Dutch Foundation Achieves Significant Victory for Petrobras Shareholders and Investors
Petrobras Faces Multi-Billion Euro Potential Liability as Litigation Finally Moves to Arguments concerning the Merits of the Case
STAMFORD, Conn.–International Securities Associations & Foundations Management Company (ISAF)
On May 26, 2021, the District Court in Rotterdam ruled that Stichting Petrobras Compensation Foundation (SPCF or Foundation) has standing to pursue declaratory relief in the Netherlands on behalf of global investors who purchased Petrobras securities on the Brasil Bolsa Balcão S.A. or B3 – Brazil (formerly BM&FBOVESPA) and linked markets in the European Union as well as certain bonds prior to July 28, 2015.
Established in 2016, SPCF has been in active litigation on these matters with Petrobras since January 2017. The first major ruling granting jurisdiction for the Foundation was an interim ruling handed down in September 2018. Since the interim ruling in 2018, the litigation has progressed largely on procedural terms and technicalities regarding standing of the Foundation.
The ruling from the Dutch Court effectively denies the Defendants’ motion to dismiss the case. With this final and favorable ruling on standing of the Foundation, the litigation will now focus on the merits of the case and whether Petrobras violated applicable laws thus causing damage to shareholders. The declines in Petrobras stock price germane to the Dutch litigation occurred over the course of several months throughout 2014 and 2015. It was revealed during this time that, for many years, Petrobras made fraudulent and misleading statements to investors regarding (i) the company’s books and records, (ii) the valuation of company assets, and (iii) the associated bribery and kickback schemes uncovered by Brazilian Federal law enforcement agencies in 2014 – the widely reported Operação Lava Jato scandal.
In summary, the key takeaways from the May 26, 2021 ruling in Rotterdam are:
1) The Court wholly rejected the Petrobras Defendants’ argument that the Petrobras investors who purchased shares on the B3 and linked markets in the EU have no right to seek relief in the Netherlands pursuant to article 58 of the Petrobras Articles of Association – the so-called Petrobras arbitration clause.
- a. The Court in Rotterdam took particular issue with the disingenuous attempts by Petrobras to advance the argument for the arbitration requirement in the Rotterdam Court when, in fact, the same Defendants argued the exact opposite in arbitration proceedings in Brazil – a contradiction for which the Foundation provided evidence to the Court during the most recent oral hearings held in Rotterdam in January 2021.
- b. The Court also noted how a broad interpretation of the arbitration clause would result in the shareholders being denied access to an independent national court. Since access to an independent court is a fundamental right, any provisions in the articles of association that would cut off this route should be clear and unambiguous. The Court determined that this was not the case since Brazilian courts have ruled on two occasions that article 58 of the Articles of Association only applies to the internal operations of the company. Since the Foundation’s case did not concern a dispute about the internal operations of the company, the Court ruled that the arbitration clause did not apply.
- c. Therefore, the facts presented by the Foundation resulted in the Court reversing its earlier interim ruling on the applicability of article 58 and affirmed the Foundation’s position that the class of Petrobras investors should include all eligible investors and not exclude a subset of investors who are domiciled in Brazil or Portuguese speaking jurisdictions.
2) The Court ruled that Petrobras investors who are currently actively engaged in arbitration proceedings or separate litigation for the same facts in Brazil or elsewhere are excluded from the global class of investors for whom the Foundation in the Netherlands litigates.
3) The Court affirmed that the Foundation represents a sufficiently large class of investors and that the collective action process in the Netherlands is an efficient vehicle by which to prosecute the claims of the eligible and damaged class of global investors.
4) The Court has set a date of September 1, 2021 for the Foundation to submit its further arguments and facts regarding the merits of the case and specifically the arguments that support the Foundation’s allegations that Petrobras violated investors’ rights under the laws of various jurisdictions as previously determined by the Court in Rotterdam.
Petrobras Faces Multi-Billion Euro Potential Liability
Now that the Dutch Court has ruled that the Foundation has standing to pursue a declaratory relief ruling in the Netherlands, the Petrobras Defendants face increased exposure to material liability. In the United States, Petrobras resolved the claims of American Depository Receipt (ADR) investors and certain bondholders through a settlement of USD 3 billion (EUR 2.5 billion). The US ADR float (American Depository Receipts) are Receipts linked to underlying Petrobras Shares equivalent to approximately 15% of the global public equity issued by Petrobras.
When excluding the underlying ADR shares and shares owned by the Brazilian government and Brazilian government agencies, the remaining public equity float of Petrobras, or “The Rest of The World,” is approximately 30% – or double the equity float owned via ADR investors.
In the US ADR and bond litigation, investors claimed damages of over USD 13 billion (EUR 10.6 billion) for which Petrobras offered a settlement of USD 3 billion mainly allocated to ADR/shareholders. The presumed liability incurred by “The Rest of The World”, mainly international and Brazilian direct Petrobras shareholders and some bondholders represented in the Netherlands, by extension, could exceed EUR 20 billion (USD 24.5 billion) – a decisively material potential liability notwithstanding Petrobras’ recent report of a strong financial position.
In the next phase of the litigation in the Netherlands, the Court will seek to determine if Petrobras violated anti-corruption and securities laws outside of the United States, specifically under the laws of several EU countries and in Brazil. The fact that Petrobras has already admitted to violating the US laws, which are similar to many countries in these matters, further supports the thesis that Petrobras faces significant legal jeopardy and associated shareholder damages in the Netherlands. Among other things, Petrobras entered into a non-prosecution agreement with the United States Department of Justice (DOJ) in 2018. The statement of facts in the DOJ agreement affirm that the Petrobras defendants admit violations of US anti-corruption laws and US securities laws as summarized in the US DOJ press release regarding the USD 853.2 million (EUR 697.3) criminal penalty paid to the DOJ, the United States Securities and Exchange Commission (SEC) and Brazilian authorities (https://www.justice.gov/opa/pr/petr-leo-brasileiro-sa-petrobras-agrees-pay-more-850-million-fcpa-violations).
ISAF Management congratulates the Foundation on this favorable outcome for global Petrobras investors. While the Court has already ruled that the Foundation has standing to represent all eligible shareholders, ISAF Management encourages any eligible investors who have not yet actively joined in support of the Foundation to do so before the next hearings which will commence on September 1, 2021.
More information about the litigation can be found at www.pbcompensation.com. SPCF instructed ISAF to coordinate all administration with investors, including funding of all litigation costs so investors can participate on a contingency only basis with no upfront cost. More information about ISAF can be found at www.isafmanagement.com. Petrobras investors who purchased shares on the B3 prior to July 28, 2015 can start the ISAF and Foundation registration process on the ISAF website.
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