The Brazilian securities regulator (CVM) published this week an important decision of its Board of Commissioners concerning preferred shares issued by Brazilian listed companies.

In the course of the IPO registration process of Azul S.A., a Brazilian airline, the CVM's technical department had refused to register the company. The refusal was motivated by a provision of Azul's by-laws establishing that preferred shares are entitled to a dividend equivalent to 75 times the dividend payable to common shares. Pursuant to the CVM's department that reviewed the application, such provision of the by-laws was not compatible with the Brazilian corporate law because it violated a general principle that economic rights should always be related to the political rights of shareholders.

But the CVM's Board of Commissioners decided otherwise and confirmed that the by-laws of Azul are in accordance with the law.

Although such structure had been adopted before in by-laws of private companies, the CVM decision now means that investors will be able to take advantage of different capital structures to match their particular needs and then move on to an IPO. Along this line of thought, the CVM decision mentioned that such type of capital structure is attractive to companies that are funded by private equity investments, because it enables the alignment of the distinct interests of controlling shareholders and private equity investors.

We believe that this decision will facilitate the structuring of new attractive alternatives for private equity and other investments in the Brazilian market.