The Market’s Experience:
Novo Mercado (New Market) in Brazil
Edna Holanda
Issuer Development and Listing Department
Novo Mercado (New Market)
Concept
Main requirements
Some results
Review process
2
Concept
•
Novo Mercado, launched in December 2000, is a special listing segment
based on corporate governance requirements over and above the Brazilian
Corporate Law and the capital market regulation
•
Option between Law (regulation) and Code (recommendation – “comply or
explain”)
•
Novo Mercado is a private initiative, based on the self-regulation power of
the Stock Exchange, in order to create receptive environment for public
offerings
3
Concept
•
Main problem identified by the Stock Exchange – the lacking of suitable
protection for minority shareholders
− For example, the Brazilian Corporate Law used to allow prevalence of
non-voting shares and inequitable treatment of shareholders in case of
changes of control or delisting
•
Corporate governance and equity market
–
Corporate governance practices can provide the alignment of interests
between investors and companies
For investors – it implies risk mitigation
For companies – it implies better valuation
–
–
4
Novo Mercado (New Market)
Concept
Main requirements
Some results
Review process
5
Shareholders’ rights
•
Only voting shares
•
Alignment between economic exposure and voting rights
•
Brazilian Corporate Law allows non-voting shares – 2/3 (until 2001) and
1/2(after 2001) of the total capital
•
Full tag-along rights extend to all shareholders in case of change of control
•
Public tender offering at economic value in case of delisting
•
Arbitration panel to solve conflicts
Transparency (monitoring)
•
Disclose of additional information
•
Board of directors with at least 5 members being 20% of them independent ones
Dispersion
•
Minimum free float of 25%
•
Procedures in public offerings to enhance the dispersion of the company shares
6
Main requirements (how to join)
•
The entering in Novo Mercado is voluntary but based on an agreement
between company, controlling shareholders, senior managers and Stock
Exchange
•
Bylaws must be amended to insert shareholders’ rights
– For example – full tag along rights and arbitration panel
•
Enforcement is based on contract’s and bylaw’s provisions
7
Five-tiered regime of listing
•
•
Standard (minimum legal requirements)
Corporate governance listing segments
– Nível 1 (Level 1)
– Nível 2 (Level 2)
– Novo Mercado (New Market)
– Bovespa Mais (Bovespa Plus)
+ better disclosure
and free float
+ shareholder
rights and
arbitration
+ only voting
shares
organized OTC
gradual access to
the market
Regulation
Standard
8
Novo Mercado (New Market)
Concept
Main requirements
Some results
Review process
9
Novo Mercado and the Levels of Corporate Governance
161
Only voting shares
Higher transparency
Shareholders’ rights
Shareholders’ rights
Corporate governance
Corporate governance
Higher transparency
Higher transparency
10
Evolution of the IPOs - Corporate governance as the norm for local companies
IPOs by listing segment
(2004 - May/2010)
Participation of listing segments at the
Stock Exchange (May/10)
•
34% of total listed companies
•
67% of market capitalization
•
77% of traded value
Launching
of the Novo
Mercado
11
Capital raised in primary and secondary public offerings (US$ billion)
•
Initial public offerings (IPOs)
•
Follow on offerings
Foreign investors represented around 75% of the offerings
12
Novo Mercado (New Market)
Concept
Main requirements
Some results
Review process
13
Review Process
Objectives
•
Enhance the value of Novo Mercado for investors and issuers and maintain it
as a benchmark
Main drivers
•
Evolution of the Brazilian regulation through the Brazilian SEC (CVM)
•
International financial crisis
•
Development of the market and the companies: the origin of the first
Brazilian “corporations”
•
Brazilian Corporate Law, enacted in 1976, was designed for companies
with controlling shareholders
•
Novo Mercado, created in 2000, focus on mitigating conflicts between
controlling shareholders and minority
14
Main issue of the review process
•
Ownership structure: from concentrated to dispersed
9 How to protect the shareholders and the companies?
9 How to avoid conflict of interests?
9 Anti-takeover clauses adopted by companies (“poison pills”): defense
measures or real obstacles to change the control and the management?
9 Transfer of control is the most sensitive item of the current review
•
The Stock Exchange proposal
9 Mandatory bid triggered by accumulation of a material ownership interest
based on the City Code and the Takeover European Directive
9 Material ownership: 30% of voting shares
9 Equitable price: the highest price paid by the acquirer in the last 12
months
9 Members of the board of directors must disclose your opinion about the
offer (against or in favour)
15
Greatest challenge of the review process
•
How to improve the current Novo Mercado in order to suit all sorts of
ownership structures
– Closed hearing: the proposals cannot be rejected by more than 1/3 of
the listed companies at Novo Mercado
•
Market support and stakeholders’ engagement are necessary
•
Novo Mercado become a reality because investors demanded corporate
governance reforms and the companies themselves saw these obligations
as advantages
(Reference – Global Corporate Governance Forum, Focus 5: “Novo
Mercado and Its Followers: Case Studies in Corporate Governance
Reform”)
16
To summarize
•
Novo Mercado’s concept
•
Option between Law and comply or explain codes
•
Main requirements with emphasis in the voting shares
•
Review process and the main proposal of the Stock Exchange based on
City Code and Takeover European Directive: mandatory bid
17
Thank you!
Issuer Development and Listing Department
Edna Holanda
([email protected])
www.bmfbovespa.com.br
+55 (11) 2565-7003 / 7341
18