Proxy season is just around the corner, and investors in Brazilian public companies are facing a new regulatory environment. With the aim of making the country more attractive for new listings and investment, last year the Brazilian federal government issued Law No. 14.195/2021. However, one of the notable provisions of the new law, concerning plural voting, or multi-class share structures, marks a potential threat to shareholder rights.
Previously, Brazilian Companies Law operated on the principle of one vote per share, which guaranteed shareholders’ voting rights in proportion to their economic interest. While that still applies to companies whose shares are already publicly traded, Law No. 14.195/2021 allows newly-listed companies to create multiple share classes, with up to 10 votes allocated per share.
The adoption of plural voting has not been unanimously welcomed in the Brazilian market. Those in favour, such as the Brazilian Stock Exchange (“B3” – Brasil, Bolsa, Balcão), note that this measure will incentivize more companies to list their shares in Brazil instead of turning to other jurisdictions. In particular, tech companies, which often feature strong founders who wish to maintain their influence, have been at the center of the debate about multi-class share structures. Two emblematic cases are the IPOs of StoneCo Ltd (NASDAQ: STNE) and XP Inc (NASDAQ: XP) in 2018 and 2019, respectively. Both companies eschewed the Brazilian market and decided to list their shares in the United States, where multi-class share structures are permitted.
Critics, on the other hand, note that the imbalance between a company’s voting rights and economic ownership resulting from plural voting effectively disenfranchises minority shareholders – and potentially allows a small group of shareholders, in most cases the founder(s), to maintain control over the company even when they do not hold most of the company’s share capital.
Without a meaningful voice to affect the direction of the company, investors are left with no option but to go along with the ride, or vote with their feet by selling their shares. However, for indexed investors, even offloading a stake can be tricky. Moreover, critics have noted that disenfranchising minority shareholders can increase the potential for conflicts of interest, and weaken the level of corporate governance and oversight in general.
The law attempts to mitigate some of these concerns through minority shareholder safeguards. For example, plural voting is prohibited on specific proposals where independent oversight is particularly relevant, such as the approval of related party transactions and administrators’ remuneration. Furthermore, a seven-year sunset clause applies to any multi-class share structure. While plural voting can remain in place beyond the initial seven-year period, any extension must be approved with quorum of at least 50% of minority voting rights — excluding the holders of shares with plural voting rights. Moreover, the right to withdrawal from the company is guaranteed to dissenting shareholders, as well as the subsequent reimbursement of their shares.
It’s possible that these safeguards will work too well and discourage companies. After a regional race to make their capital markets more desirable to new listings, Hong Kong, Singapore and China all implemented similar regulations, subject to similar safeguards – and between them have seen just a handful of listings featuring multi-class share classes. By contrast, a significant proportion of tech company IPOs include plural voting in the United States, where such safeguards are not required.
Over the past decade, Brazil has seen significant regulatory changes aimed at bringing the local investment and stewardship environment in line with other markets. Many of those changes have improved shareholder rights and made it easier for shareholders to exercise those rights effectively. However, in this case the desire to keep up with the Joneses complicates matters for investors, potentially reducing (or even eliminating) the power of their vote and making it more difficult to conduct effective stewardship.
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