Many reasons have led to an increasing dispersion of stock ownership in Brazil, including acquisitions by institutional investors, the growth of capital markets, privatization and family succession. This scenario challenges a corporate legal framework built up on the concentration of corporate control in the hands of the State and families. Due to an increase in the number of corporations with no controlling shareholder, interpretation of Corporate Law presents challenges due to the legal framework's incompleteness to address the agency conflicts present in the context of dispersed ownership, causing a legislative-regulatory malfunction.
The so-called Brazilian “corporations” are those publicly-owned companies where no shareholder or group of shareholders is entitled to the control power. Under Brazilian Law, the controlling shareholder is the one who holds the majority of the voting rights and has the power to elect the majority of the managers on a permanently basis, and, cumulatively, directs the activities and functioning of the corporation's bodies.
Inspired by Anglo-Saxon models, the Brazilian Law of Corporations lays down strategies for the agency relationship between the controlling stockholder (agent) and the minority stockholder (principal) consisting of supervising the exercise of the control power, dealing with the transfer of control and reducing informational asymmetries.
Controlling shareholders can be held liable for abusive acts or omissions causing damage to minority shareholders by virtue of law. In the absence of controlling shareholders, recourse to extended interpretation would be required to hold minority controlling stockholders (i.e., those entitled to the control power having less than half of the voting rights) or the management (managerial control) liable before other shareholders.
Another situation is the election of members to the Board of Directors. As a rule, the controlling shareholders are entitled to elect a full list of candidates for the Board of Directors, with no separate voting for the election of each member. As an exception aimed at guaranteeing the election of directors appointed by the minority shareholders, the legal mechanism of multiple voting (“voto múltiplo”) ascribes to minority stockholders representing at least ten percent (10%) of the voting rights the right to request that the number of votes of each share be multiplied by the number of positions in the Board of Directors. Also, the multiple voting mechanism can be exercised by minority stockholders of publicly-owned corporation representing at least fifteen percent (15%) of the shares with voting rights or ten percent (10%) of the capital stock represented by preferred shares with restricted or no voting rights. Once the multiple voting is exercised, election of the candidates appointed by the minority shareholders takes place separately with no participation of the controlling shareholder. The shareholder or group of shareholders representing the majority of the capital stock shall be entitled to elect the majority of the Board of Directors regardless the number of positions in the Board of Directors, even when the election is subject to the multiple voting mechanism.
The structure and purpose of the multiple voting mechanism seems dysfunctional to the dispersed ownership scenario of corporations, since there is no controlling shareholder and shareholders might have no interest to reach the minimum thresholds for requesting and exercising such rights; difficulties may arise for gathering such minimum thresholds too.
Also, considering the difficulty to elect a full list of candidates for the Board of Directors (unless the list is upheld by a group of stockholders gathered by proxy machineries), an alternative for corporations would be the mechanism of separate voting for the election of all members of the Board, although there is no express legal provision in the absence of controlling shareholders.
Thus, the election of members to the Board of Directors in the context of disperse ownership poses new challenges and creates room for corporations to put in place corporate governance structures with the purpose of mitigating legal uncertainty.
The regulation on takeovers of corporations is also impacted since mandatory public offerings are triggered in the event of transfer of control of publicly-owned corporations to third-parties, conferring upon minority shareholders the right to the totality or part of the control premium. In the absence of poison pills, verifying who is the controlling shareholder in the context of disperse ownership is a matter of proof of whether the requirements for the characterization of the controlling shareholding pursuant to the above are met, leaving less room for other shareholders to claim any premium.
Such a normative gap goes beyond the boundaries of Corporate Law and has other regulatory outcomes. An example is the interpretation of the Attorney General's Office (“Advocacia-Geral da União”) on the acquisition of rural properties, which extends the restrictions for the acquisition of land by foreign entities and foreign individuals to Brazilian companies under control of foreign entities or individuals. For corporations, with no controlling shareholder or controlling group of shareholders, those restrictions can be held simply out of purpose.
When the identification of controlling shareholders or controlling group of shareholders is not possible, it would be up for the legislation/regulation to offer additional safeguards with the purpose of protecting stockholders against managerial opportunistic behavior. For that reason, the adoption of adequate corporate governance mechanisms, including the election of independent directors, can serve as mechanisms to protect stockholders against undue interference by groups of shareholders and potential informational asymmetries, as well as work as a shelter against conflicts of interest that may arise between managers and the corporation.
Fostering a more favorable environment for stockholder activism and corporate enforcement is also key. Legislation requires a minimum share ownership for legal measures against managers and controlling shareholders and mass corporate litigation (class actions) is not a reality in Brazil unlike other jurisdictions, such as the US. A scenario where the benefits outnumbers the costs is fundamental to create incentives for participating in corporate decisions and overseeing the management. Even the Securities and Exchange Commission (“Comissão de Valores Mobiliários”), reinforced with more personnel, public budget and more legal authority, can play a more effective role in dealing with other agency relationships other than the controlling/minority.
Finally, the definition and assessment of the corporate purpose is an unsolved question. Under Brazilian Corporate Law, the controlling shareholder must also ensure that the corporation fulfills its social purpose (“função social”), with duties and responsibilities towards other stockholders, workers and the community in which it is settled. In the absence of a controlling shareholder, it is therefore up for corporations to adopt the best corporate governance and ESG (Environmental, Social and Governance) practices to reduce legal uncertainty and fulfill their social purpose with respect to the interests of all stakeholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
