Brazil’s Approach To Poison Pills Has A Significant Twist From Its Original Purpose

Poison Pills were created to become a protection mechanism against hostile takeovers in publicly traded companies that have no controlling shareholders. However, unlike what happens in the world’s most developed markets, the Brazilian experience with the tool is quite different or even the opposite of the original concept.

This Amec’s Viewpoint new edition heard experts, funds managers, lawyers, and former board members of the Securities and Exchange Commission of Brazil (CVM) to analyze the use of such clauses in companies listed in Brazil. To expand the debate and our understanding of the issue, it is necessary to review the international experience and compare it with the use of Poison Pills in Brazil.

United States bankers originally coined this curious term in 1982. It was a reaction to a kind of warrant dividend plan created by the attorney Martin Lipton. Such a plan created a kind of protection used mainly by corporations against hostile takeovers in the American market and involved a distribution trigger to subscription warrants. In case of a hostile takeover attempt, shareholders could underwrite the number of shares at a reduced price, which could dilute the concentrations that were deemed inappropriate. This mechanism was widely used in the US market.

Amec’s Advocacy Consultant Patrícia Pellini, who is also a former Regulation Supervisor at B3 stock exchange, confirms the original concept of poison pill is connected to the defense against hostile takeover attempts, “to allow better negotiation terms for all shareholders.”

Although poison pills are widely used in the US, it was in the United Kingdom that they experienced the biggest evolution due to self-regulatory and regulatory experiments. In an interview with Amec’s Viewpoint, the CEO of pension fund Vivest, Walter Mendes, shared his view about poison pills’ evolution based on a course he took at London’s Take Over Panel.

“I was studying all the topics concerning the Take Over Panel’s Code, one of them being the mandatory offer triggered by poison pills,” recalls Mr. Mendes, who is also a member of Amec’s Deliberative Board.

He says that poison pills were introduced in the US, UK, and the European Community due to companies that had no controlling shareholder, known as corporations. “In the past, the number of companies without controlling shareholders grew steeply in England, the US, and other markets, as those companies needed lots of resources to invest, fund their growth, and face competition,” explains Walter.

In England, a shareholder or group of shareholders that acquires over 30% of shares is forced to make an offer to all the other shareholders, paying the same amount as their last acquisition. It limited the percentage of shares a shareholder could own, avoiding or reducing the possibility of creating a de facto control with the ownership of a relatively low amount of shares.

“It was a form of protection for minority shareholders, ensuring that if a shareholder or group of shareholders wanted to obtain the company’s control, they would have to buy all the shares,” notes Mr. Mendes.

The 30% threshold was established in England by the self-regulatory body Take Over Panel. In 2006, it was added to the British legislation, and later, it became part of corporate laws of the European Union through specific norms.

Mr. Mendes clarifies that poison pills are clauses included in companies’ bylaws in Brazil and the US, thus are independent of regulation and legislation. “They (poison pills) became widespread in the British market and, later, in Europe. However, they are not widespread in the US, they vary from one company to another, so they are not included in the US regulation,” he says.

The Brazilian experience

Cosmetics maker Natura was the first Brazilian company to include a poison pill in its bylaws in 2004. Since then, several companies have included similar clauses in their bylaws, but with different goals. Such practice became more frequent in the 2007 IPO window, as several family-owned companies used poison pills to protect the company’s control after going public.

However, if poison pills were adopted abroad to ensure companies’ control would remain widespread, in Brazil, such clauses were initially used exactly to prevent a given shareholder or group from losing control, which many experts see as a distortion (read more).

Several fund managers point out the combination of poison pills and entrenchment clauses in many companies as a problem. The topic is discussed in this issue of Viewpoint Amec in an interview with lawyer Otávio Yazbek, a former board member at CVM, who quotes CVM’s Legal Opinion n. 36/2009 as a guideline that aims to correct such distortion (read the interview). The use of poison pills as entrenchment clauses was causing several problems to companies and their shareholders that were subject to a single shareholder who held the control and whose interests often differed from the majority of shareholders.

Standardization attempts

Due to the heterogeneity of uses of such clauses in the domestic market and the conflicts caused by the different understandings, there were some attempts to create standard rules for the mechanism. At least twice, B3 came up with proposals to define basic rules to defend companies listed in Novo Mercado segment.

The first attempt happened in 2008, with the purpose of a “30% OPA,” which aimed at reinstating the 30% threshold as a trigger for poison pills. However, the proposed alteration faced resistance from companies, and it was eventually rejected. The issue came up again in 2017, when the norms were reviewed, but without success.

There were also attempts to regulate the issue under a self-regulatory approach, notably by the Brazilian Institute of Corporate Governance (IBGC). In addition, the Brazilian Code of Corporate Governance also discussed the topic in a directive letter.

In the following stories and interviews, we present different analyses and potential proposals supported by experts to improve the use of poison pills in the Brazilian market – read more.