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INT EQUITY INV, INC. v. OPP. EQUITY PARTNERS

June 2, 2005.

INTERNATIONAL EQUITY INVESTMENTS, INC. and CITIGROUP VENTURE CAPITAL INTERNATIONAL BRAZIL, LLC, on behalf of itself and Citigroup Venture Capital International Brazil, L.P. (f.k.a. CVC/Opportunity Equity Partners, L.P.), Plaintiffs,
v.
OPPORTUNITY EQUITY PARTNERS, LTD. (f.k.a. CVC/Opportunity Equity Partners, Ltd.) and DANIEL VALENTE DANTAS, Defendants.



The opinion of the court was delivered by: LEWIS KAPLAN, District Judge

MEMORANDUM OPINION

In the late 1990s, Citibank, N.A. ("Citibank") agreed to make an entity controlled by Daniel Valente Dantas, a Brazilian banker, the sole general partner of an investment vehicle to which Citibank contributed the entire $728 million in capital. The vehicle now owns, through an elaborate holding company structure, a very substantial interest in Brasil Telecom S.A. ("Brasil Telecom"), a provider of fixed-line and cellular telephone services in Brazil. Although Citibank recently removed Dantas as general partner of its investment vehicle, Dantas continues to control Brasil Telecom because he installed individuals loyal to him as directors of the companies at each level of the holding company structure.

  Dantas now proposes to use that control, notwithstanding his removal as general partner, to push through — against the wishes of Citibank — transactions involving his own entities, Brasil Telecom, and Telecom Italia International N.V. and its affiliates (collectively "Telecom Italia") pursuant to which, among other things, (1) Dantas will sell his interests in the Brasil Telecom family to Telecom Italia for amounts that appear to be hundreds of millions of dollars in excess of their actual value, and (2) Brasil Telecom will transfer its cellular telephone business to Telecom Italia for allegedly inadequate consideration.

  Plaintiffs contend that Dantas may not use his control over the holding company structure, which was a function of Citibank's having entrusted him with its investments, to effectuate the transactions involving Brasil Telecom. To do so, they say, would breach his fiduciary duty. They seek an injunction barring these transactions pending trial. The case thus requires the Court to consider the post-removal obligations of a fiduciary to his beneficiaries.

  Background

  The motion challenges the Dantas-Telecom Italia-Brasil Telecom agreements of April 28, 2005. Understanding those agreements requires some familiarity with the turbulent history of investments in Brazil's telecommunications sector involving Citibank, the Brazilian pension funds, Telecom Italia, and the group of entities founded and controlled by Dantas, which will be referred to collectively as "Opportunity."

  A. Citibank and the Pension Funds Invest with Opportunity

  1. The CVC Fund and the Onshore Fund

  In the late 1990's, Dantas and Opportunity organized (1) a group of Brazilian pension funds and (2) Citibank to invest together with (3) Opportunity on a "side-by-side" basis in telecommunications assets being privatized by the Brazilian government. Each of the three was to invest under Opportunity's common management on the same terms in the same classes of securities, with the amount of capital that each investor put into each asset a function of that investor's percentage contribution to the three investors' total commitment.*fn1 The investments of Citibank and the pension funds each dwarfed that of Opportunity.

  The vehicle for the pension funds' investment was CVC/Opportunity Equity Partners Fundo Mútuo de Investimento em Ações — Carteira Livre, now named Investidores Institucionais Fundo de Investimento em Ações, an investment fund organized under the laws of Brazil and known as the Onshore Fund. Opportunity was the manager of the fund.*fn2

  The vehicle for Citibank's investment was CVC/Opportunity Equity Partners, L.P., now named Citigroup Venture Capital International Brazil, L.P. (the "CVC Fund"), a private equity investment fund registered as a Cayman Islands exempted limited partnership. Until recently the CVC Fund's sole general partner, which contributed no capital, was defendant CVC/Opportunity Equity Partners, Ltd., now known as Opportunity Equity Partners, Ltd. ("Opportunity Equity"), a member of the Opportunity family. The sole limited partner is plaintiff International Equity Investments, Inc. ("IEII"), a wholly-owned subsidiary of Citibank that contributed all of the CVC Fund's $728 million in capital.*fn3

  The CVC Fund is governed by a Limited Partnership Agreement (the "LPA") pursuant to which the general partner was responsible for "the management, control, operation and policy" of the fund and acknowledged its status as a fiduciary for the limited partner.*fn4 The LPA provides that "[t]his Agreement, including its existence, validity, construction and operating effect, and the rights of each of the parties hereto, shall be governed by and construed in accordance with the laws of the Cayman Islands without regard to otherwise governing principles of conflicts of law"*fn5 and that:
"[e]ach of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any New York state court or federal court of the United States sitting in the Borough of Manhattan in New York City . . . in any action or proceeding arising out of or relating to this Agreement . . . and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such [court]."*fn6
  For the first few years, relations between Dantas and the Onshore Fund and Citibank appear to have been at least satisfactory.*fn7 The funds acquired, among other assets, indirect controlling interests in two new Brazilian wireless telecommunications companies, Telemig Celular S.A. ("Telemig") and Amazonia Celular S.A. ("Amazonia").*fn8

  2. The Opportunity Investors Join Forces with Telecom Italia To Purchase Brasil Telecom

  In 1998, Citibank, the Onshore Fund, and Dantas formed a consortium with Telecom Italia to bid on the fixed-line telephone assets that became Brasil Telecom. The vehicle for the successful bid was a holding company named Solpart Participações S.A. ("Solpart") which today has majority control of Brasil Telecom Participações S.A. ("BTP"), the direct parent of Brasil Telecom. Solpart's three shareholders are Telecom Italia, a Dantas affiliate named Timepart Participações Ltda. ("Timepart"), and Techold Participações S.A. ("Techold"), one of the holding companies created by Opportunity and owned by it, Citibank, and the pension funds.*fn9 Under the 1998 agreement among these three shareholders (the "Solpart Shareholders Agreement"), Telecom Italia gained a 38 percent stake in Solpart and certain unique veto powers.*fn10 These gave Telecom Italia substantial ability to influence Brasil Telecom.

  3. Current Corporate Structure

  Brasil Telecom is controlled by a holding company structure, the relevant part of which is depicted in the following chart: [EDITORS' NOTE: CHART IS ELECTRONICALLY NON-TRANSFERRABLE.] At the top of the chain is Opportunity Zain S.A. ("Zain"), a key entity because — at least in theory — control of Zain yields indirect control of Brasil Telecom. Zain is owned 44.20 percent by the CVC Fund,*fn11 45.45 percent by the Onshore Fund, and 9.75 percent by Opportunity.

  Zain holds 67.82 percent of the voting shares in Invitel S.A. ("Invitel"), which in turn holds 99.99% of the voting shares in Techold, which owns 61.98 percent of the voting shares in Solpart. Of the remaining voting shares in Solpart, 38 percent are held by Telecom Italia and .02 percent by Timepart. Solpart holds 51 percent of the voting shares in BTP, and BTP, the preferred and common shares of which are traded publicly in Brazil, holds 99.07 percent of the voting shares in Brasil Telecom.

  Until now, Dantas' close associates have sat on the boards of many or all of these companies. The seven-member board of Brasil Telecom, at least until recently,*fn12 included four individuals affiliated with Opportunity. BTP's six-member board includes (1) Veronica Valente Dantas, Dantas's sister, (2) Arthur Joaquim de Carvalho, Dantas' brother-in-law, (3) Dantas' former brother-in-law, and (4) Luis Octavio Carvalho de Motta Veiga, a lawyer for Opportunity. The three-person boards of Invitel, Techold, and Zain*fn13 each include Veronica Valente Dantas and Maria Amália Delfim de Melo Coutrim, an employee of Opportunity.*fn14

  B. Clashes Between Telecom Italia and Brasil Telecom

  Within a few years after the Brasil Telecom acquisition, Telecom Italia and Brasil Telecom found themselves competing for Brazilian government licenses to operate cellular telephone services. By 2002, Telecom Italia had obtained several such licenses and invested heavily in infrastructure that was ready to be deployed. Under Brazilian law, however, Telecom Italia was prohibited from operating the new services because it was considered — on account of its investment and veto rights under the Solpart Shareholders Agreement — to be an affiliate of Brasil Telecom, and Brasil Telecom was precluded from offering cellular services until it had met certain government targets for extending access to its fixed-line services.*fn15

  Anxious to begin operating its cellular service, Telecom Italia decided to reduce its position of influence in Solpart in order to satisfy regulators that it was sufficiently unrelated to Brasil Telecom. In intense negotiations, Telecom Italia tried to secure from Techold and Timepart (a) a commitment that Brasil Telecom would not operate any cellular services, and (b) a right to regain its position in Solpart once Brasil Telecom had satisfied the relevant regulatory requirements. The resulting amendment to the Solpart Shareholders Agreement diminished Telecom Italia's stake in Solpart, eliminated its special veto powers, and removed provisions that allowed each shareholder to call the others' shares or put its own to them if certain triggering conditions occurred. This satisfied Brazilian regulators that Telecom Italia and Brasil Telecom were sufficiently independent of each other, and Telecom Italia was permitted to launch its cellular operations. There was, however, no agreement that Brasil Telecom would not enter the cellular business.*fn16

  Brasil Telecom then obtained a cellular license of its own. From 2002 to 2004 both it and Telecom Italia each expanded its cellular and long-distance operations. Under Brazilian law, however, affiliates may not own overlapping cellular licenses. The emergence of Brasil Telecom as a competitor in the cellular business therefore prevented Telecom Italia from reassuming the interest and veto rights that it previously had held in Solpart, even though Brasil Telecom had met the government access targets by January 1, 2004.

  This problem led to discussions between Telecom Italia and Brasil Telecom about somehow combining their cellular and long-distance businesses.*fn17 The talks, however, failed. Moreover, a dispute developed over whether the 2002 amendment to the Solpart Shareholders Agreement that had satisfied regulators' concerns about Brasil Telecom's independence of Telecom Italia had given Telecom Italia the right to regain its former influence over Brasil Telecom once the government access targets had been met. Telecom Italia asserted such a right, and it petitioned the Brazilian national telecommunications agency, Agência Nacional de Telecomunicações ("Anatel"), to require Brasil Telecom to divest its mobile and long-distance licenses.*fn18 Litigation ensued in Brazil.*fn19

  Techold, along with the Dantas-dominated Timepart, resisted Telecom Italia's attempts to reassert itself in Brasil Telecom and cause its assets to be stripped. They commenced an arbitration in London against Telecom Italia to prevent it from returning to its position of influence over Brasil Telecom before the regulatory issues are resolved.*fn20 Opportunity's de Carvalho there testified that no commitment had been made to Telecom Italia in 2002 that would allow it to resume its position of influence upon resolution of the regulatory issues: "At no stage did [Techold and Timepart] ever give any guarantee that [Telecom Italia] would be able to return to the controlling group of Brasil Telecom."*fn21 To skip ahead for a moment, now that Dantas and Telecom Italia have made a deal highly advantageous to Dantas, de Carvalho takes a very different position:
"The parties agreed . . . that Telecom Italia would be allowed to reassert its rights and shareholding in Solpart on or before January 1, 2004 if certain conditions were met. . . . According to the terms of the 2002 agreement, Techold and Timepart were required to allow Telecom Italia to reassume its control of Brasil Telecom if the overlapping license issue was resolved."*fn22
  In January 2004, Anatel decided that Telecom Italia could return to its former position in Brasil Telecom provided that the license overlaps are resolved by mid-July 2005.*fn23 The parties here dispute whether Anatel is likely to extend that deadline and the likely consequences if the deadline is not met.*fn24
  C. The Onshore Fund and Citibank Fall Out with Dantas
1. The Onshore Fund Removes Opportunity
  On October 6, 2003, the Onshore Fund removed Opportunity for cause from management of the fund.*fn25 It has alleged that Opportunity "began to perform a number of acts contrary to the interests of the Brazilian investors who had entrusted their funds to its management,"*fn26 but the record does not contain significant detail about the reasons for the removal.

  Removal from the manager position of the Onshore Fund allegedly required a 90 percent vote.*fn27 In this case, removal was approved by investors holding approximately 80 percent of the shares in the fund. The other investors found that the Brasil Telecom pension fund, one of the entities that made up the Onshore Fund, was conflicted — by virtue of its connection to Dantas — and prohibited it from voting.*fn28 The Brasil Telecom pension fund has been challenging the removal in litigation since January 2004.*fn29

  A week after the removal, the plaintiffs allege, it came to light that Opportunity had caused the agreement among the three major shareholders in Zain to be amended to provide that if either the CVC Fund or the Onshore Fund removed Opportunity as general partner or manager, that fund would lose its voting rights in Zain.*fn30 Opportunity waived its right to enforce this amendment, which is known as the Umbrella Agreement, against the CVC Fund*fn31 but takes the position that the Umbrella Agreement permits it to vote the Onshore Fund's shares in Zain.*fn32 The Onshore Fund has disputed this in litigation in Brazil. The Brazilian equivalent of the Securities and Exchange Commission filed a brief that described the Umbrella Agreement as a breach of fiduciary duty and argued that it must be annulled.*fn33 On May 11, after this motion was filed, a Brazilian court issued a preliminary injunction suspending the effect of the Umbrella Agreement.*fn34

  2. Citibank Removes Opportunity

  The relationship between Citibank and Opportunity also soured. The plaintiffs allege that evidence of extensive misconduct has come to light over the past year — misconduct through which the defendants attempted to benefit themselves at Citibank's expense.*fn35 Examples of the allegations follow.

 
• Dantas and his affiliates, using their position as general partner of the CVC Fund, allegedly signed an agreement without IEII's knowledge between the CVC Fund and Opportunity providing that the CVC Fund may not sell five percent or more of its interest in Zain unless the buyer purchases all of the BTP shares held by certain Opportunity entities. The assertion is that this agreement, which supposedly remains effective until 2028, would reduce the price that a prospective purchaser would pay for the CVC Fund's stake in Zain and thus would divert proceeds from the CVC Fund to Opportunity.*fn36
• In September 2003, Dantas allegedly arranged, without IEII's knowledge or consent, for certain of Brasil Telecom's claims against Telecom Italia to be removed from Brasil Telecom's control and placed in a trust of which the trustee is Dantas' legal advisor. This maneuver allegedly allows Dantas to control Brasil Telecom's litigation against Telecom Italia and discourages Telecom Italia from purchasing the CVC Fund's interests in Brasil Telecom.*fn37
• The defendants allegedly used the CVC Fund to pay a disproportionate share of litigation expenses in connection with the side-by-side investments, in addition to legal expenses having no connection at all to the CVC Fund.*fn38
• From September 2004 until March 2005, IEII allegedly engaged in discussions with Dantas to understand what he had done. During this period, Opportunity allegedly transferred custody of share registers relating to shares owned by the CVC Fund from a bank recognized for custodial services to an Opportunity entity. Opportunity allegedly refused as well to disclose basic information about the CVC Fund's affairs or to provide auditors with full access to its records.*fn39
• Finally, on March 4 of this year, the defendants, without IEII's knowledge or approval, commenced an attempt to auction off simultaneously (a) equity in the holding company with indirect control over Telemig and Amazonia and (b) equity in a holding company with a non-controlling interest in Telemig and Amazonia.*fn40 The first company is controlled by the CVC Fund and owned nearly entirely by it and the Onshore Fund, whereas the second company allegedly is affiliated with Opportunity. The plaintiffs allege that the auction was a gambit by Opportunity to reap for itself a portion of a control premium that rightfully belonged to the CVC Fund.*fn41
  On March 9, 2005, IEII exercised its contractual right under the LPA to remove Opportunity Equity as the CVC Fund's general partner and appointed plaintiff Citigroup Venture Capital International Brazil, LLC ("CVC Brazil") as the new general partner.*fn42

  D. The Present Action

  On March 10, 2005, plaintiffs brought this action and moved for a preliminary injunction. They sought to compel the defendants to register the change of the general partner of the CVC Fund from Opportunity Equity to CVC Brazil — required under Cayman law to make the change of partner effective*fn43 — and to prevent the auction of the indirect interests in Telemig and Amazonia, as well as any other transactions involving the CVC Fund. The Court granted a preliminary injunction on March 17 (the "March 17 Order"). In relevant part, it compelled registration of the change of general partner and enjoined defendants from:
"5. taking any action that would impair the value of the CVC Fund or its assets or interfere with plaintiff[s'] control over those assets;
* * *
"7. Interfering with the authority and power of [CVC Brazil], the newly appointed general partner of the CVC Fund, over the assets, investments and management of the CVC Fund. . . ."*fn44
E. The April 28 Agreements

  On April 28, 2005, Telecom Italia entered into agreements with Brasil Telecom and Opportunity pursuant to which Telecom Italia would acquire Brasil Telecom's cellular assets and Opportunity would be paid hundreds of millions of dollars. In addition, Telecom Italia, Brasil Telecom, and several of its Dantas-controlled holding companies entered into an agreement amending the Solpart Shareholders Agreement to reinstate the Telecom Italia rights in Solpart that previously had been suspended, thus restoring Telecom Italia to an influential role in Brasil Telecom. These proposed transactions now are the focus of this second preliminary injunction motion, as plaintiffs contend that they breach fiduciary duties owed to the CVC Fund.*fn45

  1. Agreement Between Telecom Italia and Brasil Telecom

  The April 28 transactions include three involving Telecom Italia and Brasil Telecom. a. The Cellular Acquisition Agreement

  The first of the Brasil Telecom — Telecom Italia transactions is the merger of 14 Brasil Telecom Celular S.A. ("BTC"), the Brasil Telecom subsidiary that operates Brasil Telecom's cellular business, into a subsidiary of Telecom Italia in exchange for a very small percentage interest in that subsidiary (the "Cellular Acquisition Agreement"). The parties contemplate as well, although it is not part of the agreement, that Telecom Italia will transfer its Brazilian long-distance business to Brasil Telecom.*fn46 On May 5, a Brazilian court preliminarily enjoined the Cellular Acquisition Agreement from taking effect pending a hearing on May 24.*fn47

  b. The Solpart and Settlement Agreements

  Two of the critical pieces of the April 28 transactions involving Brasil Telecom and Telecom Italia are agreements involving Solpart and Techold, entities that are majority owned by Citibank and the ...


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