International Equ. Invest. v. Opportunity Equity, 05 Civ. 2745(LAK).
| Decision Date | 20 April 2006 |
| Docket Number | No. 05 Civ. 2745(LAK).,05 Civ. 2745(LAK). |
| Citation | 427 F.Supp.2d 491 |
| Parties | 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 |
| Court | U.S. District Court — Southern District of New York |
Howard S. Zelbo, Carmine D. Boccuzzi, Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Plaintiffs.
Philip C. Korologos, George F. Carpinello, Howard L. Vickery, Eric Brenner, Boies, Schiller & Flexner LLP, New York, NY, for Defendants.
This matter again is before the Court on another motion by plaintiffs for a preliminary injunction and on defendants' motion to modify those injunctions already in place. Finding again that plaintiffs are likely to prevail on their claim that defendants are breaching their fiduciary duties to plaintiffs, their motion is granted. As defendants have not demonstrated that modification of the existing injunctions is appropriate, their motion is denied.
Citigroup has been investing in private equity in Brazil since about 1990.2 In the late 1990s, it decided to increase its Brazilian investments through a fund managed by a local partner who would invest a small amount of its own money as well.3 It chose defendant Daniel Valente Dantas as its local partner. Dantas's entity, Opportunity Equity Partners, Ltd. ("Opportunity"), became the sole general partner of the Citigroup fund, then known as CVC/Opportunity Equity Partners, L.P. (the "CVC Fund").4 Notably, Dantas and Opportunity agreed with Citigroup that any disputes between them in regard to the CVC Fund would be resolved exclusively by litigation in New York.5
At about the same time, the Brazilian government began privatizing certain telecommunication assets. Citigroup was anxious to participate. Its subsidiary, Citibank, N.A. ("Citibank"), joined forces with a group of Brazilian pension funds (the "Pension Funds") to that end. The Pension Funds formed an investment vehicle (the "Onshore Fund") and appointed Opportunity as its manager. The CVC Fund, the Onshore Fund, and Dantas then formed a company called Opportunity Zain, S.A. ("Zain"), which ultimately acquired and, through a complex holding company structure, holds a majority of the stock of Brasil Telecom, S.A. ("Brasil Telecom").6
The CVC Fund and the Onshore Fund put up almost all of the money required for the Brasil Telecom acquisition. Each owns about 45 percent of Zain, while Opportunity owns less than 10 percent.
There is little direct evidence of the precise chain of events that led to Opportunity being designated manager of the Onshore Fund. But Citibank selected Dantas as its local partner when it decided to expand its Brazilian investments.7 It joined forces with the Pension Funds to buy Brasil Telecom. The logical inference, and the inference drawn by the Court, is that the Dantas — Opportunity position as manager of the Onshore Fund was a product of the fact that Dantas had become Citibank's "man in Rio" and that Opportunity was the sole general partner of the CVC Fund.8
As a direct result of these arrangements, 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. He used that power to install individuals loyal to him at each level of the holding company structure. He thus exercised complete control of Brasil Telecom, although he did so as a fiduciary for the CVC Fund and the Onshore Fund. And, for a time, all went well.
In the summer of 2003, relations between Dantas and at least some elements in the Brazilian government allegedly were sour. Pressure is said to have been brought to bear on the Pension Funds to get rid of Dantas, and defendants feared that their control over the CVC and Onshore Funds might be in jeopardy.9 Accordingly, Opportunity conceived of and drafted the so-called Umbrella Agreement, which provided in substance 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."10
While defendants claim that "Opportunity and Citibank H creat[ed] the Umbrella Agreement,"11 they do not dispute that Opportunity alone drafted and executed the agreement. In fact, it executed the document not just on its own behalf, but also as the sole general partner of the CVC Fund and as the manager of the Onshore Fund.12 Citibank did not review the Umbrella Agreement before Opportunity signed it on the CVC Fund's behalf.13
By late summer 2003, the Pension Funds appeared to be on the verge of removing Opportunity as manager of the Onshore Fund. On September 9, 2003, defendants sent a copy of the already-executed August 8, 2003 version of the Umbrella Agreement to Citibank for the first time.
On the following day, Opportunity and Citibank representatives met via video conference to discuss the Pension Funds' apparent intention to remove Opportunity as manager of the Onshore Fund.14 Although the parties dispute the extent to which the August 8 version was discussed at this meeting,15 another version was executed on September 12, 2003, signed again solely by Opportunity in its multiple capacities.16
Paragraph 12 of the September 12, 2003 version of the Umbrella Agreement, which is at the heart of the current controversy, provides:
"[F]ollowing the occurrence of a Change in the Management [the removal of Opportunity as the manager or general partner of the Onshore or CVC Fund, respectively], any votes on resolutions to be taken at the shareholders' meeting of the relevant Company [i.e., the entity that has had the Change in the Management] shall be cast after consultation with the Non-Affected Shareholders [the companies which have not brought about a Change in Management], [] provided that in case of disagreement[], the voting instructions of the Non-Affected Shareholders shall prevail and shall be followed by the Affected Shareholder [with the Change in Management], provided that any absence or abstention of the latter shall allow the Non-Affected Shareholder to vote as attorney-in-fact.17
Thus, were the CVC Fund or the Onshore Fund to remove Opportunity as general partner or manager, respectively, Opportunity and the non-removing fund would have the right to vote that investor's shares in Zain.
Citibank did not see the executed September 12 version until October 2003, after the Onshore Fund removed Opportunity as its manager.18 Defendants contend that Citibank did not object to it for a full year.19 Plaintiffs counter that Citibank was unaware of defendants' intent to use the agreement against it.20 Citibank, moreover, either did not pay close attention because it trusted Dantas or assumed that the removal of Dantas by the Onshore Fund would have left Citibank and Dantas in voting control of the Onshore Fund's Zain stock.
In any case, in late 2004, perhaps as a result of its receipt of information allegedly suggesting that defendants had engaged in misconduct to benefit themselves at Citibank's expense,21 Citibank objected to so much of the Umbrella Agreement as would have deprived it of the right to vote the CVC Fund's Zain shares if it removed Opportunity as general partner. Dantas responded by executing an agreement pursuant to which his affiliates waived all of their rights under paragraphs 2 through 12 of the Umbrella Agreement against the CVC Fund.22
The bottom line is that the Umbrella Agreement purports to disenfranchise the Onshore Fund because it removed Opportunity and to confer its voting rights on Opportunity and the CVC Fund. Dantas goes even further, however. Defendants claim that Opportunity alone has the voting rights,23 which is at least a debatable proposition in light of the language of paragraph 12.24
On March 9, 2005, Citibank exercised its right to remove Opportunity as the general partner of the CVC Fund and appointed Citigroup Venture Capital International Brasil, LLC ("CVC Brasil") as its replacement. But Dantas did not go quietly. He first resisted Opportunity's ouster by refusing to register its removal with appropriate authorities in the Cayman Islands. He then used his control over the entities in the holding company structure to cause Brasil Telecom to seek to auction off assets and take other actions that Citibank regarded as inimical to its interests.
IEII brought this action in March 2005 and obtained a preliminary injunction that compelled defendants to register the change of the general partner of the CVC Fund from Opportunity to CVC Brazil and enjoined certain proposed Brasil Telecom asset sales (the "March 17 Injunction").25
The removal of Opportunity as the general partner of the CVC Fund did not remove Dantas from control of Brasil Telecom as the Dantas loyalists whom he had installed throughout the holding company structure extending downward from Zain to Brasil Telecom remained in place. So Dantas sought to cash in while he remained in control.
As detailed in IEII, on April 28, 2005, Brasil Telecom, Telecom Italia, and Dantas affiliates entered into a series of agreements which, if consummated, would transfer Brasil Telecom's cellular assets to Telecom Italia International N.V. ("Telecom Italia") for low consideration, place Telecom Italia in an influential position over Brasil Telecom, and — not coincidentally — give Opportunity a windfall of hundreds of millions of dollars. Brasil Telecom's board at this time still was dominated by Opportunity and Dantas affiliates.26
Citibank promptly sought relief. This Court...
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