Brazilian stock market: Distant voting
Updated: May 9, 2018
By Nikolai Rebelo *
May 3, 2018 |The public corporation allows the attraction of capital for the development and growth of a professional business. However, it carries what economists refer to as “agency problems.” Providing solutions to them can significantly strengthen stock markets, creating liquidity, and attracting companies to raise capital through listing. The positive results from a mandatory distant voting procedure recently implemented in Brazil signal the comeback of an ever-stronger economy.
According to Armour, Hansmann, and Kraakman, there are three types of agency relationships in public corporations, each with its own problems:
1. Managers act as agent and firm owners act as principal;
2. Majority controllers as agent and minority as principal; and
3. Firm is the agent and other stakeholders the principal (Kraakman, et. al, 2009).
In Brazil, the second one is prevailing. Numerous corporations have big blocks of shares held in the hands of few controllers, giving rise to an agency relationship with the minority. Recently, some of the largest corporations decided to decrease the size of those blocks leaving the controlling shareholder with less than 50% of the shares. These block holders with less than 50% of the voting shares are able to control the corporation because of the absenteeism of the minority shareholders, who rarely engage in the shareholder meetings.
The Brazilian Securities Commission (CVM) is trying to encourage shareholder activism as a tool to held controlling shareholders and mangers accountable to investors. Among other initiatives, CVM is encouraging remote voting.
Remote voting is a procedure allowing shareholders to use a voting form (also known as remote voting bulletin) to vote or to include proposals to the general meeting without participating in it. CVM’s Instruction N. 561 of 2015 details all the rules of the remote voting procedure, including percentages requirements to incorporate proposals and the timeline that the company and its shareholders must comply with.
Stock Percentages to include proposals:
Stock percentages to propose nominees for the Board of Directors:
Remote voting procedures were not mandatory in the first regulatory approach. Companies had an option to allow their shareholders to vote in a meeting by submitting a remote voting form provided by the corporation. In 2017, only companies that were part of IBx100 and IBOVESPA indexes were required to do so. Finally, in 2018, the remote voting procedures became mandatory for companies included in Category A, which are companies capable of issuing all types of securities.
CVM wants to encourage shareholder activism. In a recent event held in Porto Alegre, Manager of Listed Companies Development of B3, Alessandra Borges, presented partial results showing that the remote voting procedure increased shareholder participation in the meetings since the new rule came into force. This is important to both Brazilian shareholders and to foreign investors.
Following the economic crisis of 2015, the stock exchange experienced a decrease in all its activities. As the economy recovers and the legal protection of minority investors improves, the Sao Paulo stock exchange is preparing for comeback in the international scenario. Distant voting is thus a significant step towards maturity of the stock market in Brazil.
Tags: Remote voting, distant voting, stock markets, Brazil
* Nikolai Rebelo
Berkeley Law LL.M. '16
Partner at Silveiro Lawyers (Brasil)
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