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Opinião dos Especialistas Dwight Clancy (about Gafisa)

Dwight Clancy (about Gafisa)

Gafisa: Brazil’s First Proxy Fight

A Test of CVM Guideline 481



On May 11, 2012, Gafisa SA, Brazil’s fifth largest homebuilder by revenue, held its annual shareholders’ meeting. The company had lost more than 70% of its market value over the preceding two years largely due to its operations in the affordable housing segment. Shareholder discontent had reached its boiling point. On the day of the meeting, in what is sure to become known as Brazil’s first proxy fight and another major milestone in the development of capital markets in Brazil, a group of dissident shareholders lacking a strategic stake in the company won four seats on the company’s nine-member board.

The outcome was unexpected and the market reacted; Gafisa was the best performing stock on the exchange that day. Brazil’s premiere financial journal, Valor, reported that so many shareholders withheld their support for management’s candidates, the dissidents could have elected twice the number of candidates that they did, hypothetically leaving the company with just one incumbent on the nine member board. While such a win for minority shareholders is without precedent in Brazil, it can be explained by the recent evolution of corporate ownership in the market.


A New Ownership Paradigm and Cumulative Voting

Unlike most Brazilian companies, Gafisa does not have a controlling shareholder and has an uncharacteristically high free float of 99%. Also, the company has depository receipts listed on the New York Stock Exchange. Both of these characteristics serve to promote greater foreign investment in Gafisa. According to an article by Bloomberg, at the time of the annual meeting, foreign shareholders made up 57% of Gafisa’s shareholder base. However, these foreign shareholders were unable to participate at the meeting in the same manner as domestic shareholders in Brazil.

Under Brazilian corporate law, shareholders representing at least 5% of a company’s voting shares may request that the election of directors be carried out using cumulative voting rather than the standard slate election by a simple majority. This alternative mechanism is intended to reinforce minority shareholder rights by allowing shareholders to concentrate their votes for a single candidate and thus increase the likelihood of election.


The First Proxy Fight?

On April 25, 2012, Gafisa accepted a petition filed by Rio Bravo Investimentos, a Brazilian investment fund, for the adoption of cumulative voting at the upcoming meeting. Although cumulative voting had been utilized several times in the past by Brazilian investors, it was generally evoked immediately prior to the meeting; this was the first case where it had been requested several weeks before the shareholders’ meeting. An opportunity thus opened up for foreign investors, most of whom are obliged to send proxy voting instructions several days prior to the meeting, to participate in what would become the country’s closest rendition of an Anglo-style proxy fight.


Deficient Regulations?

Nonetheless, Gafisa did not immediately announce to the market that it had accepted the petition for cumulative voting. It wasn’t until May 2, 2012 that the company announced that it had received a petition to change the election method. It was not the original request made by Rio Bravo that was disclosed, however, but instead a new request from Polo Capital, another Brazilian investment fund. The request was made in the form of a public solicitation for proxies under the Brazilian securities commission’s guideline 481. The board’s decision not to disclose Rio Bravo’s request for cumulative voting to the market implies that they did not consider it material information. However, due to existing regulations that explicitly govern the matter in the case of a public solicitation, the board was required to make the second request public.

With the meeting just days away, the deadlines set by the global custodian banks to update the ballots with the new election method had passed and those cutoffs set to process the votes of foreign shareholders using the outdated ballot were approaching. At this point, shareholders who wanted to allocate their votes among the individual management and dissident shareholder candidates could do so only by physically attending the meeting. Otherwise, shareholders voting by proxy were limited to voting solely on the management slate listed on the original meeting agenda; a vote against or the decision to abstain from voting would serve to support the dissident shareholders’ efforts.


The Outcome

Given the obstacles faced by foreign shareholders to effectively participate in the meeting, Brazilian investors coordinated their votes at the meeting and allocated their shares to four of the five original candidates the dissidents had put forward to ensure their election. It wasn’t until the result of the election was announced that shareholders became aware that the dissident candidates won their seats with almost double the number of votes in their favor than those in favor of management’s candidates. Given the composition of Gafisa’s shareholder base, it seems apparent that many foreign shareholders opted to abstain from voting on the election. What remains unclear is whether their intention was to support the dissident candidates or whether the ambiguity around the election and approaching vote deadlines caused them to abstain on the matter.


The Problem

Shareholder activism in Brazil is undoubtedly on the rise. Those rights afforded to minority shareholders by law are increasingly being exercised at companies without a defined owner. Although regulators have tried to address increased minority shareholder participation in these companies, they failed to harmonize those rights afforded by the law and the obstacles to foreign participation in local capital markets. In a globalized economy such as Brazil’s, all shareholders should be entitled to participate in a shareholders’ meeting in the same fashion regardless of physical distance from the meeting.


Possible Solution

Regulators should introduce rules that would provide a sufficient notice period for the public solicitation process and the election of directors by cumulative voting. Further, companies should be required to disclose any material changes to the election method for the board of directors and immediately communicate these changes to the custodian banks responsible for managing the proxy voting process.

Two modifications to the current rules would greatly increase foreign participation in the election process. First, companies should be required to disclose the agenda for the shareholders’ meeting further in advance of the meeting date than currently required by law. Second, shareholders should be required to petition for cumulative voting or initiate the public solicitation process further in advance than presently required by the regulations. Under this system, local and global custodian banks would be afforded enough time to process ballots and provide investors the opportunity to vote by proxy in accordance with the format to be followed at the shareholders’ meeting itself.

Gafisa represents a new paradigm of corporate ownership in Brazil. Its shares trade in two major global markets and its owners are widely dispersed around the globe. Given the recent trend toward this new paradigm in Brazilian capital markets, rules should be written to allow owners to vote across borders with the same ease with which they invest their capital.


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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