How to reconcile the IPO with the rights of shareholders who are already in the Company?

Despite the negative impact that the current crisis caused by the Covid-19 pandemic has had on financial markets, the year 2020 remains promising for the capital markets in Brazil. In the third quarter of 2020, the values of Initial Public Offerings (IPOs) and Subsequent Offers (Follow-Ons) of Brazilian companies summed R$ 69.2 billion, an increase in 20.5% in relation to the same period last year, contributing to the total of R$ 236.9 billion registered this year so far.

Since 2007 there has been no such movement in public offerings of shares in the country. In this 13-year period when liquidity for the IPO was lower, the vast majority of national companies sought capital through private investors, such as private equity funds, or strategic investors, through private agreements that provided for shareholders’ rights and obligations, including indemnity clauses for contingencies of the past, specific treatment for contingent assets (the potential receivables that were not included in the valuation), joint selling rights in a future liquidity event, voting rights and governance, as well as guarantees granted to protect the investment.

And what happens to these agreements in an IPO?

That is a good question, and the answer is: it depends! There are shareholders’ agreements that already contain a clause of termination in the event of an IPO, but many do not have such provision. In addition, it is not certain that the investor will divest 100% of the company in the IPO, and may remain a shareholder after the IPO. In this case, should his remaining stake have the same guarantees he received when he invested in a private company?

In fact, not all rights will be preserved, since with the IPO, its assumed that the asset will have much more liquidity and thus some governance or exit issues will become less relevant. The parties will also need to observe the rules imposed by regulatory agents, such as B3 (Stock Exchange), CVM (Brazilian Securities Commission) and ANBIMA (Capita Markets Association), so that not all the aspects agreed prior to the IPO will survive. An example of this is the obligation of companies listed with the Novo Mercado segment of the B3 to only have common shares, thus eliminating any previous capital structure with preferred shares.

However, it is possible to maintain some investors’ rights, such as the right to indemnity in the event of materialization of relevant contingencies of the Company.

That is, the initial relationship between investors and founders does not need to disappear with the IPO, but it is essential that the shareholders, when preparing for the IPO, revisit the terms of their agreements to verify what should prevail and what needs to be changed. Be prepared!

Thalita Igarashi, associate at Candido Maritns Advogados
societário@candidomartins.com.br