Nora Rachman Global Corporate Governance Forum February 12, 2007 The São Paulo Stock Exchange case as a corporate governance reference

Arbitration Law 9.307/96: Recognition of arbitration in Brazil  Progress and institutional modernization  Attendance of crescent demand: enforceability, less time consuming, flexibility, neutrality, quality of decisions

Arbitration x Stock Market  Drawing a parallel: investors demands  growth and improvement of stock market rules  development of higher standards of corporate governance practices  BOVESPA – December, 2000: Novo Mercado  Framework of the initiative: Primary market totally stagnated  Need to reactivate the primary market  Friendly environment for IPOs depended on the demands and requirements of the investors

BOVESPA Strategy  Objective: building an investment culture in Brazil  Launching of NM: improve the ‘quality of the product’  Fostering companies to assure good practices: disclosure of more information and of better quality, promotion of fair rights among all shareholders  Increase the investors’ confidence and willingness to acquire stocks and pay for them a better price  Better prices would motivate companies to go public

Novo Mercado  Special listing segment of companies committed to higher corporate governance standards  Decision of joining NM is voluntary and market driven  Private sector initiative based on and enforced through a contract with BOVESPA  Compliance with the Novo Mercado Listing Rules  Agreement to settle any corporate disputes by arbitration  Two more corporate governance segments: Level 2 and Level 1

Listing Rules - examples  Investor rights: only voting shares; tag along rights; tender offer at least at the economic value in case of delisting  Board of directors: a minimum of 5 members, with a unified 2 years terms; 20% independent  Disclosure requirements: cash flow statements; quarterly consolidated financial statements; financial statements in accordance with IFRS or USGaap, self-dealing transactions  25% minimum free-float and adoption of special procedures in public offering to enhance capital dispersion

What is the outcome so far?

Revival of IPOs

A Market for IPOs The success of the Novo Mercado  Offers occurring at multiples much higher than the market average  Better corporate governance contributed to broaden investor interest  Increased confidence, especially from foreign investors  More favorable pricing is stimulating new IPOs

Novo Mercado´s Consolidation 6 years after launching

BOVESPA´s evaluation  The standard is set - the model is Novo Mercado  Investors have accepted new listing only on Novo Mercado  The culture of the companies has changed in direction to adopt good corporate governance practices in order to increase their value  Arbitration has also been accepted as a corporate governance requirement

What led to the introduction of the Market Arbitration Panel?

‘Environmental’ issues  Securities Commission enforcement: fines / de-listing  Court resolutions may take years: multiple appeals  Lack of efficiency of judicial courts for specialized issues  Environment not too friendly for investor activism  Ownership of companies is concentrated  Disclosure: efficient tool for oversight but... how to avoid abuse by controlling shareholders and the expropriation of minority?  Companies / controlling shareholders are usually defendants

Companies perception: positive impact on listings  Arbitration as a synonym of efficient corporate governance: compliance with standard that is set  Advantages: secrecy; economy; specialization; enforcement; speed; autonomy.  More concern with:  Company’s image  Shareholders rights  Market development  Time spent in judicial proceedings

Panel structure  Arbitration Proceedings:  Ordinary: recommended for the settlement of disputes involving complex issues: three arbitrators  Sumary: for simple disputes: single arbitrator  Ad hoc: Parties establish their own rules and procedures

Arbitrators  Minimum of 30 arbitrators  Appointed by BOVESPA´s Board  Different professionals: lawyers, economists, accountants, former securities commissioners

Types of disputes expected  Shareholders Meetings / Board of Directors meetings: proposals or resolutions adopted  Compliance with legal or Novo Mercado rules  Interpretation of By-laws provisions  Corporate proceedings against directors /management / controlling shareholders  Other corporate or capital market issues

Binding formalities Binding formalities  Insertion in bylaws, articles of association, agreements connected with corporate or capital market issues  Persons bound to the Panel  mandatory: NM or Level 2 Companies, shareholders, directors and officers  voluntarily:  Any company, listed or not  Any shareholder  Any natural person or legal entity

Next steps for the Arbitration Panel  Initial purpose: to complete the structure of Novo Mercado and Level 2  62 companies  Enlargement of purpose: other companies, BOVESPA/CBLC and its participants, issuers of fixed income  Reference in dispute resolution for corporate and capital market disputes: prospective campaign

Nora Rachman Secretary General Market Arbitration Panel Phone: e.mail: