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Cablegate: Brazil: Submission for Investment Disputes And

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

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