Selected issues in contracting and negotiating in Brazil, including hypothesized factors driving Brazilian practices.

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Brazilian contracting and negotiation processes
Brazilian contracting and negotiation processes
Malcolm McLelland, Director—Research and Analytical Services
18 November 2011
© 2011 Equilibrio Capital | Brasil 1

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Brazilian contracting and negotiation processes
Objective
To understand fundamental factors driving Brazilian business and negotiation practices, not
simply what the Brazilian practices are or how they differ from those of other countries.
Analytic framework
The collective experience of Brazilian society is impounded in its culture, laws and legal
institutions, and in its business practices (including negotiations):
Brazilian Brazilian
Brazilian Brazilian

 
 laws and legal 
 business and
history culture
institutions negotations
politicoeconomic economic
perspective perspective informal surveys informal surveys
Informal surveys provide unstructured data used to infer likely factors driving Brazilian business
and negotiating practices.
© 2011 Equilibrio Capital | Brasil 2

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Brazilian contracting and negotiation processes
Brief outline of modern Brazilian history
1500 – 1800 ........... Brazil claimed by Portugal and operates mainly as a Portuguese colony; plantations
are developed with over 1M slaves imported from Africa; intermittent battles fought
with other colonial powers.
1800 – 1888 ........... Brazil houses Portuguese court (until 1821); ruled by a constitutional monarchy.
1889 – 1930 ........... Brazil operates as a republic after a military coup d’etat, with non‐secret voting and
frequent political and social unrest.
1930 – 1964 ........... Military junta controls government (1930‐1945) but institutes democratic elections;
political and social unrest continues but economic growth does also.
1964 – 1985 ........... Military junta re‐establishes governmental control with relatively severe suppression.
1985 – present ....... Democratic governments; control of hyperinflation and increased internal security;
new era of more stable government, society, economic growth, and improving
income equality.
© 2011 Equilibrio Capital | Brasil 3

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Brazilian contracting and negotiation processes
Brazilian culture from an economic perspective*: Population
Brazil: Race or skin color ............................................ White 48.4%
Brown (multiracial) 43.8%
Black 6.8%
Asian .6%
Amerindian .3%
* All graphs in this and following pages courtesy of Wolfram Alpha.
© 2011 Equilibrio Capital | Brasil 4

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Brazilian contracting and negotiation processes
Brazilian culture from an economic perspective: Economic output and growth
GDP ...............................................
Income per capita .........................
© 2011 Equilibrio Capital | Brasil 5

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Brazilian contracting and negotiation processes
Brazilian culture from an economic perspective: Income distribution
Brazil (2009) ..................................................
United States (2000) ........................................
Germany (2000) ..............................................
© 2011 Equilibrio Capital | Brasil 6

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Brazilian contracting and negotiation processes
Brazilian culture from an economic perspective: Health and education
Healthcare expenditures ............................
Education expenditures ..............................
© 2011 Equilibrio Capital | Brasil 7

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Brazilian contracting and negotiation processes
Brazilian laws and legal institutions
:: Brazilian laws are similar to US laws in the sense of their general overall structure is similar;
particularly commercial and securities law.
:: Brazilian commercial, tax, and securities laws tend to be written in a more explicit, simpler,
“bright‐line” manner than US law, suggesting lawmakers were more concerned about clear
communication and ease of enforcement.
:: Brazilian law and contract enforcement by the courts is somewhat selective and quite slow (e.g.,
commercial litigation cases are often not heard by the courts for 2‐3 years, and are often not
ruled on or settled for another 2‐3 years).
:: Brazilian tax laws are relatively simple and tend to be designed to achieve specific policy
objectives; and, therefore, also tend to be many (e.g., there are over 120 different types of tax).
:: Banco Central do Brasil is not entirely independent of the Brazilian government and, in the past,
laws were past on the weekends (when banks were closed) leading to large devaluations of
currency. 
© 2011 Equilibrio Capital | Brasil 8

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Brazilian contracting and negotiation processes
Brazilian contracting processes
:: Because contracts are difficult to enforce in Brazil, Brazilians rationally tend to do business
with—i.e., enter into contracts with—only people they know and trust well; contracts with
others are, in some sense, simply not rational in Brazil.
:: This leads to—by US and EU standards—unusually long, slow contracting processes; particularly
with foreigners who are not well‐known‐and‐trusted first‐ or second‐degree friends of the
Brazilian contracting party. In turn this leads to fundamental contracting process differences:
 

typical US contracting process

contact exchange negotiate perform execute

 
 
 

counterparty information AIP due diligence contract
exchange
extensive
contact negotiate information execute

 informal 
 
 

counterparty AIP and formal contract
due diligence
due diligence
 
 
typical Brazilian contracting process
© 2011 Equilibrio Capital | Brasil 9

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Brazilian contracting and negotiation processes
Brazilian negotiating processes
:: Given the Brazilian politico‐economic experience over the last 50 years—particularly the
hyperinflation of the 1990s, and related events and conditions—Brazilian business people tend
to be highly rational/pragmatic and conservative/risk‐averse.
:: Historical politico‐economic uncertainty tends to lead to expected continued uncertainty, which
leads to large bid‐ask spreads and lengthy negotiation of terms on contracts.
:: Risk‐aversion, uncertainty, and large bid‐ask spreads—in combination with the other cultural
aspects of contracting processes—lead to conditions where Brazilians seek to infer information
during the negotiating process about counterparties’ subjective valuations, their implicit long‐
term objectives, etc.
:: Conditions outlined above lead to Brazilians’ strong preference for delayed disclosure during
negotiations, including non‐disclosure bargaining positions (e.g., asking price) and decision
processes until fairly deep into the negotiating process.
:: Problematic contract enforcement in Brazil leads to relatively high likelihoods of aborted
contracting up to the planned closing dates for contract execution. This often gives either the
buyer or seller substantial differential negotiating power, that generally must be controlled. 
© 2011 Equilibrio Capital | Brasil 10

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Brazilian contracting and negotiation processes
About Equilíbrio Capital | Brasil
Equilíbrio Capital provides research‐based transaction advisory services to middle‐market buyers and sellers in
private capital market transactions, primarily in Brazil:
Equilíbrio Capital’s approach to transaction advisory services is based on deep knowledge of—and experience
in—applying financial, micro‐ and macro‐economic theory using econometric, financial modeling, and valuation
methods.
© 2011 Equilibrio Capital | Brasil 11

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Brazilian contracting and negotiation processes
Valdir Jorge Mompean, MS, MBA
Executive Director, Equilíbrio Capital
Mr. Mompean has over 25 years combined experience in auditing, management consulting, research, company organization
and restructuring, and merger and acquisitions transactions. In recent years he has provided management consulting, private
investment banking, and tax advisory services to many major Brazilian banks, multinational corporations, and to large and
middle‐market Brazilian firms. His primary areas of expertise include:
:: advice on equity transaction pricing and negotiation assistance
:: development of structured finance solutions
:: identification and vetting of merger and acquisition targets and strategic partners
:: development of resource and capital acquisition strategies
:: organizational structuring and integrated multi‐tax planning
:: analysis of new market opportunities and related industries
Such experience was obtained through the following engagements:
:: President – Mompean & Associados, Auditores Independentes, 2005 – present.
:: Director – Global Financial Services Industry Practice, Deloitte Touche Tohmatsu, 1999 – 2002.
:: Controller – International Settlements, Banco Itaú, 1992 – 1999.
:: Audit Senior – Deloitte Touche Tohmatsu, 1989 – 1992.
Mr. Mompean has held academic appointments at Instituto Presbiteriano Mackenzie, Fundação Escola do Comércio Álvares Penteado, and Centro
Universitário Fundação Santo André where he has taught courses in accounting, finance, business administration, controllership, foreign trade, and
economic engineering. Mr. Mompean holds a bachelors degree in Accounting from Faculdade de Ciências Econômicas e Administrativas de Santo
André (Sao Paulo), and MBA (Finance) from Instituto Brasileiro de Mercado de Capitais (IBMEC, now INSPER), and a M.S. in Accounting and Actuarial
Calculations from Pontificía Universidade Católica de São Paulo. 
© 2011 Equilibrio Capital | Brasil 12

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Brazilian contracting and negotiation processes
Nilson de Lima Barboza, MBA
Director – Capital Market Advisory Services, Equilíbrio Capital
Mr. de Lima Barboza has over 20 years combined experience in auditing, management consulting, information
systems development, and risk management through numerous engagements with Brazilian banks and
insurance companies, and as director of internal auditing and risk management—and as financial expert of the
Audit Committee—of a major commercial bank in São Paulo, Brazil. His primary areas of expertise are in
capital market transaction advisory services including risk analysis, transaction negotiation, due diligence
investigations:
:: Audit Committee, Member and Financial Expert – Banco Daycoval S.A., 2009 – 2010.
:: Operational Risk Manager – Banco Daycoval S.A., 2007 – 2009.
:: Director – Global Financial Services Industry Practice – Deloitte Touche Tohmatsu, 1990 – 2007.
Auditing and consulting services director, which included management of Initial Public Offering
processes of two of the most prominent middle‐market commercial banks in Brazil: Banco Pine
S.A. and Banco Daycoval S.A.
Mr. de Lima Barboza holds bachelor’s degree in Accounting Sciences from Universidade São Judas Tadeu (São Paulo), post‐
graduate training in controllership from FECAP (São Paulo), an MBA (Finance) from Instituto Brasileiro de Mercado de Capitais
(IBMEC, now INSPER), and completed Syracuse University’s Business Extension Course in Syracuse, New York (US). 
© 2011 Equilibrio Capital | Brasil 13

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Brazilian contracting and negotiation processes
Malcolm McLelland, Ph.D.
Director – Research and Analytical Services, Equilíbrio Capital
Dr. McLelland has over 25 years combined experience in consulting, research, accounting and auditing. His primary areas of
expertise are in econometric analysis, financial modeling, and valuation, which he has used in a wide variety of engagements
including those relating to:
:: estimation of market demand and competitor supply and cost functions
:: merger and acquisition analysis, structuring, and valuation
:: negotiating private debt and equity placements
:: capital planning, (re)structuring, and reorganization
His involvement in engagements relating directly to commercial banks and financial institutions include:
:: Commercial loan portfolio analyses with respect to middle‐market commercial loan portfolio quality and
valuation in the Midwestern US and the metropolitan Indianapolis, Indiana (USA) area.
:: Bank acquisition investigations with respect to commercial loan portfolio quality and loss estimation in the
Indianapolis, Indiana region.
:: Independent arbiter appointed by the Federal Home Loan Bank (Indianapolis) with respect to disputed bank
examiner findings on commercial loan portfolio quality and loss estimation.
:: Development of integrated bank financial models for community banks in the metropolitan Indianapolis, Indiana
area used in strategic planning, asset‐liability management policy, capital planning, and performance evaluation.
Dr. McLelland’s academic research primarily involves how commercial banks optimally use accounting discretion and the (dis)information content of
commercial bank financial statements, which has been published in Review of Accounting & Finance, Managerial Finance, and on the Social Science
Research Network. Dr. McLelland has held academic appointments at University of Illinois at Chicago, Purdue University, Indiana University, and
Steinbeis University | Stuttgart Institute of Management and Technology (Germany). He holds a B.S. in Business (Accounting) from Indiana University,
and a Ph.D. in Business Administration (Accounting and Econometrics) from Michigan State University. 
© 2011 Equilibrio Capital | Brasil 14

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Brazilian contracting and negotiation processes
Contact information
Valdir Jorge Mompean Nilson de Lima Barboza Malcolm McLelland
mompean@equilibriocapital.com lima.nb@equilibriocapital.com malcolm.mc@equilibriocapital.com
+55.11.8794.0550 (BR cell) +55.11.8181.2542 (BR cell) +55.11.8797.1064 (BR cell)
+01.312.506.8679 (US cell)
Equilíbrio Capital | Brasil Equilíbrio Capital | Brasil Equilíbrio Capital | Brasil
Rua da Consolação 222, Conj 607 Rua da Consolação 222, Conj 607 Rua da Consolação 222, Conj 607
Consolação – CEP 01302‐000 Consolação – CEP 01302‐000 Consolação – CEP 01302‐000
São Paulo SP ‐ Brasil São Paulo SP ‐ Brasil São Paulo SP ‐ Brasil
+55.11.3129.7423 (BR office) +55.11.3129.7423 (BR office) +55.11.3129.7423 (BR office)
© 2011 Equilibrio Capital | Brasil 15