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14404845_sSeptember, 2008.  Russia’s invasion of Georgia commenced and a parallel technology war was reportedly underway, in parallel with conventional warfare, as many of Georgia’s internet and smart servers were under external control, including important network systems.  At the time suspicious fingers pointed to Russia, which was substantially familiar with the affected systems, given that it had developed and provided them to the neighboring country.

The description may or may not be a tale, but surely represents the underlying rationale supporting several defense technology policies of certain emerging economies, including Brazil.  Controlling the full life cycle of strategic defense technology, thus, is not a protectionist measure, but rather a vital need for countries like Brazil, with gigantic boarders presenting enormous geographic challenges and a wide range of tactical natural assets which needs tailored defense solutions.

In a nutshell, before acting tropically, the foreign player willing to enter into the Brazilian D&HLS industry game must successfully confirm its capability to (i) develop a Brazilian industrial component; and (ii) implement offset agreements, mostly those related to real technology transfer.

A player acting in the Defense, Homeland Security industry must realize the abovementioned reality before considering accessing the Brazilian market.  A player´s inability, unwillingness to cope with the described scenario is likely to produce mounting disappointments, mostly those from financial and commercial natures.  In brief, as discussed herein below, SDC your company or hit the road.

The basis for the notions above is not conceptual, but rather statutorily provided by Federal Law no. 12.598, dated March 22, 2012 (the “Strategic Defense Company or SDC Act”), which mostly discusses the concept of a Brazilian component in the D&HLS industry.

According to the SDC Act, an SDC is a legal Brazilian entity accredited with the Ministry of Defense which cumulatively fulfills the following requirements: (a) performs in Brazil one or more of the following activities: research, projects, development, industrialization, repair, preservation, revision, conversion, modernization or maintenance of D&HLS products; (b) establishes in Brazil administrative, industrial headquarters; (c) develops in Brazil scientific or technological knowledge of its own and (d) ensures production continuity in Brazil.

From a corporate perspective, an SDC formed by both foreigners and Brazilians, must ensure that the foreign partner or shareholder cannot exercise, in any given shareholders’ meetings, a votes exceeding two thirds (2/3) of the total votes that can be exercised by the Brazilian shareholders that are present in said shareholder’s meeting.

Under the SDC Act, the Brazilian government may conduct bidding procedure: (a) intended exclusively for the participation of SDCs; and (b) intended exclusively for the purchase or for the contracting of Brazil-produced or developed D&HLSA products or that use national inputs or innovation-intensive assets developed in Brazil.  Most of all, SDCs shall have access to the special taxation and financing systems for programs, projects and actions.

The SDC Act does not create a mandatory requirement for all D&HLS companies to obtain SDC certification, but rather creates a beneficial scenario for companies certified as such. It is possible that a specific tender coordinated by a Brazilian authority invites both SDCs and non-SDCs. However, SDCs are likely to have larger competitive and preferential margins, Vis a Vis a non-SDC.

Our next editorial piece will discuss the Brazilian approach towards military offsets.

Benny Spiewak
Benny Spiewak

Benny Spiewak is founding Partner at the Sao Paulo-based ZCBS law firm. Mr. Spiewak has a Masters in Intellectual Property Law by the George Washington University (Washington, DC) and a certified expert in Technology Transfer Law & Transactions by both the Franklin Pierce Law Center (Concord, NH) and the Getúlio Vargas Foundation (Sao Paulo). He manages both the firm´s Israel desk and Defense, Intellectual Property & Emerging Technology practice, focusing on legal, regulatory and policy challenges affecting R&D driven, highly regulated businesses.