Prospective Legislative Reform to Improve Position of Minority Stockholders
Pending Brazilian legislation would improve the position of minority stockholders. Preferred stock issued by Brazilian corporations is often “bald stock”, so-called because its preferred status is largely hollow. Such stock gives preferred stockholders priority over common stockholders in the event of a liquidation and at least nominally a preference in the distribution of dividends. However, the distribution of dividends is sometimes more theoretical than real.
In essence, controlling common stockholders, with little consequence, have the ability to short-change the preferred stockholders by simply not distributing the preferred dividends. Existing Law no. 6.404 of 1976, also known as Lei das S.A.s (Brazilian Law of Corporations), provides for preferred stockholders to be compensated with the grant of voting rights if they do not receive dividends for a period contemplated in the corporate charter of not more than three consecutive financial years. The dividend amounts due to preferred stockholders may be set by the corporate charter, but in the absence of a provision in the charter, the existing law establishes minimum dividend amounts as a percentage of net corporate profits. Under the current law, if there are no corporate profits, then no minimum distribution is due.
Corporations accordingly may prevent the accrual of voting rights either by arranging their affairs so as not to have any profit or by simply distributing a minimum dividend (either as fixed by the corporate charter or in the absence of an express charter provision, as established by law) to interrupt the period.
On November 20, 2007, the Brazilian Senate’s Commission of Economic Affairs (Comissão de Assuntos Econômicos – CAE), on behalf of the full Senate, unanimously approved proposed legislation that would more readily afford preferred stockholders the right to vote. The legislation would modify Article 111 of the Brazilian Law of Corporations, to provide that preferred stockholders acquire the right to vote as the law presently contemplates, but also when the corporation pays no dividends at all, even if it has no profit during the relevant period. The legislation is now under consideration by the House of Representatives (Câmara dos Deputados).
The declared goal of the legislation is to encourage corporations to adopt good corporate governance measures, including making all of their shares voting stock.
The rapid growth of listings on Brazil’s Novo Mercado – a specific listing segment of the São Paulo Stock Exchange (BOVESPA) designed for corporations that undertake to observe the highest levels of quality governance practices – makes this a propitious moment to adopt this type of legislation in order to further increase the incentives for good corporate governance.