Alarmed investors call for legal change in Brazil

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The Independent Online

F&C, the investment manager, has called on the Brazilian regulator to overhaul the country's legal framework, following a proposed merger that is threatening the rights of minority shareholders.

The asset manager has called on the support of 14 other institutional investors from the UK, North American and continental Europe in writing to the Commissão de Valores Mobiliários (CVM), Brazil's securities regulator, to urge legal protection for minority shareholders.

The letter's co-signatories include the California State Teachers' Retirement System, Legg Mason International, Morley Fund Management and Nordea Investment Funds.

The group said it took the step of writing after Votorantim Celulose e Papel (VCP) bid for the rival pulp group Aracruz Celulose. It initially paid 2.71bn reais (£901.4m) to buy a 28 per cent stake from one of Aracruz's biggest investors and will offer the same to another for another 28 per cent. Votorantim, which controls VCP, already owns 28 per cent of its rival.

The group said at the time: "Votorantim's aim is to reorganise VCP and Aracruz to capture synergies, forming a world leader in the pulp industry." Aracruz's shares dropped after the share swap Votorantim proposed valued at almost half the previous day's closing price.

Despite F&C owning no shares in either company it believes a deal that comes at the expense of minority shareholders would have a wider impact on the Brazilian market. The Capital Markets Investors Association, the domestic trade body, said it agreed with F&C and will also write to CVM.

The funds criticised the two-tiered structure of the proposed takeover, which is legal under Brazilian law, as it "allows VCP to act both as an acquirer and a controlling shareholder, exerting inappropriate influence over the transaction".

A statement explaining F&C's actions said: "As significant investors in the broader Brazilian market, they have raised their concerns because of the damaging effect they anticipate this action could have on both the value of their other Brazilian holdings and on confidence in the Brazilian market as a whole."

Karina Litvack, F&C's head of governance and sustainable investment, talked of "the recent progress of many Brazilian companies to protect the rights of shareholders, as this has contributed to the country's rising reputation in the global capital markets. Therefore we regard this most recent development with particular disappointment – indeed alarm – and we urge your intervention."

The UK manager has called for high standards of corporate governance, to boost Brazil's reputation worldwide. It said that better governance would lead to more effective management, reducing the cost of capital and improving the efficiency of the capital markets.

Ms Litvak continued: "We are asking the CVM to encourage the two parties in this specific case to act voluntarily to protect minorities. But ultimately, what is most important is that the CVM re-evaluate the existing regulatory framework so as to restore global investor confidence in the Brazilian capital markets."

F&C manages about $203bn, and said "a significant proportion of which is focused in emerging markets throughout Latin America".

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