Step-In Rights Mechanisms in Project Finance Transactions and Lenders’ Liabilities – The English and Brazilian Legal Approaches (2024)

FGV Direito SP Research Paper Series n. 160

See all articles by Carla Milani do Prado Rossi

Carla Milani do Prado Rossi

São Paulo Law School of Fundação Getulio Vargas FGV DIREITO SP; King’s College London, Dickson Poon School of Law

Abstract

Step-in rights, in the context of a project finance, are contractual mechanisms through which lenders, upon certain events pre-agreed, may intervene in a project company that they are financing to perform certain actions, to either cure a specific breach or recover the project. Lenders’ step-in can be performed in several manners, including, without limitation, by taking ownership of company’s shares or control of company’s governance bodies, or novation of the project’s contracts. Measures taken by lenders while exercising their step-in rights are likely to affect not only the project company but also third parties involved in the project, as users and company’s employees. Assuming that a step-in occurs, one question that needs to be asked is whether lenders are liable for events occurred before or during the step-in period. Per the English Law, with some exceptions, a clause that exempt a party from liabilities may be effective and an English court may enforce it based on to the principle of freedom of contract. On the other hand, under civil law countries, exemption of liabilities is a sensible matter and a court will unlikely enforce it if verify a causal link between the party whose liabilities was limited and the relevant damage. Due to the fact that lenders’ step-in and liabilities thereof are topics little explored by academics and legislators, the study in reference provides an analysis on how the English Law regulates those, with focus on what liabilities are susceptive of exemption and on what basis and whether lenders could be deemed liable as shadow directors. To give some parameter of comparison, approaches of other jurisdictions are brought to discussion. Special attention is being given to the Brazilian case, in particular due to the Brazilian Law 13.097/2015 that modified the articles on step-in rights in the Brazilian concession and public-private partnerships laws. The new wording of those articles provide that lenders are exempted from liabilities if their step-in rights are performed exclusively within the corporate governance structure of a project company (e.g., appointing members to the board or by veto rights). Controversially, if lenders take ownership of shares or in case of project contracts novation, they would be liable. This position contradicts the theory of the liability of the shadow directors and the principle of the separation of financial ownership and control. Additionally, the recent Brazilian law presents relevant gaps on how lenders’ step-in and related exemptions would be implemented and legally enforced in practice.