Changes to the special listing segment Novo Mercado approved after public consultation procedure

In 2000, local stock exchange BM&FBovespa (currently named B3) created different special listing segments, under the premise that the adoption of high standards of corporate governance would positively affect the value and liquidity of traded stock. More recently, however, general perception had become that such listing segments, whose rules had not been updated since 2011, were obsolete in comparison with internationally recommended practices.

Hence, in March 2016, B3 initiated a broad discussion with participants of the Brazilian capital markets, aiming at improving the rules for both ‘Nivel 2’ and ‘Novo Mercado’, the two main special listing segments[1]. The matter was submitted to public consultation and private hearings and, in July 2017, the corporations whose stock were listed on each of the segments voted on the relevant proposals[2].

The results of the voting process became public on July 23, 2017: (i) for the ‘Novo Mercado’, which is the main special listing segment, where no preferred shares are allowed (common shares only), a new main regulation was approved, as well as a specific rule on management evaluation; other specific proposals for the segment were rejected; and (ii) for the ‘Nível 2’, all proposed changes were rejected.

Given the mentioned partial approval of the relevant proposals, the ‘Novo Mercado’ listing segment will adopt the following new characteristics:

  1. Outstanding shares. Corporations shall trade a minimum percentage of (i)25% (twenty-five per cent) of their share capital; or (ii) provided that the average daily trading value of the corporations’ shares is, at least, of R$ 25 million, 15% (fifteen per cent) of their share capital. There will be an 18-month term for the corporation to reestablish the minimum percentage of outstanding shares in certain specific situations provided for in the regulation.
  1. Minimum outstanding shares. The rules referring to minimum outstanding shares will not be applicable in the case of public equity placements subject to offering restrictions, as defined in the applicable law.
  1. Pre-operational corporations. The trading of stock issued by non-operational corporations between non-qualified investors can only take place after the presentation of financial statements indicating operational revenue.
  1. Management. (i) The Board of Directors will be composed by at least two independent members or by independent members representing at least 20% of the total board membership, whichever is greater; (ii)the maximum, average and minimum compensation of the members of the Board of Officers, Board of Directors and Fiscal Board shall be disclosed to the public in the corporation’s reference form as regulated by the Brazilian securities and exchange commission (“CVM”); and (iii) the corporation shall structure and make public an evaluation process of the Board of Directors, its committees and the Board of Officers.
  1. Supervision and control. The corporations shall set up an Audit Committee, provided in the bylaws or not. The participation in such committee of officers of the corporation, its controlling companies, companies under its control or under common control is expressly forbidden. The corporation shall (i) have an internal audit department or hire a registered independent auditor to perform this activity, and (ii) implement compliance, internal controls and corporate risk management functions.
  1. Delisting. The voluntary withdrawal from the ‘Novo Mercado’ shall be preceded by a public tender offer at stock fair market value. For the withdrawal to move forward, shareholders owning more than one third of the outstanding shares shall need to accept to tender their shares or, at least, explicitly agree with the delisting, unless a higher threshold is established in the corporation’s bylaws.

The described new rules represent an important evolution of the ‘Novo Mercado’. The approved changes meet different demands of agents of the Brazilian capital markets, and are consistent with the original purpose of the special listing segments, i.e., to reduce information asymmetry and increase shareholders’ rights as a means to attribute value and liquidity to traded stock.

Nevertheless, it is interesting to note that three proposed items were rejected by more than one third of the corporations with stock listed on the ‘Novo Mercado’ segment: (i) disclosure of socio-environmental report; (ii) mandatory public tender offer in case of shareholder acquisition of a certain relevant equity stake in the corporation  (where the proposal had been that such stake represented 20% to 30% of the corporation’s shares); and (iii) minimum shareholder support of 50% of the capital stock to allow withdrawal from the ‘Novo Mercado’ (exceeding of the one third threshold effectively approved in the new regulation, as per above).

The voting process also resulted in a wider distance between the ‘Novo Mercado’ and the ‘Nível 2’ listing segments, which, at the outset, had diverged solely regarding the structure of the capital stock, given that the corporations in the ‘Nível 2’ may issue preferred shares. Due to the rejection of the new rules proposed to ‘Nível 2’, this segment will not count with the above-detailed innovations and the reactions of the market to such discrepancy are still to be seen.

The final version of the new regulation of ‘Novo Mercado’ was approved by CVM and will come into force in January 2nd, 2018. As of such date, the entry of corporations into the ‘Novo Mercado’ will be subject to the compliance with all provisions of the new regulation. For corporations already listed in ‘Novo Mercado’, an adaptation period was granted: although they have to observe some of the new rules as from January 2nd, 2018 (including those related to outstanding shares and delisting, as described above), the compliance with the rules regarding management, supervision and control (as per items 4 and 5 above) will only be required after the 2021 Annual General Shareholders’ Meeting.

[1] Depending on the degree of corporate governance commitment undertaken by a certain corporation, its issued stock may be listed in ‘Bovespa Mais’, ‘Bovespa Mais Nível 2’, ‘Nível 1’, ‘Nível 2’ or ‘Novo Mercado’.

[2] With respect to the ‘Novo Mercado’ regulation, the corporations voted on the following proposals: (i) new main regulation; (ii) specific rule regarding management evaluation; (iii) specific rule regarding disclosure of socio-environmental report; (iv) specific rule to increase the minimum threshold of shareholder support for a public tender offer intended to withdraw from a special listing segment; and (v) specific rule to trigger a mandatory public tender offer in case of shareholder acquisition of a certain relevant equity stake in the corporation. Regarding the ‘Nível 2’ regulation, the voting dynamics were similar: the corporations voted on proposals for a new main regulation and three specific rules (similar to those aforementioned in “(ii)”, “(iii)” and “(iv)”). The approval of each matter depended on a non-rejection by more than one third of the corporations with stock listed in each respective segment.