International In-house Counsel Journal Vol. 3, No. 12, Summer 2010, 1

Consortium Regulation in Brazil

MYCHÈLLE FORTUNATO Head of Legal, Banco CNH Capital S.A., Brazil

Abstract

The consortium is a structure which arose from the need for grouping legal entities for the purpose of pursuing activities of common interest, by joining efforts and resources to perform a specific enterprise which would exceed the individual competence of each member of the consortium, without thereby creating a new corporate entity.

This would enable companies to become part of huge corporations, explore common services and provide strength to obtain credit and loans.

During the nineties, with the privatisation of energy and telecommunication sectors, Consortiums were set up in Brazil to carry out public works.

There is a lack of specific regulation regarding Corporate Consortium in Brazil and it would be necessary to analyse this legal institute under private and public laws mainly with regard to the liabilities of the companies and their limitations.

This institute is growing especially because of the difficulties in economic development imposed on national companies compared to foreign companies, already working in the global market.

The possibility of creating a consortium is a potential opportunity for Brazilian Companies to have real opportunities to compete in the global market.

It is likely a possibility that the number of new consortiums will increase in the near future because of the events that will occur in Brazil in the next years (World Cup in 2014 and Olympic Games in 2016).

Corporate Consortiums in Brazil

The consortium is a structure which arose from the need for grouping legal entities for the purpose of pursuing activities of common interest, by joining efforts and resources to perform a specific enterprise which would exceed the individual competence of each member of the consortium, without thereby creating a new corporate entity.

The advantages of a consortium include the possibility of taking part in large scale enterprises and of exploiting common services, strengthening the position of the participants in securing loans and other funding.

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Mychèlle Fortunato

Given its institutional nature, the consortium was included in the Law which governs Joint-Stock Corporations in Brazil (Law 6404/76).

In the course of the economic evolution of the country, one has witnessed a marked growth in the use of corporate consortiums. Particularly as from the 1990’s, consortiums began to be organized for the purpose of carrying out public works, after the onset of the privatization processes, but are not limited to this kind of activity.

Thus, as a private structure subject to the rules of Trade Law, and being extensively used in the performance of activities regulated by Public Law, certain aspects require special attention, in view of the conflict arising from regulations governed by differing underlying principles.

The 1949 law, which regulated joint-stock corporations before the current legislation was enacted, did not deal with consortiums.

The 1976 law regulated this issue, although it is not a subject matter limited to joint-stock corporations.

The main justification is probably the institutional nature of the current legislation.

The law regulated the consortium, ascribing it a commercial nature, but without the purpose of distributing profits, all the more so since a consortium does not have its own capital stock.

A consortium is a grouping of companies in a temporary association of individualized efforts for the purpose of undertaking activities and commitments which they would be unable to undertake individually, whether on account of the economic dimension or their respective technical abilities.

Legal Nature

A consortium is set up by means of a multilateral association agreement, even if the number of members is limited, and does not have a specific legal personality. It is a merchant structure, but does not purport to distribute profits.

One of its defining features is its time-limed existence: once the enterprise for which the consortium was created has been accomplished, the consortium is dissolved.

The equity is autonomous, inasmuch as the funds invested by each consortium member is separated from their total equity during the existence of the consortium.

In a consortium, the communion of purposes consists of the search for advantages.

It is similar to the special partnership originally regulated by the Commercial Code of 1850 and included in the Civil Code of 2002.

In either case, the organization is not a legal entity in its own right nor does it have its own capital stock.

It is also partially similar to the joint venture structure, originally created in the United States of America. Consortium Regulation 3

A joint venture is a form of temporary partnership organized for the purpose of carrying out a single enterprise for profit.

As a rule, the management and operation of the enterprise is ascribed to one of the members of the joint venture, which does not hold powers to commit the other members, save that such powers may in fact be expressly granted to it.

The legal relationship among the parties takes the form of an express or tacit agreement, common interests, sharing of profits and losses and the right of mutual control over the enterprise.

A consortium is not the only form provided in Law 6404/76 for the purpose of organizing a joint venture, which can also take the form of a new company.

Consortiums and Corporate Groups

Generally speaking, corporate groups arise when several companies act jointly with the group as ordered by the company in command, without losing their legal personality, and are bound by a subordination relationship.

The main difference lies in purpose: permanent corporate groups seek benefits for their components; consortiums, on the other hand, are temporary arrangements and seek the individual advantage of each member of the consortium, being bound strictly within the limits defined in the consortium agreement.

Consortium and Cartel

The organization of a consortium could bring about results which infringe the rules of good corporate conduct, in view of the risk of dominating a given market and eliminating competition.

In fact, the initial notion of consortium was associated to that of the cartel, since both generate a limitation on competition.

This notion of a consortium has evolved, with the definition of new functions, particularly after the enactment of Corporation Law, which dissociated it from the notion or cartel.

Differently from individual monopolies or trusts, a consortium may purport to organize a collective monopoly. It is also one of the many forms of cartelization in branches of industry.

The purpose of a consortium cartel is to increase the profits of the cartel members or to avoid any reduction in their profits by setting limitations on their activities.

An illicit consortium cartel is the actual use of its monopolistic features to impose prices and suppress competition.

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Abuse of Economic Power and Crimes against Economic Welfare

Brazil has adopted a system for repressing abuses of economic power, conducted by the Administrative Council of Economic Defence – CADE (the Brazilian antitrust authority), a body created by Law 4137 with the mission of determining and repressing abuse of economic power.

Consortiums which may come to limit or otherwise adversely affect free competition or result in the domination of relevant markets are subject to prior review by the CADE.

Consortiums and Liabilities under Commercial Law

The absence of legal personality would imply that a consortium has no real existence within the legal sphere.

However, notwithstanding the absence of a legal personality, a consortium has a judicial and a business personality, expressed by the existence of a representation and a management vested in business, contracting and procedural powers.

A consortium is represented by a common management in the form of a mandate, carried out either by a specific administration or by the leading member of the consortium, with legal capacity to sue (as plaintiff and as defendant) and to do business, autonomously in relation to the consortium members taken individually.

The members of a consortium share no joint liability: each member is answerable in its own name for acts ascribed to it as such.

The temporary feature of a consortium does not suppress the individuality of its members, but, in what concerns the common enterprise, places them under a centralized administration.

As for the business purpose, the common enterprise of the consortium, the management powers are transferred by the members to one of the members, termed the consortium leader. This is because the nature of a consortium implies administrative autonomy in relation to its members, requiring a specific management by the leading company.

Therefore, although it does not have a legal personality of its own, it has its own management as provided in law, and the respective consortium agreement must contain rules governing the administration of the consortium.

In consortiums, much as in corporate groups, which likewise do not have a legal personality (Corporation Law, Art. 266), the acts performed by its managers are immediately binding on the assets of the consortium members.

One can therefore infer that the administrator of the consortium, when acting within the business purpose of the agreement, does so representing the interests of the consortium members, i.e., as representative of all consortium members.

The common activities of the consortium members will frequently involve the purchase of assets, under common property

Consortium Regulation 5

The members do not exercise any direct power on the assets allotted to the consortium for the term of its duration. Even the creditors of each company do not have any rights on the assets set aside for the consortium on account of any business foreign to the actual consortium.

One may state that in the coordination relationship with the consortium there is no link or subordination of the corporate activities of the members to the management of the consortium, which retain their individual autonomy.

What one does have is a communion of interests, based on the autonomy of each member company concerning its activities and management, even under a single shareholding control within the consortium.

Internally, within the scope of the consortium, the members are mutually liable for the bona fide performance of the obligations undertaken in the consortium agreement.

In relation to third parties, the consortium members are individually answerable for the commitments undertaken within the framework of the consortium agreement.

In the event of a consortium involving only two companies, if one of them becomes bankrupt and in the absence of any provision in the consortium agreement concerning its replacement, the consortium shall be extinguished.

If such provision does exist, the consortium shall continue until the replacement of the bankrupt member by another company.

The Consortium and its Liabilities in Public Bidding Proceedings

The enactment of the public bidding legislation (Law 8666 of 1993) brought about a significant evolution in the form whereby consortiums took part in public biddings. Articles 9 and 33 of the Law define the requirements for the organization of third degree consortia with one leader company acting as representative for the consortium.

Despite such evolution, Art. 33 would seem to be unconstitutional insofar as it requires that in the case of consortiums involving Brazilian and foreign companies the leader must be always be one of the Brazilian members. This requirement is groundless, particularly in view of the fact that the Administration is authorized to contract with foreign companies under international bidding proceedings.

Law 8666 thus determined that in order to take part in a public bid a commitment to organize a consortium would have to be executed. In the event of adjudication, such consortium would contract the works, services or utility concessions.

The organization of consortiums to take part in public bids could be detrimental to the dispute, by limiting competition. On the other hand, it is of essential importance in the cases in which the complexity of the purpose would hinder individual companies from taking part in the bidding proceedings, since they would be unable to undertake the tasks involved in the purpose of the bidding.

For a consortium to take part in a public bid it is not necessary for the consortium to have been formally set up. It suffices that the intent to set up the consortium has been 6 Mychèlle Fortunato expressed and proven by a commitment to organize the consortium, if the parties involved win be bid, under pain of the parties incurring in several civil liability.

Notwithstanding the preceding, each consortium member must severally meet the qualification requirements. As for technical and economic-financial requirements, these shall be evaluated jointly, given that the organization of the consortium aims precisely at meeting requirements which would be unavailable in isolation.

The construction of Art. 278 of Brazilian Corporation Law does not allow one to infer that one of the companies must necessarily be a joint-stock corporation, but the Public Administration may require this corporate form under a public bid.

A consortium may acquire a legal personality be organizing a Specific Purpose Company (SPE), which is commonplace in the contracting of services, works, supplies and utility concessions with the Public Administration. However, once an SPE is organized, the consortium itself will be extinguished in favor of a company which aims at pursuing a specific enterprise, a feature which distinguishes it from other merchant companies and which will be the successor of the consortium in all of its obligations.

In the mid 1990’s, particularly as a consequence of the new law for public utility concessions (Law 9074/95), the Public Administration began to require the organization of an instrumental consortium among the bidders, to be subsequently replaced by an SPE.

The instrumental consortium serves the purpose of retaining third party contractors for the performance of services and works and for managing public or private utility concessions. In this respect, it differs from the operational consortium which aims at developing activities and research on account of a specific corporate activity to be developed within the scope of the consortium members. As a rule, in an instrumental consortium the management is undertaken by one of the members, chosen among the others to be the leader and, as such, comply with all the requirements of the bidding proceedings.

In this sense, the Public Administration began to require the organization of a company which would be able to segregate the capitals, resources and qualifications, focused on the performance of the agreement executed with the public entity, moving beyond the specific purpose operational consortium without legal personality, in order to deal with a specific purpose company with its own legal personality, thus extinguishing the consortium as such.

But at the time Law 8666/93 was enacted, this was not a common practice, for which reason Art. 33 of the said law does not refer to this system.

Thus, although it has been implemented by the Public Administration in bidding calls which set up specific rules for each bid, the system involving an instrumental consortium to be succeeded by a Special Purpose Company (SPE) is not regulated by the law.

In administrative law, legal autonomy without joint liability for acts performed on behalf of the consortium cannot prevail, since there is a joint liability for the performance of the administrative agreement.

Consortium Regulation 7

Conclusion

In closing these remarks, it should be stressed that Brazil is lacking in specific regulations for consortiums, despite the vast and growing range of uses of this system. Such regulations would also be essential in view of the discrepancies in the understanding of the subject matter, which clearly pertains to the domain of private law, but is largely governed by principles of public law, given its extensive applicability in public enterprises.

One may conclude that joint liability is not presumed in consortiums.

The specification of rights and obligations is essential to determine liabilities, so that each consortium member can be directly sued in relation to third parties.

In the light of public law, the organization of a Special Purpose Company, as a requirement made by the Public Administration, is what validates the joint liability of the consortium within the sphere of public bids, since the consortium as such ceases to exist once it becomes the winning bidder, and is replaced by a company proper, with a specific purpose and undisputable joint liability. Once the discussion concerning joint liability is overcome, the safety in the performance of the object of the bid is enhanced, affording extensive supervision and guarantees for the creditors.

The scope of action of consortiums in Brazil is well known, in view of the difficulties in economic development imposed on domestic companies by the great number of competitors arriving from more developed countries and with a strong position on the global market.

A consortium can be envisaged as a good alternative for the development of domestic companies, with real chances in achieving a competitive edge and improved performance.

Mychèlle Fortunato is Head of Legal at Banco CNH Capital S.A. in Brazil. Her previous experiences prior Banco CNH Capital was as an in house attorney for CNH Latin America Ltda., TIM Participações S.A., NET Serviços de Comunicações S.A and as a litigator attorney.

Banco CNH Capital S.A. in Brazil, a Fiat Group Company focused on banking activities to finance manufactured equipment by CNH Latin America business (company that manufactures Agricultural and Construction Equipment CASE and New Holland Brands).

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