Super-voting shares in Brazil offer more risks than opportunities

The Brazilian Corporate Law, in its article 110, bans super-voting shares for any class of stocks. However, such debate has grown stronger amid an expressive increase in the number of initial public offers (IPOs), which had their valuations influenced by the negative real interest rate scenario.

The regulation of such a mechanism is being discussed by the Economy Ministry’s Capital Markets Initiative (Iniciativa do Mercado de Capitais – IMK). For Amec’s CEO, Fábio Coelho, super-voting shares offer more risks than opportunities. He says the instrument offers gains in the short term, but the results in the long term will be harmful to the Brazilian capital market.

Stock exchanges worldwide have been making the motto ‘one share, one vote’ more flexible. “Investors should have the right to vote according to the proportion of risk they take. This is a renowned governance principle,” says Mr. Coelho. The American Securities and Exchange Commission (SEC) has already published manifestos against a dual-class of shares, deeming it as “a recipe for disaster.”

“Ideally, Brazil should not adopt super-voting shares. But, in case it does, they should be followed by strong protections,” said Mr. Coelho during an event hosted by Capital Aberto magazine in February. Flavia Mouta, Issuers Director at B3 stock exchange, also attended the event, while Sandra Guerra, managing partner at Better Governance consultancy, acted as a moderator.

“In our view, when companies decide to issue stocks abroad, they consider other elements of competitiveness. Having access to higher valuations and a larger pool of investors is more relevant than dual-class shares,” says Mr. Coelho.  In terms of risks, shareholders could face more legal insecurity, as Brazil does not offer the same rules to protect investors as developed markets, where super-voting shares are already in place.

Safeguards

If super-voting shares are allowed in Brazil, it is essential to establish additional protection instruments to regulate it. Amec proposed safeguards in a letter to the Brazilian Securities and Exchange Commission (CVM) and to B3 (click here to read the full version). Two significant international investors associations supported the document: the International Corporate Governance Network (ICGN), which gathers investors from over 50 countries, and the Council of Institutional Investors (CII), an American association that represents pension and endowment funds that collectively manage USD 4 trillion in assets.