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International Equity Investments, Inc. v. Opportunity Equity Partners Ltd.

July 26, 2006


The opinion of the court was delivered by: Lewis A. Kaplan, District Judge


Once again, this matter is before the Court on a motion for a preliminary injunction. The Court finds that plaintiffs are likely to prevail on their claim that defendants are breaching their fiduciary duties to plaintiffs by their proposed conduct.


A. The Investments in Brasil Telecom

In the late 1990s, Citibank N.A. ("Citibank") and a group of Brazilian pension funds (the "Pension Funds") selected defendant Daniel Valente Dantas and his entity, defendant Opportunity Equity Partners, Ltd. ("Opportunity"), to manage investment funds in Brazil on their respective behalfs.*fn1 Opportunity became the sole general partner of Citibank's fund, then known as CVC/Opportunity Equity Partners, L.P. (the "CVC Fund"), under an agreement that provided that any disputes between Citibank, Dantas, and Opportunity in regard to the CVC Fund would be resolved exclusively by litigation in New York.*fn2 Opportunity became also the sole manager of the Pension Funds' investment vehicle (the "Onshore Fund") under a separate agreement.*fn3

As has been set forth exhaustively in previous decisions by the Court, familiarity with which is presumed,*fn4 all went well for a time. The CVC Fund and the Onshore Fund put up nearly all of the money used to acquire and hold, through a complex holding company structure, at the top of which stands Opportunity Zain, S.A. ("Zain"), a majority of the stock of Brasil Telecom, S.A. ("Brasil Telecom").*fn5 As Opportunity was the general partner of the CVC Fund and the manager of the Onshore Fund, "Dantas had the power to control Zain, the holding companies through which Zain owned a majority of the shares of Brasil Telecom, and Brasil Telecom itself."*fn6 This control was exercised as a fiduciary for both funds.*fn7 During this period, the boards of many or all of the companies in the Brasil Telecom holding structure included many of Dantas's close associates.*fn8

In the summer of 2003, defendants began to fear that the Pension Funds, under pressure from an allegedly anti-Dantas Brazilian government, might remove Opportunity from management of the Onshore Fund.*fn9 Accordingly, Opportunity drafted the so-called Umbrella Agreement, which provided in substance that if either the CVC or Onshore Fund were to remove Opportunity as general partner or manager, that fund would lose its voting rights in Zain.*fn10 The parties dispute whether and to what extent Citibank was aware and approved of the Umbrella Agreement, but there is no dispute that Opportunity signed it on behalf of the CVC and Onshore Funds in 2003.*fn11

The Onshore Fund removed Opportunity as its manager in October 2003, and the CVC Fund followed suit in March 2005.*fn12 Citibank then sought to regain control over the CVC Fund's interests in Zain and the other holding structure companies and encountered significant resistance from Dantas and Opportunity. It first brought this action in March 2005 to compel defendants to register the change of the CVC Fund's general partner from Opportunity to CVC Brasil and to enjoin certain proposed Brasil Telecom asset sales. The Court granted the request (the "March 17 Injunction") and enjoined defendants from, among other things, "taking any action that would impair the value of the CVC Fund or its assets or interfere with plaintiff[s'] control over those assets."*fn13

Citibank then returned to this Court in June 2005 after the Opportunity-dominated Brasil Telecom board entered into a series of agreements with Dantas and Telecom Italia International N.V. ("Telecom Italia") that, among other things, would have transferred Brasil Telecom's cellular assets to Telecom Italia for low consideration and given Opportunity a windfall of hundreds of millions of dollars.*fn14 The Court concluded that plaintiffs were likely to prevail on their contention that defendants threatened to exploit, for their own benefit, "board seats and other positions conferred upon them as fiduciaries and to act to the detriment of their cestuis que trustent."*fn15 It therefore enjoined the transactions (the "June 2 Injunction").*fn16

Citibank and the Pension Funds thereafter moved down the holding company structure, removing and replacing Dantas loyalists as managers and directors.*fn17 That process was completed in September 2005 with the replacement of Brasil Telecom's officers and directors, giving plaintiffs and the Pension Funds -- who are aligned*fn18 -- complete control over Brasil Telecom.*fn19

B. The Litigation in Brazil and the April 20, 2006 Injunction

Meanwhile, additional litigation has been proceeding in Brazil. In April 2004, investors in the Onshore Fund challenged in the Brazilian courts the validity of the Umbrella Agreement as between the Onshore Fund and Opportunity.*fn20 On May 11, 2005, a Brazilian court granted the investors' request for a preliminary injunction staying the effect of that agreement as between those parties (the "Brazilian Injunction").*fn21 After numerous failed appeals by Opportunity, on April 11, 2006, an intermediate appellate court dismissed the investors' petition on statute of limitation grounds and vacated the Brazilian Injunction (the "April 11 Brazilian Decision").

Without the protection of the Brazilian Injunction, plaintiffs feared that defendants would use the Umbrella Agreement to vote the Onshore Fund's shares in Zain, which, combined with Opportunity's own Zain shares, would give Opportunity majority control of Zain and thus of Brasil Telecom.*fn22 Plaintiffs thus sought an injunction from this Court preventing defendants from enforcing or giving effect to the Umbrella Agreement.*fn23

After considering the history of the parties' relationship, including the evidence in the record about the early relationship among Citibank, the Pension Funds, and Dantas, the Court concluded that Opportunity "became the manager of the Onshore Fund, and gained a position that enabled it to sign the Umbrella Agreement on its behalf, as a result of its relationship with Citibank."*fn24 Thus, the Court continued, if Opportunity were to emerge victorious from its battle with the Pension Fund investors over the viability of the Umbrella Agreement as between Opportunity and the Onshore Fund, "defendants nevertheless will owe their positions of influence over Zain and Brasil Telecom to the fact that Opportunity was the sole general partner of the CVC Fund. They may use these positions only in a manner consistent with the fiduciary duty they owe to it, which means that they may not use them to its detriment or to benefit themselves. That is precisely what defendants threaten to do."*fn25

Accordingly, the Court held that plaintiffs were likely to prevail on their claim that defendants' proposed use of the Umbrella Agreement to take control of Zain and ultimately Brasil Telecom would breach their fiduciary duties to the CVC Fund. It enjoined defendants from enforcing or otherwise giving effect to the Umbrella Agreement (the "April 20 Injunction").*fn26

C. The Instant Motion

The April 20 Injunction did not end the dispute about the April 11 Brazilian Decision.

The parties disagree as to whether that decision is self-executing. It states that "[a]s a logical result of the dismissal of the original action, it is imperative for the parties to return to the status quo ante upon the reversal of the decision that granted anticipatory relief on merit, and the annulment of all acts and effects resulting therefrom."*fn27 Defendants argue that this language automatically restored the composition of the boards to those in place on May 11, 2005 -- a time when Opportunity remained in control of the holding structure companies and Citibank and the Pension Funds had not yet replaced the Dantas-affiliated officers and directors. Plaintiffs counter that the April 11 Brazilian Decision did no more than vacate the May 11 Injunction and did not automatically remove the current officers and directors from their positions.

On April 19, 2006, the Superior Tribunal de Justiça ("STJ"), Brazil's highest non-constitutional court, held that the April 11 Brazilian Decision does not conflict with earlier decisions of the STJ concerning the company's management as it contains "no reference to the replacement of Brasil Telecom's controllers."*fn28 Thus, the STJ has held that the April 11 Brazilian Decision is not self-executing.

Faced with this STJ ruling, defendants tried a new tack. On May 3, 2006, Opportunity filed a petition with a Brazilian court for an order compelling the officers and directors of the Portfolio Companies to step down immediately and permitting those individuals in office on May 11, 2005 to retake their positions.*fn29 Plaintiffs promptly sought relief in this Court, arguing that defendants impermissibly were seeking to retake control of Brasil Telecom and to violate their fiduciary duties to plaintiffs. Pursuant to a temporary restraining order issued by this Court on May 4, 2006, defendants withdrew the petition without prejudice. Plaintiffs now seek a preliminary injunction (1) restraining defendants from "attempting to retake control of the Portfolio Companies or from seeking to remove existing directors, officers or management of the Portfolio Companies," (2) preventing defendants from filing another petition before the Brazilian courts seeking an order reinstating those directors and officers that were in place at the Portfolio Companies on May 11, 2005, and (3) requiring defendants, ...

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