for the productive chain and expertise for the local industry. Additionally, the government is encouraging the establishment of foreign companies in Brazil to increase the competitiveness of the local industry and its capacity to meet the oil companies’ demand. Furthermore, the government is also implementing public policies aiming at increasing the

participation of the local industry in the Brazilian oil and gas cluster, such as local content requirements as well as support to small and medium-sized companies.

It is important to note that since the local industry does not yet meet the oil companies’ demand, the government has created a special customs regime called REPETRO, which suspends the federal taxes due on the temporary importation of certain goods for activities related to exploration or production of hydrocarbons.

Nonetheless, the combination of governmental programmes and the pre-salt discoveries have already started to heat up the market and are to be taken into consideration by major oil companies and their service renderers when planning their respective businesses. Petrobras, for instance, announced in 2008 its Programme for Modernisation and Expansion of the Support Ships Fleet (PROMEF), which ordered 146 new support vessels in Brazil for exploration and production activities, which represented up to $5 billion in investments only in the third quarter of 2008.

According to the Naval Industry Union (SINAVAL), after years of crisis in the sector, the Brazilian industry prospers with the execution of new projects. In addition to Petrobras’ demands, the government has announced public policies to stimulate the construction of new shipyards, ships, drilling units and platforms within the Brazilian territory, in order to expand and revitalise the Brazilian naval industry. The development of the South Korean naval industry is regarded as a tremendous example to be followed. As a result of the increased demand from Petrobras and other companies, Brazil would climb up to the sixth position in the world ship construction rank.

Moreover, other sectors of the market also expect an increase in work opportunities for the next years. The magnitude and extension of those pre-salt sites will result in a huge demand for services such as seismic data acquisition and interpretation, drilling, completion of wells, installation of deepwater pipes and training of personnel.

Due to the complexity of the sites, the exploration and production of these reservoirs will need technological development. In this sense, the supplementary equipment industries also expect an increase in demand, including new technologies for ultra-deep exploration


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and production equipments, such as risers, manifolds, automotive lifting systems, wellheads and submarine pipes.

On the other hand, the boost in investments in the oil and gas sector in Brazil is not limited to upstream activities, as Petrobras does not wish to export crude oil, but rather refined products with added value, in line with the Brazilian government policies for the sector.

In this sense, several important downstream projects in Brazil are under development, which may reach more than $43 billion in investments for the next years, such as: (i) the Premium I Refinery, in the Maranhão State, with a projected 600,000 bpd capacity, scheduled to start operating in 2013; (ii) a 300,000 bpd processing capacity Premium II Refinery in the State of Ceará, which is scheduled to start operating in 2013; (iii)

the Refinaria Abreu de Lima, in the State of Pernambuco; and (iv) the petrochemical complex named COMPERJ in the State of Rio de Janeiro. These projects, together with the ongoing modernisation and expansion programmes of other Petrobras’ refineries, reflect the company’s objective to become the world’s third largest refiner, by doubling its refining capacity in the next years.

Under the present scenario of major investments in Brazil, the country hosts a perfect opportunity for those seeking new business opportunities. Although the pre-salt exploration will certainly require long-term investments, those companies with an immediate prospective approach will surely ensure major future benefits over the latecomers once the oil revenues begin to gush in the world’s next energy powerhouse.

recent changes to brazilian corporate law and accounting rules and their effects on taxation

Cristiane S MagalhãesMachado Associado,

São Paulo

cmagalhaes@

machadoassociados.

com.br

Fabia AzevedoMachado Associado,

São Paulo

fazevedo@

machadoassociados.

com.br

corporate Law No 6404/76 recently underwent important changes in order to adapt the Brazilian Accounting Principles to the

International Financial Reporting Standards (IFRS). The use of international accounting standards should make Brazilian Financial Statements clearer for the analysis of foreign investors. The changes were introduced by Law No 11638/07.

This Law – in force as of 1 January 2009 – brought up new methods and criteria for recognising and measuring assets and liabilities, as well as revenues and costs/expenses. It also implemented new financial statements to be prepared and published by legal entities, such as the Statement of Cash Flow (which replaces the statement of changes in financial position) and the statement of value added.

According to Law No 11638/07, only corporations and large companies are subject to these new rules. A large company is defined as a legal entity, or a group of legal entities under the same control, whose

assets exceed R$240 million in the previous financial year or whose gross income earned in the previous financial year has been higher than R$300 million. However, since these new methods and criteria are being regulated by the Accounting Procedures Committee (CPC) through technical standards, that are being approved not only by the Brazilian Securities and Exchange Commission (which regulates publicly-held companies) but also by the Brazilian Federal Accounting Council (CFC), it is possible to infer that they become part of the Brazilian Accounting Rules and, as a result, shall apply to every legal entity.

We point out that some of the new methods and criteria have not been regulated yet. Among those already regulated are: (i) framework for the preparation and presentation of financial statements; (ii) impairment of assets; (iii) the effects of changes in foreign exchange rates; (iv) statement of cash flows; (v) intangible assets; (vi) related party disclosures; (vii) leases; (viii) accounting for government grants and disclosures of government assistance; and


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(ix) financial instruments: recognition and measurement (partially regulated).

The Corporate Income Tax (IRPJ), Social Contribution on Net Profit (CSLL), Contribution for the Social Integration Programme (PIS) and Contribution for Social Security Funding (COFINS) are calculated, respectively, on the profits and revenues ascertained in compliance with corporate law. Despite the fact that corporate law has changed, tax legislation has not been adjusted to the new accounting methods and criteria yet.

During the fiscal years of 2008 and 2009, taxpayers may decide to adopt or not a Transitional Tax Regime (RTT). This regime was introduced to allow the taxation to occur disregarding the new methods and criteria introduced by Law No 11638/07, ie, with the methods and criteria in force on 31 December 2007. If a new law does not regulate the tax effects of the new criteria and methods resulting from Law No 11638/07, the RTT will be mandatory as of fiscal year 2010. The option for the RTT shall be made on the Annual Corporate Income Tax Return (DIPJ) and is valid for both years (2008 and 2009) and cannot be revoked.

If the company opts for the RTT, its profit or loss will be ascertained in compliance with corporate law and the new accounting methods and criteria. However, the entries arising from the new accounting methods and criteria will not affect the IRPJ, CSLL, PIS and COFINS taxable bases, which means that revenues will not be taxed and expenses will not be deducted. The adjustments to promote the non taxation and/or the non deduction shall be made on the Actual Profit Ascertainment Book (LALUR).

If the company does not opt for the RTT, we believe that the entries arising from the new accounting methods and criteria will be considered as taxable income and tax deductible expenses depending on their nature and in compliance with the tax legislation still in force. It is important to mention that tax authorities have not yet regulated the procedures to be taken in case of non option for the RTT and, up to this moment, there are only few specific rulings regarding the subject. However, they are only applicable to the taxpayers that required them and do not represent the understanding of tax authorities.

We shall provide comments on the accounting and tax aspects regarding some of the relevant changes: (i) financial

instruments; (ii) intangible assets; and (iii) issuance of debentures.

Financial instruments

CPC 14 – Financial Instruments: recognition and measurement – establishes principles for recognising and measuring financial assets and some financial liabilities and determines that some of them shall be measured by their fair value. CPC 14 defines fair value as the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

The gain or loss arising from the fair value recognition shall be recorded under profit or loss or, in certain circumstances, directly under equity in a specific account for equity appraisal adjustment. The amount that affects the income or loss of the company shall not be taxed or deducted if the company adopts the RTT since, according to the provisions of Article 17 of Law No 11941/09, its amount will be excluded (in case of gain) or added (in case of loss) from the net profit, by means of adjustments on LALUR.

If the company does not opt for the RTT, we believe that the income recorded in the results will be considered as taxable while expenses shall be considered deductible provided that the expenses are proven to be usual, required for the company’s business and to maintain the producing source. As for the taxes that are charged on revenues (PIS and COFINS), we believe that unless they can be characterised as financial revenues (in which case taxpayers subject to the non cumulative regime are levied at a zero rate on such revenues), tax authorities will require the payment of such contributions on these revenues.

Intangible assets

The intangible assets are a new non-current asset account group introduced by Law No 11638/07. CPC 04 – intangible assets – basically prescribes that an asset shall be recorded as an intangible asset once it complies with the (i) intangible asset definition and (ii) recognition and measurement criteria.

According to CPC 04, an intangible asset is an identifiable non-monetary asset without physical substance that is separable, which means that (i) it may be separated from the entity and sold, transferred, licensed, rented


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or exchanged, either individually or together with a related contract, asset or liability, regardless of its use by the legal entity; or (ii) it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

CPC 04 also provides that an intangible asset shall be recognised if, and only if, (i) it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity and (ii) the cost of the asset can be measured reliably.

CPC 04 details the accounting treatment of intangible assets like patents, rights deriving from franchising contracts, copyrights, trademarks, costs deriving from new products development etc, but not of goodwill, which will be regulated by CPC 15 – business combinations (this standard has not been issued yet). Intangible assets that have a finite useful life can be amortised and all intangible assets are subject to the impairment test annually.

As for assets previously recorded in the deferred assets group, CPC 13 (initial adoption of Law No 11638/07) determined that if they comply with the intangible assets definition and their recognition and measurement criteria, they shall be recorded as an intangible asset; if they do not, they shall be written-off and recorded as loss or be maintained as an asset until their total amortisation. These values will be subject to the impairment test annually.

The loss arising from the write-off of a deferred asset, the amortisation of intangible assets and the amounts previously registered as deferred asset (and maintained as an asset) and the loss derived from the impairment test will affect the profit or loss of the company. If the company adopts the RTT, these expenses shall only be deducted in case they comply with the accounting rules in force on 31 December 2007 and also with the tax rules. For instance, in case of amortisation of a patent, the amortisation is a tax deductible expense if made according to the period in which the patent is valid. If the company does not opt for the RTT, we believe that the loss recorded in the profit and loss can be considered deductible depending on its nature (an actual expense or an expense that complies with the rules for amortisation of deferred assets).

Moreover, CPC 04 prescribes that goodwill can only be recorded as an asset if it was paid to third parties, otherwise it shall be written

off. It also establishes that the goodwill may be amortised only up to December 2008. After that period, the amortisation is not allowed and the goodwill value will be subject to the impairment test annually.

The expense deriving from the impairment test of the goodwill affects the profit or loss of the company and shall not be considered as a tax deductible expense if the company opts for the RTT. However, we believe that in this case it is possible to exclude from the taxable basis of IRPJ and CSLL the amount of the amortisation that could be recorded according to the rules in force on 31 December 2007.

If the company does not opt for the RTT, the deduction of the goodwill amortisation shall not be accepted by tax authorities since it cannot be made in the accounting books according to the new rules in force. Due to this, we believe that companies in this situation will probably opt for the RTT.

Issuance of debentures

The accounting of the issuance of debentures includes recognising the expenses with their placement (raising expenses), the funds and premium collected with the issuance of the debentures and the remuneration paid to the debentures’ holders. CPC 08 – cost of transaction and premium on issuance of securities – provides for applicable accounting procedures.

The raising expenses as well as the interest due and premium received shall be appropriated to income according to the amortised method under which the amortisation takes into account the internal return rate (TIR) of the operation. The corresponding liability account shall be valuated by its fair value deducted by the placement expenses and added by the premium earned.

The amount of the premium affecting the profit or loss of the company issuing the debentures shall not be taxed if the company opts for the RTT. That is because article 442 of the Income Tax Regulations (RIR/99) states the non levy of IRPJ on the amount of the premium received upon issuance of debentures provided that the amount be maintained in a Capital Reserve account. Once CPC 08 prescribes that the premium shall be appropriated to income, the company that opts for the RTT may exclude the premium amortisation in the taxable basis of IRPJ and CSLL (by means


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of an adjustment on LALUR) and allocate its value to a Profit Reserve (that cannot be distributed to the partners).

If the company does not opt for the RTT, we believe that the income related to the premium recorded in the results will be considered as a taxable income and the expenses can be considered as tax

deductible according to the accrual basis (any difference derived from the amortised cost method should be temporarily non deductible). As for the taxes that are charged on revenues (PIS and COFINS), we believe that tax authorities will require the payment of such contributions on these revenues.

Uruguay’s Personal Data Protection Act

eduardo Jiménez de Aréchagabado, Kuster, Zerbino &

Rachetti, Montevideo

[email protected]

o n 8 August 2008, the Executive Power ratified Law No 18.331,1 named the Personal Data Protection Act, which came

into force on 28 August and which grants databases a one-year term to adapt to it and 180 days to the Executive to regulate the same.

It is a considerably comprehensive and modern law which subscribes to the European Union stipulations in the matter (especially Order UE 95/46/EC).

Scope

The scope of this law is considerably wide, since it considers databases ‘...indistinctively, the organised group of personal data object of manipulation or processing, electronic or not, regardless the method of collection, storage, organisation or access.’

The law makes no distinction between the database that any company may have and/or use, such as a list of clients, suppliers etc, and what we usually know as a database. The law does not bind those responsible for the databases whose use is exclusively individual or domestic, to register in the Register of the Office of Personal Data Control (analysed hereunder).

General principles

The abovementioned law sets forth that those responsible for databases shall proceed following the general principles of legality (be registered and follow the principles of the law), truthfulness (no inaccurate or untrue data), purpose (data shall be used for the purpose it was gathered), prior informed consent, data security, reserve and responsibility.

As far as the principle of prior informed consent is concerned, the law establishes that the handling of data is licit when the owner has expressed its voluntary, prior, express, and informed consent. This shall be registered. We believe that, since the law establishes that the prior informed consent shall appear clearly and expressly, the same should be granted through an independent document; the inclusion of a clause in the contract binding the parties would not be enough, in order to guarantee that the consent is express and informed.

Nevertheless, it is worth mentioning that the law establishes certain exceptions to the prior consent, for the cases when the data is obtained from a public source of information (eg, newspapers); for the functions of the powers of the state or pursuant to a legal obligation; when the lists are composed only of basic data such as: in the case of individuals, name, identity card, address and date of birth (telephone number is not included), and in the case of legal persons, firm name, fictitious name, RUC number, domicile, telephone and identity of its representatives; when the owner’s data derives from a contractual, scientific or professional relationship and it is necessary for its development or fulfilment; or when it is prepared by those responsible for its exclusively personal or domestic use.

Data owner rights and habeas data

The data owners shall be informed, prior to collection (of the data), of the purpose of the database, the existence, character of the answers and whether the same are obligatory or optional, and the consequences of giving


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negative answers; the possibility of exercising access rights, correction (including up-dating or inclusion) and deletion of information; and the non-obligation to provide sensitive data (which can only be obtained in case of general interest or for statistic or academic purposes independently from their owners).

Likewise, the law confers the right to bring an action similar to a Relief Action (called Habeas Data), to get to know the information concerning a person that may be included in public or private databases, when access, according to the law, has been denied and in case of error or untruth to demand correction, inclusion and/or suppression.

Data related to credit

The new legislation sets forth that the personal data connected to business obligations (eg, credit reports) of individuals may only be registered for a five-year term, and upon expiration, the creditor may request for one more time, within the thirty days prior to the original expiration, its register for another five years. Obligations settled or paid off shall remain registered, under express notation, for a maximum non-renewable five-year term, as of the corresponding date of settlement or expiration.

When any pending obligation registered in a database is settled, the creditor shall inform the person in charge of the database within a five-working-day period after settlement took place. The latter shall have a three-working-day term to update the relevant information.

Advertising lists

The law allows the collection of data for advertising and the manipulation of data in order to develop specific profiles for promotional, commercial or advertising purposes. Such collection is also permitted when the information reflects consumer behaviour, when the data appears in documents of public access or submitted by the owners themselves or with their consent (being able to request, at any time, their removal or blocking of the data).

Data transferred internationally

The Law sets forth in Section 23 the prohibition of any transfer of personal data with other countries or international organisations that do not offer the adequate protection according to the international or

regional legal standards on the matter (one of the EU main requirements), except by consent. Nevertheless, such consent shall not be necessary when the transfer be related to the execution of a contract; be required by law for the protection of an important public interest or during a judicial procedure; the protection of vital interest of the party involved, or be carried out from a register conceived to offer information to the public and open to the public in general.

Public bases

The Law also includes public databases, with the exception of those cases in which the data may affect national defence, public safety or the pursuit of criminal violations.

Those in charge of bases may deny access, rectification or cancellation of data according to the dangers that may arise regarding State defence or public safety, protection of third parties’ rights and freedoms or the needs of investigations being carried out, or in the case of public finance (eg, General Taxation Office or Social Security Administration) ‘when it may block the administrative measures aiming at ensuring the fulfilment of taxation duties or when the data owner is being object of inspections.’

Register and controlling office

Finally, the creation, modification or suppression of databases that are not for exclusively individual or domestic use must be entered in the Register of the Office of Personal Data Control, which shall have the power to impose penalties. As mentioned above, the law confers a one-year term to adapt to the same, having the existing databases such term to duly register.

They shall inform (apart from the general data) the nature of the personal data contained, collection and handling procedures, safety measures, protection and exercise of rights, technical description of the database, data destination and individuals or legal persons to whom it may be transferred, conservation period, form and conditions of access to the data and procedures in case of data rectification or update.

Note1 The complete text in Spanish of Law No 18331 can be

found at: http://200.40.229.134/leyes/AccesoTextoLey.asp?Ley=18331&Anchor.


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Introduction

Law No 25,156 (the Antitrust Law), prohibits certain acts related to the production and exchange of goods and services in case they restrict, falsify or distort competition, or they constitute an abuse of dominant position, and provided that in such acts cause or may cause harm to the general economic interest.

The provisions of the Antitrust Law apply to all individuals and entities which carry out business activities within Argentina, and also to those which carry out business activities abroad to the extent that their acts, activities or agreements may affect the Argentine market (known as ‘effects theory’).

The Antitrust Law created the National Tribunal for the Defence of Competition (the ‘Antitrust Tribunal’) within the scope of the Ministry of Economy, which would be the ultimate antitrust regulator in Argentina.

However, ten years later, the Antitrust Tribunal has not been created yet. In this scenario, the National Commission for the Defence of Competition (the ‘Antitrust Commission’) is the entity which performs a technical review on infringement cases and issues a recommendation to the Secretary of Domestic Trade of the Ministry of Economy, which is the body that ultimately decides upon antitrust matters.

Abuse of dominant position in Argentina

Pursuant to section 4 of the Antitrust Law, a person has a dominant position when: (i) it is the only buyer or supplier of a given product within the market; (ii) when, without being the only supplier or buyer, it lacks of substantial competition or; (iii) it is able to determine the economic feasibility of competitors because of a certain vertical or horizontal degree of integration.

Three relevant factors are stipulated in section 5 to determine the existence of a dominant position: (i) the degree of substitution for a product or service; (ii) the existence of regulatory barriers, and; (iii) the extent to which a company can unilaterally set prices or restrict output. The Antitrust

Commission also considers the market share as an important factor to determine whether there is dominant position or not.

Section 1 of the Antitrust Law prohibits the abuse of a dominant position. On the other hand, section 2 describes some vertical and exclusionary practices that could violate Section 1, but that are not unlawful per se: they must have the likelihood to cause harm to the general economic interest.

Since the beginning of the 1980s, antitrust authorities have been investigating different types of abuse of dominant position. Additionally, in the view of antitrust authorities, the dominant position may be abused of, by committing different anticompetitive conducts such as predatory pricing, fixing retail prices, tied-in sales, blocking access to essential facilities and discriminating prices. However, no significant sanctions were imposed until 1995 when the local petroleum company received a significant sanction for abuse of its dominant position by discriminating prices in the liquid gas market.

Regarding the above-mentioned case known as the YPF case,1 the investigation was initiated due to increases in the price of liquid petroleum gas (‘LPG’), an essential source of energy for many residences in Argentina. The relevant market was determined to be the bulk supply of LPG. The Antitrust Commission determined that Yacimientos Petroliferos Fiscales (‘YPF’), a local petroleum company, had a dominant position in all phases of LPG production and supply. It also found out that the market entry barriers were high and that imports were not a constraint on domestic producers.

The conduct assessed by the Antitrust Commission was YPF’s practice of exporting a high amount of LPG at prices that were lower than in Argentina. Further, YPF’s export contracts prohibited the re-importing of LPG to Argentina. The Antitrust Commission concluded that this conduct was harmful to the general economic interest and ordered YPF to cease its price discrimination as between the domestic and export markets

the abuse of dominant position in Argentina

Alfredo O’FarrellMarval, o’farrell &

Mairal, buenos Aires

[email protected]

Miguel del PinoMarval, o’farrell &

Mairal, buenos Aires

[email protected]


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and to eliminate the prohibition of re-importing LPG. Additionally, it imposed YPF a fine of AR$109,644,000 (U$S29,600,000).2 The decision was upheld by the Supreme Court of Argentina.3

Secondly, within the Monsanto case4 the Federal Court of Appeals for Civil and Commercial Matters (the ‘Court of Appeals’) revoked a decision from the Antitrust Commission that decided to investigate Monsanto Technology LLC and Monsanto Argentina SAIC (Monsanto) for the potential infringement of the Antitrust Law in Argentina due to the enforcement by Monsanto of certain patent rights outside Argentina. According to the Antitrust Commission, Monsanto abused of its dominant position in the soybeans market as it owned, outside Argentina, the ‘Round Up Ready’ patent. On 30 September 2008, the Court of Appeals accepted that Monsanto had a constitutional right to plead before judicial authorities and that said action could not be considered as an anticompetitive conduct in Argentina.

The Court of Appeals decided that there were not enough grounds that would evidence that Monsanto’s legal actions had been baseless. The Court of Appeals expressly mentioned the ‘Noerr-Pennington’ doctrine developed in the United States.5 Further, the Court of Appeals stated that there was no evidence that Monsanto had abused of its right to plead before foreign judicial authorities.6

Additionally, the Movicom Bellsouth case7 involved a plaintiff who was a company that offered mobile phone services and a defendant which provided basic telephone services and had a licence for offering mobile phone services and telecommunications services in certain areas of Argentina.

The plaintiff argued that the defendant had launched a programme that infringed the Antitrust regulations which consisted in a 50 per cent discount in certain phone calls, only when the clients: (i) owned or were willing to acquire a fixed line provided by the defendant; (ii) were subscribed or were willing to subscribe to the long distance call services provided by the defendant; and (iii) owned or were willing to acquire two mobile phone lines of a company controlled by the defendant.

The Antitrust Commission considered that the case involved a practice known as ‘package of products’. It dismissed the claim as it considered that the practice did not show any predatory pricing practice from the plaintiff, although it held a dominant position in the market.

Finally, within the frame of the Impsat case,8 the Antitrust Commission investigated a conduct that involved allegations of predatory pricing. The plaintiff was a provider of data transmission services and alleged that one of the incumbent’s land line services was pricing its competitive services below cost. The main issue that was assessed in this case was the calculation of the relevant cost. The Antitrust Commission had to decide if the costs of operating the incumbent’s land line network should be attributed to the cost of the data transmission service. The Antitrust Commission took a conservative view and excluded those network costs from the calculation of the relevant cost. It concluded that the incumbent’s prices were not predatory and dismissed the case.

Conclusion

Although the Antitrust Commission has dealt with a lot of dominance cases in the past, very few resulted in sanctions. As the Antitrust Law allows private parties to file complaints before the Antitrust Commission, the agency is obliged to consider them.

Most of the claims filed before the Antitrust Commission alleging abuse of dominance did not evidence a potential harm to the general economic interest as provided in Section 1 of the Antitrust Law and, therefore, were not considered as infringements to the antitrust regime.9

From a practical point of view, it is advisable to terminate any practice that abuses of a dominant position immediately after it is known. One of the elements that the Antitrust Commission takes into account for the accrual of the fine is the ‘illegal’ profits obtained, therefore, as soon as this conduct is finalised, the lower the setting of the fine will be.

In case an infringement proceeding has already been initiated, Section 36 of the Antitrust Law could provide the company with a bit of steerage area by means of which it can negotiate with the Antitrust Commission the finalisation of the conduct. The Antitrust Law sets out a five year statute of limitation on these kinds of conducts.

The Antitrust Commission has been contradictory in analysing cases that imply or not abuse of dominant position and has used many times the concept of market power to sanction conducts that also meant an abuse of dominant position. In the near future the Antitrust Commission should clarify whether

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it meant any of both as well as to clarify the differences between these two concepts.

Notes1 Decision No 314, issued by the Antitrust Commission on

19 March 1999.2 Considering an exchange rate of AR$3.7 for US$1.3 Fallos 325:1702.4 Sentence issued by Chamber III of the National Court of

Appeals for Civil and Commercial Federal Matters on 30 September 2008, in re Monsanto Company s/ Apel Resol Comisión Nac de Defensa de la Competencia Acumulada: Causa No 638/08, Monsanto Argentina SAIC s/ Apel Resol Comisión Nacional de Defensa de la Competencia, case No 13.676/07. Published in elDial – AA4D7A.

5 Noerr v Eastern Railroads, 365 US 127 and Pennington v United Mine Workers, 381 US 657.

6 This case is still under the analysis of the Supreme Court. The Antitrust Commission requested the review of the decision from the Court of Appeals.

7 Decision No 470, issued by the Antitrust Commission on 27 October 2004.

8 Decision No 442, issued by the Antitrust Commission on 20 February 2004.

9 There have been several precedents in this regard before the Antitrust Commission, eg, La Casa del Gráfico SRL v Rich Klinger (20 February 1986), HE Reynal v Cervecería y Maltería Quilmes SA (12 June 1987), Diario Los Andes Hermanos Calle SA v Prensa del Oeste SA (12 July 1988), Tejeduría del Chubut SA v Sniafa SA (4 May 1999), SADIT v Massalin Particulares SA y otra (4 December 2000), Odima SA v Repsol YPF (4 January 2001).

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