By Ana Mano
SAO PAULO (Reuters) - Brazilian federal prosecutors are asking a judge to unwind a 2017 deal handing control of pulp and paper company Eldorado from Brazilian firm J&F to Paper Excellence Group, citing restrictions on foreign land ownership.
The prosecutors mentioned "sovereignty" and "national security" concerns as grounds to block the $3 billion transaction, according to a court filing signed on Monday and seen by Reuters.
The move adds another twist to one of Brazil's biggest ongoing corporate litigation sagas, while raising questions about foreign investment in land-intensive economic sectors.
In 2017, J&F Investimentos agreed to sell Eldorado Brasil Celulose to a unit of Paper Excellence at an enterprise value of 15 billion reais ($3.0 billion). But seller and buyer soon after accused each other of breaching the terms of the deal, which was not fully implemented.
Brazil imposed limitations on foreign land ownership in the early 1970s, but spotty public records have left uncertainty about how consistently those restrictions are enforced.
Paper Excellence, which has grown through acquisitions, first in Canada, then later Europe, Latin America and the United States, is owned by Indonesian billionaire Jackson Widjaja.
In December, Brazil's rural land agency Incra issued a recommendation saying the deal would effectively give Paper Excellence control of 14,486 hectares of rural land owned by Eldorado.
In a statement, Paper Excellence said it acquired a pulp mill and "has no interest in buying ... rural land in Brazil or in any other country where it operates."
Eldorado, which also leases land, processes eucalyptus trees planted on 249,000 hectares, according to its website.
Incra said Paper Excellence's Brazilian unit was "equivalent to a foreign company" and therefore obliged to seek congressional approval via the agency before closing the takeover.
On Jan. 2, Eldorado advised shareholders to take the necessary measures to implement Incra's directive, including potentially "cancelling the acquisition." Eldorado did not immediately comment on the prosecutors' motion.
Paper Excellence said Incra's opinion was not legally binding, and a judge has not ruled on the prosecutors' motion. Incra will analyze an appeal from Paper Excellence on Feb. 15.
J&F said it is ready to comply with Incra's recommendation by returning 3.77 billion reais to Paper Excellence in exchange for a 49.41% stake in Eldorado.
The Brazilian senate has approved a bill which would relax restrictions on foreign land ownership, but its chances in the lower house are uncertain.
Senator Iraja Abreu, who authored the bill, told Reuters that current rules constrain billions of dollars of investments. He said the Eldorado dispute was an example of how restrictions on foreigners can hold back major investments.
"We cannot be prejudiced against foreign investments," he said. "If foreigners are willing to respect our sovereignty and laws, why can't they be welcome in the rural sector?"
Nearly 6.5 million hectares (16 million acres) of Brazilian farmland are owned by foreign nationals or companies, according to data from the Agrarian Reform Ministry.
($1 = 4.9602 reais)
(Reporting by Ana Mano; Editing by Brad Haynes and David Ljunggren)