VZCZCXRO1066
PP RUEHRG
DE RUEHBR #1366/01 1871852
ZNR UUUUU ZZH
P 061852Z JUL 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6012
INFO RUEHRG/AMCONSUL RECIFE 5087
RUEHRI/AMCONSUL RIO DE JANEIRO 2428
RUEHSO/AMCONSUL SAO PAULO 7390
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDO/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001366 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS EB/IFD/OIA 
STATE PASS L/CID 
STATE PASS USTR 
TREASURY FOR OASIA 
 
E.O. 12958:  N/A 
TAGS: EINV KIDE ENRG CASC ECON OPIC PGOV BR
SUBJECT: BRAZIL: SUBMISSION FOR INVESTMENT DISPUTES AND 
EXPROPRIATION REPORT 
 
REFS: A) SECSTATE 60294 
 
¶1. (SBU) Summary:  Per instructions in reftel, US Embassy Brasilia 
is aware of two (2) claims of US persons that may be outstanding 
against the Government of Brazil (GOB). 
 
Claim 1 
------- 
 
a.  Claimants A and B 
b.  1999 
c.  Claimants A and B, along with a Brazilian partner, through a 
joint venture (JV), purchased 33 percent of the voting shares of the 
electric power company CEMIG from the state of Minas Gerais, for 
$1.05 billion in 1997.  The acquisition was made through a public 
auction promoted by the national development bank (BNDES).  The sale 
included a Shareholders Agreement that the purchasers executed with 
the state of Minas Gerais, giving the JV certain negative control 
(i.e., veto) rights over the management of CEMIG and the ability to 
nominate some of the executive officers.  However, in 1999, a new 
state government took office and challenged the validity of the 
Shareholders Agreement in a suit filed in a lower state court.  The 
state court overturned the Shareholders Agreement in 1999, depriving 
the JV of the negative control rights.  This left the JV with a 33% 
ownership stake but no influence over the management of the company. 
 In 2001, the Appellate Court of Minas Gerais rejected the JV's 
appeal and sought to deny the JV access to the Brazilian federal 
Superior Court and Supreme Court of Justice, where the JV has 
further appealed the decision.  Those appeals remain pending. 
 
According to the Claimants, the shares alone, in the absence of a 
Shareholders Agreement, were worth no more than $400 million.  The 
difference in value between purchase price of the JV's shares in 
CEMIG and their value stripped of the negative control rights, 
according to the claimants, approximates the outstanding balance 
($700 million) of a loan extended to the JV by the BNDES to finance 
the share purchase.  Although BNDES rescheduled that loan, the JV 
subsequently went into default on this loan.  The JV actively 
negotiated with BNDES on ways to settle the outstanding debt. During 
2005, U.S. officials repeatedly raised the dispute with senior GOB 
officials until the case went to court. 
 
According to the Claimants, the JV and BNDES have come to an 
agreement to settle the debt through the sale of a portion of 
claimants' shares. The sale is subject to regulatory approval and is 
expected to be completed by end summer 2006. Post will notify when 
and if the transaction is completed.  After numerous attempts since 
May 2006 to get further background on next steps, post relies on the 
claimants' public statements regarding their case. 
 
 
Claim 2 
------- 
 
a. Claimant C 
b. 2003 
c. In 1998, the State of Parana auctioned off a 40% voting interest 
in the state's sanitation utility, Sanepar.  To induce private 
investors to provide the needed equity capital, the state offered 
the winning bidder a 15-year "Shareholders Agreement" that 
guaranteed certain customary minority shareholder protections as 
well as provided the investors a limited operating role through the 
appointment of three of the seven executive officers of Sanepar.  A 
consortium of investors purchased the Sanepar stake.  Claimant C 
holds an indirect $18 million stake in the consortium.  A Joint 
Venture (JV) between a Spanish and a French company also invested in 
Sanepar through this consortium. 
 
In February 2003, the new Parana state governor, Robert Requiao, 
unilaterally terminated the Shareholders Agreement and subsequently 
replaced two of the three Sanepar executive officers that the 
investment consortium had the right to appoint.  Having effectively 
achieved ownership and management control of Sanepar, Governor 
Requiao also amended the company By-Laws without approval of the 
minority board members and undertook a debt-for-equity swap with the 
state government that diluted the minority shareholders' stakes. 
Following the annulment of the Shareholder's Agreement, the French 
company sold its interest in the company to its Spanish JV partner. 
The JV has fought the state government's actions in the courts, 
 
BRASILIA 00001366  002 OF 002 
 
 
which have not yet ruled definitively on the case. 
 
In January 2006, the JV partner sought a rescission of a September 
2005 Paran state legislature decree voiding the contract between 
the Spanish JV partner and the state, but did not receive it. 
 
List of Claimants 
----------------- 
 
Claimant A: Mirant (known as Southern Electric at the time of the 
purchase) 
Claimant B: AES 
Claimaint C: Overseas Private Investment Corporation (OPIC), through 
credit to the Global Environmental Emerging Markets Fund II (GEEMF 
II) 
 
 
WILLIAMSON