Abstract
Little is known about the outcomes of legal transplants carried out by emerging economies aiming to develop their securities markets. This chapter contributes to fill this gap by analyzing the effectiveness of investor protection rules of the Novo Mercado, a self-regulatory transplant created in 2000 in Brazil to distinguish companies committed to higher governance standards. Employing the institutional autopsy approach through an in-depth qualitative analysis of two controversial cases, I conclude that the legal transplantation generated mixed results. On the one hand, Brazil greatly developed its capital markets after the Novo Mercado’s creation. On the other hand, the Novo Mercado did not work as expected regarding investor protection due to deficient enforcement and rule’s interpretation. I argue that these problems may derive from conflicts of interests of the stock exchange, the formalistic interpretation of rules and a lack of adequate oversight structure. The Brazilian case demonstrates that cultural, political, economic, and institutional elements permeate entire markets and that the transplant did not alter the main agency problem between controlling and minority shareholders that still characterizes Brazilian companies, even those listed on the Novo Mercado. I believe that this result should be considered for any legal transplantation.
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Notes
- 1.
- 2.
Examples of these special listing segments created since 1996 wishing to replicate the success of NASDAQ are EASDAQ (Brussels), Nouveau Marché (Paris), Ü AIM (London), Nieuwe Markt (Amsterdam), Neuer Markt (Frankfurt), Nuovo Mercato (Milan) and Mercado Nuevo (Madrid).
- 3.
Specifically about Neuer Markt, Coffee (1999, p. 50) says: “Particularly noteworthy has been the success of the German Neuer Markt, a new small company market, patterned after NASDAQ’s small capitalization market, to attract listing by start-up companies.”
- 4.
All mentions to Novo Mercado Listing Rules (“NMLR”) referred to the rules valid until 9th May of 2011, period that evolved the cases analyzed.
- 5.
See Donaggio (2012, p. 58) for a comparative table of the Neuer Markt and Novo Mercado requirements.
- 6.
One example is the intensification of OECD’s support for Brazilian reforms to ensure funding sources linked the adoption of higher standards of corporate governance, mainly Novo Mercado listed companies.
- 7.
According to Milhaupt and Pistor (2008, p. 31) “conscious of the signaling power of law and legal reform, political actors and members of the legal community may use foreign as opposed to home-grown Law to signal some desired quality of their governance”. All those similarities can be understood as desired by BM&FBovespa due to the “signaling function” of legal transplant.
- 8.
The listing of just eight new companies from 1995 to 2000 illustrates the unattractiveness of Brazilian equity market at that time.
- 9.
The Brazilian Institute of Corporate Governance (IBGC) was founded in 1995 as a non-profit entity and since its inception, IBGC has been the central forum for the introduction and dissemination of the corporate governance concept in Brazil and it stands today as the main reference in Brazil that focuses on the development of best practices in corporate governance. IBGC is well known for preparing the “Code of Best Practices in Corporate Governance”, originally released in 1999, now in its fourth edition of 2009.
- 10.
According to Santana et al. (2008), BM&FBovespa wanted to create only one special listing level (Novo Mercado), however, some “blue chips” companies resisted to migrate to Novo Mercado but, at the same time, wanted to be seen as more friendly to investors. In order to accommodate the interests of large companies already listed BM&FBovespa created two intermediate levels (Levels 2 and 1).
- 11.
According to item 12.1 of NMLR it is up to BM&FBovespa to send a written notice to the company, the senior managers and the controlling shareholder to preserve the compliance to NMLR whenever they are in breach of any obligations deriving from the NMLR.
- 12.
According to Silveira and Dias (2010) there was a loss of R$840 million of Cosan’s market value just 15 days around the announcement of the material fact and was not recovered until the last trading day of 2007.
- 13.
Even if the agreement had been signed, Cosan Ltd. would still be subject to corporate law more lenient than Brazilian Law.
- 14.
See Memorandum of SRE/GER-1 CVM 399/2007.
- 15.
Besides the two classes of shares, Cosan Ltd. provided a great disproportion between voting and economic rights, pyramidal structure and shark repellent with 15 % trigger.
- 16.
The unique attitude of the CVM regarding investor protection was an official letter to the controlling shareholder (Aug. 2007) regarding potential conflicts of interest between Cosan and Cosan Ltd. After that, Cosan Ltd. published a press release (Nov. 2007) about a commitment to offer commercial opportunities between Cosan Ltd., Cosan and Ometto.
- 17.
According to news “Because he challenged the Stock Exchange” (“Por que ele desafiou a Bolsa”) of Época Negócios Magazine (21 Nov. 2007), BM&FBovespa was among those most angered by Ometto because it had an additional concern–its own IPO–and did not like Cosan casting doubt on the credibility of the Novo Mercado.
- 18.
During 2008 first quarter, Brokers from Itau and Brascan Banks recommended shares with high expectation to reach R$27.50 by the end of 2008. On the contrary, shares reached their highest value (R$ 12.80, May 2008). From that period, shares dropped due to a set of facts: (i) the offering of 430,000 shares (R$ 4,643,000.00) holded by the controlling shareholders in a 7 day period and (ii) a leak of a criticizing e-mail of a Credit Suisse employee relating to quality of Tenda shares. Just 1 day after this email, Credit Suisse issued a report downgrading its recommendation (from buy to neutral) and reducing its price target (from R$21 to R$7). It is important to note that Credit Suisse have been one of the coordinators of the Tenda’s IPO (with Itaú BBA S.A.).
- 19.
The withdrawal or appraisal rights are established by Brazilian Corporate Law (Art. 109, V) and are considered an essential rights of shareholder that cannot be deprived by bylaws or general meetings.
- 20.
It seems that Novo Mercado is a public self-regulation because is characterized by coercive submission of the participant and is subject to state sanction since there is an authorization of special listing segments granted by the CVM to the BM&FBovespa and every change in the segment rules must be submitted to the CVM’s authorization (Art. 21, Law 6.385/1976 and CVM Instruction 312/1999). According to Van Waarden (1984) apud Moreira (1997), to identify the degree of autonomy of the self-regulation entity it is needed to verify (i) the degree of freedom of the self-regulatory body for modifications of its organization and operation and (ii) the need of the governmental authorization or ratification of decisions.
- 21.
According to Art. 4 of Law 6.385/1976.
- 22.
Cosan had at least 19 formal administrative proceedings related to operation with Cosan Ltd., whereas Tenda had at least nine formal administrative proceedings related to operation with Fit and Gafisa.
- 23.
An analysis of the news in the specialized media results in more than 30 negative news about Cosan (from Jun.25th to Dec.25th, 2007) and over 15 bad news associated with Tenda (from Sep.1st, 2008 to Dec.31, 2009).
- 24.
Law 10.303/2001 made many reforms towards greater protection of minority shareholders, Law 10.411/2002 granted greater autonomy to the CVM and established fixed terms to its directors and Law 11.638/2007 determined the mandatory elaboration of financial statements to large companies.
- 25.
To avoid this potential conflict of interest on monitoring and compliance of the NMLR – including its liability and punishments – the creation of an external structure to BM&FBovespa may be required.
- 26.
Lazzarini (2011) made several social network analysis’ experiments with Brazilian companies and their connections. The author found a crony capitalism was even stronger (from 1996 to 2009) than before 1990s.
- 27.
Siems (2008, p. 3) states that “Legal rules must not be regarded in an isolated way, because the functioning of legal systems can only be understood as a whole.”
- 28.
According to Kraakman et al. (2004, p. 215): “By necessity, corporate law in every jurisdiction must deal with three generic agency problems: the opportunism of managers vis-a-vis shareholders; the opportunism of controlling shareholders vis-a-vis minority shareholders; and the opportunism of the firm itself vis-a-vis other corporate constituencies, such as corporate creditors and employees. (…) the principal function of corporate law, as we conceive of it, is to respond to these three generic agency problems”.
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Acknowledgments
The author is grateful to Professor Dr. Alexandre Di Miceli da Silveira for his detailed reading and valuable critique, to Professor Dr. Esdras Borges Costa (in memoriam) for his important review, and to Muriel Waksman for her careful research. All errors and omissions are the sole responsibility of the author.
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Donaggio, A. (2014). Limitations of Legal Transplants and Convergence to Corporate Governance Practices in Emerging Markets: The Brazilian Case. In: Boubaker, S., Nguyen, D. (eds) Corporate Governance in Emerging Markets. CSR, Sustainability, Ethics & Governance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-44955-0_19
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