The Federal Attorney General’s Office (AGU) filed on Friday evening a direct action of unconstitutionality challenging the legality of the provision in the law that authorized the privatization of Eletrobras and established a limit of 10% of the voting capital for any shareholder of the company.

According to AGU, the restriction on voting rights creates a disproportionate burden and serious damage to the public interest, in “clear violation of the right to property of the federal entity, the principles of reasonableness and proportionality, and various constitutional mandates.”

In a statement released Monday morning, Eletrobras said it had followed the entire privatization process established by law, which was carried out by the Brazilian Development Bank (BNDES) and was extensively debated and validated by the National Congress and public spending watchdog TCU.

“At the time, four other direct actions for unconstitutionality were filed challenging the same law, in which no injunction was granted that in any way affected the conclusion of the privatization process,” the company said.

In Credit Suisse’s view, the Eletrobras privatization process was well executed both legally and politically, which significantly reduces the risk of a ruling in favor of the government at the Federal Supreme Court (STF). However, the bank says that the increased political noise in the power industry is bad.

“We believe that this clash is not good for the power industry or the market because it increases the perception of political interference in situations that should be addressed by other means,” said analyst Rafael Nagano. He recalled that the extensive discussion at several regulatory levels increases the security of the transaction.

Any decision favorable to the government would be a breach of contract, a practice that Brazil has not done for several decades, which makes it unlikely to go that way, Citi said. “The Brazilian government must remember that it sold some of its voting rights to minority shareholders in the privatization process.”

Analysts André Junqueira and Guilherme Bosso point out that even with the perception that the AGU lawsuit is unlikely to succeed, the issue is likely to remain in the political news for the next few months, creating political noise that will continue to affect the performance of the company’s stock and board.

BTG Pactual said the federal government’s decision to litigate the Eletrobras privatization could set dangerous precedents not only for the power industry but also for other regulated public sectors where private-sector companies operate. “Even with the government’s tactic of appealing directly to the STF, it is still likely to face obstacles.”

Analysts João Pimentel, Gisele Gushiken, and Maria Resende wrote that the privatization of the company has been supported by several democratic bodies and recently defended by Chamber of Deputies Speaker Arthur Lira. They recalled that STF Justice Nunes Marques is expected to analyze the case.

“Once again, it is important to mention that this whole process took place less than a year ago and the characters are mostly the same,” said Genial Investimentos. The asset manager pointed out that this considerably reduces the chances of the federal government’s success and point out that the privatization was uncontroversial.

Analyst Vitor Sousa points out that a decision in favor of the federal government would have unforeseen consequences for other companies, such as Vibra Energia (formerly BR Distribuidora) and plane maker Embraer, in addition to causing considerable legal uncertainty and loss of credibility.

A favorable decision for the federal government would certainly eliminate the possibility of other state-owned companies, such as Sabesp and Copel, designing their privatization processes with the same mechanism as Eletrobras, said Ativa Investimentos.

Ativa’s analyst Ilan Arbetman said that in addition to the legal uncertainty, a decision in favor of the government would have a direct impact on the country’s economic panorama, reducing the federal government’s chances of success. “We understand that the stock will feel this weight until the matter is finally decided.”