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Dwight Clancy

Dwight Clancy

Foreign shareholders continue to be effectively excluded from participating in Brazilian public companies

On March 19th, Petrobras, the Brazilian state-owned oil company that is the largest company by market capitalization listed on the BM&FBOVESPA, held its annual shareholders’ meeting. Although the oil giant’s shareholders’ meeting has traditionally been treated as a mere formality given that the company is controlled, this meeting proved to be anything but that. For the first time in Brazil’s capital market history, a group of minority shareholders led by global asset manager Blackrock and Brazilian hedge fund Polo Capital attempted to appoint two independent representatives to the board under a statutory provision intended to counterbalance controlling shareholders’ power. Despite gathering the requisite votes needed to elect their candidates, the minority shareholders’ efforts were thwarted by the government.

Under Brazilian corporate law, preferred shareholders may elect one member to the board of directors if the shareholders represent at least 10% of the total shares in that class; common shareholders may elect one member if they represent at least 15% of the total shares in that class. While these thresholds appear to be high considering Petrobras’ $275 billion plus market capitalization, Blackrock alone held 5% of the preferred shares at the time and the subsequent seven largest foreign holders made up the additional 5%.

So why did minority shareholders fail to elect their candidates at the Petrobras meeting?

The Brazilian government holds a direct controlling interest of 50.2% of the common shares of Petrobras giving it ultimate decision power. The government also has several indirect stakes in the company namely through BNDES, the state development bank, and two sovereign wealth funds. Together, these other entities hold just over 15% of the common shares and 27% of the preferred shares. Despite the fact that the law prohibits the controlling shareholder, in this case the federal government, from electing directors into these two seats, BNDES and several state-affiliated pension plans successfully elected two directors to the board having aggregated more votes in favor of their candidates than minority shareholders were able to gather for their candidates.

The Brazilian state thus opted to maintain the status quo and re-elected Josué Gomes da Silva, the son of the late vice president in the Lula administration, and Jorge Gerdau Johannpeter, chairman and controlling shareholder of Brazil’s largest steel producer and a major supplier to Petrobras, to seats reserved for the representatives of minority shareholders. As a result, the board continued to be entirely composed of individuals that are connected to or employed by the Brazilian government. Although shareholders who are independent of the State do in fact hold approximately 50% of the total shares in Petrobras, not one director will be present to represent their interests.

Why couldn’t minority shareholders gather more votes than BNDES?

The cause of Blackrock and Polo’s failure to get candidates elected is rooted in the election system itself. Despite the Brazilian securities commission’s efforts to increase participation at shareholders’ meetings through regulation, foreign shareholders continue to be effectively excluded from participating.

If you are the manager of a foreign investment fund and you want to support an independent candidate for the board of Petrobras or any company in Brazil, the current regulations afford you two ways of doing so. The easiest way would be to hop on a flight to Rio and attend the meeting yourself with all the requisite paperwork. Unfortunately, because of the associated cost, most foreign funds managers would only opt for this option if they had a strategic stake in the company. Instead, foreign investors choose the other, more cost efficient way of participating in shareholders’ meetings: voting through a proxy. In the case of Brazil, that means sending an attorney to attend the meeting on behalf of tens and sometimes hundreds of foreign investment funds. But who hires the attorney?

Because foreign investors typically own stock in thousands of companies around the world, they hire the services of a global custodian bank to help them manage the voting process. The global custodian bank has a network of local custodian banks it then contracts to help it deliver the votes. For example, Blackrock may hire BNY Mellon as its global custodian, which in turn will contract with Banco Itaú as its local custodian. It is the local custodian, Banco Itaú in this example, that would then hire a law firm to send a representative to vote on behalf of all of the foreign investors who contracted the services of the global custodian bank, BNY Mellon, to manage the voting process. The whole process takes several days. Now, how do you ensure the attorney attends the meeting with all the requisite paperwork that allows him/her to cast your votes in favor of your chosen candidate?

The short answer is, you can’t. In Brazil, a company notifies its shareholders at least 15 days in advance that a meeting will take place. The company makes the meeting agenda publicly available so that shareholders can anticipate the topics that will be discussed. If an election is to occur, the Brazilian securities commission only requires that companies disclose to their shareholders the candidates that the board of directors has nominated. It is up to minority shareholders to decide on their own candidates and to nominate them at the meeting. In the case of Petrobras, Blackrock and Polo had selected their candidates prior to the meeting and attempted to garner support for their candidates from foreign shareholders via phone, email and site visits. However, when it came time for foreign shareholders to send their voting instructions in support of the minority appointed candidates to their custodian banks, the shareholders found there was no way of doing so.

Foreign investors send their votes to their custodian banks through one of several online voting services, the two largest of which are provided by Broadridge and Riskmetrics. Shareholders are limited to voting in favor, against or abstaining on each item on the company’s agenda. In the case of Petrobras, item 4 on the agenda contained the proposal to elect the board’s nominees, but how was one to support Blackrock and Polo’s candidates when voting through this system? Despite this being the system through which almost all foreign investors participate in Brazilian shareholder meetings, there was no way they could support their fellow minority shareholders’ candidates.

What can be done to facilitate the election of minority shareholder appointed candidates?

In order to allow those shareholders voting by proxy to support minority appointed candidates, a company’s agenda for the shareholders’ meeting must include additional items under the election of directors proposal. As the election of the board of directors occurs in two separate elections, first the election of the controlling shareholder’s slate and second the election of the minority shareholder-nominated candidates, the agenda should reflect that two elections will occur. Moreover, the minority shareholders who meet the shareholding requirements would need to communicate their nominees to the company in advance of the publication of the meeting agenda so that they may be included in the meeting materials. Subsequently, each minority appointed candidate would require a separate proposal on the agenda so that shareholders are able to vote for one candidate that corresponds to their class of shares. Had all four candidates that were nominated to represent minority shareholders been presented as separate proposals on the agenda for Petrobras’ shareholders’ meeting, Blackrock and Polo’s nominees would undoubtedly have won much more support from foreign shareholders and possibly the election.

Minority shareholders in Brazil are vested with the right to elect representatives to the board of directors to protect their interests. Unfortunately, as the Petrobras case has demonstrated, this right is purely theoretical. Brazil is experiencing a new economic reality in Latin America, where new capital is increasingly being provided from outside its borders. In order to protect the rights afforded all shareholders, irrespective of their location, a system must be put in place that allows active participation in the oversight of publicly listed companies in Brazil.


Dwight Clancy received his Bachelor of Arts in economics from the University of California, San Diego and studied Latin American political economy at the University of Belgrano in Buenos Aires, Argentina. He joined Glass, Lewis & Co. in 2007 as a research associate and currently serves as the head of Latin American and Iberian research.  Mr. Clancy is an active contributor to the Organization for Economic Co-Operation and Development’s Latin American Corporate Governance Roundtable and the Brazilian Institute of Corporate Governance on the topic of cross-border proxy voting.



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