Cai Zhenzhen, Wang Xinyue Regulatory 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 Cost of the reform What’s Regulatory Dualism? Comprehensive Reform Regulatory Dualism No Reform

What’s Regulatory Dualism? Regulatory Competition V.S Regulatory Dualism Regulatory Competition 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. 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. 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 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. 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 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. What’s Regulatory Dualism?

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. 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 firms New 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) (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) (a typical example of Regulatory Dualism) The Novo Mercado (“New Market”)

Old firms New firmsNew regime Old regime

Regulatory Dualism in Brazil 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 Regulatory Dualism in Brazil

BasicLevel 1Level 2 Novo Mercado Levels of minority shareholder protection

To gain support from the existing firms Level 1 Level 2 Novo Mercado

Level 2Level 1 Securities listedCommon Stock Nonvoting preferred stock(with special voting rights in case of merger,spinoff and related- party contracts) Common Stock Nonvoting preferred stock Mandatory bid rule100% price100% price for common stock 80% price for preferred stock 80% price for common stock Mandatory arbitrationYes No Board of directorsMinimum of 5 directors 20% independent 2-year unified term Minimum of 5 directors 20% independent 2-year unified term Minimum of 3 directors Mandatory tender offer at “economic value” in case of delisting Yes NO Financial statements in accordance with U.S. GAAP or IFRS Yes No Minimum free float of 25% of total equity Yes Disclosure of material related- party contracts Yes Disclosure of monthly equity ownership and trading by controlling shareholders, directors and officers Yes Public offerings to use mechanisms favoring capital dispersion Yes

1.Securities listed Novo MercadoLevel 2Level 1People’s Republic of China (PRC) Common Stock Nonvoting preferred stock (with special voting rights in case of merger,spinoff and related-party contracts) Common Stock Nonvoting preferred stock Common 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.

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 limit the controlling shareholders’ incentives for exploiting nonvoting preferred shareholders

2.Mandatory bid rule Novo MercadoLevel 2Level 1 100% price100% price for common stock 80% price for preferred stock 80% price for common stock

The purchaser of a controlling block must offer to purchase the rest of the company’s stock at the same price per share. Allowing minority shareholders to exit at a fair price Protecting the minority shareholders

Novo MercadoLevel 2Level 1PRC Yes No 3.Mandatory arbitration

Dispute settling Arbitration Public judicial procedures Faster More confidential More technical

Authority in charge A permanent Market Arbitration Panel Structure Resembles a public court

Novo MercadoLevel 2Level 1PRC Minimum of 5 directors 20% independent Minimum of 5 directors 20% independent Minimum of 3 directors Minimum of 5 directors 30% independent 4.Board of directors

Novo MercadoLevel 2Level 1 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.

6.Financial statements in accordance with U.S. GAAP or IFRS Novo MercadoLevel 2Level 1PRC Yes NoA share: accounting standard made by ministry of finance B share: IFRS GAPP: Generally Accepted Accounting Principles IFRS: International Financial Reporting Standards

Novo MercadoLevel 2Level 1PRC Yes 7.Minimum free float of 25% of total equity More than 25% of the total equity should be held by public shareholders.

Novo MercadoLevel 2Level 1PRC Yes 8.Disclosure of material related-party contracts 9.Disclosure of monthly equity ownership and trading by controlling shareholders Novo MercadoLevel 2Level 1PRC Yes

Novo MercadoLevel 2Level 1 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.

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