Shaking it up

As more global law firms establish offices in Brazil, some have tied-up with local firms while others remain unattached. Legal Business finds out who has the right mix

The big news in the Brazilian legal market has been the surge in the number of international players joining the party. UK and US firms, including Squire, Sanders & Dempsey, DLA Piper, Simpson Thacher & Bartlett and Mayer Brown, have all set up shop in São Paulo in the past two years (see box, ‘International office launches in Brazil’). The new arrivals join those who have been resident for some time, including Allen & Overy, Linklaters, White & Case and Clifford Chance. The number of Global 100 firms in São Paulo, Brazil’s key commercial and financial centre, has grown from six to 12 since 2007.

For the most part, these global giants have been happy to practise only US and English law, leaving the domestic work to the Brazilian firms. For example, although Clifford Chance advised Royal Dutch Shell on its entry into Brazil’s ethanol market through a $12bn ($ refers to US dollars in all instances) joint venture earlier this year, it was 130-lawyer local firm Souza, Cescon, Barrieu e Flesch that advised on the Brazilian aspects of the deal. But, this attitude is changing. Many international firms now want more serious, exclusive relationships with local firms – the law firm equivalent of moving from casual dating to full-blown marriage. Bar regulations mean that foreign firms can’t practise Brazilian law, so must ally themselves with a domestic firm to offer local expertise. Mayer Brown announced in December 2009 that it had formed an association with oil and gas specialist Tauil & Chequer, while DLA Piper signed a co-operation agreement with corporate firm Campos Mello in March this year. It’s a sign that the market is becoming increasingly split between ‘dating’ overseas firms that advise only on the international aspects of deals, and ‘married’ firms that have taken the plunge with affiliates to practise Brazilian law. The question is, which is the right strategy for international firms to pursue?

Potent cocktail

Currently, Brazil is an intoxicating place for international law firms. More investment capital, along with oil and gas exploration and a wave of new construction projects, are fuelling growth. Brazil did not avoid the economic downturn, but it was among the last major countries to fall into recession and one of the quickest to bounce back, suffering just two consecutive quarters of shrinking GDP. Goldman Sachs predicts that by 2025 Brazil is likely to become the world’s fifth-largest economy, overtaking Britain and France, while according to PricewaterhouseCoopers’ global city GDP rankings, São Paulo will be the world’s sixth-wealthiest city, also by 2025. Foreign investment is pouring in, attracted by a market boosted by falling poverty and a swelling lower-middle class. International law firms have seized on this opportunity, keen to aid their international clients in moves to Brazil and help Brazilian companies spend their money abroad.

The growth of capital markets mandates from 2005 was a major lure for US firms, as David Sonter, Freshfields Bruckhaus Deringer’s corporate country partner for Brazil, explains. ‘São Paulo is the hub for Brazilian capital markets. Five years ago, you had a lot of Brazilian companies who listed on the Brazilian stock exchange but would also list on the NASDAQ or NYSE,’ he says. ‘US firms were crawling all over that. Many of the American firms moved into Brazil to do equity and debt capital markets work. That was a big driver.’

Last year’s $7.5bn listing of Banco Santander’s Brazilian subsidiary was the largest IPO in the country to date, and the biggest in the world since Visa’s offering in March 2008. Santander Brasil, which is the third-largest private-sector bank in Brazil, listed on the New York Stock Exchange and on the São Paulo stock and futures exchange, the Bovespa. US firms were heavily involved with the deal: Davis Polk & Wardwell advised Santander Spain, and Shearman & Sterling advised the lead banks. Meanwhile, local firm Pinheiro Neto advised Santander and Machado, Meyer, Sendacz e Opice advised the lead banks on the Brazilian aspects of the deal. The offering shows the continued resilience of Brazilian capital markets, and the deal also benefited from the growing appetite for emerging market securities that has helped push Bovespa back to pre-recession levels. Santander has performed well. The company has expanded rapidly, with six takeovers in Brazil over the past 12 years, and it now has over 3,600 branches in the country.

Robert Ellison, capital markets partner at Shearman & Sterling, worked on the deal. He describes the course of events. ‘We came down here to service our corporate clients, then got caught up in the wave of IPOs that started in 2005,’ he says.

‘There are no huge differences between the way Portuguese and Brazilian lawyers operate.’
Nuno Galvão Teles, Morais Leitão, Galvão Teles, Soares da Silva

Sonter argues that while US firms have predominantly stayed busy on capital markets work, British firms have focused more heavily on infrastructure projects: ‘Infrastructure financing was the main driver for many British firms setting up in Brazil.’ In December 2009, Proskauer Rose represented the lenders in a $500m financing of two oil drill ships for Schahin Group on behalf of the Brazilian national oil company Petrobras. The deal, governed by a mixture of New York and English law, will see one drill ship expected to operate off the Angolan coast and the other off the Brazilian coast.

Upgrading Brazil’s substandard roads, ports and telecoms have also proved big business for international firms. The Brazilian government pledged to spend $283m on infrastructure projects between 2007 and 2010 (although more than half of these projects have yet to begin). In March of this year, the Brazilian government announced a further $550bn in infrastructure investment from 2011 to 2014. This is likely to increase as the country gears up for the 2014 World Cup and 2016 Olympics.

Biofuels and ethanol have also taken off, providing rich pickings for international firms. In February 2010, Clifford Chance and Davis Polk & Wardwell secured lead roles on Royal Dutch Shell’s entry into Brazil’s sugar-based ethanol market. The $12bn deal is a joint venture with local biofuel company Cosan. Local firm Barbosa, Müssnich & Aragão advised Cosan, while Souza, Cescon, Barrieu e Flesch advised Shell on the Brazilian aspects of the deal.

Making the move

At Pinheiro Neto, one of Brazil’s largest law corporate firms, managing partner Alexandre Bertoldi believes the arrival of international firms shows the maturity of the market. ‘We may get slightly less business, but overall it’s good,’ he says. ‘The international firms increase the prestige of the market. It’s like being a football club – you want to play in the Champions League, even if that means you don’t win every single weekend.’

Moving into Brazilian law is not easy for global firms. Foreign law firms and lawyers are subject to strict rules from the Brazilian Bar. They are only allowed to advise on foreign law and must be registered as foreign law consultants, known locally as ‘SCDEs’ or ‘CDEs’. According to the current rules, partners of Brazilian law firms must be Brazil-qualified lawyers, so if a global firm wants to become full service, affiliating with a local firm is the only option. Full market liberalisation is a few years away, and these restrictions have, in the past, deterred international firms from establishing full-service Brazilian branches. As international firms have been largely happy to stay ‘single’, keeping their focus on US and English law, the local firms have generally welcomed their presence.

At offshore firm Harneys, Marco Martins, head of the Latin American practice, highlights the good relationships it has with the Brazilians: ‘We complement each other. They don’t do what we do. Most of the big firms have been very careful not to venture into the local portion of the work, so they’ve created very good partnerships with local firms.’

However, to the consternation of some, this balance has changed and wedding bells have been ringing. At DLA Piper, the latest UK firm to announce an affiliation, Stuart Berkson, chair of the firm’s Latin America practice, believes the union will strengthen his firm’s offering in Brazil. ‘You want to get a consistent level of service,’ he explains. ‘As a firm, we refer a tremendous amount of business into a market. The most effective way to check it’s done right is to have this kind of co-operation.’

US firms Squire Sanders and Mayer Brown have also become full service, practising Brazilian law through their affiliates. Squire Sanders teamed up with corporate specialist Derraik in 2008, while Mayer Brown ‘married’ energy and infrastructure firm Tauil & Chequer in December 2009. Oil and gas is a hot sector at the moment, with new deep-sea oilfields coming onstream in the next few years. Stephen Hood, a partner at Mayer Brown’s São Paulo office, hopes the association will help expand the firm’s energy and infrastructure practice. In a press statement at the time of the tie-up he said: ‘Continued growth in the energy and infrastructure sectors is a top strategic priority. Tauil & Chequer’s strength in this market will contribute greatly to our realisation of that goal.’

Portuguese firms are also getting in on the act: BCS Advogados, a banking and finance firm based in Lisbon, is now partnered with Brazil and Argentina-based corporate firm Lotti e Araújo. Portuguese corporate firm Morais Leitão, Galvão Teles, Soares da Silva & Associados is now affiliated with the sixth-largest firm in Brazil, 258-strong Mattos Filho Veiga Filho Marrey Jr. e Quiroga.

Nuno Galvão Teles, a specialist M&A partner at Morais Leitão, believes that affiliations are the logical next step. ‘We have been working with Mattos Filho since 1995, we have grown up together and we are two very similar firms,’ he says. ‘I want to be working with the market leader and provide my clients with the best service in the market.’

Mixing it up

Linklaters was one of the first to arrive on the São Paulo legal scene, forming an association with Brazilian boutique M&A specialist Lefosse in 2001. Many senior partners in Brazil hold up Linklaters’ experience as a cautionary tale. It affiliated with the local firm with the intention of having a full-service Brazilian operation. The two firms moved into the same offices in São Paulo but, due to Brazilian Bar rules that restrict foreign ownership of local firms, the management teams had to be kept separated. As one US partner puts it: ‘They attempted to comply with the Bar rules, but it was quite ridiculous. The left side of the building wasn’t allowed to speak to the right side of the building.’ Following a strategy dispute in 2007, two local partners led a breakaway group of 27 lawyers to independent firm Lobo & de Rizzo. Lefosse now has just 19 lawyers, down from around 80 in 2007.

‘Linklaters, in practical terms, bought an existing Brazilian firm,’ Bertoldi says. ‘I think it caused a lot of confusion among clients.

‘The pricing strategy was never quite right because it couldn’t charge the Brazilian clients what it was charging as Linklaters,’ he adds. ‘Most of all, it created resentment among the Brazilian associates and partners because they felt that they were second-tier within the firm. That’s difficult to manage. Eventually, many of the Brazilian lawyers left and they were back to square one.’

‘We may get slightly less business, but overall it’s good. The international firms increase the prestige of the market.’
Alexandre Bertoldi, Pinheiro Neto

Sergio Spinelli Silva Jr, capital markets partner at Mattos Filho, argues that Linklaters had difficulties from the outset because it allied with the wrong firm. ‘You have to find a firm with the same sort of profile that you have,’ he says. ‘I couldn’t understand why it picked that firm. To me it wasn’t a great law firm. It was a strange move for Linklaters. It could have formed an alliance with a smaller firm that did more of the type of work it did.’

But at Linklaters, regional managing partner John Turnbull believes that the firm made the right choice in teaming up with Lefosse. ‘The Lefosse team is closely aligned with Linklaters’ global strategy,’ he says. ‘It has generated important relationships with large Brazilian multinationals that have become clients of Linklaters, generating work across a number of jurisdictions.’

Many of the top-tier Brazilian firms do not see the advantage of exclusive affiliations, making it difficult for the best internationals to ally with the best locals. At boutique competition firm Advocacia José Del Chiaro, founding partner José Del Chiaro believes that exclusive agreements can limit business. His firm has worked with many international firms, including Clifford Chance while handling the Brazilian antitrust aspects of Kraft Foods’ $19bn takeover of Cadbury. ‘International firms are asking me how they can establish themselves in Brazil,’ he says. ‘But at the moment we have good relationships with so many Brazilian and international firms, we do not want to be related to just one firm.’

‘We came down here to service our corporate clients, then got caught up in the wave of IPOs that started in 2005.’
Robert Ellison, Shearman & Sterling

The perception of many in the local legal market is that Linklaters was hurt by its involvement with Lefosse. Paulo Marcos Rodrigues Brancher, an international law specialist at São Paulo-based Barretto Ferreira, Kujawski, Brancher e Gonçalves, believes that since the strategy dispute in 2007, the firm is now focused on international work rather than local work. ‘Linklaters stepped back from local work and is now really just providing services to its international clients,’ he explains. ‘Our international clients know that it’s better to have a local firm that knows the issues in Brazil, rather than having an international brand that doesn’t have the depth of knowledge of local issues that we do.’

Turnbull, who took over as regional managing partner for the Americas on 1 May 2010, counters this by arguing that the firm’s profile has not dropped off. ‘Brazil is an emerging market with lots of potential and we anticipate significant growth over the next five years across different practice areas,’ he says.

Domestic strength

Nevertheless, the problems experienced by Linklaters’ Brazil practice have led many firms to question whether the full-service model is workable for international firms in Brazil. Full-service firms are, in effect, putting themselves in direct competition with local firms. That’s a tough fight to win. Brazil is a country where local firms are large and strong personal relationships are key to winning business.

According to David Fenwick, finance partner at US firm Proskauer Rose, Brazilian firms have grown rapidly in recent years, from family run ‘sweet shop’ operations in the 1980s to the large professional firms of today. Indeed, one of the largest Brazilian law firms, TozziniFreire, now has 441 lawyers. He believes that this change has put the domestic firms in a strong position: ‘Ever since the international firms opened in Brazil ten years ago, I think the large Brazilian domestic firms have used the intervening time period well,’ he says. ‘They have consolidated themselves as commercial law firms, improved management, their structures and remuneration. They now have the hallmarks of the international firms. That has left them in a very healthy position.’

‘Brazil has lots of potential and we anticipate significant growth over the next five years across different practice areas.’
John Turnbull, Linklaters

Carlos Fernando Siqueira Castro of 450-strong litigation specialist Siqueira Castro agrees that Brazilian firms are in a much stronger position now than they were 20 years ago. He explains that as Brazilian companies have grown larger and more important in the international economy, so have domestic law firms. ‘The Brazilians are becoming big boys in the global market. Brazilian companies are becoming multinational, they are investing in 20 to 30 countries,’ he says. ‘Those companies now ask us to refer them to foreign firms in those markets. Now when the Americans want to speak to a big Brazilian company, they have to come and talk to us in São Paulo. Twenty years ago, that was unthinkable.’

Latin links

Along with size and strength, incumbent firms also have the advantage of long-term relationships with clients. As Siqueira Castro explains: ‘[The international firms] may be doing the same type of deals as in their home countries, but we are Latins: it’s all about who you know. If they practise law in the same way as they do at home they can get a piece of the cake, but not the whole of it.’

Interestingly, this ‘Latin’ way of doing business means that many of the cultural problems that face US and UK firms are less of an issue for Iberian firms.

Galvão Teles believes that there is the same emphasis on relationships and a similar legal framework. ‘There are no huge differences between the way that Portuguese and Brazilian lawyers operate. Brazilian law has been very influenced by Portuguese law,’ he says.

At Lisbon-based Raposo Bernardo & Associados, Manuel Esteves de Albuquerque, a real estate partner, agrees that barriers for Iberian firms are lower. He explains that personal relationships are vital to business in both cultures. ‘Relationships are key for us Latins,’ he says. ‘The personal bonds between lawyer and client are very important – they trust you. Perhaps it’s having something more than a strictly professional relationship; arguing about football, not just exchanging e-mails.’

Language is also key to winning business, as Todd Crider of Simpson Thacher & Bartlett argues: ‘We have had to adapt to the Brazilian way of doing things. For one thing, you have to function at a very high level of Portuguese.’ Currently, international firms with a presence in Brazil are only allowed to hire foreign-qualified lawyers and almost all of the firms’ most visible players are US or English lawyers. It may be acceptable to international clients to have US or English lawyers working on their deals, but strong Portuguese language skills and good relationships with clients are essential for winning work in the domestic legal arena.

‘The personal bonds between lawyer and client are very important – they trust you. Perhaps it’s having something more than a strictly professional relationship.’
Manuel Esteves de Albuquerque, Raposo Bernardo & Associados

According to a partner at a major Brazilian firm, only a tiny minority of the in-house lawyers at oil giant Petrobras speak English. This means that in order to be successful, the international firms have to recruit the right Portuguese-speaking talent, usually dual-qualified Brazilian lawyers who have studied abroad and returned to Brazil. But this is easier said than done. Shearman & Sterling’s Ellison believes that the most experienced talent will not be tempted to join the international firms. ‘The best people from the domestic firms will not go over to the international firms,’ he explains. ‘They will never achieve a critical mass.’

Perhaps unsurprisingly, the foreign firms that have opted against local tie-up are among the most sceptical that exclusive local affiliations can work. Ellison says: ‘I do not think the idea of an international firm practising Brazilian law could be successful. The Brazilian law firms are very well established, they know what they are doing. How can the international firms come in and compete with domestic firms that have over 200 lawyers?’ He adds: ‘It’s like going to the UK and instructing some medium-sized firm in Plymouth instead of getting Clifford Chance or Linklaters.’

There are many obstacles to becoming full-service in Brazil, with numerous potential pitfalls for a successful marriage. If successful, the rewards may be great, but weigh these against the regulatory issues; the large, sophisticated Brazilian firms that know their clients; the difficulties of developing relationships; and the high risk of angering local firms (who might have generated business through referrals) by encroaching on their turf, and perhaps it’s best for international firms to stick to what they know best: international law. Leave the Brazilian law to the experts. Keep dating and don’t get married after all. LB