Latin American Capital Markets

CORPORATE GOVERNANCE AND CAPITAL MARKET DEVELOPMENT 447Novo Mercado listing rules. Bovespa recognized that the well-understood shortcomingsof existing law that the legal reforms ultimately failed to address could providethe basis for a voluntary rules-based response. Bovespa's initiative can properly becalled a privatization of part of the reform process.Different Strokes for Different FolksThe Novo Mercado is a listing segment of Bovespa for companies that choose tocommit themselves to the highest standards of corporate governance by contract. 9In addition to the Novo Mercado, Bovespa created two intermediate listing segments,Special Corporate Governance Level I and Level 2.The listing rules for Levels I and2 also require higher corporate governance standards than existing norms, but theyare not as strict as the requirements of the full Novo Mercado. Companies remainfree to list under Bovespa's old rules, which simply require compliance with Brazil's(now amended) company and securities laws.Therefore, companies listed on Bovespanow have the option to choose among four listing segments, in ascending order ofcorporate governance standards: the old market, Level I, Level 2, and the NovoMercado. 10By committing themselves to higher standards of corporate governance,companies that join the Novo Mercado hope that investors will respond by placinghigher valuations on their securities, reducing the general corporate governance discountapplied to Brazilian firms. 1 ' The creation of the Level I and Level 2 segmentswas a bit of an afterthought. Bovespa felt it had to offer something that would allowsuch companies to avoid appearing indifferent to investor concerns and that would,it hoped, encourage such issues to eventually move up to full Novo Mercado status. 129 www.novomercadobovespa.com.br/english/index.htm.10 The idea of creating a separate set of listing rules within an established stock market was taken from the GermanNeuer Markt. However, an important difference is that the Neuer Markt was designed for companies from the technology,media, and telecom sectors, whereas the Novo Mercado is intended for all companies wishing to demonstrateadherence to the highest standards of corporate governance, regardless of the industrial sector1 ' The most exigent of the Novo Mercado's rules is that companies may not issue nonvoting shares. The other mainrules require that public shares be offered through mechanisms that favor capital dispersion; that the company maintaina free float equivalent to 25 percent of the outstanding stock; that the same conditions provided to controllingshareholders in the transfer of the controlling bloc must be extended to all shareholders (tag-along rights); that thecompany be obliged to make a tender offer at an objectively determined "economic value" share price should adecision be taken to delist from the Novo Mercado; that a single one-year term for the entire board of directors beestablished; that the annual balance sheet be made available in accordance with accepted international accountingpractices; and that quarterly reports be improved (consolidated financial statements are required).12 Level 2 has almost all the same rules as the Novo Mercado. The notable exception is that Level 2 companies maystill issue nonvoting shares. Level I relates mainly to transparency and disclosure, rather than shareholder rights. It isdoubtful whether a company's adherence to Level I shows a real improvement in its corporate governance; adoptionof Level I standards are better viewed as a first step toward more substantial changes.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub