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
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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.
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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:
1. withdrawal
rights in corporate restructuring
transactions (mergers, consolidations and spinoffs);
2. 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.
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1997 Reform (Law 9457) – Cont’d

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. R$0.01
per share) to meet legal requirements.
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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.
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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).
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Kapaz Clean Bill – Cont’d

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 newlyorganized 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.
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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.
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Personal Thoughts – Cont’d

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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