BRAZIL Trends and Developments Contributed by: Enrique Tello Hadad, Daniel Domenech Varga and Marcus Luan Silva, Loeser e Hadad Advogados
Concentrated ownership structure The structure of concentrated ownership in Brazil, characterised by the prevalence of large controlling blocks, poses a significant obstacle to shareholder activism. Within many Brazilian companies, control- ling shareholders possess a substantial stake that affords them significant sway in corporate decision- making, thereby creating barriers for minority share- holders seeking to exercise influence. Consequently, the concentrated power held by controlling sharehold- ers can curtail the efficacy of activist campaigns, as they have the ability to dismiss proposals and resolu- tions put forth by minority shareholders. In cases where the interests of controlling sharehold- ers align with those of activist investors, or when there is significant pressure from institutional or international investors, shareholder activism can be more impact- ful. For instance, if controlling shareholders recognise the long-term benefits of embracing ESG practices, they may be more open to considering the demands of activists. This alignment can ultimately lead to posi- tive changes within the company. Need for legal reforms To overcome these challenges, Brazil must continue to promote legal reforms that facilitate shareholder activism and strengthen the protection of minor- ity shareholders, such as reducing the shareholding thresholds required to propose meetings or measures. This adjustment would effectively empower minority shareholders, making it more feasible to exercise their rights and influence corporate decisions. By lowering these thresholds, a broader spectrum of shareholders would be empowered to actively participate in corpo- rate governance, ultimately bolstering management oversight. One important reform is to simplify the procedures for acquiring corporate information. By implementing measures that enable shareholders to access essen- tial information quickly and easily, these reforms will foster more informed decision-making and promote greater shareholder activism. Moreover, advocat- ing for greater transparency in corporate operations and governance would break down barriers to active shareholder participation, ensuring that every share- holder, irrespective of their stake, has the opportunity
to contribute meaningfully to the company’s strate- gic direction. This commitment to transparency and open communication bolsters shareholder trust and engagement, fostering a more inclusive and account- able corporate environment. Corporate Defence Mechanisms As shareholder activism becomes more prevalent in Brazil, companies are developing strategies to pro- tect themselves against activist campaigns. These strategies range from preventive measures to reac- tive responses, depending on the nature of the activist campaign and the interests at stake. Governance shielding One of the frequently employed corporate strategies is referred to as “governance shielding” and encom- passes the inclusion of specific clauses in the com- pany’s bylaws. These clauses are intended to restrict the voting power of shareholders and establish addi- tional conditions for the approval of certain measures. By doing so, companies seek to prevent minority shareholders from exerting influence without majority shareholder support. Despite its widespread use, governance shielding has been subject to criticism. Many argue that it can perpetuate poor governance practices and serve as a safeguard for existing management against legiti- mate challenges. Therefore, companies must navigate a delicate balance, ensuring protection against activist interference while upholding transparent and respon- sive corporate governance principles. It is incumbent upon companies to carefully monitor governance shielding to avoid its potential misuse as a means of increasing management authority to the detriment of shareholder rights. Active dialogue with shareholders Another fundamental strategy for companies is main- taining an active and ongoing dialogue with their shareholders. This involves responding to sharehold- ers’ concerns during general meetings and proactively engaging throughout the year, seeking to understand investors’ expectations, and adjusting corporate prac- tices as necessary.
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