The new rules include: the requirement for Level 2 and Novo Mercado companies to have at least 20% independent members on the Board of Directors; the possibility of extending the term of the Board of Directors up to two years. For the Level 2 companies the increase mandatory tag along for preferred shares from 70% to 80% and the inclusion of provisions beginning to deal with a new reality in Brazil, the existence of companies with control exercised in a diffuse way.
Another objective of the changes in the Listing Rules was seeking more uniformity between Bovespa’s and the Brazilian Securities and Exchange Commission (“CVM”) definitions, as well as, improving the wording of a few rules. Additionally, the Regulations of Level 1 and Level 2 were separated in order to facilitate reading and understanding.
The proposed changes have been analyzed, in a restricted audience, between October 25 and November 25, by the 63 participating companies, at that time, in the Novo Mercado and Levels 1 and 2 of Corporate Governance, and each one assessed the suggestions for their respective segment. They were approved, since there was not opposite manifestation from more than 1/3 of the companies from each segment, as set forth by the Regulations, and have also received a favorable opinion from CVM.
The new rules will be in force as of February 6 and the new versions of the Regulations of the Novo Mercado and Levels 1 and 2 of Differentiated Corporate Governance Practices are available at Bovespa website (www.bovespa.com.br), in the menu “Companies”, “For Investors”, “Corporate Governance”, “Novo Mercado” or “Levels 1 and 2 of Corporate Governance”.
Please read below the main aspects of the new Regulations:
Board of Directors (for Novo Mercado and Level 2)
- The Board of Directors of Novo Mercado and Level 2 companies shall consist of, the minimum, 20% of independent Directors, a measure that aims at improving Corporate Governance practices. Such evolution in the operation of the Board, the body that is most highlighted in the governance structure, is important, since independent Directors tend to take more impartial decisions in situations involving controlling shareholders, management or related parties.
- The definition of independent Director is an adaptation of the one contained in the Code of Best Practices of Corporate Governance of the Brazilian Institute of Corporate Governance.
- Another change refers to the term of the Board of Directors, which may be extended for up to two years. The purpose is to meet the considerations of minority shareholders and company administrators, in order to grant a greater stability to the administration of controlled companies in a shared way, or which control is diffuse, or not yet formally established in shareholders’ agreement.
In the case of companies with diffuse control, it was included in the Regulations a provision for the edition of complimentary by Bovespa in relation to the obligation of public share acquisition in the case of withdrawal from the Novo Mercado or Level 2. According to a definition included in the Regulations, diffuse control is the one exercised by the shareholder holding less than 50% of the voting capital and per group of shareholders who are not signatories of voting agreements and which is not under a common control and does not act as a representative of a common interest. The measure that allows Bovespa, in the absence of a controlling shareholder formally characterized, to have the responsibility for the performance of a public offer of purchase of shares from the other shareholders, if there is a deliberation of the withdrawal of the Novo Mercado or Level 2.
Public Distribution (for Novo Mercado)
The requirement for the public distribution of shares for entrance in the Novo Mercado has been excluded. Such change resulted from Bovespa’s experience that there may be companies reaching a minimum free float of 25% required in this segment, by means of corporate reorganization, as in the case of the incorporation of shares from controlled public companies. As the Companies of the Novo Mercado already undertake to reach and maintain at least 25% of outstanding shares, an offer shall be made anyway if the 25% is not reached.
Extension in the period to adequate to the minimum percentage of 25% of outstanding shares (Novo Mercado, Levels 2 and 1):
The possibility of grating an additional time has been extended to situations such as capital increase, offering for acquisition of shares in tag along provisions and other exceptional situations. This change enables Bovespa to manage situations of non compliance with the minimum free float percentage, specially after the capital increases not subscribed by the market or after the public offering of shares on tag along cases, in which the six months of deadline guaranteed by the regulations may not be enough for recomposition, if the current situation is unfavorable. In situations, for example, in which the market is not receptive for issuances, any efforts for adequacy may be unfruitful.
Extension in the period to perform public offering of acquisition, in cases of going private, withdrawal from Novo Mercado or Level 2, or tag along (Novo Mercado and Level 2)
The deadlines previously provided for in Regulations have been withdrawn, since they became harmless after the Instruction 361 of CVM that regulated the registration processes of shares public offerings. As all Public Offers of Shares provided for in the listing regulations depend on the registration of CVM, these shall occur within the deadlines provided for in the Instruction.
Monthly disclosure of transactions with shares of the company by employees, administrators and Fiscal Counselors (Novo Mercado, Levels 2 and 1)
The disclosure of such trades will be made by Bovespa, consolidated per group, and not individual. The purpose is to match the disclosure means of such data to the means adopted by SEC for information about administrators and Fiscal Counselors. The new format is also more compatible with the grouped disclosure of share positions of controllers and administrators, required by the Regulations for Quarterly Report (ITR) and Annual Information (IAN) of companies.
Change in the percentage of tag along from 70% to 80% (Level 2)
In case of transfer of control of companies of Level 2 that may have issued preferred shares, the holder of such instruments will be entitled to receive, a minimum of 80% of the amount received by the holders of common shares. Considering that Law 10.303/01 provides, as one of the alternatives of advantage of preferred shares, the right to be included in the public offer of control transfer under the conditions provided for in Art. 254-A, among which the granting an 80% tag along, Bovespa decided to uniform such provision of the Regulation of Level 2 with the Law percentage.
Lock up (Novo Mercado and Level 2)
Since at the time of the launching of Novo Mercado and Levels 1 and 2, it was expected that all IPOs would occur in Novo Mercado, the Regulations did not include the provision of Lock up for Level 2. In the recent boom of IPOs, we had some in Level 2. BOVESPA considers that is important to have Lock up requirements in all segments that companies are initial public offering. Besides it was included two exceptions for Lock up: for lending of securities that subsequently could be sold to the investors, as green shoe and in the case of the lending shares to the market maker (limited to 15% of the lock up) block position.
Arbitration (Novo Mercado and Level 2):
The wording of some of the items related to arbitration contained in the Regulations has been improved and also it was included that the provision of arbitration will be better disclosured, being informed in several companies’ documents, for instance, IAN, ITRs, DFP, propects and corporate events’ calendar. Such changes also consider the New Corporate Law, which now provides the use of arbitration as a means to solve disputes among shareholders and the company, or among shareholders, when such is set forth in Bylaws.
Sanctions (Novo Mercado, Levels 2 and 1)
A provision for the disclosure of the names of companies to which penalties may be applied by has been included in the Regulations, with the purpose of informing the activities of the Stock Exchange aiming at guarantying the compliance with the rules. Currently, only the amount of notices and fines applied are disclosed.
