Is it time to end the Brazilian ban on multi-voting shares?
Huck Otranto Camargo, São Paulo
Lucas Carneiro Gorgulho Mendes Barros
Huck Otranto Camargo , São Paulo
Brazilian corporations are not permitted to issue multi-voting shares under local corporation law. In other jurisdictions, major companies issue multi-voting shares and benefit from it. This is not a new corporate governance tool -- it dates back at least to the first half of the 20th century, when it became more widespread.
The Brazilian ban on multi-voting shares was first established in 1932 by Decree-Law No. 21,536/1932. This was repeated in Decree-Law No. 2,627/1940. The prohibition is still present in the current Brazilian corporation law (Law No. 6,404/1976).
However, this has not always been the rule for Brazilian corporations. From 1849 to 1932, no piece of legislation expressly prohibited multi-voting shares in Brazil. In fact, prior legislation usually permitted that bylaws provided for a minimum number of shares that would entail the exercise voting rights to shareholders, contrary to the rationale behind prohibiting multi-voting shares.
Recently, the debate regarding multi-voting shares has been rekindled. The Brazilian Stock Exchange (B3 SA – Brasil, Bolsa, Balcão) held a public conference on this matter in December 2019. In addition, the Brazilian Securities and Exchange Commission (CVM) also released a public consultation regarding the issuance of Brazilian Depository Receipts (BDRs) representing securities issued by companies that are headquartered abroad, even though their relevant assets are in Brazil, which allows Brazilian companies to adopt alien corporate structures and still have their securities negotiated in Brazil.
One of the reasons for the resumption of interest in this matter is that Brazilian corporations, such as Arco Educação, Stone Pagamentos, PagSeguro Digital, Afya Educacional and XP Investimentos – all of which underwent an initial public offering (IPO) in the US in either 2018 or 2019 – are going public in other jurisdictions with multi-voting share structures. This naturally fosters a rethink of Brazilian institutional frameworks, particularly the incentives and disincentives schemes of its legal regime, the ban on such schemes and the competitive disadvantage it may bring to companies listed in Brazil.
The debate is also timely, as a bill regarding the authorisation of issuance of multi-voting shares under certain conditions (Bill No. 10,736/2018), is currently under analysis of Brazilian Chamber of Deputies (Câmara dos Deputados).
The bill authorises the issuance of one multi-voting shares class by closely held companies, even though the multi-voting powers may remain applicable even if the company goes public after the issuance of the special shares. Such shares may be held solely by ‘entrepreneurs or founders’ and they grant their owners multiple votes for a maximum period of six years (an initial three years, extendable for an equal term). After this term, they retreat to the scheme of ‘one share, one vote’. The bill does not limit the maximum number of votes that may be given by this special class of shares. The proposition, therefore, would permit multi-voting shares on a restricted basis.
Considering that there are other means available in Brazil for attaining the effects of multi-voting schemes (discussed below), it may be preferable to remove these limitations and to allow the issuance of multi-voting shares more extensively. The bill is nonetheless one of the initial steps that has helped to put in motion the debate on potential legal advances on this field.
Justification of the ban on multi-voting structures in Brazil
The justification for the ban on multi-voting shares was threefold. In the opinion of its conceiver, multi-voting shares:
• could prevent the majority of shareholders from controlling the corporations;
• could foster the entrenchment of management; and
• would foment the assumption of higher risks in the undertaking of corporate activities.
The ban reinforces the principle of ‘one share, one vote’, which is highly disputed in legal and economic academic debate. In short, each share has equal political and voting rights, based on the assumptions that political rights should be attached to subjacent economic interest and that the share would be the smallest unit of such political and economic package. As discussed below, however, this coupling is not an irrevocable principle in corporations, even in Brazil.
It is curious that the same law that prohibited multi-voting was the one which introduced preferred shares, with no or restricted voting rights, in Brazil, These two structures are analogues in practical and economic terms, as both permit the decoupling of voting rights and economic interest. The rationale behind ‘one share, one vote’ was simultaneously absorbed and repelled.
Loopholes in the law: deviations from the principle of ‘one share, one vote’
There are many ways of decoupling voting rights and economic interest in corporations, or at the least deviating from the principle of ‘one share, one vote’. Many of these are permitted by the current Brazilian legal regime and in other jurisdictions. One may divide them into traditional and modern techniques.
Traditional schemes include:
• pyramidal structures of control;
• dual or multi-class shares structures, which give some classes of shares higher economic interest than others and give them restricted or no voting rights;
• setting a maximum number of votes which may be exercised by each shareholder; and
• usufruct of political or economic rights.
Modern techniques of decoupling are generally termed ‘the new vote buying’ (empty voting and hidden (morphable) ownership). By using financial instruments, it is currently possible, and even common, to detach economic interest from the property of shares (and its political rights).
The issuance of shares without par value also undermines the idea that each share encapsulates equal voting rights and economic interest. Shareholders that subscribe the same number of shares in different issuances will have equivalent voting rights – even if they pay distinct unitary issuance prices.
Additionally, each shareholder has its own economic interest, weighted by its particular situation and its bonds to the company: the same amount of money invested by two shareholders may represent different interests for each of them. These are subtler departures from ‘one share, one vote’, but are still deviations from the principle.
In summary, even though the Brazilian corporation law expressly bans multi-voting shares, it indirectly permits companies and shareholders to achieve the same effects through multiple other mechanisms and structures.
It is time to reconsider the relevance of maintaining a ban on issuance of multi-voting shares in Brazilian corporations. The justification is disputable and there are other legal schemes already permitted in Brazil that leads to equivalent practical and economic results.
Multi-voting shares may be indeed a useful corporate governance mechanism available to corporations, which is compatible with the evolution of governance. It may find its applicability both in privately held and publicly held corporations (even if only in some segments of stock exchanges) and benefit corporate structures that reflect the diversity of companies.
One should not disregard that the structure led to frauds in the past, or even the justifications for its ban, as largely reported by legal scholars. Eventual abuses, however, may be tackled by other means: not by prohibition itself, but rather by addressing frauds, wrongdoings or acts contrary to the social interest. Dysfunctional uses should not disregard one potential useful corporate governance technique, but should lead to mechanisms for avoiding such dysfunction.
The current bill authorising multi-voting shares is therefore a commendable initiative. Further reflection on its criteria and specific rules, as well as potential refinements and extensions of its scope, are still necessary, though.
 It is usually understood that multi-voting shares became more popular after the First World War (cf. Ascarelli, Tullio. Sul Voto Plurimo nelle Società per Azioni [Re Multiple Votes in Corporations]. Modena: Società Tipografica Modenese. 1925, p. 3).
 Cf Section 1, Paragraph 4th, of Decree-Law No. 2,627/1940: ‘Sec. 80. Sole Paragraph. Multi-voting is void.’
 Cf Section 80, Sole Paragraph, of Decree-Law No. 21,536/1932: ‘Sec. 1. §4th. Multi-voting is void.’
 Cf Section 110, Paragraph 2nd, of Brazilian Corporation Law: ‘Sec. 110. §2nd. It is void to assign multiple votes to any class of shares.’
 Cf Decree No. 575/1849, Law No. 556/1850 (Brazilian Commercial Code), Decree No. 2,711/1850, Law No. 3,150/1882, Decree No. 8,821/1882, Decree No. 164/1890, Decree No 1,362/1891 and Decree No 434/1891.
 Cf, i.a., section 15, Paragraph 6th, of Law No. 3,150/1882, section 721, chapeau, of Decree No. 8,821/1882; section 15, Paragraph 6th, of Decree No. 164/1890; and section 141, chapeau, of Decree No 434/1891.
 The bylaws of Brazilian first corporation (Banco do Brasil), incorporated by Charter of 12 October 1808, stated that: (1) each shareholder should hold at least five shares for granted voting rights; and (2) no shareholder should be entitled to exercise more than four votes (cf section 11, of the bylaws). Such provisions no longer exist in current bylaws of Banco do Brasil SA.
 In such conference, it was presented a study regarding multi-voting structures in 20 jurisdictions, commissioned by the Brazilian Stock Exchange: Extrato da Análise Internacional e Repercussão no Mercado Brasileiro da Adoção de Estruturas com Duas ou Mais Classes de Ações com Direitos de Voto Diferenciados (DCS) [Extract of International Analysis and Repercussion in Brazilian Market of the Adoption of Structures with Two or More Classes of Shares with Different Voting Rights (DCS)], available at www.bmf.com.br/portal/images/newsletter/bmfbovespa/Voto-Plural.pdf, last accessed on 12 February 2020.
 The study commissioned by Brazilian Stock Exchange found that the structure with multi-voting shares was not the determining reason for the undertaking of IPOs of Arco Educação, Stone Pagamentos and PagSeguro Digital abroad (cf. Extrato da Análise Internacional e Repercussão no Mercado Brasileiro da Adoção de Estruturas com Duas ou Mais Classes de Ações com Direitos de Voto Diferenciados (DCS) [Extract of International Analysis and Repercussion in Brazilian Market of the Adoption of Structures with Two or More Classes of Shares with Different Voting Rights (DCS)], p. 47).
 Campos, Francisco. Exposição de Motivos do Decreto-Lei no 21,536/1932 [Explanatory Statement of Decree-Law No. 21,536/1932]. Revista dos Tribunais v 82, n. 386. 1932, p. 579-580.
 Cf., i.a, Ferrarini, Guido. ‘One Share – One Vote: A European Rule?’, European Company and Financial Law Review, v. 3, n. 2. 2005, p. 147-177. In respect of structures departing from the principle of ‘one share, one vote’, see Bebchuk, Lucian Arye; Kraakman, Reinier; and Triantis, George. Stock Pyramids, Cross-Ownership and Dual Class Equity: The Mechanisms and Agency Costs of Separating Control From Cash-Flow Rights. In Morck, Randall K. (ed.). Concentrated Corporate Ownership. Chicago: University of Chicago. 2000, p. 445-460.
 See, i.a., Grossman, Sanford J.; and Hart, Oliver D. ‘One Share-One Vote and the Market for Corporate Control’, Journal of Financial Economics, v. 20. 1988, p. 175-202; Adams, Renée; and Ferreira, Daniel. ‘One Share-One Vote: The Empirical Evidence’, Review of Finance, v. 2, n. 1. 2008, p. 51-91 (in this paper, there is a review of empirical evidence on the principle); and Burkart, Mike; and Lee, Samuel. ‘One Share – One Vote: the Theory’, Review of Finance, v. 12, n. 1. 2008, p. 1-49 (in this paper, there is a review of theoretical literature over this matter).
 The adage is Easterbrook and Fischel’s: ‘It is not possible to separate the voting right from the equity interest’ (The Economic Structure of Corporate Law. Cambridge: Harvard University Press. 1991, p. 74).
 Cf section 1, Paragraph 3rd, of Decree-Law No. 21,536/1932: ‘Sec 1, §3rd. The bylaws may refrain from granting to preferred shares one or more rights given to common shares, including voting rights, or granting them with restrictions […].’
 Withholding this understanding, see Ascarelli, Tullio. Problemas das Sociedades Anônimas e Direito Comparado [Problems of Corporations and Comparative Law]. São Paulo: Saraiva. 1945, p. 66.
 Cf Section 15, Paragraph 2nd, of Brazilian Corporation Law: ‘Sec 15. §2nd. The number of preferred shares without voting rights, or subject to restriction in the exercise of such right, may not exceed 50% of all shares issued by the company.’
 Brazilian legislation has also always admitted such rules, even though this is not common nowadays. See Section 110, Paragraph 1st, of Brazilian Corporation Law: ‘Sec. 110. §1st. The bylaws may limit the number of votes of each shareholder.’
 For the analysis of the phenomena, see Hu, Henry; and Black, Bernard. ‘The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership’, Southern California Law Review, v. 79, n. 4. 2006, p. 811-908; and Ringe, Wolf-Georg. The Deconstruction of Equity. Activist Shareholders, Decoupled Risk, and Corporate Governance. Oxford: Oxford University. 2016.
 See Mazeau, Henri. Le Vote Privilégié dans les Sociétés de Capitaux [The Privileged Vote in Corporations], 2nd ed, Paris: Dalloz. 1929, p. 319.
 Cf., ia, Ringe, Wolf-Georg. ‘Deviations from Ownership-Control Proportionality—Economic Protectionism Revisited’. In Bernitz, Ulf; and Ringe, Wolf-Georg (eds.). Company Law and Economic Protectionism. New Challenges to European Integration. Oxford: Oxford University. 2010, p. 216-222.