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Petrobras: New Public Bidding and Corporate Governance Requirements under the Government-Controlled Companies Law


Ricardo E. Vieira Coelho; Flavia Piras Lodi

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The Vice-President of Brazil currently in office in the position of President of Brazil just issued Law No. 13303/2016 (the “Government-Controlled Companies Law”) which changes several rules that govern Petróleo Brasileiro S.A. – Petrobras as discussed below.

Simplified Public Bidding

The obligation to submit contracts generally entered into with the public authorities to public bidding proceedings is established in the Brazilian Federal Constitution (article 37, item XXI), as regulated by Law No. 8666 of June 21, 1993 as amended (“Public Bidding Law”).

The public bidding principles set forth by the Public Bidding Law are applicable to all companies controlled by the federal government, states, federal district and municipalities, either directly or indirectly. However, article 67 of Law No. 9478 of August 6, 1997 (“Petroleum Law”) instituted a specific legal regimen to govern Petrobras.

According to the Petroleum Law, Petrobras shall be able to compete with other companies in an equitable manner for the carrying out of its corporate purposes. To such effect, the Petroleum Law established that the acquisitions of goods and services by Petrobras would be subject to a simplified bidding procedure to be regulated by Presidential Decree.

Presidential Decree No. 2745 of August 24, 1998 (“Presidential Decree No. 2745/98”) contemplated the rules applicable to the simplified procedures for public biddings carried out by Petrobras for the contracting of works, services and acquisition and sale transactions. Although Petrobras was generally subject to public bidding principles, such public bidding were to be proceeded in a simplified manner as compared to the requirements and formalities of the Public Bidding Law.

On the other hand, there are cases where public bidding could be waived, not required or even non-applicable, and a decision in this regard shall be duly justified by an internal opinion issued by Petrobras. Pursuant to Presidential Decree No. 2745, with due regard to the Bylaws of Petrobras, the duly motivated sale of goods which are part of the permanent assets of the company would always be subject to valuation and public bidding, except in certain cases, such as the sale of shares, which could be negotiated on the stock market with due regard to specific legislation, among other cases.

We are aware that the Treasury Account Court (Tribunal de Contas da União - TCU) has challenged the legality of such Decree No. 2745 on the grounds that rules for public bidding procedures by mixed capital companies like Petrobras needed to be established by ordinary law (a Legislative Branch Act) as provided for in the Federal Constitution, rather than by means of a Presidential Decree (which is an Executive Branch Act). On March 23, 2006, however, the Brazilian Supreme Court granted an injunction with respect to a writ of mandamus filed by Petrobras, which shall suspend the effects of the decision of TCU until such injunction is revoked or a final decision has been given on the writ of mandamus.

The Government-Controlled Companies Law now repealed article 67 of the Petroleum Law (please refer to items 3 and 4 above), which established the aforementioned simplified public bidding procedure for Petrobras.

Article 68 of the Petroleum Law in turn contemplated that, for the preparation of proposals to participate in bidding preceding the concessions for exploitation and production of oil and natural gas, Petrobras could enter into pre-contracts by sending out invitation letters, in order to secure prices and commitments of delivery of goods and services. Such pre-contracts had to contain a resolutory condition whereby the relevant agreement would be terminated without penalty or indemnity, in case another bidder were to be declared winner. Said article 68 was also now revoked by the Government-Controlled Companies Law.

The Government-Owned Companies Law 

According to the newly-issued Government-Controlled Companies Law, agreements entered into by third parties with respect to the rendering of services to government-controlled companies, the acquisition, lease or sale of assets, as well as other works shall be subject to public bidding, except in certain cases, such as (i) hiring of concessionaires or entities that holds a permission or authorization  for the supply of electric power or natural gas and other public utility companies (public service providers) pursuant to applicable law, as long as the object of the contract relates to public service; (ii) the transfer of assets to legal entities of the Public Administration; (iii) donation of movable assets for social interest purposes; or (iv) purchase and sale of shares, credit instruments and debt securities or assets produced or traded by such Government-Controlled companies. As a general rule, the sale of assets shall also be subject to an appraisal of the assets to be sold.

The public bidding procedure may also be waived when the selection of the partner by these government-controlled companies is related to its special particulars, specific and determined business opportunities, provided that the unfeasibility of a competitive procedure is justified. Law No. 13303/2016 considers such business opportunities as (i) the formation or extinguishment of partnerships and other associative, corporate or contractual forms; (ii) the purchase and sale of participation in companies and other associative, corporate or contractual forms; and (iii) transactions carried out in the capital market.

The Government-Controlled Companies Law contains rules that shall govern the bylaws of government companies (empresas públicas), mixed-capital companies (sociedades de economia mista) and their subsidiaries controlled by the federal government, states, federal district or municipalities, including the companies which explore economic activities and the ones subject to monopoly of the federal government and public services. Such law shall also be applicable to government-controlled companies, which participate in consortium as operator and companies that are controlled by such government-controlled companies, including special purpose companies. However, please note that certain provisions established by such legislation would not be applicable to government-controlled companies which, together with their respective subsidiaries, have a gross operating income lower than R$ 90.000.000,00, except if the federal government fails to issue applicable regulations for such companies within 180 days as from enactment of the Government-Controlled Companies Law.

The creation of subsidiaries by government-controlled companies, as well as their participation in companies of the private sector (the corporate purpose of which shall be related to that of the investor) shall depend on approval by law, except for participations authorized by the Board of Directors (Conselho de Administração) in accordance with the company’s business plan, among other few cases. In addition, the provisions established in Law No. 6404 of December 15, 1976 as amended (the “Brazilian Corporation Law”) and rules of the Brazilian Securities Committee (“Comissão de Valores Mobiliários”) on the bookeeping and preparation of financial statements shall be applicable to all government companies, mixed-capital companies (including also those closely-held) and their subsidiaries.

With respect to the management of government-controlled companies, the Government-Controlled Companies Law states that the Board of Directors (“Conselho de Administração”) shall be composed of 7 to 11 members, including 25 per cent of independent members (as defined by law) or at least 1, in case of exercise of multiple vote by the minority shareholders, while the Executive Committee (“Diretoria”) shall be composed of at least 3 members. The members of the Board of Directors and the Executive Committee shall have a unified term of office, which shall not be superior to 2 years, 3 consecutive reelections being permitted.

The appointed individuals shall have a good reputation and knowledge, in addition to the following requirements: (a) alternatively: (i) at least 10 years of experience to conduct business that are similar to the company’s business or in a related area to which he/she has been appointed; or (ii) at least 4 years in a high management position, position of trust or as a professor or researcher in the practice areas of the government-controlled companies; or (iii) at least 4 years as a professional acting, either directly or indirectly, in areas related to the practice areas of the government-controlled companies; and (b) cumulatively: (i) an educational background suitable to the position to which he/she has been appointed; and (ii) he/she shall not be considered as ineligible, in accordance with the applicable legislation.

There are also restrictions for election of members of the Board of Directors and Executive Committee, especially those who at least 3 years before the appointment date have entered into agreements or partnership as suppliers, purchasers, claimants or as offering parties of assets or services of any kind in connection with the political-administrative entity that controls the government-controlled company.

The Government-Controlled Companies Law also contemplates the creation of a compliance and risk area, an internal audit and, as an auxiliary body of the Board of Directors, a Statutory Audit Department for government-controlled companies. Such Statutory Audit Department shall be composed of 3 to 5 members (mostly independent members) and shall resolve on the following matters, among others: (i) the hiring and dismissal of an independent auditor; (ii) the monitoring of the activities of independent auditors; and (iii) the monitoring of quality of internal control mechanisms, financial statements and information disclosed by the company.

Vetoed Provisions

Law No. 13303/2016 was originally proposed by the Senate and approved by the Brazilian Congress on June 22, 2016. It was then forwarded by the Senate to the President of the Republic, who partially sanctioned it on June 30, 2016. Some vetoes to the Government-Controlled Companies Law included the following, among other matters: (i) a 10-year term for mixed-capital companies, whose shares are listed in the stock exchange and created prior to the issuance of this new legislation, to place at least 25 per cent of their outstanding shares in the capital market; (ii) the restriction for an individual to cumulate, even provisionally, the positions of officer or chief executive officer and member of the Board of Directors; (iii) joint liability between government-controlled companies and contracted parties for social security obligations; (iv) joint liability for Board decisions; (v)  a general restriction for suppliers or purchasers of services or goods of government companies or mixed-capital companies to act as independent Board members.


Public bidding procedures and agreements commenced or entered into by government-controlled companies up to 24 months after the issuance of the Government-Controlled Companies Law shall be grandfathered and, therefore, still be governed by the previous legislation. 

General Provisions

Government companies and mixed-capital companies already existing prior to the issuance of the Government-Controlled Companies Law shall take the necessary measures to adapt to such new legislation within 24 months.

Closely-held mixed-capital companies may within 24 months after issuance of the Government-Controlled Companies Law be converted into government company, through redemption by the company of the totality of company shares held by  shareholders of the private sector, taking into account the net worth value indicated in the last balance sheet approved at a general shareholders’ meeting.

Expenses with marketing and sponsorships of government companies and mixed-capital companies shall not exceed, in each fiscal year, 0.5 per cent of the gross operating income earned in the preceding fiscal year, provided however that such limit may be increased to 2 per cent of the gross operating income earned in the preceding fiscal year by proposal made by the Executive Committee based on market parameters of the specific industry and approved by the Board of Directors. 

Government companies and mixed-capital companies shall be prohibited, in an election year involving positions in the public administration entity to which they relate, to incur marketing and sponsorship expenses that exceed the average spent in the 3 last years that preceded the request or in the last year immediately preceding the election​.​

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