The Novo Mercado1 is a listing segment created by the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A – Bolsa de Valores, Mercadorias e Futuros – BVMF) and designed for shares issued by companies that voluntarily undertake to abide by good corporate governance practices and transparency which are more rigid than those already required by the Brazilian legislation and by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM).
It is based on the premise that stock valuation and liquidity are positively impacted and assured by shareholder's rights and by the quality of companies´ information. These rules, consolidated in the Listing Regulation, increase shareholder's rights and enhance the quality of information commonly disclosed by companies.
Additionally, the Market Arbitration Panel for conflict resolution between investors and companies offers a safer, faster and specialized alternative to investors.
The main innovation of the Novo Mercado concerns the capital stock, which must be solely represented by common shares (voting shares).
In brief, publicly-held companies listed on the Novo Mercado have the following additional obligations: (i) public share offerings have to use mechanisms to favor capital dispersion and broader retail access; (ii) maintenance of a minimum free float, equivalent to 25% of the capital; (iii) same conditions provided to majority shareholders in the disposal of the company's control will have to be extended to all shareholders (tag along); (iv) establishment of a two-year unified mandate for the entire Board of Directors, which must have five members at least, of which at least 20% shall be independent members; (v) disclosure of annual balance sheet, according to standards of the US GAAP or IFRS; (vi) improvements in quarterly reports, such as the requirement of consolidated financial statements and special audit revision; (vii) obligation to hold a tender offer by the economic value criteria, in case of delisting or cancellation of registration as publicly-held company; (vii) compliance with disclosure rules in trades involving securities issued by the company in the name of controlling shareholders; (viii) some of these obligations must be approved at the General Shareholders Meetings and included in the company´s bylaws.
Now the Novo Mercado has parameters for admission that go beyond the BVMF´s regulation. Since the end of 2011, BVMF applies a standard analysis to determine whether the company is suitable or not for this differentiated corporate governance segment. It is no longer enough to simply announce that the company wants to join the Novo Mercado.
Before the adoption of these new parameters, should the company had its bylaws adapted to the BVMF´s regulation, the admission to the Novo Mercado would be almost guaranteed. Now there is a qualitative analysis of the companies that intend to join this segment of the market. As the capital market is of public interest and needs to be preserved and we are dealing with a consolidated environment, BVMF decided to impose these criteria to allow the entry of new companies in the Novo Mercado.
In order to be admitted to the Novo Mercado the new companies must attend the following parameters:
- the capital available for circulation in the market should be of at least R$ 150 million. Therefore, as the regulation of the Novo Mercado requires a minimum free float of 25% of the capital, the company must have a minimum market value of R$ 600 million. Otherwise, the company will not be approved; (ii) the price of each share shall be quoted between R$ 10 (floor) and R$ 50 (ceiling). BVMF concluded that small price fluctuations represent high percentage changes. Shares with very high value (above R$ 50) affect the liquidity and when the value is too low (below R$ 10), then the volatility is increased and both situations are harmful to the investors and should be avoided;
- the company's history in delivering the mandatory documents. If the company is in default and has not submitted these documents on a timely basis, it will not be approved;
- the good quality of the documents delivered by the company. Obviously, if the quality is poor, the company will not be approved;
- the opinion of the independent auditors about the company´s financial statements must be clean (without qualifications). Qualified auditors´ opinions are not accepted.
* This article contains the notes prepared by the author for the panel White Wall Street? – The Impact of Technology and Globalization on International Financial Markets held on Friday, April 20, 2012, 4:30 pm – 6:00 pm, at the Grand Hyatt New York Hotel, at the ABA Section of International Law Spring Meeting 2012 in New York City.
1. Created in 2000, the Novo Mercado became the centre of the process of revitalization of the Brazilian capital market as from 2004 and, along with Levels 1 and 2 segments, BVMF attracted nearly 140 new companies over the past 8 years that together with the already existing listed publicly-held corporations totaled approximately R$ 370 billion in stock offerings.
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