There has already been much discussion regarding the reforms in the listing segments of the B3 (formerly BM&FBOVESPA), especially relating to the Novo Mercado and Level 2 (still in the voting stage) regulations, in order to strengthen the corporate governance rules applicable to companies included in these groups. However, a very powerful instrument to strengthen these governance rules has just come into force and, best of all, it applies to any company listed and registered in issuer category A, as defined by the Brazilian Securities Commission (CVM) in Instruction No. 480/2009 (ICVM 480).

Last June 8, CVM issued Instruction No. 586, which amended ICVM 480 and regulates, among other matters, disclosure of information regarding application of the governance practices set forth in the Brazilian Corporate Governance Code - Public Companies (or simply the Governance Code), an initiative of 11 entities that are part of the Interagency Working Group, made up of different market players, such as investors, companies, intermediaries, investment analysts, and investor relations professionals. The basis for drafting the Governance Code was the Brazilian Institute of Corporate Governance - IBGC’s Code of Best Corporate Governance Practices, applicable to publicly-held companies, and the "practice or explain" model provided for in the ABRASCA’s Code of Self-Regulation and Good Practices for Publicly-Held Companies.

The document reflects the consensus of the entities participating in the Interagency Working Group with respect to 31 principles and 54 practices recommended to issuers as a suggestion to strengthen corporate governance in the Brazilian market and, consequently, to attract more investments, with a lower cost of capital for Brazilian companies.

Among the principles and practices mentioned in the Governance Code, we highlight the following:

  • Capital stock of the company composed only of common shares;
  • Shareholders' Agreements without tying them to the exercise of voting rights of any officer, director or member of supervisory and control corporate bodies;
  • Non-use, in the by-laws, of clauses which make it impossible to remove measures intended to defend the company against acquisitions of control;
  • In case the bylaws determines that a Tender Offer shall be conducted whenever a shareholder achieves a relevant stake, the rule of price determination should not impose premium increases well above the economic or market value of the shares;
  • Tender Offers arising from the sale of control with a guarantee to the shareholders of receipt of the same price and conditions paid to the controlling shareholder;
  • Provision in the bylaws that the board of directors must give its opinion with respect to any Tender Offer relating to shares or securities issued by the company;
  • Board of directors composed, in its majority, of external members, with at least 1/3 being independent members;
  • Positions of CEO and chairman of the board of directors not concentrated in one individual;
  • Variable compensation of directors, if any, not tied to short-term results;
  • Establishment of a permanent auditing committee in the bylaws, formed mostly of independent members and coordinated by an independent board member; and
  • Not engaging as an independent auditor for the company any party that has provided audit services for less than three years.

The Governance Code follows the "practice or explain" model, that is, it does not oblige the company to adopt the recommendations described therein, but it does require that it justify why it does not follow the principles and recommended practices.

To this end, ICVM 586 created a new periodic document to disclose comments from issuers on the Governance Code entitled "Report on the Brazilian Corporate Governance Code - Public Companies". It must be completed and delivered within seven months from the closing date of the fiscal year by all issuers registered in category A who are authorized by a market management entity in order to trade shares or certificates of deposit of shares on a stock exchange.

The obligation to submit the report shall apply (i) as of January 1, 2018, to companies that, on the date of publication of ICVM 586, had at least one share type or class of their issuance included in the Brazil 100 Index (IbrX-100) or Bovespa Index (Ibovespa); and (ii) as of January 1, 2019, for the other issuers registered in category A authorized by a market management entity to trade shares on a stock exchange.