Should I stay or should I go now?
If I go there will be trouble
And if I stay it will be double.
The Venezuelan crisis has been reported on incessantly by the international media;depicting Venezuela as the country with the largest proven hydrocarbons reserves, which is, nevertheless, mired in an economic depression, has almost become a media cliché.
Nevertheless, there are still a number of large multinational companies inside and out of the oil and gas sector that have managed to survive. There are also multinationals, and even local business groups, that have exited Venezuela with little or no harm to their people, brands and reputations.
A corporate crisis in Venezuela may spring from several homegrown risks,many of which may be triggered by the decision to exit the country. It is impossible to predict where and how a corporate crisis will erupt in connection with deploying an exit strategy. We will try to highlight relevant risk exposures to give the reader ideas on how to mitigate them.
The management group that will take the decision on whether to exit the country (or downsize its presence) should ideally be outside the country and should involve international as well as local counsel. The confidential nature of the decision is self-evident and its importance is compounded by the reality that any leaks concerning a decision of this nature have the potential to place people involved in harm’s way.
Over the last six years, several multinationals have deconsolidated their Venezuelan operations to isolate their adverse financial and accounting effects. Other multinationals have taken a step further and left the country, permanently halted operationsor transferred their Venezuelan businesses to third parties with a different risk appetite and tolerance, in many cases at distressed prices and, in some cases, with contractual arrangements, such as repurchase options, which allow the seller to re-enter the Venezuelan marketplace.
With winds of change being felt across Venezuela, these arrangements are becoming more even more relevant.
Several multinationals operating in Venezuela have successfully managed to transfer their operations in Venezuela to local and even international investors who have a greater tolerance for risk. There are even local private equity funds that are actively looking for opportunities and have shown interest in these types of divestitures, especially because they tend to be completed in exchange for little or no compensation.
One critical task that must be dealt with from the outset of the transaction is to conduct a thorough due diligence on the potential acquirer to confirm that it is not under any international or US sanctions, or otherwise raises reputational issues.
Typically, the transferor should negotiate for:
The main sticking points that typically arise concerning negotiating are:
This alternative, if achieved, will be the most effective and seamless way to exit Venezuela.
If the Venezuelan company operates in a regulated sector for which a governmental licence is required, such as a bank, insurance company or telecoms provider (in addition, of course, to the oil and gas sectors) the transferor should anticipate that the political and even diplomatic nuances and implications of the acquisition will very likely come into play and may delay completion of the transaction.
Currently, formal insolvency proceedings are not commonly used by businesses in Venezuela that are looking to liquidate, restructure or downsize their operations.
This is because a formal bankruptcy process must be undertaken with the oversight of a commercial court in Venezuela, and the bankruptcy and moratorium provisions of the Venezuelan Code of Commerce are outdated.
In practice, downsizing or restructuring operations in Venezuela should preferably be carried out outside of the courts. This means that management will likely have to engage in negotiations with its customers, suppliers, trade and financial creditors and partners on a piecemeal basis.
This is probably the area that creates the most risks, mainly because the government has the legal power to ‘temporarily intervene’ in companies to ‘protect employment’.A temporary intervention can very easily mutate into a de facto permanent takeover.
In addition, it is practically impossible to terminate employees in Venezuela, even for cause; therefore, the job cuts that are necessary to wind down a business in Venezuela have to be achieved by negotiating enhanced termination packages with the employeesto incentivise their resignation. Union leaders, health and safety delegates and employees on maternity or sick leave are under special protection and may require tailor-made termination packages in exchange for their resignations. Job cuts are usually implemented gradually over several tranches during several months (or even up to one or more years) to ensure a low profile. Failure to reach an agreement may lead to a protracted labour conflict that may hamper the company’s ability to wind down operations.
Massive job cuts must be planned in advance. Based on our experience, managers outside Venezuela do not always have ready access to the information regarding labour liabilities and they are understandably reluctant to involve local management in the earlier stages of the process. Without accurate information on labour contracts, it is daunting to quantify the total cost of labour terminations and how to fund them.
Depending on the industry, if there is a suspension or reduction of a ‘critical activity’, consumer-protection law will require the company to make available spare parts and repair facilities for a ‘reasonable’ time period.
The risk of criminal prosecution should not be ruled out in the context of an exit strategy. In fact, there are several purely business-driven measures that are normally taken by companies in the midst of a crisis that may qualify as criminal offences under the Venezuelan Fair Prices Law, which formulates criminal offences broadly, and grants enforcement powers to prosecutors, the police and the military.
For example, the temporary closure of a manufacturing facility for low levels or lack of raw materials has been viewed by the authorities as a ‘boycott’,and as such may be subject to criminal prosecution and punishable by imprisonment of up to 12 years. Other actions that may seem reasonable, especially in a hyperinflationary environment, may be construed as ‘hoarding’ (holding on to product inventories) or ‘speculative transactions’ (adjusting prices).
Therefore, management and expert counsel should walk hand-in-hand to design and implement commercial and asset protection and preservation tactics to minimise the risk of criminal prosecution.
Under extreme circumstances, it is sometimes preferable to err on the side of caution. Managers may be continually faced with having to choose not to take a commercially reasonable action if said action could expose management or key employees to criminal prosecution.
An integral part of any exit strategy is its contingency plan, which should be used as a flexible road map if crisis ensues. The following preparatory measures should be carefully considered to craft a contingency plan:
It is impossible to predict when and how a crisis will unfold in the context of an exit strategy. But the risk exposures briefly described above are almost a certainty. Management and counsel should keep a flexible approach and an open mind during the process. Key players in these processes may react in ways that are unreasonable and, sometimes, even irrational.
It is important for the company to have a well-defined set of principles and priorities, since these will guide management on the tough choices they will be faced with during the process. Events that were unforeseeable from the outset but later seem obvious after the fact may cloud a decision-maker’s judgement. Having a clear set of principles and objectives will help dissipate the fog.
Our experience has shown us that companies that are keen on protecting the safety of their people have a greater chance of exiting these processes with little or no harm to their people, brand and reputation.
 Fulvio Italiani and Carlos Omaña are partners at D’Empaire.
 ‘Venezuela’s New Currency Sows Confusion and Shutters Stores’, https://www.nytimes.com/2018/08/21/world/americas/venezuela-currency-economy.html.
 ‘Venezuela’s Oil Meltdown is Getting Worse’, https://www.wsj.com/articles/venezuelas-oil-meltdown-is-getting-worse-1526220000.
 Foreign exchange restrictions, price controls and very strict labour regulations have turned the Venezuelan marketplace into a very challenging one.
 Several subsidiaries of large multinationals have left Venezuela by deploying a shut-down strategy, See ‘Venezuela Takes Over Plants Left by U.S Firm Clorox’, https://www.reuters.com/article/us-clorox-venezuela/venezuela-takes-over-plants-left-by-u-s-firm-clorox-idUSKCN0HL2FW20140927; and ‘Is It the End? Venezuela Takes Over Kimberly Clark Operations’, https://www.barrons.com/articles/is-it-the-end-venezuela-seizes-kimberly-clark-operations-1468342351. A ‘shut down’, which fundamentally involves shutting operations in Venezuela over a compressed time frame, and funding employee bank accounts with any unpaid salaries and other labour benefits, such as severance and accrued vacation bonuses, will very likely provoke a very strong reaction from the government. Shut-down mechanics are outside the scope of this chapter and are very company-specific.
 Organic Labour Law, Article 145. Pursuant to this law, the Ministry of Labour has the power to designate an intervention committee, albeit including members to be designated by the shareholder, and delegate this committee with the power to manage the company.
 Known as cajitas felices.
 Fair Prices Law, Article 88.
 See footnote 5.