(This article appears courtesy of International Financial Law Review,  sign up for a free trial here) Law firms are catching a new wave of Brazilian equity deals. Ben Maiden reports from São Paulo.

 According to Dealogic, in 2006 to mid-August Brazilian issuers raised $8.9 billion from 28 deals. This already outpaces 2005's total of $5.9 billion from 21 offerings and leaves recent years ($800 million from six deals in 2003, for example) in the dust.

All this comes amid precarious times for emerging markets. Geopolitical instability and rocketing oil prices have led to the usual flight to quality by investors and caused an extended spring break for some Brazilian issuers. Unlike in other turbulent periods, however, they have rebounded quickly. Even more unusually, they have done so in the build up to an election, which in previous cycles has put the capital markets into hibernation.

This year there is far less concern among local and international investors about the electorate's choice between incumbent Luiz Inácio Lula da Silva, who scared them before he came to office four years ago, and his main rival, the conservative Geraldo Alckmin. Even spiralling gang violence, which has led to calls for the deployment of troops in São Paulo, the country's financial centre, has not stopped the flow of equity deals on the city's stock exchange. In July CESP completed the largest Brazilian 144A deal to date, with a R$3.2 billion ($1.5 billion) secondary offering. The previous record holder had arrived just a month earlier in the form of an $888.7 million offering from Banco do Brasil. MMX Mineração e Metálicos also closed the largest Brazilian IPO in dollar terms to date when it went public for $475 million in late July.

The boom in Brazilian equity has many sources: greater political stability and investor confidence (particularly when compared to countries such as Venezuela and Bolivia), a strengthening economy, a deep pool of large local companies looking to raise capital and strong local investor appetite for their securities. But it also has a lot to do with regulatory reform.

US regulators, and particularly the SEC, have spent the last few years creating new rules to combat corporate and accounting mismanagement, to the point where many companies claim that they are being driven away from the US capital markets. Yet over the same period the Brazilian authorities, led by the Comissão de Valores Mobiliários (CVM) and Bovespa, the São Paulo stock exchange, have introduced reforms that have raised standards, given investors greater confidence in issuers and encouraged equity issuance.

Two developments have been key to what Antonio Mendes of Brazilian law firm Pinheiro Neto, calls "a total change of mentality" towards seeing the stock market as a viable and necessary source of finance. In 2001 Bovespa gave listed companies the opportunity to meet different levels of corporate governance, the highest being the Novo Mercado. To join this market segment companies must meet certain requirements, such as having a free float of at least 25% of their stock, full voting rights on all company's shares and adhering to US GAAP and International Accounting Standards.

While not compulsory, being part of the Novo Mercado sends a positive signal to investors both in Brazil and abroad, so that featuring on the higher corporate governance levels on Bovespa has now become a de facto requirement for most issuers. Of the first 15 Brazilian companies to go public this year, 12 joined the Novo Mercado and two others are in the second highest corporate governance tier, Nível 2.

Then in late 2003 the CVM introduced Instruction 400, which regulates public securities offerings. The lengthy instruction created a formal structure to the offering process, including a CVM review of offering documents, setting standards for disclosure and governing bookbuilding, greenshoes and other aspects.

These reforms have taken Brazilian corporate governance and offerings rules a long way towards meeting, and in one or two areas exceeding, international standards. One effect of Instruction 400, for example, has been more detailed prospectuses that look strangely familiar to those who work with US offering documents. Higher standards have in turn helped Brazilian issuers to access local and international markets. This in turn has provided a welcome rush of work for Brazilian and international law firms and investment banks. It has also been accompanied by dramatic changes in the ways in which deals are done.

Found in translation

Over the last two years the locus of equity capital markets deal-making has shifted from New York to São Paulo, with important knock-on effects for both underwriters and lawyers. Instrument 400 requires that any offering by a Brazilian issuer must include a Brazilian tranche, even if it will also be sold internationally. This, combined with growing local investor demand, has led to a greater focus on the domestic portion of deals. While these were usually side issues in previous years, they now often constitute a larger portion of the deal, sometimes up to 80% of the value raised.

Instrument 400 also requires issuers to submit their prospectuses in Portuguese for review by the CVM first. If the offering is registered with the US SEC, the company files simultaneously with both the regulators in Portuguese and English. But since most Brazilian issuers prefer to avoid the costs and burdens (perceived or otherwise) of registering in the US, not least being compliance with Section 404 of the Sarbanes-Oxley Act, the vast majority of equity deals are 144A offerings led by the Brazilian documentation.

If the company requires an industry specialist who does not speak Portuguese to contribute to its prospectus the relevant parts of the offering documents may be prepared in English before being translated. If the selling shareholder is a US company, such as JC Penney in the IPO of Lojas Renner last year, that can also result in English leading the way in document preparation. On some deals, the New York offices of international investment banks also ask for certain portions of the prospectus, such as the MD&A and risk factors, to be prepared initially in English.

Despite these exceptions, the great majority of equity deals (the same does not hold true for bond offerings) are now driven out of São Paulo by Portuguese-speaking companies, bankers and lawyers. It is a trend that has been helped in part by Brazil's geographical location – far enough away from New York to be remote, yet with a one-hour difference in time zones that means advisers can make the journey overnight without wasting too much time in transit and jetlag. The need for speed in getting deals to market pushes in favour of filing with the CVM first, as does the tendency among Brazilian companies (more so than in other Latin American countries) to prefer not to work in English. It has also been helped by the strength of Brazil's local underwriters, notably Banco Pactual, Itaú BBA, Unibanco and Banco Bradesco.

The international investment banks have been quick to seize the opportunities of this shift and over the last two years have increased the staffing levels of their São Paulo offices. Observers describe the Brazilian operations of banks such as UBS, Credit Suisse First Boston, Morgan Stanley and Merrill Lynch, the first two of which are particularly strong in the Brazilian equity sector, as some of the most autonomous in their global networks.

A question of strategy

But while no one is complaining about the new gold rush of equity work, the shift in focus to São Paulo raises strategic questions for the international law firms.

As the tables above indicate, a relatively small group of firms, both local and international, dominate Brazilian equity capital markets work. The number of underwriters in the market is also small, and is set to get smaller with UBS buying Pactual this year.

Of the US and UK firms active in Brazilian capital markets work most do not have an office in São Paulo, but Shearman & Sterling, White & Case, Linklaters and Clifford Chance have all opened branches. Each of these has a slightly different history and approach to Brazilian work, but they share a common belief that having people on the ground helps them to maintain relationships with powerful Brazilian corporations and banks for a broad range of work. M&A, banking, debt and project finance had been the main sources of work prior to the recent boom, but such relationships also stand them in good stead for equity work.

Their chief rivals, all of which are US firms, have opted to stay in New York. This group includes Davis Polk & Wardwell, Simpson Thacher & Bartlett, Cleary Gottlieb Steen & Hamilton, Skadden Arps Slate Meagher & Flom and Sullivan & Cromwell. They argue that they can best serve clients by having direct access to the wider resources of their New York offices rather than having to staff deals from a small São Paulo branch and passing much of the work back to home base – something that Clifford Chance, for example, does with much of its underwriter work. Most have a fairly fluid Brazilian group featuring anything from five to 10 lawyers, not all of whom spend the majority of their time on Brazilian work. The areas they focus on is similarly fluid, having shifted over the last year from debt, project finance and M&A to equity.

With more of those deals being done, in São Paulo and in Portuguese, firms' choices are coming into focus. Although both those with and without São Paulo offices have benefited equally from this year's equity work, it is an increasingly important and remunerative practice area that needs to be maintained.

Given the small number of players on the local and international banking and law firm sides, relationships in all directions are crucial to ensuring that firms win mandates. At the same time none of the parties develops a particularly strong or exclusive relationship with any of the others since to do so risks cutting off other important pipelines of work. Staying friends requires spending time together. Five years ago law firms could maintain relationships with decision-makers at the international investment banks who were based in New York. Two years ago many of the international banks' people in Brazil had previously spent time in their New York offices. Now the banks are reported to use primarily local people in São Paulo and those lawyers without bases there must spend more time on planes and in the city's notorious traffic heading to meet bankers and their in-house counsel.

Such firms are confident, however, that they are not missing out. "The São Paulo offices of investment banks have grown their internal legal functions, and they now feature on deals, but the in-house counsel in New York still play the same role as before," says Manuel Garciadiaz, a partner with Davis Polk & Wardwell in New York.

"So far we've found that not having an office in Brazil is not an issue for us. I can't predict that it won't be forever, that would be foolish, but at the moment it's not," says Sergio Galvis, head of the Latin American group at Sullivan & Cromwell.

With such a small pool of advisers competition is also inevitably fierce. Even though relationships, reputations and referrals are important sources of work, beauty parades are still common and lawyers report downward pressure on fees. This is not helped by the fact that much more of the work can now be done by Brazilian firms, although US lawyers are quick to point out that their role is not limited to that of translators.

One change that law firms cannot hide from is the need to have (ideally native) Portuguese speakers on staff. "The market has developed to a point where if you can't speak Portuguese it's definitely a competitive disadvantage," says Francesca Lavin, a partner with Cleary Gottlieb Steen & Hamilton in New York.

Each US firm with a serious Brazilian practice has at least two or three lawyers fluent in the language. US firms have traditionally taken on foreign associates and many of the leading capital markets lawyers at Brazilian firms spent time earlier in their careers with one of the firms they now line up alongside for international deals. With the supply of well-qualified Portuguese-speaking US lawyers smaller than those speaking Spanish, competition for their services is growing. Garciadiaz, for example, notes that Davis Polk will increase its foreign associates from two to five this autumn.

Domestic bliss

The shift in emphasis to Brazil for equity has brought local firms new work and a higher profile, without presenting the same strategic questions as it does for international firms. A number however are making their own moves, albeit over a shorter distance, and relocating away from the traditional business districts of Centro and Avenida Paulista. Several investment banks and other clients are building operations in the Itaim Bibi and Vila Olimpia neighbourhoods, which suffer slightly less from the endemic congestion, and firms such as Pinheiro Neto, Machado Meyer Sendacz e Opice and Tozzini Freire Teixeira e Silva are following suit.

As with the international firms, the equity capital markets are dominated by a select group of locals. Chief among these this year have been Machado Meyer and Mattos Filho Veiga Filho Marrey Jr e Quiroga, who between them have carved out a large portion of the equity advisory roles [see previous tables]. Firms such as Pinheiro Neto, Souza Cescon Avedissian Barrieu e Flesch, Barbosa Müssnich & Aragão and Pinheiro Guimarães also play an active part in the sector and carry strong reputations for their general corporate and finance work.

In a relatively stable market where events such as the formation in 2001 of Souza Cescon by a group of former Machado Meyer lawyers are rare, local firms maintain collegial but competitive relationships with each other. But increasing numbers of lateral hires (almost entirely at the associate level) hint at a growing emphasis on competition and an ambitious generation of young lawyers.

Brazilian firms also benefit from operating in one of the few remaining protected legal markets among major economies, with foreign lawyers barred from offering local law. Linklaters, which opened a São Paulo office in 1997 and began a cooperative relationship with Brazilian firm Lefosse Advogados in 2001, has arguably come closest to having a local practice. The firms are located in the same building but occupy different floors. The arrangement has come under scrutiny from the local bar association, but according to Linklaters partner Gregory Harrington discussions between the firms and the bar have now concluded, seemingly without dramatic changes but with the understanding that a formal association is not permitted.

The EU reportedly raised the subject of law firm regulation during the recent Doha round of trade negotiations, but observers agree that change is unlikely any time soon. Not only is the Brazilian government demanding changes to the EU's agricultural subsidy regime, something the EU is loathe to do, in return for any concessions, but there is also little obvious support among either Brazilian or international law firms for reform.

To gain sufficient resources to be able to effectively and competitively offer local law advice, a foreign firm would most likely have to merge with or buy out one of the larger local firms, as they have done in other jurisdictions. Given their size and the need to maintain a broad array of referrals in a market dominated by a handful of large firms, however, foreign firms view this approach with scepticism. "The market is so well served with good, well-staffed law firms that I would have to think twice about offering local law advice, and how I would go about it," says Donald Baker, head of White & Case in São Paulo.

For most US firms, offering local law does not fit with their overall international strategies, and firms without bases in Brazil say they are not looking to launch there. "If Brazil changed the rules [on foreign lawyers] we wouldn't change a thing. It's not what we came here for," says Andrew Jánszky, co-head of Shearman & Sterling's São Paulo office, which opened in 2004.

Michael Fitzgerald, one of Milbank Tweed Hadley & McCloy's leading Latin American lawyers in New York says his firm is unlikely to launch in São Paulo. "Even if we opened an office in Brazil we would advertise the fact that we wouldn't be offering local law advice," he says.

Brazilian firms, meanwhile, remain confident that they can withstand any future foreign invasions. "The international firms are 20 years too late [to compete for local work]," says Alexandre Bertoldi of Pinheiro Neto. That said, some would not stand in the way of increased competition if it came. "We welcome foreign investments into Brazil in other industries, why shouldn't we in our own field?" says Eduardo Salomão Neto of Levy & Salomão.

José Roberto Opice of Machado Meyer acknowledges that the larger US and UK firms can out-fight Brazilian firms in terms of financial muscle but says: "If the law changed we would have to rethink how we fit in. ... I welcome competition provided I can compete with the same weapons."

Beyond Lojas Renner

Brazil has taken great strides in improving its corporate governance and listing rules towards international standards. "I don't think that we are too far behind," says Antonio Felix de Araujo Cintra of Tozzini Freire Teixeira e Silva. But work remains to be done. The CVM in particular is taking a more activist look at issues such as insider trading and gun-jumping. Some lawyers also have their wish lists. The CVM, for example, has had to cope with a sudden rush of work in reviewing a greater number of equity offerings within its self-imposed 20-day limit.

Lawyers who have worked on deals are impressed by how the regulator has been able to keep up and with the sophistication of its comments and analysis, though some say that increasing the CVM's team would enable it to examine certain areas more closely. "One thing that would benefit companies, disclosure standards and investors generally would be if the CVM reviews looked more closely at financial disclosure and accounting issues," says Davis Polk's Garciadiaz. Others would like to see the CVM take a new look at issuers' continuing reporting requirements.

The equity boom has also raised questions over the nature of corporate control. Most Brazilian companies have traditionally been family-held businesses, and many of those that have sold shares issued non-voting stock. Bovespa, however, has sought to broaden share ownership and corporate control by requiring that companies have certain levels of freely floated stock and requiring that all Novo Mercado shares have full voting rights. The IPO of retailer Lojas Renner in 2005 marked the first time that a Brazilian company did not have a controlling shareholder. It was a deal that Garciadiaz of Davis Polk, which acted on the deal alongside Mattos Filho, Shearman & Sterling and Pinheiro Guimarães, describes as "a shock to the Brazilian system".

A number of others, including Submarino, Embraer, Perdigão and Telemar have since followed suit in various forms and to varying degrees. Lawyers say they expect more companies to take this route, not least because of the benefits arising from membership of the Novo Mercado. "The market will no longer accept non-voting shares unless there is a legal reason why," says Sergio Spinelli Silva, a partner with Mattos Filho. However, it will be easier for companies such as Lojas Renner and Submarino, which were previously held by a foreign company and private equity investors, to make the change than for family-run businesses.

Getting rid of the controlling shareholder, sometimes referred to as pulverization, inevitably leaves a company open to the takeover. Brazil has never seen the equivalent of a US-style hostile takeover but this year it came close, when shareholders in Perdigão rejected a tender offer from Sadia. Companies that have removed their controlling shareholder have also introduced poison pills and lawyers agree that, even though they were not used in the Perdigão case, they should be a tough measure against hostile bids. Mittal Steel's bid to acquire Arcelor has also raised questions. Although primarily a European deal, the merger has tentacles reaching into Brazil, where the CVM has ruled that the transaction involves a change of ownership, which triggers a mandatory tender offer. The ruling is under appeal.

Lawyers say the CVM and Bovespa need to take a serious look at the tender offer rules, which have not needed to be fully developed in the past, to make sure they function properly in a new corporate environment. "It would be good to give the market some parameters," says Spinelli, whose firm represented Perdigão on its dealings with Sadia and is Brazilian counsel to Mittal. Barbosa Müssnich is representing Arcelor.

Broader retail share ownership brings with it a number of complications. There is an increased need for investor education and regulators will need to look at new areas of corporate governance such as proxy statements and quorum levels. While it is easy to secure a quorum at annual shareholder meetings where there is a single controlling shareholder or controlling group, Lojas Renner is reported to have had great difficulties in rounding up sufficient numbers of often unaware or uninterested investors.

Increased share ownership also brings with it the prospect of securities litigation. Until now, US-style litigation and class action suits from investors stemming from IPOs have not been a feature of the Brazilian legal scene, but that could change. "We're starting to have our own securities ambulance chasers," says Marcelo Lamy Rego of Pinheiro Guimarães. Alexandre Bertoldi of Pinheiro Neto agrees: "When the first downturn happens the lawsuits will come."

Equity work has come to dominate the work of both local and foreign law firms in Brazil, but M&A has also been active. Dealogic counts 143 Brazilian target M&A deals in the year to August 14 with a combined value of $41.1 billion, compared with 2005 totals of 154 deals worth $11.7 billion. Among the more high profile deals, Machado Meyer and Simpson Thacher are advising UBS on its planned acquisition of Pactual, which in turn is advised by Barbosa Müssnich and Skadden Arps. Cleary Gottlieb was retained as US adviser to CVRD on its $17.6 billion bid for Canada's Inco, with Shearman & Sterling acting for CVRD's banks. Project finance, which has been quiet, may also be showing signs of future life, not least in the public-private partnership sector, with bidders in place for a concession on São Paulo's planned fourth subway line.

In the meantime, lawyers expect the run of equity work to continue. Not only has Brazil shaken off some, though by no means all, of the fragility typical of developing economies, it also has a firm regulatory foundation, strong banks and a large supply of potential issuers. Some question whether less liquidity in the 144A market and a softening of SEC regulation, in particular the expected simplification and easing of deregistration requirements, could draw some Brazilian issuers back into registered offerings. But everyone expects the spotlight to remain on São Paulo.