Regulatory Dualism in Brazil

1. Regulatory Dualism in Brazil Cai Zhenzhen,Wang Xinyue

2. 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.

3. Cost of the reform 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. Comprehensive Reform Regulatory Dualism No Reform What’s Regulatory Dualism?

4. What’s Regulatory Dualism? 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.

5. What’s Regulatory Dualism? Regulatory Dualism It permits the preexisting system of regulation to be maintained; meanwhile, a second, more efficient system, namely thereformistregime, 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.

6. Why Regulatory Dualism has been produced? 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 shareholdersin publicly tradedbusiness corporations.

7. The resistance of the established firms Why Regulatory Dualism has been produced? Influence on political process Resistance to the reform Incentive

8. The demand of the capital market The resistance of established firms Regulatory Dualism New developing firms Existing firms

9. 1) It’s a listing segment of Sao Paulo Stock Exchangefor 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) Regulatory Dualism in Brazil The Novo Mercado (“New Market”)

10. 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) Regulatory Dualism in Brazil The Novo Mercado (“New Market”)

11. Old regime Old firms New firms New regime

12. Regulatory Dualism in Brazil The Novo Mercado Standards • They don’t focus on particular industry or type of firm, unlike the standards in German. • They operate like a privately created law for publicly traded business corporations. • They are entirely voluntary (companies are free to remain listed on or obtain their initial listing on the old system).

13. Regulatory Dualism in Brazil 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 levelsof regulation culminated in the Novo Mercado

14. Levelsofminorityshareholderprotection

15. WHY? Togainsupportfromtheexistingfirms Toprovidetheopportunityfortheexistingfirmstochangestepbystep

17. 1.Securitieslisted

18. Commonstock Nonvotingpreferredstock • Differences: • Thepaymentofdividendsandremainingfundsisdifferent. • Rightstovoteandtoparticipateintheoperationofthecompanyaredifferent.

19. WhytheNovoMercadoprohibits thenonvotingshares? The central feature of the Novo Mercado is a “one share, one vote” requirement. Toremovethesubstantialwedgebetweenvotingandcashflowrights Tolimitthecontrollingshareholders’incentivesforexploitingnonvotingpreferredshareholders

20. 2.Mandatorybidrule

21. Tag-along Whatis“Mandatory Bid Rule”? Thepurchaserofacontrollingblockmustoffertopurchasetherestofthecompany’sstockatthesamepricepershare.

22. 3.Mandatory arbitration

23. Arbitration Disputesettling Publicjudicialprocedures Why? Moretechnical Faster Moreconfidential

24. TheNovoMercado’sapproachtoarbitration

25. 4.Board of directors

26. 5.Mandatory tender offer at “economic value” in case of delisting TheNovoMercadoandLevel2requirethefirmstolaunchatenderofferforthefirm’ssharesatapriceatleastequaltotheireconomicvalue.

27. 6.Financial statements in accordance with U.S. GAAP or IFRS GAPP:GenerallyAcceptedAccountingPrinciples IFRS:InternationalFinancialReportingStandards

28. 7.Minimum free float of 25% of total equity Morethan25%ofthetotalequityshouldbeheldbypublicshareholders.

29. 8.Disclosure of material related-party contracts 9.Disclosure of monthly equity ownership and trading by controlling shareholders

30. 10.Publicofferingstousemechanismsfavoringcapitaldispersion Whenacompanyoffersitssecuritiestothepublic,ithastoadoptwaystodispersethecapital.

31. Thanksforyourattention!