Super-voting shares in Brazil: Regulatory lessons from a developing market

In August 2021, the Brazilian Congress approved the creation of super-voting shares in Brazil. At the time, legislators implemented significant safeguards to address power imbalances and peculiarities of the local market.

Three years later, this regulatory experience arises as a relevant study case at a time when other countries, especially in Europe, are debating the adoption of such a model.

Notoriously controversial, super-voting or dual-class shares (DCS), grant extra voting rights to the shareholders who own them. Thus they go against the celebrated “one share, one vote” governance principle, which embodies the idea that shareholders’ rights should be proportional to the capital invested in a company.

Since Google (now Alphabet) adopted this structure in its 2004 IPO, technology start-ups and investors became particularly interested in dual-class shares. Their appeal lies in allowing companies to access capital markets (and give investors the opportunity to profit) while ensuring control remains in the hands of founders and key company personnel.

From a business perspective, safeguarding founders’ independence as start-ups learn the dynamics of capital markets allows them to make savvy business decisions, privileging a long-term view without being constrained by board and shareholder demands.

In other words, super-voting shares can help companies adapt – and adaptation periods do not last forever.

With more and more companies wanting to adopt super-voting shares for their IPOs, stock exchanges worldwide felt the pressure to be more flexible with their listing rules.

The trend, which started around 2018 in Asia, spread to Brazil and is now coming back to Europe. Germany recently allowed a dual-class shares system and the UK is studying further relaxation of rules for dual-class listings.

Safeguards

In all these markets, the same argument has been used against strong safeguards – namely, that they make super-voting shares less appealing to founders, thus preventing the local market from receiving more IPOs.

Or do they?

Brazil offers an interesting case study. As a developing market with few corporations and many companies with controlling shareholders, the Brazilian market struggles with a track record of corporate conflicts.

Considering the local reality, legislators therefore included the following safeguards:

• Companies are forbidden from adopting a dual-class share structure after their IPOs
• The voting rights ratio is set at 1:10
• Sunset clauses are valid for seven years. Extensions, which can be valid for any period, can only be approved by minority shareholders
• The power of the super-voting shares is restricted in relation to approving dividend distribution and financial statements
• Super-voting shares are immediately converted into regular shares if ownership is transferred
• Shareholders that disagree with dual-class shares can opt out and receive the due value for their shares
• Companies with a dual-class share structure are not accepted in Novo Mercado, Brazil’s premium listing segment

Critics of this approach note that no companies have adopted super-voting shares in Brazil due to the impossibility of transferring the shares, the short period for sunset clauses and low voting rights per share.

This has prompted calls for the relaxation of a law, the effects of which we cannot measure yet – not because founders have rejected Brazilian super-voting shares, but simply because no IPOs have occurred in Brazil since 2021.

Moreover, a careful analysis shows Brazil’s legislation is on par with international experiences, which are not limited to the US.

In the UK, for instance, sunset clauses are triggered after only five years and Germany adopts the same voting rights ratio of 1:10. That is the same ratio for Alphabet’s famous Class B shares, held by the founders.

The literature also shows that companies with dual-class shares tend to lose value six to nine years after their IPO, thus supporting the need for sunset clauses.

Even in the US, institutional investors have been pressing for similar legislation against “eternal” super-voting shares, which many see as an unrestricted vote of confidence not only in the founder but also in their heirs.

A rule of thumb in monetary policy is that a single tool cannot fix more than one economic issue.

In our context, super-voting shares should not be the only attractive characteristic of a market. The US market, for instance, is also remarkable for its increased liquidity and investors with an appetite for technology, who are willing to pay higher premiums.

Those conditions, which are not necessarily related to a dual-class share structure, also make New York a favoured destination for IPOs.

The Brazilian experience shows that relying only on regulatory flexibility without addressing other key aspects is not the answer to creating a more liquid and dynamic capital market.

It is, however, a potential recipe for increasing disputes, which contributes to a lack of confidence in developing markets.

Fabio Coelho is CEO of the Brazilian Institutional Investors Association (AMEC)