Publications

Category: Labor and employment

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After approximately 2 months and 178 amendment requests, the Brazilian Senate approved the labor reform bill of law last Tuesday (07/11/2017) without any change to the original text submitted by the House of Representatives. There were 50 votes in favor, 26 in opposition, and 1 abstention. As there were no changes suggested by the Senate, bill of law no. 6,787/2017 will now be sent for the sanction of the in-house President Michel Temer.

In a letter sent to the Senate on June 28, 2017, the President reassured his commitment in the sense that any adjustments to the bill of law would be made by himself, either through vetoes to the bill of law or through the execution of Provisional Presidential Decrees.

However, after the approval of the bill of law, the president of the House of Representatives has already stated that he will not  consider any Provisional Presidential Decree aiming at amending said bill of law.

Considering such statement, it is possible then to expect vetoes by President Michel Temer of some points of the labor reform, especially regarding (i) the treatment of the pregnant or breastfeeding employees in the unhealthy workplace environment, (ii) individual agreement that provides for a 12-hours work day for 36 hours of rest and (iii) some points of the intermittent-work agreement.

If the President fully sanctions the bill of law, the law will come into force 120 days after the date of the sanction. However, if the President vetoes part of the bill, only those vetoed matters will return to the Congress, which will decide in a joint session (House of Representatives and Senate), within 30 days, whether to agree or reject the vetoes. The presidential veto, however, can only be rejected by the vote of the absolute majority of the Congress.

If the veto is rejected by the Congress, the President or Senate (in the event of the President's lack of action), shall sanction the content of the previously vetoed law. In this case, more than 100 articles of the Brazilian Labor Code (CLT) will be adjusted.

Category: Infrastructure and energy

Law No. 13,448 (conversion of Provisional Presidential Decree No. 752 or "Concessions MP") governs the procedure for re-bidding projects operated through public concession in the toll road, railway and airport sectors. 

What is re-bidding?

The law defines re-bidding as the procedure that contemplates the amicable termination of existing concession agreements in default or under financial distress and the conduction of a new public tender to delegate the exploration of the project to a new concessionaire, under new contractual conditions.

It is aimed at toll road and airport concessionaires that are facing difficulties in complying with agreements, either because of credit scarcity and restrictions, impacts from Operation Carwash [Lava Jato] or radical change in the country's economic scenario.

The law provides that a new bid for agreements already in force may be held when: (i) they are not being complied with by the contracted parties; or (ii) the contracted parties show an inability to comply with the contractual or financial obligations assumed under the concession agreement.

What is new?

Strictly speaking, in the regulations of the Concessions Law, the system applicable to termination of contracts due the breach by the contracted party is forfeiture. Extinction due to forfeiture involves a complex administrative process, often leading to litigation. It is also common that, via injunction, the contracted parties secure the right to continue to operate, in order to prevent the interruption of the public services.

In the new model, the current contracted party must agree to proceed with the early termination of the agreement. However, it is possible that, at this point, the amount of indemnification due to investments made in the concession and not yet amortized is defined only later in the process. This is an important point, since the concessionaire cannot disengage the amicable termination in the event of a later dispute over the indemnity amount, which usually leads to judicial litigation, extending for years.

As an alternative, the law provides that the parties may submit the indemnity calculation to an arbitral proceeding, carried out in parallel to the new bidding process. In any scenario, the indemnity due must be settled and fully paid to the concessionaire before the winner of the re-bidding process assumes the project. If so determined in the bid notice, the indemnity can be paid by the new contracted party.

In summary, the law seeks to establish more modern forms of conflict resolution (amicable termination and arbitration), especially in relation to property rights, in order to allow the effective termination of the agreement and the undertaken of the project by a new private party, qualified to perform the necessary investments and services. 

What is the procedure for re-bidding?

It is possible divide the re-bidding procedure into three phases. First, the agreement must be included in the Investment Partnerships Program (PPI) of the Federal Government, at the request of the competent ministry and with presidential approval. In a second phase, the concessionaire and the granting authority must negotiate the amicable resettlement. This phase includes the submission of a series of technical information by the concessionaire, as well as an irrevocable and irreversible statement adhering to the re-bidding process.

After qualifying for re-bidding, the agreement cannot be submitted to judicial and extrajudicial recovery schemes. This is a clear-cut provision to shield assets managed by companies that are subject to Operation Car Wash [Lava Jato], which face financial difficulties. In addition, measures intended to initiate or continue forfeiture proceedings against the contracted party will be suspended.

Once the terms of the amicable termination have been agreed upon, the law provides that an amendment to the agreement must be executed together with the current concessionaire. The amendment must provide for: (i) the concessionaire’s adherence to the amicable termination; (ii) the suspension of the original obligations and new conditions for rendering the services until termination; (iii) the indemnity amount (or the arbitration commitment); and (iv) possible direct payment of any indemnities to the sponsors.

In addition, it is the responsibility of the competent agency to prepare feasibility studies regarding the new concession and submit them to public consultation. Subsequently, the studies and the drafts of the bid must be submitted to the Federal Audit Court (TCU) for review. Only then can the new bidding process for the project be formally launched. In case of delay in the re-bidding, the granting authority may order maintenance of the current agreement for up to 24 months to ensure the continuity of the services.

Another relevant provision is the prohibition of participation by some entities in the re-bidding process or in the future capital of the winning bidder. The restriction covers both the current contracted party (Specific Purpose Entity - SPE) as well as shareholders holding 20% or more of the capital of such entities at any time prior to the initiation of the re-bidding process. Even shareholders who did not cause the breach and have financial conditions to manage the concession will be prevented from participating in the new concessionaire.

Relevant claims of the current concessionaires were not contemplated by the law. That is the case of the possibility of renegotiation of existing concessions, in order to maintain the current contracts. This could be an alternative to re-bidding in relation to certain concessions under default. Despite of not being included as public policy in the law, nothing prevents this type of negotiation from being initiated based on the general regulations applicable to Brazilian concessions. 

For more information on Law No. 13,448/2017, see also: Benefits of Law No. 13,448/2017 for the infrastructure sector and Conversion of MP 752 confirms possibility of early extension of railroads and toll road concessions.

Category: Infrastructure and energy

Sanctioned on June 5, as the result of the conversion of Provisional Measure No. 752/2016 (MP 752), Law No. 13,448/2017 regulates the ordinary and early  extension of railway and toll-road concessions. The law provides

Ordinary extension is carried out due to the end of the original term of the concession agreement and depends on an express provision allowing term extension in either the original bid notice or the agreement. The public administration must also demonstrate that the maintenance of the current concession for a longer period is more advantageous than the granting of the concession to a new private party, by means of a public tender.

The law also established rules for early extension of concession agreements. Pursuant to the law, the early extension is conditioned to the performance, by the concessionaire, of new investments not foreseen and not amortizable within the term of the original agreement. The terms of the extension must be formalized by an amendment to the agreement, which must also include an investment plan and investment schedule previously agreed upon. The amendment may also provide for mechanisms to discourage default by the concessionaire, such as an annual discount in the tariffs or an obligation to additional payments to the granting authority. In summary, extension will be conditioned to the performance of new investments with aggressive mechanisms in case of non-compliance. Other particular requirements are also applicable to each toll-road and railway concessions, as summarized below. 

It is worth highlighting that the requirements for railways were more severe in the MP 752 than in the final wording of the law. Still, some concessionaires may face difficulties when requesting a term extension.

The law applies only to the toll-road, airport, and railway sectors, and extension is geared towards toll roads and railroads. The exclusion of other industries was not accidental. The government has chosen to have a separate approach for sectors with different realities and levels of maturity. The port sector, for example, has already had a series of regulations with broad application on contractual extensions and early extensions, such that their inclusion could bring in more questions than answers. A similar situation is experienced by the energy sector, which also faced this issue with greater intensity in 2013, in view of the need to renew the distribution, transmission and generation agreements.

In order to justify the extension, the granting authority must present a technical, economic, and environmental study demonstrating the advantage of the term extension in relation to a new bidding process. This provision is in line with the recent decisions of the Federal Audit Court (TCU), which questioned the lack of criteria and information asymmetry in the analysis of extension and rebalancing of concession contracts. In the same sense, the law requires the submission of the extension process to public consultation and to the TCU.

The amendments inserted in the original text of MP 752 brought in some important changes with regard to what could be negotiated in the extension amendment. According to the law, the early extension may imply a renegotiation of the contractual terms as a whole, in order to resolve operational and logistical issues, including through extensions and partial re-bidding of the projects originally contracted.

Specifically for railways, the law provides for termination of lease agreements and the possibility of reshaping the network and adopting specific measures for lines, including incorporation of new networks, deactivation of assets, short distance transportation by third parties etc. These provisions could help unlock long-standing discussions about the deactivation of routes and assets that are not economically sustainable under the current concessions model.

There is also a tendency to increase the standards for extension, requiring the Public Administration to clearly demonstrate its advantage in relation to a new bidding process, as well as the increase of the control and transparency of the process.

At some point, the proposed wording of the law also provided that the concessionaires could undertake financing and other forms of debt and guarantee the rights arising from the agreement and shares of its capital stock and securities, without the need of prior consent by the granting authority. Operations would be subject to mere notice. This introduced more flexibility to the concession regime, with the clear objective of expanding investment operations and injecting funds into infrastructure. However, this provision was vetoed by the president on the grounds that the free granting of securities could make partnerships more fragile and jeopardize the rendering of services.

Law No. 13,448/17 provides greater regulatory clarity and legal certainty for both public administration and private agents. However, the real impact of its terms will only be known when the law is applied to the sectors it regulates.

For more information on Law No. 13,448/2017, see also: Benefits of Law No. 13,448/2017 for the infrastructure sector and Law No. 13,448/2017: procedure for re-bidding for public service concessions.

Category: Infrastructure and energy

Six months after its publication, Provisional Presidential Decree - MP 752/2016 was officially converted into Law No. 13,448/2017, thereby incorporating the amendments approved by the National Congress, with some presidential vetoes. The text of the law brings in relevant innovations to the extensions of federal agreements in the infrastructure sector and seeks to establish clear rules for what was already practiced in other sectors, but did not have an express provision in the legislation applicable to the matter.

The new law integrates the package of government actions to resume and expand investments in Brazil, in a context of economic and political instability. Although there are limitations, the initiative indicates a federal tendency to standardize early extension procedures, respecting TCU guidelines, and building on successful experiences in securing new investments in infrastructure.

For the private sector, the approved text gives greater predictability and security to the realization of investments at a crucial moment for Brazil. For the public authorities and public agents conducting the process, the law brings more clarity to the procedures and criteria for extension. In our view, the measure can contribute to increase the speed of performance and resumption of investments in infrastructure, which are key to the Brazilian economy, and benefit users, who have interest in the continuity and quality of service.

The law regulates three public policy solutions in the scope of partnership agreements that are entered by the federal public administration or that make use of federal funds: (1) the extension of administrative agreements, carried out near the end of their original term; (2) the possibility of early extension, during the course of agreements, with the aim of expanding and anticipating investments; and, finally, (3) the possibility of amicable contractual termination and subsequent re-bidding of concessions in default or whose concessionaires have lost the necessary financial conditions to perform under the agreement.

The extensions will depend on a demonstration of their advantage in relation to holding new public tenders, through technical feasibility studies (EVTE). The process is subject to the evaluation of the TCU and other requirements set forth in the legislation for each sector.

Similarly, the re-bidding should be preceded by EVTE and public consultation, as well as submission of the documents to the TCU. Another relevant issue is the prohibition on participation by some entities in the re-bidding process or in the future capital of the winning bidder. The restriction covers both the concessionaire and shareholders holding 20% or more of the concessionaire’s capital at any time prior to the commencement of the re-bidding process. Even shareholders who did not cause the breach or who have financial conditions to manage the concession will be prevented from participating in the new bidding and the capital of the new concessionaire.

In order to benefit from the law, companies must be qualified under the Investment Partnerships Program (PPI), upon request of the competent ministry and publication of presidential decree (see Federal Law No. 13,334/2016 and CPPI Resolution No. 1/2016).

The law applies only to agreements entered into by the federal public administration in the road, airport, and railway sectors, and extension is directed towards toll roads and railroads. Both sectors have a number of mature concessions (with more than 50% of the original deadline), the extension of which is possible and has already been discussed in many cases with the agencies governing the sector, although there is no general regulation on the matter. The re-bidding applies to the three sectors, but is mainly focused on highways and airports, where there are cases of difficulties in executing agreements due to different factors, such as widespread frustration of demand resulting from the crisis and loss of capacity on the part of the concessionaires belonging to economic groups investigated in Operation Carwash [Lava Jato].

The enactment of Law No. 13,488/17 indicates that the government is willing to solve the problems which hinder the expansion of infrastructure in strategic sectors for national development. This is an important step in the resumption of investments, signaling the government's willingness to address problematic issues that hinder the expansion of infrastructure in sectors that are strategic for national development. However, its real extent will only be known once the law is applied to the sectors regulated by it.

For more information about early extension and re-bidding, see also: Conversion of MP 752 confirms possibility of early extension of railroads and toll road concessions and Law No. 13,448/2017: procedure for re-bidding for public service concessions.

Category: Restructuring and insolvency

The Judicial Reorganization and Bankruptcy Law (LRF) establishes that, once the request for judicial reorganization is accepted, all lawsuits and enforcements against the debtor will be suspended during the stay period, except for claims that are labor in nature, those that involve illiquid amounts and tax foreclosures.

Because tax debts are not subject to this procedure, the LRF provides that it is necessary to create special tax installment payment procedures for companies in financial distress, which, on the occasion of the approval of the reorganization plan, must submit certificates of good tax standing.

However, in practice, due to the principle of preservation of the company, Courts have not allowed the Tax Authorities, in tax foreclosure proceedings, to satisfy debts via excussion of assets of companies under reorganization when those assets are essential to the development of the debtor’s business.

Moreover, due to the principle of preservation of the company, together with the delay in enacting the law, and its lack of comprehensive treatment of all issues, in order to address tax installment payments, Courts have granted requests for judicial reorganization without requiring submission of certificates of good tax standing.

Specifically regarding the difficulty of the Tax Authorities in attaching assets, this issue also involves a conflict raised in a substantial number of judicial reorganizations – namely, when there is a lien/attachment on the assets of a company in reorganization in tax court – with respect to which court has jurisdiction to decide on the essentiality of the asset, whether the tax execution court or the judicial reorganization court.

These disputes were being referred to the Private Law Section of the Superior Court of Justice (STJ), which has established an understanding that the jurisdiction is that of the reorganization court, regardless of the origin of the attachment order. Based on the principle of preservation of the company, this court generally does not allow excussion of assets essential to the debtor by creditors not subject to the procedure.

However, with the entry into force of Law No. 13,043/14, which instituted federal tax debt installment payments specifically for companies undergoing judicial reorganization, there is an attempt to change the scenario described above that deserves closer review.

A recent decision by Justice Herman Benjamin, member of the Public Law Section of the STJ, calls for a re-reading of the understanding consolidated by the Private Law Section. According to Justice Benjamin, even though tax debts are not subject to judicial reorganization plans, considering that tax foreclosures are not suspended, there may be attachment of assets, even those assets that are essential for the fulfillment of the plan.

In this context, upon deciding Special Appeal REsp No. 1.512.118/SP and Internal Interlocutory Appeal AgRg no REsp No. 1.582.260/PE, Justice Benjamin understood that if the plan was approved with evidence of good tax standing, the tax foreclosure will be stayed on the grounds of the stay of tax debts set forth in article 151 of the National Tax Code. Otherwise, if the plan is approved without demonstrating good tax standing, foreclosure may develop normally, notwithstanding the judicial reorganization. In this case, per the Justice Benjamin’s understanding, it is not necessary to affirm the prevalence of the reorganization court over the tax foreclosure court, since opening a reorganization proceeding does not interfere with tax foreclosure, in which the court is competent to decide on essential assets and interests, subject to the principle of lower burdens to the debtor.

These are isolated decisions, but they must be monitored, especially due to some exceptions observed in the practice of sending conflicts of this nature to the STJ’s Private Law Section. In fact, some of these cases were reassigned to the Public Law Section, as in the cases of Conflict of Jurisdiction No. 116,579/DF and No. 112,646/DF. In the latter, the reporting judge, Justice Benjamin, stated that "the conflicts of jurisdiction decided in the Second Section refer to ordinary enforcements, of a civil or labor nature; while this case is a tax foreclosure that is a special procedure, governed by Law No. 6,830/1980, and whose singularity is recognized in Law No. 11,101/2005".

Still on the situation of the Tax Authorities in judicial reorganizations, on April 27, 2016, in the court records of the judicial reorganization of the GEP Group, the 2nd Court of Bankruptcy and Judicial Reorganization of São Paulo, based on the decision reported by Justice Benjamin, conditioned the maintenance of the decision granting the reorganization to submission of proof within 120 days of the existence of an installment plan for tax debts. It would be up to the debtor to choose among the installment options available and not necessarily follow the provisions of Law No. 13,043/14, which establishes payment terms in 84 months and demands a waiver of claims before courts. In that judge’s opinion, the conditions laid down in the law are not compatible with the situation of a company in economic and financial distress.

Despite these developments, the prevailing understanding is still that, since the conditions for adhering to the installment plan set forth in Law No. 13,043/14 are extremely onerous to companies in reorganization and since the law only deals with federal taxes, judicial approval of the plan and the granting of judicial reorganization can occur regardless of whether certificates of good tax standing are submitted.

Category: Labor and employment

Employers wishing to extend the employee's working day in an environment deemed hazardous must have authorization from the Ministry of Labor (MTB), issued only after inspection and analysis of the application, in addition to complying with a series of requirements imposed by the agency.

The same procedure is necessary for the purposes of whole day compensation, such as Saturdays, and in such cases, the replacement of authorization by collective agreements signed with the trade union representing the professional category is not even accepted. This understanding is consolidated in Precedent No. 85, item VI, of the Superior Labor Court (TST).

If the basic text of the Labor Reform is approved by the Federal Senate and sanctioned approved by the President of the Republic, however, these issues may be changed. In any case, not all companies will be free from the need for authorization of the MTB. The exemption provided for in the basic text concerns only those professions that work a 12-hour work shift per 36 hours of rest, such as caretakers and nurses.

The proposed change is in the item that deals with contracts as against legislation. According to the text, the employer and the trade union representative of the professional category are authorized to enter into collective bargaining agreements or accords to extend the workday in environments deemed hazardous without a prior license from the MTB.

This anticipated change in the Consolidated Labor Laws (CLT) will lead to a forced change in case decisions, considering what is required by Precedent No. 85 regarding the invalidity of compensation arrangements for work in a hazardous environment, even if guaranteed by a collective rule. It is necessary to verify how much of the new rule will be applied to pending cases if and when the amendment enters into force.

Another possible change that the Labor Reform may entail for labor relations in hazardous environments concerns pregnant women and women who are breastfeeding. Currently, the law prohibits them from working in environments with any degree of hazard. With the amendment of the Consolidated Labor Laws (CLT) envisaged in the text approved by the Chamber of Deputies, however, pregnant employees will only be mandatory absent from such environments when the activity is considered hazardous to a maximum degree, as in the case of handling of carcinogenic substances or hydrocarbon derivatives.

In medium or minimum degree hazard conditions, pregnant women must be removed from the hazardous environment if they present the employer with an affidavit issued by a trusted doctor who recommends that she avoid such environments during pregnancy. For breastfeeding mothers, the avoidance of such environments will be mandatory with the presentation of a doctor’s health certificate in any degree of hazard found in the work environment.

When the employer is not able to provide the pregnant employee the ability to work in nonhazardous conditions, the basic text of the Labor Reform foresees that gestation will be considered a risk, thus placing the employee on leave and resulting in a right to maternity leave pay during the whole period she is on leave from the company.

If accepted, the changes envisaged in the proposal approved by the Chamber of Deputies will therefore create new requirements for compliance with work in hazardous environments. While this is not the case, it is up to employers to ask MTB for authorization to extend work hours and to remove pregnant and breastfeeding employees in order to avoid fines and lawsuits.