Brazilian issuers, the São Paulo stock exchange, the Brazilian Securities and Exchange Commission (“CVM”) and Amec—the Brazilian Association of Capital Market Investors—have had a very busy year. To begin with, the long-awaited Instruction 561 was finally implemented in time for the 2017 proxy season, albeit with uneven results (for further analysis of the effect of Instruction 561, see our 2017 Proxy Season Review for Brazil).
Early in the year, Brazilian issuers trading in the Novo Mercado segment were asked to vote on the revised listing rules. The vote was split into two sections, with non-material changes bundled into a single vote, and four contentious changes voted on separately, in order to avoid the possibility of a the entire reform being derailed by opposition to specific clauses.
The first section included basic regulations concerning matters such as:
- keeping a minimum free float of 25% (or 15% for highly liquid stocks);
- increasing board independence to a minimum of 20% or two members, whichever is greater;
- a structured process for evaluating the independence and functioning of the board;
- requiring a tender offer, which must be approved by at least one-third of free float shareholders, in order to delist from this segment; and
- requiring maintenance of the listing on Novo Mercado following a change in control, unless approved by free-float shareholders.
The second section included four rules, each voted on separately, regarding:
- requiring a formal process for the assessment of the board and management;
- public tender offers launched upon the acquisition of 20% to 30% of the company’s shares;
- issuing mandatory reports on social and environmental issues; and
- increasing the current one-third quorum to a 50% quorum requirement for approval of a tender offer to delist from the Novo Mercado.
After several private and public discussions, and having given issuers the chance to ask and request clarifications on every matter proposed, the voting was carried out in June 2017. A total of 131 companies participated and a minimum of two-thirds affirmative votes were required for the approval of each proposal. The basic regulations and the introduction of board and management assessments were approved. However, a majority of issuers refused changes to the rules regarding tender offers and environmental and social impact reports. While the final outcome has been broadly positive, it is also significant that more issuers than might have been expected voted against every single item.
The listing rules were approved by the CVM in September 2017 and take effect from 2 January 2018 for new entrants into the Novo Mercado. However, companies currently listed on the Novo Mercado will have until 2020 to fully comply with the regulations.
Whether due to the country’s economic and political situation serving as a wake-up call, or because regulators are finally acknowledging the need to catch up with more developed markets, Brazilian regulators seem to be decidedly working towards improving its governance regime. While these steps forward represent progress, investors may understandably be disappointed that several significant amendments were not approved. More broadly, it seems clear that Brazilian listing regulations, mired in a regulatory environment that gives significant power to issuers, still lag behind most advanced markets.
Eva is an analyst covering the Brazilian market.