Bumpy road to Rio

Dale McEwan finds out how law firms are taking advantage of Brazil’s developing economy, despite regulatory restrictions

In contrast to the efforts made by international law firms to break into the world’s other emerging markets, interest in Brazil among international firms seems to have waned even as the country’s economy is expanding explosively.

This could be partially due to the strict rules governing the relationship between foreign firms and their Brazilian affiliates. A number of international firms, such as
DLA Piper and Mayer Brown, are alleged to have infringed these regulations, and ­investigations by the Ordem dos Advogados (OAB), the Brazilian bar association, are ongoing.

TozziniFreire Advogados founding partner Jose Luis Freire explains that the legal profession in Brazil is regulated by law and not by the internal rules of the OAB. Any foreign lawyer may demonstrate that he or she has a law degree from a foreign law school, pass the bar exam and practise Brazilian law. Foreign lawyers may register with the OAB as foreign legal consultants and practise foreign law.

According to Brazilian rules, all partners of Brazilian law firms have to be lawyers admitted to practise in Brazil. Brazilian lawyers cannot be associated with any other profession, including foreign lawyers or firms not admitted to practise Brazilian law.

This means that Brazilian and foreign firms cannot, for example, share the same letterheads, so Brazilian firms practising Brazilian law cannot sport the logo of an international firm.

“It was a clever way to circumvent [the rules],” says Pinheiro Neto Advogados ­managing partner Alexandre Bertoldi.

Playing the game

Freire explains that in recent years a lot of foreign law firms have registered as foreign legal consultants. A more recent trend is for foreign firms to associate themselves with Brazilian firms, disregarding the local law in an attempt to grab a slice of outbound investment from Brazil.

Freire thinks this trend is more indicative of competition among foreign law firms, than a challenge to the local incumbents.

But Shearman & Sterling’s São Paulo office managing partner Robert Ellison ­disagrees. “It does cause friction,” he argues. “The international law firms that have been here since the beginning tend to play the game. We allow our clients to choose the Brazilian firm they want to work with. It’s the slew of recent arrivals that are, in many cases, being ­investigated by the OAB. Now there’s an appeal process going on with the federal bar.”

“It’s an issue for those who don’t ­comply,” says Anneliese Moritz, associate at ­Felsberg Pedretti e Mannrich Advogados e Consultores Legais.
Old-school senior partners are seen as the driving force of the OAB, using the ­association to emphasise the law. These partners see foreign firms as competing for both work and people.

Raid resistance

Lateral hires are not in Brazil’s culture, so local firm raids initiated by foreign firms have not gone down at all well.

“Senior partners who were expecting to retire got more competition [when foreign firms moved in], so they hid themselves behind the OAB,” says Pedro Amaral Dinkhuysen, managing partner of Laurence Simons’ São Paulo office. “Within five years the guys who are really fighting will have to retire. You don’t see more hungry international law firms wanting to come to Brazil. The cherry on top would be to be able to practise Brazilian law.”

Dinkhuysen explains that he spoke to around five international firms in 2010 that wanted to open in Brazil. “Now there are none,” he adds.

“The biggest trend is that the associations between international firms and their Brazilian friends have stopped,” says ­Hudson Legal principal consultant David Stuckey. “The OAB has put a chill on those ­relationships.”

Think again

The general feeling is that several firms, such as Clifford Chance and CMS Cameron McKenna, have had to rethink their plans for a local law component in Brazil.

One firm that had the option to practise Brazilian law but chose not to is Iberia’s Cuatrecasas Gonçalves Pereira, which opened an office in São Paulo in October 2010. ­Portuguese lawyers are the only ­foreign lawyers who can practise Brazilian law from the get-go.

“We’re not getting the benefit of that for the time being,” says partner Diogo Perestrelo. The office subcontracts domestic law work to a legal team in Brazil. “We thought that it was better to work with Brazilian law firms rather than trying to compete with them,” he adds.

There are mixed feelings over whether the situation will change in the future.

“It’s a trend in many countries,” says ­Pinheiro Guimarães Advogados partner Plinio Pinheiro Guimarães. “It’s a matter of time.”

“It’s difficult to say,” adds Perestrelo. “One may think that if Brazil wants to open its doors to foreign investors it’s difficult to put restraints on foreign law firms. If Brazil wants to have foreign investors it’ll be ­difficult to place conditions on the market in any area, and that includes foreign lawyers. I think it’s a question of time.”

Freire is not so optimistic.

“I don’t believe the regulatory scenario will change,” he says. “First, because the regulations are pretty liberal and second, they are not against any international treaty to which Brazil is a party. Third, any changes would require a change in the law and therefore a majority vote of the Federal ­Congress.”

Some see the use of the OAB as an indication that firms are holding onto power in contrast to the many developments that Brazil is enjoying.

International rescue

It is felt that allowing international firms to practise Brazilian law could help develop the legal market for the better.

“The legal market here is good but it’s still immature,” says Dinkhuysen. “It’s 15-20 years behind London in terms of ­development. One of the positives of having international law firms is that they help to improve the legal market. If you have some of those [international] law firms coming to Brazil the bar will be higher.”

With regard to developing the legal ­market, Stuckey adds that the offering of regular refresher training is a gap that has not yet been filled.

“There’s continuing refresher training in the US, but, to my knowledge, not here,” Stuckey says. “Several of our clients have asked us for referrals to technical training and management consultants. [There’s] a market for it here.”

Educational underachievement

In the same vein, legal education is an area that will need to develop rapidly to catch up with the growth in the Brazilian economy.

“The law schools still teach the most ­traditional areas of the law,” says Freire. “There’s a lot of emphasis on litigation ­subjects rather than corporate, so they still train more litigators than corporate lawyers. Therefore, the law firms in Brazil have to train students to become corporate lawyers.”

Finding well-qualified individuals is a significant issue in the current legal market. In a bid to sort the wheat from the chaff the Brazilian bar has toughened up its entrance exam. In the last exam, held in December 2010, only 12 per cent of the 106,891 law graduates enrolled passed.

The search for talent is probably toughest for firms looking for junior and mid-level associates, explains Stuckey. Many Brazilian firms are top-heavy, and while they have the partners and senior associates they need there are gaps lower down the hierarchy.

“The massive investment in the country, both foreign and domestic, has created an explosion in the amount of legal work that needs to be done, and the supply of skilled, smart, English-speaking associates is simply too small to serve all the clients that partners are bringing in,” Stuckey says. “That should change naturally over the next few years as supply catches up with demand, but at the moment it’s a very real problem. In addition, this is a boom time for young lawyers, with more established firms vying for talent with new competitors, as well as the increasing number of in-house opportunities that ­associates are presented with.

“This game of musical chairs should stop as the market becomes more predictable, transparent and stable, but at the moment there are too many apparently good opportunities for young lawyers to chase, which contributes to the problem,” he concludes.

Work options

In terms of the available work for firms, the Brazilian market now offers a plethora of options.

“It just used to be capital markets work that international firms did here,” says Shearman’s Ellison. “But Brazil is now behaving more like an emerged country and there’s more that firms can do. With M&A work you have to do your homework and look for value. This shows that Brazil is being treated like a developed economy.”
Another area of development is project finance.

“As the economy grows it’s able to respond to one of its drawbacks, which is the bottleneck with regard to infrastructure,” Ellison says. “You can build stadiums for the World Cup and the Olympics, but the real story of what Brazil needs is investment in roads, ports, airports, oil and gas infrastructure, industrial ports and railways. The major challenge for the country is to make sure that generated cash is put back into the development of infrastructure. What that means is there’ll be a lot of work for lawyers in project finance.”

Freire reports that TozziniFreire’s Porto Alegre office in the south of the country is seeing more corporate work as opposed to the flow of litigation traditionally seen ­outside São Paulo.

“The trend we’re seeing shows that if you have the skills in place there’s room for a national law firm with offices in many cities, as we have. I think the Brazilian market is sophisticated,” he concludes. “It’s more sophisticated than other South American markets, including Mexico.”