By Robert Eugene DiPaolo*

During the last decade Brazilian law firms have experienced rapid growth. When I worked on my first Brazil-related transaction in 1997, a big Brazilian law firm, of which there were only a handful, had 100 lawyers. Now that number is 300 or more. During this same period, globalization has transformed the world economy. As a result, Brazilian lawyers and law firms are increasing finding themselves representing Brazilian clients involved in transactions with foreign companies or investors. This experience has undoubtedly caused many practitioners to ask what are “best practices” when providing legal advice to Brazilian clients engaged in cross-border transactions with foreign companies or investors.

One area of best practices sometimes overlooked by Brazilian attorneys representing Brazilian clients engaged in cross-border transactions is the need to consult foreign legal counsel. Brazilian lawyers have become accustom to being consulted by foreign clients or law firms in connection with transactions in which foreign companies or investors are doing business in Brazil, but tend to have less experience representing Brazilian clients involved in transactions with non-Brazilian counterparts. As a consequence, they often fail to recognize the need to consult with a legal counsel in the jurisdiction of the party on the other side of the transaction from their Brazilian client. However, in a global economy where Brazilian clients are increasingly involved in transactions with foreign companies and investors, this is an area of best practices which Brazilian lawyers and their clients should not overlook.

In 1997, when I worked on my first Brazil-related transaction, I was an associate attorney at a large New York City law firm. My firm was representing a multinational client in connection with its proposed acquisition of a Brazilian company. My first assignment, after the letter of intent was signed, was to find a Brazilian law firm to assist us with the transaction. I never questioned that we would need the assistance of a Brazilian law firm, nor did our client. However, we were both surprised that the Brazilian company was being represented by a small Brazilian law firm with little international experience. What surprised us even more was that even though the transaction agreements were U.S. documents, written in English and “localized” to conform to Brazilian law, neither the Brazilian company nor its lawyers had consulted with U.S. legal counsel to assist with the transaction, not even to review the agreements that were governed by New York, rather than Brazilian law.

At our first meeting in São Paulo, Brazil, I found myself sitting at table with a partner from my NYC law firm, two partners from a Brazilian law firm and our clients on one side of the table and a partner and associate from a Brazilian law firm and their client on the other side. While I have no doubt that the lawyers on the other side of the table were good Brazilian lawyers, they were however unfamiliar with U.S. styled transaction documents and U.S. law. As a result, they struggled with understanding various aspects of the transaction and the significance of certain provisions of the transaction agreements. In the end, it was fairly obvious to everyone, including the partners of Brazilian company, that if the lawyers representing the seller would have consulted with U.S. legal counsel, they would have been better prepared to negotiate the provisions of the transaction agreements. This is not to say that the Brazilian company got a “bad” deal. Nor is it to say that the Brazilian lawyers were not good lawyers. But, rather that the Brazilian seller could have gotten a better deal if it or its Brazilian lawyers had consulted with U.S. legal counsel. And the seller could have also avoided being subjected to certain undesirable terms and conditions which exposed it to potential contingent liabilities of which it and its legal counsel seemed unaware.

At the time I figured this experience was exceptional, since a U.S. law firm would not represent a U.S. client involved a transaction with a Brazilian company or investor, regardless of the governing law, without consulting Brazilian legal counsel. Since then however, this experience, rather than proving to be the exception to the rule, has come to represent the norm. I have frequently encountered Brazilian companies on the other side of the negotiation table which are represented only by their Brazilian lawyers, even though they were involved in a cross-border transaction with a foreign company or investor. The result is generally the same. The Brazilian client does not receive the legal advice it needs. The Brazilian client tends to accept terms and conditions that are not as favorable as those for which it could have successfully negotiated. And more often than not, the Brazilian company is exposed to potential contingent liabilities or market conditions of which it and its legal counsel were unaware.

This scenario has puzzled me, though it has resulted in new Brazilian clients, who having sat on the other side of the negotiation table, represented only by their Brazilian legal counsel realized that they or their Brazilian legal counsel should have consulted with U.S. legal counsel, at least with respect to certain aspects of the transaction. This is not to say that the Brazilian lawyers representing these clients were not good lawyers, but rather that they attempted to do something that no U.S. lawyer would consider doing, namely representing a client involved in an international transaction with a foreign investor or company without consulting legal counsel from the jurisdiction of the foreign company or investor. No U.S. lawyer, no matter how skilled or how experienced, would be able to provide such client with the legal advice it needed to successfully complete the transaction. However, Brazilian clients involved in transactions with foreign companies and investors, tend to think that they can rely exclusively on their Brazilian lawyers. And their Brazilian lawyers tend to think that it’s unnecessary to consult with legal counsel from the jurisdiction of the foreign company or investor on the other side of the transaction from their client.

My puzzlement has led me to ask Brazilian clients and lawyers why they tend not to consult with foreign legal counsel when they or their client is involved in a cross-border transaction with a foreign company or investor. Brazilian clients have told me that they thought that their Brazilian lawyers were capable of handling the transaction. Some told me that their Brazilian lawyers assured them that they could handle the transaction, and that consulting with foreign legal counsel was unnecessary. Brazilian lawyers at small to midsized firms told me that their clients thought it was unnecessary to confer with foreign legal counsel or that doing so would be too expensive. Others told me that they had not considered the necessity of consulting with a foreign lawyer or law firm under such circumstances. Brazilian lawyers at larger firms generally told me that since some lawyers at their firms had LLM degrees and/or had worked as foreign legal consultants in the U.S. or U.K., they were competent to deal with any U.S. legal issues that might arise. Regardless of the reason or what one might think about them, in an increasingly globalized economy, Brazilian lawyers and law firms will need to reconsider past practices and begin to focus on best practices, which include understanding when it is necessary or desirable to engage or consult with foreign legal counsel. A skilled practitioner knows when it is necessary to consult legal counsel in another jurisdiction.

When should a Brazilian lawyer representing a Brazilian client involved in a transaction with a foreign company or investor consult a foreign lawyer or law firm? The short answer is always, but lets take a look at a few cases where doing so is essential, and not doing so would (at least in the U.S.) be akin to malpractice.

If your client is involved in a transaction with a foreign company or investor and some or all of the transaction documents are governed by foreign law, you should consult legal counsel in the jurisdiction of such governing law. While this would seem to be common sense, I have worked on Brazil-related transactions where the governing law was New York, but the Brazilian lawyers on the other side of the transaction did not consult a New York lawyer or law firm. If you are not licensed to practice law in the jurisdiction of the foreign company or investor on the other side of the transaction from your Brazilian client, and the agreements are governed by foreign law, you should consult someone who is.

If your client is involved in a transaction with a foreign company or investor where the governing law is Brazilian, but where the transaction agreement are “localized” versions of those typically used in the jurisdiction of the company or investor on the other side of the transaction from your client, you should consult legal counsel in that jurisdiction. This may seem less necessary, but if the transaction documents were originally prepared by foreign legal counsel and localized to conform to Brazilian law, they will be driven by legal concepts with which you may not be familiar. There will be issues that you will not be able to spot and questions that you will not know to ask. More importantly, if you do not consult foreign legal counsel, neither you nor you client will know what is considered to be standard “market practice” for such transactions. For instance there is generally a big difference between the term sheets sent by U.S. buyers or investor to my U.S. clients and those that are sent by U.S. buyers or investor to my Brazilian clients. This is because most U.S. companies and investors know that Brazilians tend to rely exclusively on their Brazilian legal counsel, which may not know what market practice is for such transactions.

If your client is involved in a transaction where part or all of the purchase price consists of foreign securities, say the shares of a U.S. company, you should consult legal counsel in the jurisdiction of the company issuing such securities, if only to understand the securities laws that will govern their issuance and the rules and regulations applicable to their future transfer or resale. I have worked with more than one Brazilian client (after the fact), which received U.S. securities as part of the purchase price in consideration for the sale of their companies, who unnecessarily agreed to receive unregistered¹ shares or to have their shares “locked up” so that they could not sell them whenever they wanted to, in particular whenever the stock price began to fall. These clients lost millions of dollars, which they did not need to lose.

These are just three examples of when consulting with foreign legal counsel should be a priority for the Brazilian lawyer representing a Brazilian client involved in a cross-border transaction with a foreign company or investor. If cost is an issue to your client, you should assure your client that the cost of not consulting with foreign legal counsel will more than likely always be more expensive than the cost of doing so, at least in the long term. Moreover, you do not need to hire the biggest and most expensive law firm in New York City where some partners are now charging $1000 per hour. There are plenty of small to medium sized law firms, as well as solo practitioners, which do excellent work and whose billable rates are not somewhere in the stratosphere.

In the end, it is important to keep in mind that the reason you should consult with foreign legal counsel in connection with a cross-border transaction in which your Brazilian client is involved with a foreign company or investor, is not because you are not a good lawyer, but rather because you are. Being a good lawyer and following best practices means understanding that it is your responsibility to make certain that your client receives the legal advice it needs, not just the legal advice you are able to provide. In the context of a cross-border transaction with a foreign company or investor, best practices generally means that you should consult with foreign legal counsel in the jurisdiction of the company or investor on the other side of the transaction from your Brazilian client. This is true regardless of the governing law, and certainly when the governing law is anything other than Brazilian.

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[1] Note that under U.S. securities laws it is the transaction pursuant to which U.S. securities are issued that is registered, not the securities themselves. Thus, "unregistered" shares are securities issued pursuant to a private placement exempt from the registration requirements of the 1933 Securities Commission Act (the “1933 Act”). These unregistered or “restricted” securities can only be resold or transferred pursuant to a registration under the 1933 Act, or an exemption therefrom.

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