Low corporate governance standards have been a traditional concern for investors in Brazil. In recent years, Brazil seems to have woken up to this issue. In an effort to gain the confidence of international and domestic investors, the country has been promoting improved corporate governance practices.

Alongside legal reform and a consolidation of institutions, self-regulatory initiatives have promoted a real improvement in corporate governance practices in Brazil. Such factors have also led to the creation of a more diffuse control of capital in Brazilian companies and the increased participation of active minority investors demanding professional, independent and transparent management bodies.

Guidelines and Corporate Law Reform

Guidelines and Codes

The Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa, or IBGC), a non-profit organization founded in the mid-1990s when Brazil witnessed a number of significant privatizations, has been playing a lead role in introducing and disseminating better corporate governance practices in Brazil.

In addition to its role as a self-regulatory forum for Brazilian privately-held and government-owned corporations, IBGC has issued a Code of Best Practices in Corporate Governance (IBGC Code), which has become a primary reference for corporate governance practices in Brazil. The consultation process related to the drafting of the IBGC Code involved various Brazilian private and governmental agencies. Earlier versions of the IBGC Code centered more on establishing practices to promote the independence and accountability of management and auditing. The latest version of the IBGC Code also addresses specific issues such as ways to protect minority shareholders and promote transparency and wider participation in voting at general meetings. The IBGC Code also looks at the use of so-called “poison pill” defense mechanisms aimed at preventing hostile takeovers.

Recognizing that a high proportion of Brazilian corporations have concentrated capital — i.e., they are controlled and managed by families — IBGC recommends the use of Conselhos de Família (Family Committees) aimed at ensuring that family interests are discussed separately from management meetings and that the interests of the controlling families do not conflict with those of the company.

The Brazilian Securities Commission (Comissão de Valores Mobiliários, or CVM) has gained autonomy as a market regulator under the corporate law reform and has been playing an important role in improving corporate governance standards in the country. CVM has issued a Cartilha de Recomendacões sobre Governança Corporativa, which creates a set of guidelines on corporate governance practices (CVM Guidelines).

In line with the spirit of the corporate law reform, CVM Guidelines and the IBGC Code focus on the protection of shareholders with no voting rights (i.e., holders of ações preferenciais, or preferred shares). CVM Guidelines establish that all shareholders – regardless of the type of shares they hold – should be called to vote on important company decisions, such as those involving: (i) the approval of an asset valuation integrating the capital of the company; (ii) changes to the object of the company; (iii) a reduction of compulsory dividend distributions; and (iv) M&A transactions.

CVM Guidelines and the IBGC Code recommend the use of mediation and arbitration to resolve disputes between shareholders. Such provisions should be added to the company bylaws or agreed by separate contract.

Brazilian state-owned companies have also sought to improve corporate governance standards. In this respect, the Council for the Protection of State Capital (Conselho de Defesa dos Capitais do Estado, or CODEC) has issued a manual on corporate governance principles for state-owned companies. Brazilian state-owned/controlled companies have also been adhering voluntarily to higher corporate governance standards by opting to list on segments of the Brazilian capital markets that require higher corporate governance standards, such as Novo Mercado, Nível 1 and Nível 2, which are discussed below.

Corporate Law Reform

Over the years important modifications have been introduced to corporate law in Brazil aimed at offering greater protection to minority shareholders, increasing transparency in the management of corporations and allowing CVM to operate as a market regulator. The clear intention has been to promote a greater participation by smaller investors and institutional investors in the Brazilian securities market.

One of the main targets of corporate law reform has been those Brazilian companies where the capital is highly concentrated (i.e., companies controlled and managed by families and thus lacking independent management boards). Previous Brazilian corporate law allowed corporations to issue up to two-thirds of its shares with no voting rights. Current legislation, however, prohibits newly incorporated companies from issuing more than 50% of shares without voting rights. Companies established before October 31, 2001 and with provisions in their bylaws enabling them to issue up to two-thirds of non-voting preferred shares are entitled to keep such proportions in place. Nonetheless, CVM Guidelines recommend that companies – irrespective of the date of their establishment and the provisions of their bylaws – should not issue preferred shares representing more than 50% of the total capital of the company.

If companies intend to trade their preferred shares (either with no voting rights or with restricted voting rights) in the securities market, corporate law requires that such shares must confer their holders with a minimum of one of the following benefits: (i) a payment of dividends equal to a minimum of 25% of average profits at year-end; (ii) a payment of dividends at least 10% higher than the dividends paid to common shares (which confer voting rights to their holders); or (iii) the right to “tag-along” the preferred shares in a public offer for disposal of control and receive dividends at least equal to the dividends paid for common shares.

Current Brazilian corporate law establishes that holders of common shares which are not part of the controlling block have the right to tag these shares along for disposal of control and receive at least 80% of the price paid for controlling shares. Both CVM Guidelines and the IBGC Code recommend that this right be extended to minority holders of all types of shares, including preferred shares.

Special Listings

The creation by BM&FBOVESPA (the São Paulo Stock Exchange) of new special listing levels for companies with high corporate governance standards (Nível 1, Nível 2, Novo Mercado and BOVESPA Mais) is arguably the measure that has had the greatest impact in terms of enhancing corporate governance standards in Brazil. It has also been central in improving investor confidence and promoting the growth of capital markets in Brazil.

Each special listing segment has its own listing requirements. A company intending to list shares in one of these segments must enter into an agreement with BM&FBOVESPA and adhere voluntarily to corporate governance standards that are higher than those required under current Brazilian corporate law.

Novo Mercado has become the most popular special listing segment in Brazil, chosen by the vast majority of issuers that went public in recent years. Companies seeking new listings on Nível 1 and Nível 2 tend to be those subjected to specific regulation and, particularly, certain regulatory provisions regarding their capital structure with preferred non-voting shares. Examples of such companies include financial institutions and airlines.

The Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais, or ANBIMA), states in its code of rules and best practices for securities public offerings and tender offers that ANBIMA members must only participate in public offerings of equity securities if the issuer is listed on the Novo Mercado or another special listing segment of BM&FBOVESPA.

Novo Mercado Listings

The main requirements include:

  • 100% of the capital stock must be divided into voting shares (i.e. common shares, as opposed to preferred shares with no voting rights);
  • a minimum of 25% of the shares of the capital stock must float in the market;
  • tag-along rights offering the same price paid per share for the controlling block, where a sale of corporate control occurs;
  • a minimum of 20% of the board members must be independent from the company and from the controlling shareholders (the definition of “independence” is included in the Novo Mercado Listing Requirements);
  • mandatory tender offers in the case of a delisting from Novo Mercado, a delisting from BM&FBOVESPA and a deregistration from CVM, for fair value, as determined by an independent, specialist firm with certain qualifications and experience, appointed by the board and approved by the shareholders; and
  • any disputes arising between shareholders and the company must be resolved by arbitration conducted by the Câmara de Arbitragem do Mercado.

Nível 2 Listings

The main requirements applicable to listing under Nível 2 include:

  • capital stock can be divided into common and preferred shares;
  • preferred shares are entitled to certain voting and tag-along rights (despite the fact that current corporate law only entitles common shares to tag-along rights). Voting rights must be granted in the bylaws of the company in the following circumstances:
  1. when choosing a firm to issue a valuation report for the shares in connection with any capital contribution or with the tender offer for delisting the shares from Nível 2;
  2. on any transaction with related parties, when such transaction requires a shareholders’ vote;
  3. on any proposed change of the voting rights of preferred shares; and
  4. on the delisting of the company from Nível 2;
  • a minimum of 25% of the shares of the capital stock must float in the market;
  • tag-along rights offering the same price paid per share for the controlling block, where a sale of corporate control occurs;
  • a minimum of 20% of the board members must be independent from the company and from the controlling shareholders (the definition of “independence” is included in the Nivel 2 Listing Requirements);
  • mandatory tender offers in the case of a delisting from Nível 2, a delisting from BM&FBOVESPA and a deregistration from CVM, for fair value, as determined by an independent, specialist firm with certain qualifications and experience, appointed by the board and approved by the shareholders; and
  • any disputes arising between shareholders and the company must be resolved by arbitration conducted by the Câmara de Arbitragem do Mercado.

Nível 1 Listings

Nível 1 requirements include:

  • capital stock can be divided into common and preferred shares;
  • a minimum of 25% of the shares of the capital stock must float in the market;
  • annual financial statements have to be produced in accordance with international standards (i.e., U.S. GAAP or IFRS);
  • mandatory tender offers in the case of a delisting from Nível 1, a delisting from BM&FBOVESPA and a deregistration from CVM, for fair value, as determined by an independent, specialist firm with certain qualifications and experience, appointed by the board and approved by the shareholders; and
  • any disputes arising between shareholders and the company must be resolved by arbitration conducted by the Câmara de Arbitragem do Mercado.

BOVESPA Mais Listings

The BOVESPA Mais is aimed at “SMEs” (small and medium-sized enterprises) seeking a less regulated market. Requirements for such listings include:

  • capital stock must be divided into common shares. Companies that already had preferred shares before listing on BOVESPA Mais may keep them but cannot issue additional preferred shares after the listing;
  • a minimum of 25% of the shares of the capital stock must float in the market, with a grace period of seven years should the company not comply with this requirement at the time of the listing;
  • mandatory tender offers in the case of a delisting from BOVESPA Mais, a delisting from BM&FBOVESPA and a deregistration from CVM, for fair value, as determined by an independent, specialist firm with certain
  • qualifications and experience, appointed by the board and approved by the shareholders; and
  • any disputes arising between shareholders and the company must be resolved by arbitration conducted by the Câmara de Arbitragem do Mercado.

This type of special listing has not been widely used, which suggests that Brazilian SMEs are still not familiar with the use of funding from capital markets and that many Brazilian SMEs still have difficulties in complying with regulatory requirements.