VZCZCXRO9239
PP RUEHRG
DE RUEHBR #1466/01 2141146
ZNR UUUUU ZZH
P 021146Z AUG 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 9651
INFO RUEHSO/AMCONSUL SAO PAULO 0519
RUEHRI/AMCONSUL RIO DE JANEIRO 4875
RUEHRG/AMCONSUL RECIFE 7016

UNCLAS SECTION 01 OF 02 BRASILIA 001466 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EINV KIDE ENRG CASC ECON OPIC PGOV BR
SUBJECT: BRAZIL: SUBMISSION FOR INVESTMENT DISPUTES AND 
EXPROPRIATION REPORT - JUNE 2007 
 
 
¶1. (SBU) Summary:  Per instructions in reftel, US Embassy Brasilia 
is aware of one (1) claim 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.  Post 
has been notified that the parties are still working on this case. 
As of June 2007 the case is still pending. 
 
 
Claim 2 (resolved) 
------- 
 
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 
held 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. 
Claimant C was initially contacted about this matter by the Global 
Environment Emerging Markets Fund II (GEEMF II) in 2005.  At the 
time, GEEMF II was a Claimant C borrower under financing that was 
originally provided by Claimant C to support eligible fund 
investments.  GEEMF II's indirect investment in Sanepar was 
partially financed under the Claimant C's loan.  Between 2005 and 
2006, Claimant C provided limited advocacy support to GEEMF II with 
regard to the Sanepar situation.  However, in 2006, Claimant C was 
fully prepaid on its loan to GEEMF II.  Consequently, it is no 
longer a lender to GEEMF and does not have a stake in the matter 
 
BRASILIA 00001466  002 OF 002 
 
 
concerning Sanepar. Hence, as of June 2007 the status of this case 
has been resolved to the satisfaction of the U.S. investor. 
 
As of June, 2007 there are no other investment disputes or 
expropriation claims to report in Brazil. 
 
List of Claimants 
----------------- 
 
Claimant A: Mirant (known as Southern Electric at the time of the 
purchase) 
 
Claimant B: AES 
 
Claimant C: Overseas Private Investment Corporation (OPIC), through 
credit to the Global Environmental Emerging Markets Fund II (GEEMF 
II). 
 
Sobel