On October 16, 2007, SUSEP, the Brazilian insurance supervisory body, disclosed new draft regulations regarding reinsurance in Brazil and submitted them to a public hearing. Suggestions from the private sector may be received byNovember 16, 2007.

The purpose of the public hearing is to allow the general public to submit suggestions for improvements and adjustments of the rules before their effective release. SUSEP’s intention is to “broaden and improve its communication with the private sector, due to the belief that transparency is one of the main principles for achieving the credibility required to ensure proper functioning of the insurance, open pension fund and capitalization markets”.

The long-awaited regulations follow from the enactment of Supplementary Law Nº 126/2007, enacted in January, which enables private reinsurance companies to operate in Brazil, thus terminating the monopoly held by IRB (the State-controlled reinsurer).

Despite the opening of the Brazilian reinsurance market, the regulations, which lay down the structural basis for the market, protect local reinsurers insofar as Brazilian insurance companies must assign 60% of the risks subject to reinsurance to a local reinsurer. This percentage is to be reduced as from January 16, 2010, to 40% of insurance companies’ reinsurance assignments.

Foreign reinsurers may operate in Brazil as admitted reinsurers (“resseguradores admitidos”), which are those incorporated overseas but with a representative office in Brazil, or as sporadic reinsurers (“resseguradores eventuais”), when they are incorporated overseas, do not have a representative office in Brazil and must observe an annual assignment limit.

Foreign reinsurers must comply with certain requirements when registering with SUSEP to operate in Brazil. For instance, the admitted reinsurer must have a net worth in excess of US$100 million and its solvency rating must be a level above investment grade. Admitted reinsurers must also maintain a bank account in Brazil (connected with SUSEP) with cash deposits of at least US$5 million. The sporadic reinsurer, in turn, must have a net worth greater than US$150 million and a rating three levels above investment grade.

Further, foreign reinsurers will have to provide collateral for potential losses, according to the underwritten risks. Indeed, the regulations establish that the whole provision loss must be permanently secured by collateral. For admitted reinsurers, such collateral corresponds to the previously mentioned US$5 million bank balance in Brazil. For sporadic reinsurers, such collateral should be in the form of a letter of credit issued by a financial institution authorized to operate in Brazil.

Local reinsurers will have to comply with the same rules established for insurance companies, except for solvency rates and minimum capital rules, for which there will be specific figures, also to be submitted to public hearing.

Finally, pursuant to the draft provisions, insurance companies are permitted to assign risks up to a limit of 50% of reinsurance underwritten risks (surety bonds, agricultural insurance and export credit insurance being excluded from such limitation due to their high risks), which prevents insurance companies from allocating all of their underwritten risks to other reinsurance companies.

Felsberg e Associados’ continues to follow-up the reinsurance market opening process. Further information on the same may be obtained from Partner Neil Montgomery (neilmontgomery@felsberg.com.br) or from Associate Ana Carolina Penteado (anapenteado@felsberg.com.br).

On October 15, the World Trade Organization – WTO confirmed that the USA has failed to comply with its rulings in the Cotton Case. The report is still confidential, but officials from both contenders confirmed its content.

The dispute started back in September 2002, when Brazil contested certain USA agricultural subsidy schemes before the WTO. After years of ingrained legal discussion, it was determined that Washington subsidy programs were WTO-inconsistent and should be brought into conformity.

Since the final decision of the Appellate Body, the USA has implemented some changes, such as the repealing of certain export subsidies, but Brazil kept arguing the inadequacy of the remaining measures, and now, finally, it has what it was chasing. Or maybe not. Is the dispute really approaching its end? The answer lies in the analysis of the WTO dispute settlement system, specifically in its implementation mechanisms.

According to the WTO routine, the USA will most likely appeal the recent ruling and postpone the compliance discussion until next year. Once this debate is over, both the extent and the way in which Brazil may decide to retaliate will be left to arbitration. As one may anticipate, it might take some time until Brasilia is granted the right to impose sanctions against its adversary.

Even so, the granting of such authorization is not yet the end of the road. WTO sanctions were not designed to replace, but rather stimulate, the implementation of WTO rulings. Therefore, the Cotton Case would only be properly concluded if Brazil managed to induce the USA to bring its illegal measures into conformity (i.e., eliminate the illegal subsidies), by exercising – or threatening to exercise – its right to retaliate.

WTO sanctions generally consist of the raising of the complainant’s tariffs against the defendant’s exports within the same “sector” in which the violation was found (in this dispute, goods). In many cases, however, the penalty tends to hurt more than benefit the sanctioneer, as it affects the costs of imports, thus harming its national industries (i.e., raw materials and capital goods) and consumers (i.e., manufactured goods). No wonder it is commonly said that WTO sanctions bite back.

In the Cotton Case, Brazil has requested the right to impose countermeasures at an amount up to US$4 billion. However, expecting the mentioned obstacles, it has sought authorization for sanctions not only in goods, but also in other areas, such as services or intellectual property (“IP” ). This is the concept of “cross-retaliation”, which – although rarely used – is allowed by the relevant WTO Agreement when regular retaliation is proved to be unfeasible or ineffective, and circumstances are serious enough.

The granting of the right to suspend concessions on IP could be a particularly persuasive alternative to induce USA compliance without harming Brazilian imports. Upon the suspension of several rules in TRIPS, those affected USA IP owners could pressure Washington to abide by WTO law, strengthening the Brazilian position.

Currently, there are two bills under discussion in the Brazilian Congress aimed at regulating the cross-retaliation through the suspension of obligations regarding IP. These are PL 5489/05 and PL 1893/07, respectively presented by Deputies Fernando Gabeira and Paulo Teixeira. Brazil has also created a workgroup within the Chamber of Foreign Trade (“CAMEX”) to discuss suggestions on how to enhance such proposals.

In summary, there seems to be a long path in anticipation towards a satisfactory conclusion to the Cotton Case. The multilateral dispute settlement procedure still has a couple of stages left before WTO acknowledges Brazil’s right to impose retaliatory duties. Moreover, once this right is granted, Brazil will face thorny obstructions trying to persuade the USA to conform its subsidy policies, through either negotiation or retaliation itself. Having those difficulties in mind, cross-retaliation, especially on IP, could be seen as a light at the end of the tunnel: an encouraging contribution to the effectiveness of the system, mainly for developing countries.

Further information on “WTO case: cotton the battlefield” may be obtained from Carolina Saldanha (carolinasaldanha@felsberg.com.br) and Abrão Árabe Neto (abraoneto@felsberg.com.br).

Felsberg e Associados has contributed the Brazilian Chapter of “Mergers & Acquisitions – A Practical Global Guide”, to a 453-page publication recently released by Globe Business Publishing Ltd. of London, UK. The single-volume book is unique in explaining the legislation and routines on M & A transactions in 27 jurisdictions across five continents. The Brazilian Chapter was written by Corporate Finance Partner Neil Montgomery and Associate Evy Cynthia Marques.

The book covers the many aspects of M & A transactions in countries as diverse as Brazil and China, Denmark and Malaysia. As stated on the back cover of the book, a wide range of legal issues are covered, including: structuring the M & A agreement, seller’s and buyer’s liabilities, arbitration agreements, choice of law clauses, and acquisitions of insolvent and listed companies.

Further information on “Mergers & Acquisitions – A Practical Global Guide” may be obtained from Neil Montgomery (neilmontgomery@felsberg.com.br) or Evy Cynthia Marques (evymarques@felsberg.com.br) or by accessing the website http://www.globebusinesspublishing.com/MA.

Felsberg e Associados’ Corporate Finance Partners Thomas Benes Felsberg and Neil Montgomery, recently spoke at the Brazilian Economic and Legal Seminar in Catalunya (held in Barcelona) and at the Brazilian Embassy in London to large groups of interested businesspeople and lawyers.

The event held in Barcelona took place on September 17 and 18 at the prestigious venues of the Círculo Ecuestre and the Colegio de Abogados de Barcelona. While Senior Partner Thomas Benes Felsberg spoke about the Business Environment in Brazil, Partner Neil Montgomery addressed the topic of Incorporating Companies in Brazil. Both talks were given in Spanish.

On September 20, and this time at the Brazilian Embassy in London, Senior Partner Thomas Benes Felsberg again spoke about the Business Environment in Brazil while Partner Neil Montgomery addressed the topic of Insurance and Reinsurance in Brazil. That week in London, both Partners also participated in the intergovernmental events held under the auspices of JETCO – the Joint Economic and Trade Committee, created by the Brazilian and British governments following President Lula’s visit to the UK in March 2006.

Thomas Felsberg (second from right) with Brazilian Ambassador
to Spain (right) and Neil Montgomery (second from left)

On October 1, 2007, EMIRATES’ brand-new Boeing 777-200LR, prefix A6EWA, took-off from Guarulhos International Airport, on the historic inaugural non-stop flight from São Paulo to Dubai. This is the first direct air route linking South America and the Middle East and has been praised by the business and tourist communities at both ends of the air route. Felsberg e Associados is proud of having contributed to this historic event.

Felsberg e Associados has been instructed by EMIRATES to provide legal advice in connection with the setting up and operations of such airline’s Brazilian branch. EMIRATES now flies non-stop to six continents, with São Paulo being its 94th destination and Brazil the 60th country served.

The team catering for EMIRATES’ needs in Brazil has been lead by Partner Neil Montgomery, who recently met with EMIRATES’ CEO and Chairman, His Highness Sheik Ahmed bin Saeed Al-Maktoum, and attended the recent inaugural event at one of São Paulo’s most prestigious venues. The team so far comprises Associates Wagner Botelha (real estate), Isabel M. Andrade (aviation), Evy Cynthia Marques (corporate) and André de Melo Ribeiro (employment).