On TV, on fintwit, in meetings and conversations with friends, all people are talking about the tax reform, which is no surprise considering the democratic impact that the change will have on pockets throughout Brazil.
However, another less famous reform is quietly moving towards a definitive approval in the National Congress, with an impact on corporate governance as big as the impacts of the tax reform.
This is the Business Environment Provisional Measure (MP No. 1.040/21), approved by the Chamber of Deputies last June 23, and which brings a series of changes with the aim of increasing the attractiveness of the Brazilian market for foreign and national investors.
Among the proposed changes, one of the most important is the introduction of plurality voting in Brazilian law.
The theme has been gaining traction in recent times due to the growing number of Brazilian companies that decided to go public abroad. According to this rationale, the absence of legal provision in Brazil for plurality voting would make the country lose many IPOs to foreign markets.
This movement has been driven more by the liquidity of the markets than by the corporate issue itself. In any event, with this rationale in mind that the plurality vote was introduced in the reforms promoted by the Federal Government.
Despite the noble purpose, the way in which plurality voting is provided for in the legal text recently approved by the Chamber seems far from fulfilling its objective.
In fact, Brazilian legislation itself already provides for some alternatives that, in one way or another, meets the need for a special class of shares with multiple votes (super preferred shares are an excellent example in this regard, including being recently adopted in the IPO of Track & Field).
As a result, the expectation was that plurality voting, when implemented, could bring greater clarity in relation to governance rules and greater security for controllers and investors. This does not seem to be the case with the proposed new legislation.
The current proposal brings several rules that, in practice, could turn against the institute.
For example, the plurality vote will have an initial term of seven years, that can be extended upon approval of the shareholders of the other classes of shares. In what situations would an investor adopt the plurality vote when, as of inception, he/she will have a determinate term in which he/she will lose the control of the company? In this case, the issuance of preferred shares without voting rights seems more attractive.
Another rule that may discourage plurality of votes is the prohibition of merger, merger of shares and business combinations involving a merged company without the adoption of a plurality vote by another one that does. Would companies adopt a rule that would limit them from growing via acquisitions if the knew these restrictions in advance?
Of course, these limitations were thought of as a mechanism for controlling the plurality vote, with the objective of limiting any possible abuse of such mechanism. However, the result may be precisely the opposite, far from achieving the objective of making the Brazilian business environment more welcoming.
The risks we are facing today is that we have a new rule with limited applicability… as a saying goes in Brazil that has been adopted since the colonial times, “for the English to see” (i.e. just a façade) … or, a plurality vote but not that much. We must now wait for the next episodes in the National Congress.
