Calls for more protection for Brazil's minority shareholders

For the second time in less than a month, F&C has been joined by a group of leading institutional investors, to call for greater protection for minority shareholders in Brazil. In August, the group of investors wrote to the Brazilian securities regulator, the Commissão de Valores Mobiliários (CVM), expressing their concerns about the bid launched by Votorantim Celulose e Papel (VCP) on paper producer Aracruz. Last week, another letter was sent to the São Paulo Stock Exchange (Bovespa) regarding the recent announcement that construction and property company Gafisa SA will acquire a controlling stake in Construtora Tenda SA.

On this occasion, the concern lies with the mechanics of the merger, which involve a large issuance of Tenda shares to Gafisa in exchange for the incorporation of Gafisa's subsidiary Fit Residencial Empreendimentos by Tenda. According to the investors, although Tenda's management has sought to portray the transaction as an acquisition of Fit, it's clear that the deal actually provides Gafisa with control of a severely diluted Tenda on effectively an indirect takeover.

"While many details of this acquisition have yet to emerge, we are concerned that the deal has been structured so as to circumvent Brazilian law, Bovespa listing standards and the rights of minority shareholders," said Karina Litvack, Head of Governance & Sustainable Investment at F&C.

Since its launch, Bovespa's Novo Mercado - a listing segment for shares issued by companies that voluntarily undertake to abide by higher corporate governance standards and transparency requirements in addition to those requested by Brazilian law and the CVM - has been driving a new age of equity investment in Brazil, attracting interest from more and more international investors.

"The good reputation of Brazil's Novo Mercado as a ‘gold standard' in governance could be under threat if the exchange sanctions this type of transactions," Litvack added. "However, we are encouraged that Bovespa has just announced it will be reviewing the rules governing its premium governance segment with a special focus on ‘novel' mergers and transactions, such as the ones that triggered both our letters."