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The great Brazilian migration – Why stocks flock to the Novo Mercado

This year, some high-profile transactions have been proposed in Brazil involving the conversion of non-voting into voting shares. Shareholders at Vale, Suzano and Eletropaulo have already approved the conversion as a major step in their journey towards listing on the Novo Mercado, the B3 Stock Exchange segment for companies with higher standards of corporate governance and enhanced shareholder rights.

This stands in sharp contrast with what we see in other markets, such as Hong Kong, London or Singapore, where stock exchanges are under pressure to adopt a more flexible approach to dual-class shares in order to attract new listings.

The movement in Brazil is driven by business imperatives rather than regulatory requirements or listing rules. In each case, controlling shareholders are relinquishing part of their voting rights in exchange for increased liquidity, a more adaptable capital structure and becoming more attractive to investors as a result of better governance and shareholder rights.

Of course, not everyone is happy. Some holders of non-voting shares have disagreed with the discount applied to their shares when converted to voting shares or with the loss of preference in the payment of dividends. The majority view, however, is that, in the long term, the migration to the Novo Mercado will have a positive impact on the share price.

One-share one-vote
We are strong advocates of the principle of one-share one-vote, which ensures proportionality between the equity ownership and voting power of all shareholders. We have therefore supported the proposals for conversion by the companies and are engaging with them on the adoption of best practice in the composition of their boards.

The momentum created is particularly welcome at a time when Brazil emerges from a prolonged recession and its economy is showing signs of a new cycle of investment. An increase in the number of companies listing their shares to finance growth is expected. This therefore presents a great opportunity for investors to engage with companies with dual-class shares on the benefits of adopting the one-share one-vote principle, as well as to press newcomers to the B3 stock exchange to list their shares in the Novo Mercado right from the start of their new life as a listed company.

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