By means of Decision No. 442/2017, taken on 03.29.2017, the Federal Audit Court (“TCU”) approved, in a plenary hearing, a Representation filed by the Oil, Natural Gas and Mining Infrastructure Inspection Department (“Seinfra-Petróleo”), that Petróleo Brasileiro S/A (“Petrobras”) should recommence from the beginning its divestment program of assets, with the exception of a few projects which can continue from the stage they are at, but utilizing the new Divestment Methodology.

In compliance with the Decision No. 442/2017, the company disclosed a material fact to the market on 03.31.2017, indicating the projects to be continued and those to be canceled. It also gave notice that its Executive Board has approved the preparation of a new divestment portfolio with projects that should follow, from their commencement, the new procedures of the “Divestment Methodology”, explained below. 

The background of the case and the grounds of Decision nº 442/2017

On 05.06.2016, administrative proceeding No. TC 013.053/2016-6 was initiated with the purpose of assessing the claim brought by Seinfra-Petróleo against the so-called Methodology for Divestment of Assets and Business (“Divestment Methodology”), a set of procedures used by Petrobras for the disposal of assets and companies.

Seinfra-Petróleo raised the following questions (i) the compliance of the Divestment Methodology with the law, (ii) the need for legislative authorization for the sale of a subsidiary of a joint-stock company, and (iii) the need to follow the national privatization program.

The plaintiff argued (i) that the Divestment Methodology should be based on Decree No. 2,745/1998, which established Petrobras's simplified bidding procedure, and (ii) this regulation could not provide for bidding related matters, since they are matters reserved for federal law, according to the Brazilian Federal Constitution. 

The Reporting Minister of the proceeding opined that there would be no need for legislative authorization for Petrobras to sell a subsidiary or a participating interest in another private company. Nor did the Reporting Minister accept Seinfra-Petróleo's argument concerning the application of Law 9,491/1997 to Petrobras's divestment as it does not fit in the concept of privatization established therein.

As for Seinfra-Petróleo's request to adapt the Divestment Methodology to the Brazilian Bidding Law (Law 8,666/1993), the Reporting Minister commented that there is limited scope in analyzing the matter since the Supreme Federal Court had already issued several favorable injunctions to Petrobras by writs of mandamus against decisions of the TCU in which the compliance with Law 8,666/1993 by Petrobras are required. Accordingly, the TCU opined that suspending divestments based on this argument would not be effective.

Changes in the Divestment Methodology 

During the proceeding, Seinfra-Petróleo also argued that Petrobras should make changes in the Divestment Methodology to ensure greater publicity, transparency and corporate control to the bidding procedures. 

According to Seinfra-Petróleo, among the issues which should be addressed are: (i) the lack of transparency of the competitive process and, in particular, the lack of publication to the market of business opportunities; (ii) the selection of the financial advisors for projects without consulting the market; (iii) the lack of objective criteria for selecting potential buyers; (iv) the right to alter the terms of the bid at any time, without any opportunity for the bidders to comment; and (v) the confidentiality of the questions and answers made by the bidders. 

Such issues were acknowledged by the TCU.

The new divestment portfolio 

According to the Decision of the TCU, the following projects should follow the new Divestment Methodology and should be placed into  a new divestment portfolio: (i) assignment of participating interests in onshore fields located in the Sergipe and Potiguar Basins ("Topázio Project"); (ii) assignment of concessions in shallow waters in the Ceará and Sergipe Basins ("Arctic Project"); (iii) sale of equity of BR Distribuidora, the retail oil by-product company of Petrobras; (iv) assignment of concessions  in the Baúna and Tartaruga Verde Fields; and (v) assignment of interest in the Saint Malo Field in the Gulf of Mexico. 

However, the sale of Petroquímica Suape e Citepe is to continue since this had been confirmed by an injunction of the Federal Regional Court. The sale of Liquigás is also to continue, since the purchase and sale agreement had already been signed prior to another decision issued by the TCU last year which had suspended the ongoing negotiations.

The perception of regulatory risk

In general, the divestment process is time-consuming, complex and composed of several stages. Initially, a project is reviewed to establish the structure for the sale and prepare the asset for sale. At the second stage, an invitation letter is sent to selected potential buyers and preliminary information regarding the business is disclosed. Subsequently, due diligence is carried out, non-binding offers are presented, there is the preliminary selection of the best offers, technical visits are scheduled, meetings are held with the selected companies and, lastly, binding offers are presented, accompanied by initial mark-ups of the draft contracts, the final negotiations of the contracts take place and the tenders are awarded. 

Thus, in determining the recommencement afresh of sales processes which, according to market information, were already in their final stages and with binding offers having been presented, the TCU’s decision is concerning for the oil industry in particular, and investors in general, as it increases the perception of regulatory risk and reverts to the days of so-called “Brazil Risk”, besides delaying the divestment program of Petrobras as a whole, whose timely completion is considered fundamental for the company's financial health.  

Although the prevailing view of the industry is that the Divestment Methodology should be improved to give greater transparency to the bidding procedures, such views alone should not have the effect of invalidating ongoing negotiations which are at an advanced stage with third parties who have acted in good faith. 

At a time when the Federal Government is striving to create a favorable environment for future bids organized by the ANP, the decision issued by TCU weakens the application of the principle of the stability of the rules, to the detriment of third parties who, in good faith, have participated in the bids to invest in the country. 

Improvements in the processes for asset sales and in the bidding procedures are important and are part of the very application of the "Living Constitution" principle in administrative law; however, they must be promoted in a constructive way, with a vision for the future, and not based on  past events which are unrelated to the processes at hand.