Poison Pills under discussion in Brazil
Por – Alexandre L. Ribeiro do Valle – Fonte: Blog VML Advogados
Since 2000, Brazilian Government has started to review its corporate laws and capital market regulations in order to introduce greater protections for investors, abandoning, at some extent, the protectionism and State interventionism models that characterised the former decades when capital market was almost non-existent and popular savings had no significant role as a form of capitalising companies.
After many changes introduced into the corporate law in the last few years as the reduction of the percentage of non-voting shares in the corporate capital; the right to receive mandatory dividends; the possibility of resolving disputes between minority and majority shareholders through arbitration; and specific performance for shareholders agreement, as well as the recent enacted law number 11.638 dated 2008, introducing new accounting rules in line with the International Accounting Standards Board’s rules, which certainly brought and will keep bringing unaccountable benefits to the country, the authorities have perceived that Corporate Governance practices can have a special role in the development of the Brazilian Capital Market to the extent that the Weigh Average Cost of Capital could be greatly reduced if the Players have more protection and access to relevant information on the company and its business, enabling them to better identify and quantify risks pertaining to the same.
In accordance with this new understanding, and aiming to grant stability to the market, specially in this moment of international crisis, Brazilian authorities are now discussing the rules applicable to “poison pills” (a mechanism created in the USA by the 80’s with the objective of making a share’s control acquisition unattractive or, in other words, extremely expensive), specifically those who establishes that the shareholders voting against the application of “poison pills” becomes obliged to make a public offer themselves, an instrument that is becoming more and more common in Brazilian company’s by-laws, even though the capital structure of Brazilian companies is still concentrated in the hands of few majority shareholders.
In this regard, Brazilian Securities Exchange Commission (CVM) is seeking, since last month, public comment on whether there should be an increase on the restrictions to the insertion of “poison pills” in company’s by-laws, thus facilitating takeovers strategies in our market.
As a general rule, takeovers in Brazil are ruled by Law number 6.404/76 (Corporate Law), as amended in the last few years, and Normative Instruction number 361 issued by CVM. In the basic terms of the law, takeovers can be understood as the direct or indirect transference of equity control, and, for companies whose shares are trade in the market, can only be effected if a public offer for the acquisition of the remaining voting shares is put in place by the purchaser for a price not inferior to 80% (eighty) of the price paid for the company’s control.
Notwithstanding the above, in order to avoid hostile takeovers, and justified by the argument that Initial Public Offers in Brazil would only be possible if the former controller is keep saved in the control of the company even after going public, many Brazilian companies are now inserting in its by-laws dispositions stating that the purchaser of certain percentage of shares shall make a public and bonna fide offer to the other shareholders with a premium.
In addition to the obligation of making public offer, many companies have introduced in their by-laws clauses stating that shareholders voting for the exclusion of any such “poison pill” shall also be obliged to make public offers to the other shareholders, thus turning the “poison pill” protected from any future amendment to the company’s by-laws.
In line with the best corporate governance practices, such contractual disposition should be considered in conflict with the Brazilian Corporate laws, in the sense that Articles 115, and 121 of said law establish, respectively, that the shareholders shall use their voting powers in the best interest of the company (which in some cases can happen to be voting against a “poison pill”) and Shareholders General Meetings are empowered to decide any and all matters relating to the company’s corporate objectives (including amending the by-laws, if appropriate).
Brazilian Laws does not prohibit defensive measures as “poison pills”, but to certain extent, and in order to explore the huge potential of the market, Corporate Governance issues should not be put aside and the discussions now in place are a great signal that authorities are following up the tendencies of the capital market in the world and taking the necessary steps to encourage investments and popular savings.