Habemus CAF

After more than four years of negotiations, the Mergers and Acquisitions Commission – CAF, popularly known as Brazilian Take Over Panel, will be finally set up in the next weeks. Although police authorities are not likely to have problems with groups of people celebrating this accomplishment on the streets, this is a fact that must (should) be happily celebrated by all those who expect a healthier capital market. May it reach its full potential, CAF can eventually be as important for the country as the Novo Mercado created 12 years ago.

Amec is very proud of participating in this initiative since its conception. We can even say that Amec’s Second Seminar was one of the first platforms to discuss the project, at which time the association brought to the country representatives of the English and Australian Take Over Panels, who shared the experiences in their jurisdictions with the seminar’s attendees. The idea is that a private entity that operates on a voluntary membership basis eventually becomes an important “judging filter” of corporate operations involving publicly traded companies aimed to assure transparency and equity for all investors.

The need of such an entity arises from the fact that, in practical terms, both our regulating agency (CVM) and the courts have difficulties detecting and assessing some subjective characteristics of complex corporate operations. Therefore, despite CVM’s attempts (such as Guiding Opinion No. 25), the announcement of any corporate restructuring process continues to be a sword of Damocles hanging over investors’ heads taking into account that our legal and regulatory environment allows that many of these operations – even formally in compliance with the law – involve scandalous equity and value transfers that jeopardize investors’ returns on capital and, accordingly, the credibility of our capital market.

CAF is a result of the efforts of CVM and other four market entities – in addition to Amec, Anbima (Brazilian Financial and Capital Markets Association), BMF Bovespa, and IBGC (Brazilian Institute of Corporate Governance) are also its founding members. Its major goal is stated in the introduction of its Code of Self-Regulation (which establishes the new entity’s regulations): “to ensure, among other principles, an equitable and egalitarian treatment to shareholders.” In fact, this could be the Code’s sole sentence.

But life is not that simple. That is why the Code has 110 pages. Its essence, however, can and MUST be understood based on the above-mentioned powerful sentence once the document points out that CAF must “focus on sticking to the principles rather than to the regulations themselves.” In other words, if CAF does reach its objective, the idea of complying with the formalities of the law while investors are “fried in hot oil,” is on borrowed time. It is a groundbreaking concept, primarily in a country so used to legal formalities as in the case of Brazil – what can be of utmost importance in regulating such rich and complex situations as corporate restructuring processes.

CVM has already established parameters to work towards an agreement with CAF with a view to providing the operations analyzed by the commission with presumption of legality. It is a powerful incentive for the companies to comply with this new structure.

The major incentive, however, primarily during this first stage, goes far beyond. Does anybody remember a highway concession start-up company that innovated by becoming the first one to go public in the Novo Mercado ? The then unknown CCR bet on the then unknown Novo Mercado and today both are synonyms of success in their respective areas: CCR’s shareholders had actual returns of more than 40% p.a. and Novo Mercado was recognized as one of the most successful innovation experiences in the capital market worldwide. Who said that opportunity never knocks twice at one’s door?

Surely CAF does not have pretensions to solve all problems overnight. Sound companies will continue to carry out their operations based on the equality principles expected by CAF – as it happened, for example, when CCR acquired airports from its controlling shareholders. And unsound companies will continue to seek to expropriate their shareholders through dark operations. However, the voluntary association with CAF is at least a sign of a company’s actual objectives. Mainly because – unlike other self-regulation attempts – CAF is not a check list. The commission involves a more qualitative analysis of operations, what is a direct consequence of its principle-based nature.

Will we see unfair operations approved by CAF? Possibly. We expect them to be rare, but once again it is important to point out that it’s not possible to find a solution for all the problems. CAF itself will be the responsible for its reputation. If it is identified with equitable, efficient and transparent operations, companies and investors will value its opinion and transform it into a reference when it comes to protect shareholders’ rights and add significant value to the companies that adhere to its rules. If not, it will sentence itself to become irrelevant over the years.

Amec bets on a successful future for CAF. And this expectation is based on three fundamental factors. First, the Code of Self-Regulation – a result of lengthy discussions among its founding members – brings together characteristics that allow the best possible expectations. By its own, Amec would have probably prepared a different Code. But maybe because of that it would not have the same power as that of a document written by four entities. Each of the parties involved compromised on topics that were important for the other parties. That’s exactly the result of any joint commission that works based on diversity: each party presents its view on the problem and the result, which gathers all these views, tends to be more balanced and feasible to be trusted by a higher number of addressees.

The second reason is CAF’s ability to update itself. As we could notice in 2010, the Novo Mercado has a highly restrictive process to update its regulations – what impairs many important changes and progresses. To have flexibility to keep updated is of utmost important for any document related to corporate governance practices – an example is IBGC’s Code, now in its fourth edition. CAF’s own members will be allowed to update the Code, which will include an opt out clause for the associates that do not agree with the changes. Therefore, in addition to being feasible to be updated, this rule will make companies hesitate to reject changes once the default is to continue to be a member of the entity.

Finally, Amec relies on the ability, impartiality and vision of those who are being invited to participate in CAF’s first commission and in its first executive board. In the end of the day, these people will be the responsible ones for defining how the regulations will be interpreted and, consequently, the extent to which CAF will be able to assure an equality treatment, which is the foundation of its principles.