The Latin American Corporate Governance Roundtable 2000 S

1
The Latin American Corporate Governance
Roundtable 2000 São Paulo, Brazil, 26-28 April
2000

• Session 4 Corporate Governance in Latin America
  A Comparative Overview of Key Legal and
  Regulatory Issues
• Status and Treatment of Non-Voting Shares
• by Henrique Lang

2
Current Status (Law 6404 of 1976, as amended)

• A Brazilian corporation may issue up to 2/3 of
  its capital stock in preferred non-voting shares.
• A shareholder may retain absolute control by
  holding shares representing 17 the equity,
  assuming a company with a ratio 1/3 common voting
  shares (33) and 2/3 preferred non-voting shares
  (67).
• The few common shares floated in the open market
  generally have low liquidity, which makes them
  unattractive and undervalued.

3
1997 Reform (Law 9457)

• Law 9457 intended to facilitate the privatization
  of public utilities (telephone and power
  companies) by eliminating certain minority
  shareholder rights, notably
• withdrawal rights in corporate restructuring
  transactions (mergers, consolidations and
  spin-offs)
• mandatory tender offers in corporate control
  changes.
• As a trade-off for the elimination of minority
  shareholder rights, preferred shares of companies
  that do not provide for fixed or minimum dividend
  payments are entitled to receive dividends that
  are at least 10 greater than common share
  dividends.

4
1997 Reform (Law 9457) Contd

• The 10 premium on dividends may give rise to
  conflicts of interest between controlling and
  public shareholders as dividend rights attributed
  to preferred shares (owned by the public) are
  incommensurate to their equity stake in the
  company in detriment to common shares (in the
  hands of controlling shareholders).
• A number of companies resolved to create a small
  minimum dividend for preferred shares (e.g.
  R0.01 per share) to meet legal requirements.

5
Certain Revision Proposals

• Elimination of preferred non-voting shares.
• The issue of preferred non-voting shares would be
  limited to 50 of the capital stock (a return to
  the 50 ratio in force prior to 1976).
• Transition period proposals under discussion
  vary from (a) one year as from effectiveness of
  the new legislation to (b) the earlier of the
  third equity issue or five years.
• Over the past years, initiatives to reduce the
  ratio of voting/non-voting shares have faced
  strong opposition of public companies led by
  ABRASCA.

6
Kapaz Clean Bill (as approved at the Commission
for Economic Affairs of the House of
Representatives)

• Ratio of voting/non-voting shares is limited to
  50 of the capital stock.
• Eliminates the 10 premium on dividends.
• Alternatives offered for preferred shares
• 1. Priority payment of dividends at 3 of the
  book value per share.
• or
• 2. A dividend equal to common share dividends
  plus the right to sell preferred shares at the
  same price and conditions in case of a change in
  control (tag along right).

7
Kapaz Clean Bill Contd

• Election of one member of the Board of Directors
  by the holders of preferred shares (representing
  at least 10 of the capital stock) and one member
  of the Fiscal Board at a separate cast (the vote
  of controlling shareholder being excluded).
• Transition Rules
• The new ratio would apply immediately to
  newly-organized companies and private companies
  going public.
• Existing public companies may maintain their
  current ratios, but trading of newly-issued
  shares on Stock Exchanges will only be permitted
  at the new ratio.

8
Personal Thoughts

• Although the Kapaz Clean Bill has clear merits,
  the 50 ratio of voting to non-voting shares is
  still a modest change for international
  standards.
• A shareholder will be able to retain absolute
  control by holding shares representing 26 of the
  equity, assuming a company with a ratio of 50 of
  common voting shares and 50 of preferred
  non-voting shares.
• Instead of reducing the ratio of voting to
  non-voting shares or eliminating preferred
  shares, the law should only limit or prohibit the
  primary distribution of preferred non-voting
  shares by public companies.

9
Personal Thoughts Contd

• Companies wishing to access the capital markets
  for funding purposes would be required to issue
  voting shares.
• Current distortions would be cured in the long
  run without affecting rights of incumbent
  controlling shareholders.
• An exception should be made for the primary
  distribution of preferred shares with fixed
  dividends, since these shares may be considered
  as mezzanine instrument (quasi debt).
• Preferred non-voting shares are valid instruments
  for structuring business transactions that
  involve private companies (e.g., joint ventures).

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