Sunset Clause of Dual-Class Share Structure

On August 26, 2021, Provisional Measure No. 1.040/2021 was sanctioned and converted into Law No. 14.195/2021. Commonly referred to as the Business Environment Law, it established several mechanisms with the objective of making Brazil advance its position in the The World Bank’s Doing Business ranking and, among such mechanisms, we had the creation of the plural vote.

This mechanism, which is already adopted in other countries, consists in the possibility of a single share having the right to more than one vote at the general shareholders’ meetings. As a result, founding shareholders can maintain control of their companies even without holding a majority of the share capital, which guarantees decision-making power.

The adoption of plural voting aims to encourage Brazilian companies to go ahead with their initial public offerings in the country, without migrating to foreign markets that have the plural voting structure (dual-class share structure). Although this mechanism is not considered decisive for the listing of some Brazilian companies abroad, it is still attractive for Brazil to have the same alternatives offered in other countries.

The novelty is seen as a stimulus for startups to go public in Brazil, since for the technology sector, this structure recognizes the importance of the founders for the success of the business. The granting of greater voting power to the founders guarantees the control and management of the company even after its IPO and can continue the business plan already designed by the founder for the company.

Unlike most international jurisdictions, the new law imposed a limit on the duration of plural voting (the so-called sunset clause) of 7 years. This period can only be extended if approved by the majority of the shareholders (excluding the holders of shares of the class whose plural vote is intended to be extended) and guaranteeing dissenting shareholders the right to withdraw.

Studies on the benefits of plural voting are inconclusive, some have identified that shares of companies with plural voting have lower returns for companies with multiple voting compared to single class ones. Others, however, show that the plural voting structure can be a good solution for companies with growth opportunities, or those in need of capital-intensive financing.

The time limit is a positive mechanism since, while it allows the founder to implement the company’s business plan, it does not allow the founder to maintain control forever. It is difficult, however, to say what would be the ideal period for this structure, since each company has a different period for the maturation of the business. The Brazilian legislator, who historically has an interventionist stance, has already defined this period in 7 years which, in principle, should be a topic to be freely decided by the parties.

In any case, Brazil gains with the creation of a mechanism that makes the principle of “one share, one vote” more flexible, bringing us closer to the capital markets of developed countries, promoting the opening of funds for startups in the country.

By Júlia Caldeira de Godoy,

Lawyer at Candido Martins advogados.