Corporate Governance Practices and B3’s Novo Mercado

Novo Mercado is a listing segment designed for shares issued by companies that voluntarily undertake to abide by corporate governance practices and transparency requirements in additional to those already requested by the Brazilian Law and CVM (Brazilian Securities and Exchange Commission).

It is based on the premise that stock valuation and liquidity are positively impacted and assured by shareholder’s rights and by the quality of companies´ information.

The admission to Novo Mercado implies the compliance with corporate rules, known as “good practices of corporate governance”, which are more rigid than those required by the current legislation in Brazil.

These rules, consolidated in the Listing Regulation, increase shareholder’s rights and enhance the quality of information commonly disclosed by companies. Additionally, the Market Arbitration Panel for conflict resolution between investors and companies offers a safer, faster and specialized alternative to investors.

The main innovation of Novo Mercado concerns the capital stock, which must be solely represented by common shares (voting shares). In brief, publicly-held companies listed on Novo Mercado have the following additional obligations:

  • Public share offerings have to use mechanisms to favor capital dispersion and broader retail access;
  • Maintenance of a minimum free float, equivalent to 25% of the capital;
  • Same conditions provided to majority shareholders in the disposal of the Company’s Control will have to be extended to all shareholders (Tag Along);
  • Establishment of a two-year unified mandate for the entire Board of Directors, which must have five members at least, of which at least 20% (twenty percent) shall be Independent Members;
  • Disclosure of annual balance sheet, according to standards of the IFRS;
  • Improvements in quarterly reports, such as the requirement of consolidated financial statements and special audit revision;
  • Obligation to hold a tender offer by the economic value criteria, in case of delisting or cancellation of registration as publicly-held company;
  • Compliance with disclosure rules in trades involving securities issued by the company in the name of controlling shareholders;
  • Some of these obligations must be approved at the General Shareholders Meetings and included in the corporate bylaws.

Rights of Santos Brasil Participações‘ Shares

Rights of Common Shares

Each of Santos Brasil Participações‘ common shares entitles its holder to one vote in its general shareholders’ meetings. The Company’s shares are issued in registered form and are kept in book-entry form in the shareholders’ deposit accounts at the financial institution designated and approved by the board of directors. Shareholders may be charged a transfer fee from such financial institution each time shares are transferred from its deposit account pursuant to paragraph 3 of Article 35 of Brazilian Corporate Law.

In addition, pursuant to the Novo Mercado Corporate Governance Regulations and Santos Brasil Participações‘ Bylaws, in case of change in its control, the holders of the Company’s common shares shall have the right to sell their shares to the new controlling shareholder for the same price paid to the selling controlling shareholder for its common shares (100% tag along rights).

Regulation of the Brazilian Securities Market

The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and securities markets, by the National Monetary Council and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are governed by the principal law governing the Brazilian securities markets, by the Brazilian Corporation Law, and by regulations issued by the CVM, the CMN and the Central Bank. These laws and regulations provide for, among other things, disclosure requirements, restrictions on insider trading and price manipulation and protection of minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as U.S. securities markets.

Under the Brazilian Corporation Law, a company is either publicly held and listed, a “companhia aberta”, or privately held and unlisted, a “companhia fechada”. All listed companies are registered with the CVM and are subject to reporting and regulatory requirements. To be listed on the B3, a company must apply for registration with the B3 and the CVM and is subject to regulatory requirements and information publishing requirements.

A company registered with the CVM may trade its securities either on the Brazilian exchange markets, including the B3, or in the Brazilian over-the-counter market. Shares of companies listed on the B3 may not simultaneously trade on the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to several limitations.

The Brazilian over-the-counter market, whether or not organized, consists of trades between investors through a financial institution registered with the CVM, and authorized to trade in the Brazilian capital market. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in the non-organized over-the-counter market. The CVM must receive notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.

The trading of securities on the B3 may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of the B3 or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a significant event or has provided inadequate responses to inquiries by the CVM or the B3.

Disclosure and Use of Information

Pursuant to CVM Rule # 358, of January 3, 2002, the CVM revised and consolidated the requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies.

Such requirements include provisions that:

  • Establish the concept of a material fact that gives rise to reporting requirements. Material facts include decisions made by the controlling shareholders, resolutions of the general meeting of shareholders and of management of the Company, or any other facts related to the Company’s business (whether occurring within the Company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade such securities or to exercise any of such securities’ underlying rights;
  • Specify examples of facts that are considered to be material, which include, among others, the execution of shareholders’ agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the Company, and any corporate restructuring undertaken among related companies;
  • Oblige the officer of investor relations, controlling shareholders, other executive officers, members of its board of directors, members of the audit committee and other advisory boards to disclose material facts;
  • Require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading;
  • Require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not to de-list the corporation’s shares, within one year;
  • Establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholding stake; and
  • restrict the use of insider information.

Investment in Santos Brasil Participações‘ Units by non-residents of Brazil

Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including Santos Brasil Participações‘ units, on B3 provided that they comply with the registration requirements set forth in Resolution No. 2,689 of the National Monetary Council, which the Company refers to as Resolution 2,689, and CVM Instruction No. 325.

With certain limited exceptions, under Resolution 2,689 investors are permitted to carry out any type of transaction in the Brazilian financial capital market involving a security traded on a stock exchange, futures exchange or organized over-the-counter market. Investments and remittances outside Brazil of gains, dividends, profits or other payments under Santos Brasil Participações‘ units are made through the new unified exchange rate market.

In order to become a Resolution 2,689 investor, an investor residing outside Brazil must:

  • appoint a representative in Brazil with powers to take actions relating to the investment; appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and CVM; and
  • through its representative, register itself as a foreign investor with the CVM and the investment with the Central Bank.

Securities and other financial assets held by foreign investors pursuant to Resolution 2,689 must be registered or maintained in deposit accounts or in the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions involving securities listed on the Brazilian stock exchanges or traded in organized over-the-counter markets licensed by the CVM.