Minority shareholders in Brazil are escalating a fight for fair treatment. So far, they’re losing.
Securities regulator CVM last month sided with Oi SA (OIBR4) controlling shareholders in a dispute over a 14.1 billion-reais capital increase preceding a merger with Portugal Telecom SGPS SA. The board of state-run oil producer Petroleo Brasileiro SA (PBR:US) remains dominated by government officials even after minority holders won a second seat last week.
The two companies underscore the struggles for small holders in Brazil, where recent activist efforts have failed to dent the traditional clout of large families and investor groups, said Joao Nogueira Batista, chief executive officer of the Mergers & Acquisitions Committee. CVM’s ruling in the Oi case will dilute the stock and helped push its market value loss to $1.3 billion since October.
“It calls into question what rights minority shareholders have in investing in Brazil overall,” said Walter Piecyk, an analyst with BTIG LLC in New York, citing the Oi ruling. “It sends a very poor message.”
Tempo Capital, which led the fight to block the Oi-Portugual Telecom merger, said the CVM’s March 25 ruling was a step backward for the regulation of Brazilian capital markets.
The decision “sheds light on the need to create stronger and more effective mechanisms to protect Brazilian minority shareholders and higher corporate governance standards,” Tempo said in a statement.
Controlling shareholder Telemar Participacoes SA didn’t return e-mail requests for comment. Oi declined to comment in an e-mail. CVM declined to comment.
Brazil’s biggest phone company, Oi plunged 11 percent the day after the ruling and has declined 33 percent since the merger was announced Oct. 2.
Oi’s “minority shareholders saw how the CVM didn’t stand up for their rights,” Piecyk said.
Minority investors had fought to block controlling shareholders from voting on the capital increase and the valuation of assets involved in the merger because the deal involves paying off 4.5 billion reais in the controlling group’s debt in addition to diluting holdings.
At the time of the decision, CVM said most of its board agreed that the issue should be voted on during the shareholder meeting and on those grounds majority investors couldn’t be prevented from voting. The board also said that there weren’t enough elements to prohibit the controlling shareholders from voting, according to the decision posted on CVM’s website.
Petrobras has tumbled 55 percent since 2010, the year stakeholders fought to stop a $70 billion share sale, and as investors try to raise a government-set fuel price cap that contributed to 17.7 billion reais in refining losses last year. Petrobras rose 0.12 percent to 16.48 reais at 11:30 a.m. in Sao Paulo trading today.
As more foreign investors are lured to Brazil, demands for better corporate governance are also rising, said Cristiano Guerra, head of Latin America and U.S. research for ISS.
“It’s essentially growing pains in many cases,” Guerra said by telephone from Rockville, Maryland. “Most companies are still controlled by large families, by large groups, but as minority shareholders are growing in numbers we’re seeing a lot of these regulations and laws need to be tweaked.”
Small investors in Petrobras, which is shouldering billions of dollars in fuel-subsidy losses, have failed to sway the government to raise gas prices, while independent investors are locked in a power struggle with HRT Participacoes em Petroleo SA over control of the board. CVM also ruled against minority shareholders in cases including drink-maker Interbrew’s merger with Cia. de Bebidas das Americas, now known as Ambev SA (ABEV3), in 2004. Petrobras and HRT declined to comment via e-mail. Ambev declined to comment.
Sugar-cane processor Cosan SA and steelmaker Usinas Siderurgicas de Minas Gerais SA have also been pulled into disputes with minority shareholders in the past 13 years since laws were first changed to protect investors, and the Novo Mercado, a listing body for companies committed to better corporate governance practices, was created. Usiminas declined to comment via e-mail. Cosan didn’t return a request for comment via e-mail.
The disputes frequently stem from older companies that still work under outdated legislation, Batista said. Prior to 2001, companies were allowed to issue preferred shares with no voting rights, and no tag-along rights and either no dividends or no capital payback priority. Now they must allow both fixed dividends and capital payback priority. The law continues to not confer tag-along rights for all shareholders, while Novo Mercado-listed companies require them, as does the U.S.
“The peculiarity of Brazil versus the U.S. is that here control is more concentrated,” said Raphael Martins, a partner at Faoro & Fucci Advogados, which represented Oi minority shareholder Tempo Capital. “The way we protect shareholder rights is through the legal system, which is expensive and slow, or the CVM, which says existing legislation doesn’t give it power regarding shareholder rights violations.”
Minority shareholders have had some wins along the way, including increased disclosure and more board members, according to Joao Laudo, an associate from the Brazilian Institute of Corporate Governance.
“Today, you have a much more favorable scenario in terms of protecting the rights of minority holders,” Laudo said in a phone interview from Sao Paulo.
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