Views on improving the integrity of global capital markets
13 April 2017

CorpGov Roundup: Shareholder Rights a Key Theme

Protections for shareholders and investors are important elements in good corporate governance. Brazil’s stock exchange took some steps toward improving corporate governance at listed companies, and Canada moved closer to implementing a majority voting requirement. In the European Union, the shareholder rights directive was finally passed, which is aimed at fixing governance problems exposed in the financial crisis. In the United State and United Kingdom, backlash against Snap Inc.’s issuance of non-voting shares continued.


The Brazilian stock exchange, BM&FBOVESPA, recently presented final proposals on the listing regulations for special corporate governance segments (Novo Mercado and Level 2) that will be put before a Closed Hearing.

Companies listed on the exchange can make assessments and clarify doubts regarding the proposals for the respective listing segments until the end of May. Companies will vote on the final proposals will take place in June.

The following are the principal points of the Novo Mercado Regulation to be submitted for the companies to assess:

  • Free Float: Each company should maintain a minimum 25% free float, or 15% depending on the average daily trading volume of the shares or of public offerings. In addition, there should be an increase from 6 months to 18 months in the deadline to restore the free float in the case of a lower percentage than the minimum foreseen in the regulation, as well as the holding of a voluntary public tender offer (PTO) at fair value for divestiture of control or for acquisition of a relevant stake.
  • Preoperational: Include a rule that foresees trading being liberated for nonqualified investors only after the company publishes a financial report containing operating revenue.
  • Independent Board Members: The company must foresee its board of directors being composed of at least 20% or two (whichever is higher) independent members, always rounding upward, and foresee a process for determining the independence of nominees for independent board member positions.
  • Audit Committee: Include a Statutory Committee in compliance with CVM Instruction 308 that is composed of one independent board member and one expert and that publishes an annual report. Alternatively, include a non-Statutory Committee with the same rules that apply to the Statutory Audit Committee, and publish a report every quarter to the Board of Directors. Finally, prohibit the participation of directors of the company, subsidiaries, and controlling company and companies in the same business group.
  • Corporate Restructuring: In cases of the transfer of the shareholder base, the resulting companies must request listing at the Novo Mercado or Level 2 (if the restructuring results in companies that do not intend to request a listing at the Novo Mercado or Level 2, the decision about the structure must be made by the majority of free float shareholders).
  • Delisting: Voluntarily leaving the Novo Mercado must be preceded by a PTO at fair price, with acceptance of the exit from the Novo Mercado being approved by 1/3 of the shareholders of the free float, and voluntary exit procedures must be in compliance with CVM Instruction 361 (including the possibility of a second finding).
  • Acquisition of a Significant Shareholding: The company must foresee in its corporate bylaws that upon reaching a 20% or 30% (at the company’s discretion) shareholding, there must be a PTO held at the best price paid by the acquirer in the past 6–12 months (at the company’s discretion). Companies are dispensed from this rule if their bylaws already consider protection against dilution or a poison pill.

Critics of the measure were hoping for stronger governance standards, including more requirements about executive pay transparency.


Canada already has proxy access, but the 5% ownership threshold is considered by some to be too high. Some argue that the Corporations Act and Bank Act do not allow for a lower threshold, but the Canadian Coalition for Good Governance disagrees, stating that the acts do not forbid a lower threshold and advocating for the 3% ownership threshold adopted by a number of US companies.

Two of the largest proxy advisory firms were split on the issue when proxy access with a 3% threshold was put on the proxy of Toronto Dominion Bank, with Institutional Shareholder Services (ISS) recommending the 3% threshold, and Glass Lewis, a proxy advisory service, opposing.

Also in Canada — majority voting may be coming.

The Toronto Stock Exchange (TSX) recently issued guidance on its majority voting requirement. The notice stated that the TSX’s Majority Voting Requirement “was introduced to improve corporate governance standards in Canada by providing a meaningful way for security holders to hold individual directors accountable.” The TSX conducted a review of 200 randomly selected majority voting policies adopted by TSX-listed companies to assess issuers’ compliance with the TSX Majority Voting Requirement. The TSX “identified several deficiencies in the reviewed policies, as well as inconsistencies with the policy objectives” of the TSX Majority Voting Requirement.

The TSX stated its key findings as follows:

  • Certain reviewed policies did not have the effect of requiring a director to tender his or her resignation immediately if he or she was not elected by a majority of votes cast.
  • Certain reviewed policies did not provide a timeframe for the board of directors to render a decision as to whether or not to accept a resignation or the timeframe was outside the 90 day period permitted by TSX.
  • Certain reviewed policies did not specifically require the board of directors to accept the resignation of a director who was not elected by a majority of votes cast, absent exceptional circumstances.
  • A number of the factors identified as exceptional circumstances in the reviewed policies were inconsistent with the policy objectives of the [TSX] Majority Voting Requirement.
  • Very few of the reviewed policies contained the requirement to provide a copy of the news release with the board of directors’ decision to TSX.
  • Certain reviewed policies contained additional requirements that may have the effect of circumventing the policy objectives of the [TSX] Majority Voting Requirement.

European Union

In March, the European Parliament passed its long-awaited shareholder rights directive. The main goal of the directive was to fix governance problems exposed by the financial crisis, namely engagement between issuers and investors, short termism in the markets, executive and director compensation, and shareholder rights in general.

The following are some highlights of the changes:

  • Stronger shareholders’ rights and facilitation of cross-border voting: The new rules will make it easier for shareholders to exercise their rights. Intermediaries, such as banks, will have to ensure that they pass on the necessary information from the company to the shareholders, and vice versa. The new rules will ultimately make it easier for shareholders that reside in another EU country than where the investee companies is based to participate in the general meetings of such companies and vote.
  • Long-term engagement of institutional investors and asset managers: The new rules will require institutional investors and asset managers to be transparent about how they invest and how they engage with the investee companies. Through increased transparency requirements, the Directive encourages these investors to adopt a more long-term focus in the investment strategies and to consider social and environmental issues. These new rules will be based on a “comply or explain” approach, which means that if the investor decides not to comply with the rules, he or she needs to provide explanations of why. The approach is similar to those in corporate governance codes and stewardship codes. There is no requirement to reveal any confidential information.
  • More transparency of proxy advisors: The new rules will require proxy advisers to disclose certain key information about the preparation of their recommendation and advice and to report about the application of the code of conduct they apply.
  • Shareholders will have a “say on pay”: The new rules will encourage more transparency and accountability about directors’ pay. Shareholders will have the right to know how much the company’s directors are paid and they will be able to influence the amount. This rule will guarantee a stronger link between pay and performance.
  • Related-party transactions: The new rules will require companies to publicly disclose material related-party transactions that are most likely to create risks for minority shareholders at the latest at the time of their conclusion. Companies will also have to submit these transactions for approval at the general meeting of shareholders or by the board.


India’s regulatory authority recently published a stewardship code for insurers. Some believe this code is a stepping stone toward a similar code that would cover all institutional investors. Stay tuned.

United Kingdom

It is safe to say that most institutional investors do not like Snap Inc.’s IPO, in which the company went public with shares that offer shareowners no voting rights. The UK Investment Association can also be added to that group. They called on index providers to exclude Snap from their indexes so that institutional investors who are largely indexed would not be forced to own shares of Snap and other companies that offer shareowners no voting rights. The FTSE 350 does not permit dual class share structures.

United States

Institutional investors in the United States have echoed their UK counterparts in asking index providers to exclude Snap from passive indexes because its common shares carry no voting rights. Index providers FTSE Russell and S&P Dow Jones have plans for open consultations on the issue. FTSE Russell states that it will not include companies (e.g., Snap) with nonvoting shares in its indexes until these consultations are completed (expected to be by the end of June). S&P Dow Jones asks for comment by 3 May.

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About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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