Brazil: Amendments to the Regulations for Differentiated Corporate Governance Levels at the Brazilian Exchange

On September 9, 2010 the Brazilian Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A – "Bolsa de Valores, Mercadorias e Futuros" – BVMF) announced alterations to the listing rules for companies committed to good corporate governance practices1 and admitted in the New Market ("Novo Mercado") and Levels 1 and 2 segments.

According to the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa - IBGC), corporate governance is a system by which companies are directed and monitored, concerning Shareholders, the Board, Directors, Independent Audit and Fiscal Council. Good practices of corporate governance aim to increase the value of the company, facilitate its access to capital and contribute to its sustainability. The admission to the Novo Mercado2 implies the compliance with good corporate governance practices, which are more rigid than those required by the current legislation in Brazil and by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM).

Ten years after BMVF first established this special listing segments a revision process was advisable due to a number of factors, including development and growth of both the equities market and the issuers, the advent of capital dilution, the need for improvement of corporate governance practices whose vulnerabilities were unveiled by the global financial crisis, and because of the improved regulatory environment prevailing in the Brazilian capital markets, of the process of convergence to IFRS started with the enactment of Law No. 11,638, of December 28, 2007, and of the heightened transparency requirements conveyed under CVM Instruction No. 480, of December 7, 2009. This revision aims to sustain the value of BMVF's listing segments, and therefore their differential and attractiveness for investors and issuers, in addition to preserving the value of the Novo Mercado segment as a national and international benchmark.

The following proposals have been approved3:

  1. Vote limitation (for Novo Mercado and Level 2). At the end to the lower limit of 5% of share capital. This means that companies will not be able to include provisions in their bylaws that limit the number of votes for shareholders with less than 5% of the share capital, except in the case of privatization (golden shares), of limits required by law or of mandatory regulations that are applicable in any particular industry.
  2. Overturning the establishment of a special quorum (for the Novo Mercado and Level 2).
  3. Overturning the clause that prevents the exercise of a favorable vote or which places the onus on shareholders, known as "eternity clause" (for the Novo Mercado and Level 2).
  4. Overturning the establishment of an obligatory rights plan when a determined shareholding is reached, which refers to the so-called "poison pills" (for the Novo Mercado).
  5. Overturning the accumulation of positions of Chairman of the Board of Directors and Chief Executive Officer - CEO (for the Novo Mercado and Levels 1 and 2).
  6. Obligation on the part of the Board of Directors to make a formal announcement within 15 days from the publication of a takeover bid (for the Novo Mercado and Level 2). This refers to the disclosure of the terms of any takeover bid, considering the interests of all shareholders.
  7. Securities trading policy (for the Novo Mercado and Levels 1 and 2). This means that companies should announce their securities trading policy.
  8. Code of conduct (for the Novo Mercado and Levels 1 and 2). According to this proposal, companies should draw up and announce a code of conduct.

Regardless of the approval or not of certain items BMVF considered important, the revision process resulted in a fully-participative and transparent debate between companies, investors and a range of market agents. The result reflects the consensus possible between firms regardless of their specifics4. It is foreseen that the rule changes will come into effect by the end of 2010, after the approval by the BMVF Board of Directors and by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM). Only after the approval by CVM, the companies will be notified of the final content of the regulations and of the deadline for adapting to the new rules.


1. In accordance with regulations, changes, which were decided by block vote, can only be implemented if there is not a contrary vote of over a third of the companies listed in the segment. This translates as up to 35 in the case of the Novo Mercado, an 11 maximum for Level 1 and up to six for Level 2. Anything over these numbers and the action is considered reproved.

2. The Novo Mercado is a listing segment designed for shares issued by companies that voluntarily undertake to abide by corporate governance practices and transparency requirements in additional to those already requested by the Brazilian legislation and 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.

3. It should be noted that three important proposals of BMVF have not been approved:

  • 1. Composition of the Board of Directors. This would result in the increase from 20% to 30% of the number of independent Board members (proposed for the Novo Mercado and Level 2) and the inclusion of a minimum of five members of whom at least 20% must be independent Board members (proposed for Level 1).

    2. Audit Committee (proposed for the Novo Mercado and Levels 1 and 2). This would result in the requirement for an Audit Committee comprised of a minimum of three members elected by the Board of Directors, of whom at least one must be an independent Board member, with a three-year deadline for forming the body.

  • 3. Takeover bid through substantial acquisition of shares (proposed for the Novo Mercado). This would be applicable in the hypothesis of a shareholder or a group of shareholders hitting 30% of the target company. The price established for the takeover bid would be the highest paid by the acquirers in the past 12 months. In the case of approval in a restricted hearing of a takeover bid following a substantial acquisition of shares, the companies listed in the Novo Mercado up to the date of the changed regulation would be able to maintain the shareholder protection clauses (poison pills) in the company´s bylaws.

4. BMVF received several suggestions about the matter since 2006, when the last reform was made. In 2008, the suggestions were systematized and passed along to the Novo Mercado Advisory Committee (CCNN), created in October 2008 and composed of 21 external members, including investors, companies, lawyers, investment banks, associations and others. From November 2008 to January 2009 subgroups were created to discuss specific themes. In June 2009,  BMVF held 16 forums with 169 representatives of companies listed in special segments. In September 2009, the New Market Challenges seminars were held in Rio de Janeiro and São Paulo, bringing together 27 panelists and with the participation of over 700 people in a broad debate open to the public. After several companies had their say, regulation minutes were drawn up and submitted to market experts and, after assessment by the Board of Directors, to listed companies in seminars held throughout May 2010.

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.

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Walter Stuber
Adriana Maria Gödel Stuber
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