Nora RachmanNora RachmanGlobal Corporate Governance ForumGlobal Corporate Governance Forum

February 12, 2007February 12, 2007

The São Paulo Stock Exchange case as a corporate governance reference

ArbitrationArbitration

Law 9.307/96: Recognition of arbitration in

Brazil

Progress and institutional modernization

Attendance of crescent demand:

enforceability, less time consuming,

flexibility, neutrality, quality of decisions

Arbitration xArbitration xStock MarketStock Market

Drawing a parallel: investors demands growth and improvement of stock market rules development of higher standards of corporate governance practices

BOVESPA – December, 2000: Novo Mercado

Framework of the initiative: Primary market totally stagnated

Need to reactivate the primary market

Friendly environment for IPOs depended on the demands and requirements of the investors

BOVESPA StrategyBOVESPA Strategy

Objective: building an investment culture in Brazil

Launching of NM: improve the ‘quality of the

product’

Fostering companies to assure good practices:

disclosure of more information and of better

quality, promotion of fair rights among all

shareholders

Increase the investors’ confidence and willingness

to acquire stocks and pay for them a better price

Better prices would motivate companies to go

public

Novo MercadoNovo Mercado Special listing segment of companies committed

to higher corporate governance standards

Decision of joining NM is voluntary and market

driven

Private sector initiative based on and enforced

through a contract with BOVESPA Compliance with the Novo Mercado Listing Rules

Agreement to settle any corporate disputes by

arbitration

Two more corporate governance segments: Level

2 and Level 1

Listing Rules - examplesListing Rules - examples

Investor rights: only voting shares; tag along rights;

tender offer at least at the economic value in case of

delisting

Board of directors: a minimum of 5 members, with a

unified 2 years terms; 20% independent

Disclosure requirements: cash flow statements; quarterly

consolidated financial statements; financial statements

in accordance with IFRS or USGaap, self-dealing

transactions

25% minimum free-float and adoption of special

procedures in public offering to enhance capital

dispersion

What is the outcome so far?

Revival of IPOsRevival of IPOs

2

79

26

7

41111

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

ACTUAL RUNNING

A Market for IPOsA Market for IPOsThe success of the Novo MercadoThe success of the Novo Mercado

Offers occurring at multiples much higher

than the market average

Better corporate governance contributed to

broaden investor interest

Increased confidence, especially from

foreign investors

More favorable pricing is stimulating new

IPOs

Novo Mercado´s ConsolidationNovo Mercado´s Consolidation6 years after launching6 years after launching

18 24 31 33 37 36 363

3 710 14 14

22

7

18

44 48

2001 2002 2003 2004 2005 2006 feb/ 2007

NM

N2

N1

BOVESPA´s evaluationBOVESPA´s evaluation

The standard is set - the model is Novo Mercado

Investors have accepted new listing only on Novo Mercado

The culture of the companies has changed in direction to adopt good corporate governance practices in order to increase their value

Arbitration has also been accepted as a corporate governance requirement

What led to the introduction of

the Market Arbitration Panel?

‘‘Environmental’ issuesEnvironmental’ issues Securities Commission enforcement: fines / de-

listing

Court resolutions may take years: multiple appeals

Lack of efficiency of judicial courts for specialized

issues

Environment not too friendly for investor activism

Ownership of companies is concentrated

Disclosure: efficient tool for oversight but... how to

avoid abuse by controlling shareholders and the

expropriation of minority?

Companies / controlling shareholders are usually

defendants

Companies perception: Companies perception: positive impact on positive impact on listingslistings Arbitration as a synonym of efficient corporate governance:

compliance with standard that is set

Advantages: secrecy; economy; specialization; enforcement;

speed; autonomy.

More concern with:

Company’s image

Shareholders rights

Market development

Time spent in judicial proceedings

Panel structurePanel structure

Arbitration Proceedings:

Ordinary: recommended for the settlement

of disputes involving complex issues: three

arbitrators

Sumary: for simple disputes: single

arbitrator

Ad hoc: Parties establish their own rules

and procedures

ArbitratorsArbitrators

Minimum of 30 arbitrators

Appointed by BOVESPA´s Board

Different professionals: lawyers, economists,

accountants, former securities commissioners

Types of disputes Types of disputes expectedexpected

Shareholders Meetings / Board of Directors

meetings: proposals or resolutions adopted

Compliance with legal or Novo Mercado rules

Interpretation of By-laws provisions

Corporate proceedings against directors

/management / controlling shareholders

Other corporate or capital market issues

Binding formalitiesBinding formalities

Insertion in bylaws, articles of association, agreements connected with corporate or capital market issues

Persons bound to the Panel

mandatory: NM or Level 2 Companies, shareholders, directors and officers

voluntarily:

Any company, listed or not

Any shareholder

Any natural person or legal entity

Next steps for the Arbitration PanelNext steps for the Arbitration Panel

Initial purpose: to complete the structure of Novo Mercado and Level 2 62 companies

Enlargement of purpose: other companies, BOVESPA/CBLC and its participants, issuers of fixed income

Reference in dispute resolution for corporate and capital market disputes: prospective campaign

Nora Rachman

Secretary General

Market Arbitration Panel

Phone: 55 11 3233-2146

www.bovespa.com.br

e.mail: nrachman@bovespa.com.br