cai zhenzhen, wang xinyue regulatory dualism in brazil

Cai Zhenzhen, Wang XinyueRegulatory Dualism in Brazil

What’s Regulatory Dualism? Concept of the reform

It aims to establish a new and more rigorous shareholder protection regime which operates parallel to the existing one.

And it is open to any new or existing firms that wish to make use of it.

brings a direct transfer of corporate

wealth and power to public

Shareholders.

The advantages of the Regulatory Dualism:

1) It avoids the costs of blocking all reform;

2) It dilutes the costs of sweeping legal changes;

3) It reduces the political pressure for more

comprehensive reform.

blocks all reform which can be very expensive.

Cost of the reform

What’s Regulatory Dualism?

Comprehensive

Reform

Regulatory Dualism

No Reform


Regulatory Competition V.S Regulatory Dualism

Regulatory Competition

It creates multiple regulators with overlapping jurisdictions, so that the regulated actors can choose the regulatory regime to which they will be subject.

The regulated actors have an incentive to be governed by an efficient regulatory system so that they can attract more patrons such as investors.

Regulatory Dualism

It permits the preexisting system of regulation to be maintained; meanwhile, a second, more efficient system, namely the reformist regime, is created. The two systems are both made available to all actors.

The regulatory dualism creates a dynamic in which the choice between two regimes of differing efficiency actually reduces pressure to reform the less efficient (preexisting) regime.


The demand of the capital market

Economic development receives strong stimulus from an effective capital market, which in return requires a substantial and effective legal infrastructure to protect the interests of minority shareholders in publicly traded business corporations.

Why Regulatory Dualism has been produced?

The resistance of the established firms

1

• The reform will shift wealth, corporate power, ultimately political power from the controlling owners to public shareholders.

2

• Effective shareholder protection will facilitate the financing of potential competitors.

Incentive Influence on

political process

Resistance to the reform

Why Regulatory Dualism has been produced?

The demand of the capital

market

The resistance of established

firms

Regulatory Dualism

Existing firmsNew

developing firms

Regulatory Dualism in Brazil

1) It’s a listing segment of Sao Paulo Stock Exchange for the trading of shares issued by companies that commit themselves voluntarily to adopt corporate governance practices in addition to those are required by law.

(complementary to, not competitive with the law)

The Novo Mercado

(“New Market”)

Regulatory Dualism in

Brazil

2) It’s open, on a voluntary basis, to both new and existing firms that are prepared to comply with its requirements. Meanwhile, the old regime remains available to both old and new firms as well.

(a typical example of Regulatory Dualism)

The Novo Mercado

(“New Market”)

Old firms

New firms New regime

Old regime


The Novo Mercado Standards

1)They don’t focus on particular industry or type of firm, unlike the standards in German.

2)They operate like a privately created law for publicly traded business corporations.

3)They are entirely voluntary (companies are free to remain listed on or obtain their initial listing on the old system).

2-step changes of the Novo Mercado Step 1: a single alternative regime - the “one

share, one vote” Novo Mercado Step 2: a more accommodating solution - three

new graduated levels of regulation culminated in the Novo Mercado


Basic Level 1 Level 2 Novo Mercado

Levels of minority shareholder protection

WHY?To gain support from the existing firmsTo gain support from the existing firms

To provide the opportunity for the existing firms to change step by step

Level 1

Level 2

Novo Mercado

Novo Mercado Level 2 Level 1

Securities listed Common Stock Common StockNonvoting preferred stock(with special voting rights in case of merger,spinoff and related-party contracts)

Common StockNonvoting preferred stock

Mandatory bid rule 100% price 100% price for common stock80% price for preferred stock

80% price for common stock

Mandatory arbitration Yes Yes No

Board of directors Minimum of 5 directors20% independent2-year unified term

Minimum of 5 directors20% independent2-year unified term

Minimum of 3 directors

Mandatory tender offer at “economic value” in case of delisting

Yes Yes NO

Financial statements in accordance with U.S. GAAP or IFRS

Yes Yes No

Minimum free float of 25% of total equity

Yes Yes Yes

Disclosure of material related-party contracts

Yes Yes Yes

Disclosure of monthly equity ownership and trading by controlling shareholders, directors and officers

Yes Yes Yes

Public offerings to use mechanisms favoring capital dispersion

Yes Yes Yes

1.Securities listed

Novo Mercado Level 2 Level 1 People’s Republic of China (PRC)

Common Stock Common StockNonvoting preferred stock (with special voting rights in case of merger,spinoff and related-party contracts)

Common StockNonvoting preferred stock

Common Stock

Nonvoting preferred stock

Differences: 1.The payment of dividends and remaining funds is different.2.Rights to vote and to participate in the operation of the company are different.

Differences: 1.The payment of dividends and remaining funds is different.2.Rights to vote and to participate in the operation of the company are different.

Common stock

Why the Novo Mercado prohibits the nonvoting shares?

The central feature of the Novo Mercado is a “one share, one vote” requirement.

To remove the substantial wedge between voting and cash flow rights

To remove the substantial wedge between voting and cash flow rights

To limit the controlling shareholders’ incentives for exploiting nonvoting preferred shareholders

2.Mandatory bid rule


100% price 100% price for common stock

80% price for preferred stock

80% price for common stock

What is “Mandatory Bid Rule”?

The purchaser of a controlling block must offer to purchase the rest of the company’s stock at the same price per share.

Tag-along

Allowing minority

shareholders to exit at a fair

price

Protecting the minority

shareholders

Novo Mercado Level 2 Level 1 PRC

Yes Yes No No

3.Mandatory arbitration

Dispute settling

Arbitration

Public judicial procedures

Why?

FasterFasterMore

confidentialMore

confidential

More technical

More technical

THE NOVO MERCADO’S APPROACH TO ARBITRATION

Authority

in charge

• A permanent Market Arbitration Panel

Structur

e

• Resembles a public court



20% independent


20% independent



30% independent

4.Board of directors


Yes Yes No

5.Mandatory tender offer at “economic value” in case of delisting

The Novo Mercado and Level 2 require the firms to launch a tender offer for the firm’s shares at a price at least equal to their economic value.

The Novo Mercado and Level 2 require the firms to launch a tender offer for the firm’s shares at a price at least equal to their economic value.

6.Financial statements in accordance with U.S. GAAP or IFRS


Yes Yes No A share: accounting standard made by ministry of financeB share: IFRS

GAPP: Generally Accepted Accounting PrinciplesIFRS: International Financial Reporting Standards


Yes Yes Yes Yes

7.Minimum free float of 25% of total equity

More than 25% of the total equity should be held by public shareholders.


Yes Yes Yes Yes

8.Disclosure of material related-party contracts

9.Disclosure of monthly equity ownership and trading by controlling shareholders


Yes Yes Yes Yes


Yes Yes Yes

10.Public offerings to use mechanisms favoring capital dispersion

When a company offers its securities to the public, it has to adopt ways to disperse the capital.When a company offers its securities to the public, it has to adopt ways to disperse the capital.

Thanks for your attention!

cai zhenzhen, wang xinyue regulatory dualism in brazil

Documents

reformwhy regulatory

regulatory regime

efficient regulatory

regulatory competition

wang xinyueregulatory

old system

efficient system

novo mercado step