New Rules, Few Takers

In May, the São Paulo Stock Exchange created a series of new market segments for companies that agree to meet more demanding standards of corporate governance and disclosure than currently required by law. Companies adhering to these new categories-known as Level I and Level II-sign a private contract with Bovespa binding them to these more stringent requirements.

Standards for a Level I listing are roughly similar to those for a full American Depository Receipt listing on the New York Stock Exchange. Companies are required to provide quarterly audited figures and disclose additional information such as stock option schemes for executives. Bovespa officials agree that these demands are not particularly stringent-one official refers to the Level I program as a “marketing coup.” Local investors agree. Bruno Rocha, head of Dynamo, a Rio de Janeiro fund manager, says “Level I does not mean very much.”

Admission to Level II requires companies to meet more exacting standards. Companies must agree to provide full tag-along rights for minority investors holding voting shares-known as ONs in Brazil-in the event of a takeover. They must give holders of non-voting preferred stock – called PNs – at least 70% of the sale price in a tender offer for their stock. They must also publish financial statements according to US or international accounting standards. So far, no company has acquired a Level II listing. Walter Appel, of Banco Fator says, “We are obviously pressing companies to go to the next level. They need to be convinced that this is worth doing and that they will benefit” if investors improve their valuations.

The exchange has also created an entirely new market known simply as the Novo Mercado in which only companies that issue only common stock can enter. So far no company has applied for entry. Microsiga, a São Paulo software company, which has said it intends to list on Novo Mercado when it launches an IPO, has yet to say when it expects to go public. Given the state of the market in late summer, it could be some time before that occurs.