The dynamic rate of developments in technology and the online and e-commerce sectors demands continually innovative thinking from GCs in the sector. Flávio Franco, executive legal director at online retailer Netshoes, shares his strategies for inking the types of unprecedented deals that saw him crowned Dealmaker of the Year during this year’s LACCA Awards.
In April this year, São-Paulo headquartered e-commerce sporting goods company Netshoes made history by becoming the first Brazilian company to launch an IPO on the New York Stock Exchange (NYSE). Netshoes raised almost US$150 million through its sale of eight million shares, directing funds into both its own expansion and into building the capacity of its sister site, Zattini, which also sells fitness clothing and equipment. The man pulling the legal strings to deliver the IPO celebrated its closure with an early night and a plan in place to support the company through the necessary adjustments it had to make as a publicly listed company. Six months into Netshoes’s life on the open market, LACCA hears Flávio Franco’s reflections on why his in-house insight has been so crucial to his company’s trend-setting tendencies and business success.
A history of deliverance
Franco became Netshoes’s first ever legal director in 2012 at a pivotal moment for the company’s plans to increase its presence in the region. Since its founding in 2000, the company had engaged in a small number of agreements with domestic partners including with Brazil’s National Basketball Association (NBA) and the women’s volleyball team (Vôlei Futuro), but it was keen to explore other ways to increase its online presence and customer base. As part of this plan, Franco was instrumental in helping the company negotiate a deal to sponsor a Brazilian mountain biking championship in 2013, shortly after his appointment. Franco also worked with the company to begin hosting online stores for the Brazilian Soccer Federation and the US’s National Football League.
While sponsorship agreements are fairly routine procedures for companies and their in-house counsel, it was not until 2014 that Franco entered truly innovative legal territory and helped Netshoes break the mould with a brand new type of deal. Netshoes and four of Brazil’s largest mobile phone operators teamed up to allow customers to access the Netshoes website and app without using up any data allowance included in their mobile internet packages. As the first company to strike such a deal in Brazil, Netshoes’s legal team was entering unchartered territory, but Franco knew that in-depth research would always be a valuable part of turning plans into projects. “There’s a lot less back and forth when you’ve already thought of the questions other people might come up with,” he says, explaining the importance of creating a range of contingency plans and pre-emptive solutions to potential challenges. “Our CEO [Marcio Kumrian], always wants to try different things, so often this means us working in situations where there are no previous cases or examples to follow. The answers won’t be in books or in courthouse documents, so you have to decide which way to go and be brave.”
Motivated by the desire to carry out ground-breaking, innovative deals, Franco and his senior colleagues at Netshoes concluded that working with the mobile carriers would be “a very clear win-win partnership,” and pressed ahead with convincing the other mobile operators . “Communications and e-commerce are both industries that are moving very fast and that are increasingly dependent on mobile phone usage, we believe it’s important to be the first ones on the scene with any new development,” surmises Franco. Initially the companies agreed to a short-term partnership, but the mutual fruits of the deal have led it to be renewed year on year. Not only have the phone companies been able to attract new users, but most importantly Netshoes has also seen a significant uptick in online traffic and sales.
The success of Netshoes’s partnership with mobile operators has inspired many similar enterprises to follow suit. “A lot of other companies are reaching similar agreements now, on the one side it’s increased our competition but on the other hand, it’s great to realise that your company is a leader that other people will try and copy,” he reflects.
The big deal
Franco’s experience in sealing landmark deals meant he was confident of his ability to deliver a deal that would radically alter Netshoes’s corporate structure and secure its image as an innovative player in the e-commerce industry in Latin America. Netshoes has long counted on a very strong base of shareholders but it had always been a future plan to eventually pursue an initial public offering (IPO). While Netshoes executives were prepared to delay the IPO until a good economic period arose to ensure maximum share prices, Franco was charged with preparing the company’s legal affairs so that it could take immediate advantage of positive market movements and strike while the iron was hot.
Knowing that the IPO would demand almost 100% of his time in the run-up to the float, Franco restructured the legal department’s workflow to ensure the team could fully address the company’s day-to-day legal affairs without his support. “IPOs are always a huge undertaking for in house counsel to work on. It’s a high pressure situation and you have to get every member of staff working together to meet them same deadline,” says Franco. For Franco, however, the biggest challenge was preparing to list on the New York Stock Exchange (NYSE) instead of locally in Brazil, a decision that was made in order to attract US investors that were interested and experienced in the e-commerce market. “There are different ruling laws, ways of doing things, and of course the language barrier,” he points out. Selecting the right external counsel to support his efforts was therefore key to the IPO’s success, and Franco took his time to assess the proficiencies of each law firm in a number of areas, including their comprehension of the Latin American e-commerce market, experience delivering IPOs on the NYSE, capital markets expertise and checking that they had partners with native-level Portuguese fluency. After months of preparation, Netshoes sold eight million shares for a total value of US$148.5 million; etching the company’s place in history as the first Brazilian company to make its debut on the NYSE with the help of Franco and his external counsel.
While the firms he worked with on the IPO, including partners at Simpson Thacher & Bartlett LLP and Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, provided significant technical expertise which was crucial to the deal, Franco stresses that the deal’s success would have been impossible without his support from the inside. “External counsel can’t do anything without good information and proper documentation, so preparing that was a key task,” he argues. In addition to gathering all the company information Netshoes needed for due diligence purposes relating to the IPO, Franco also had to ensure the company would be compliant with the more stringent regulations and reporting duties it would be subject to as a publicly listed enterprise. To do so, he revised and updated company guidelines and policies on anti-corruption and whistleblowing, and introduced new rules on topics such as insider trading and anti-money laundering. Franco also provided intense training for staff across the company to ensure the new policies were ingrained within the company’s corporate culture. “There are lots of new [reporting and compliance] duties you take on after ringing the bell, so we made sure that other parts of the company were well aware of what being publicly listed would mean,” he adds.
Almost six months since its April IPO, Franco says he is delighted with the growth of the company so far. “Zattini has been growing a lot, and we’re confident of that this will continue going forwards,” he says, adding that Netshoes has also made promising developments in setting up a “marketplace platform” to enable peer-to-peer selling, similar to eBay or MercadoLibre.com.
Secrets to success
While heavily crediting the support of each and every member of Netshoes’s five-strong in-house team, Franco considers his dealmaker of the year accolade as an important recognition for all the hard work he has put in to foment his company’s growth. What gives him the most amount of professional satisfaction, however, has been fielding enquiries from people outside of Netshoes, who are keen to replicate the company’s success. “We’ve had major players call us from other sectors or from abroad asking for advice,” he says. “You obviously have to respect the confidential aspects of certain aspects of things but it’s important to share things with other GCs and corporate counsel because it gives you an opportunity to learn from them too.”
One of the most important tips Franco has for any GC working on similar deals is to ensure an extremely thorough risk analysis is conducted before anything else. “You have to weigh up both the risks and opportunities involved in the new business idea, and consider all the possible scenarios you could face, then you need to be able to explain this clearly to company executives,” he says. “Invest your time and energy into learning so you can give better advice to the business.”
Once the initial risk analysis is complete, however, Franco believes communication becomes the key part of any successful deal, adding that his company’s fruitful IPO was heavily dependent on him adequately conveying each department’s deadlines and responsibilities heading into it. Maintaining regular contact with external counsel and stakeholders as well as internal legal staff and other department heads is important to ensure proper coordination, but also to address issues as soon as they arise. “It’s not just internal communication you have to think about, as an in-house counsel there are a lot of things you have to do with people outside of the company, including counterparties to deals, suppliers, customers, investors and people from the government,” he says. “For any legal team to be really effective it has to have fully accessible communications channels that attend to everyone from the bottom up.”
While having clearly established and open communication channels is key, Franco also believes that another crucial element of being a successful dealmaker is earning trust. “Commit to being a better listener, get out from behind your desk, walk down the corridor and invest time in interacting with the other areas of the business and earn a position as a business partner,” he advises. Building trust requires some work, but Franco says it is well worth the effort. “Putting in that time to continually let people know that you share the company goals and corporate values makes them open up when you’re handling their affairs,” he say. “Generally, being a trusted partner to the business means you’ll always be involved in decisions and never face surprises.”