Cai Zhenzhen, Wang Xinyue Regulatory Dualism in Brazil.
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Transcript of Cai Zhenzhen, Wang Xinyue Regulatory Dualism in Brazil.
Cai Zhenzhen, Wang XinyueRegulatory 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
What’s Regulatory Dualism?
Comprehensive
Reform
Regulatory Dualism
No Reform
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.
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.
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.
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 firmsNew
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)
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)
The Novo Mercado
(“New Market”)
Old firms
New firms New 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
Basic Level 1 Level 2 Novo Mercado
Levels of minority shareholder protection
WHY?To gain support from the existing firmsTo gain support from the existing firms
To provide the opportunity for the existing firms to change step by step
Level 1
Level 2
Novo Mercado
Novo Mercado Level 2 Level 1
Securities listed Common Stock Common StockNonvoting preferred stock(with special voting rights in case of merger,spinoff and related-party contracts)
Common StockNonvoting preferred stock
Mandatory bid rule 100% price 100% price for common stock80% price for preferred stock
80% price for common stock
Mandatory arbitration Yes Yes No
Board of directors Minimum of 5 directors20% independent2-year unified term
Minimum of 5 directors20% independent2-year unified term
Minimum of 3 directors
Mandatory tender offer at “economic value” in case of delisting
Yes Yes NO
Financial statements in accordance with U.S. GAAP or IFRS
Yes Yes No
Minimum free float of 25% of total equity
Yes Yes Yes
Disclosure of material related-party contracts
Yes Yes Yes
Disclosure of monthly equity ownership and trading by controlling shareholders, directors and officers
Yes Yes Yes
Public offerings to use mechanisms favoring capital dispersion
Yes Yes Yes
1.Securities listed
Novo Mercado Level 2 Level 1 People’s Republic of China (PRC)
Common Stock Common StockNonvoting preferred stock (with special voting rights in case of merger,spinoff and related-party contracts)
Common StockNonvoting preferred stock
Common Stock
Nonvoting preferred 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.
Common stock
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 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 Mercado Level 2 Level 1
100% price 100% price for common stock
80% price for preferred stock
80% price for common stock
What is “Mandatory Bid Rule”?
The purchaser of a controlling block must offer to purchase the rest of the company’s stock at the same price per share.
Tag-along
Allowing minority
shareholders to exit at a fair
price
Protecting the minority
shareholders
Novo Mercado Level 2 Level 1 PRC
Yes Yes No No
3.Mandatory arbitration
Dispute settling
Arbitration
Public judicial procedures
Why?
FasterFasterMore
confidentialMore
confidential
More technical
More technical
THE NOVO MERCADO’S APPROACH TO ARBITRATION
Authority
in charge
• A permanent Market Arbitration Panel
Structur
e
• Resembles a public court
Novo Mercado Level 2 Level 1 PRC
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 Mercado Level 2 Level 1
Yes 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.
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 Mercado Level 2 Level 1 PRC
Yes Yes No A share: accounting standard made by ministry of financeB share: IFRS
GAPP: Generally Accepted Accounting PrinciplesIFRS: International Financial Reporting Standards
Novo Mercado Level 2 Level 1 PRC
Yes Yes Yes Yes
7.Minimum free float of 25% of total equity
More than 25% of the total equity should be held by public shareholders.
Novo Mercado Level 2 Level 1 PRC
Yes Yes Yes Yes
8.Disclosure of material related-party contracts
9.Disclosure of monthly equity ownership and trading by controlling shareholders
Novo Mercado Level 2 Level 1 PRC
Yes Yes Yes Yes
Novo Mercado Level 2 Level 1
Yes Yes 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.When a company offers its securities to the public, it has to adopt ways to disperse the capital.
Thanks for your attention!