A fight pitting Templeton Worldwide Inc. and other minority shareholders against the controlling shareholders of a privatized Brazilian telephone company might boost the corporate governance movement in that country.
Mark Mobius, managing director of Templeton Asset Management, Hong Kong, has been leading the fight against what he calls a "rip-off" by the controlling shareholders of Telecentro Sul Participacoes SA, a Brasilia-based telephone company that was privatized in August 1998.
Templeton Asset Management and Templeton Global Advisors own a combined 4.8 million shares in Telecentro Sul, slightly less than 2% of its total market capitalization.
At its April 28 shareholders meeting, the controlling shareholders, which include several Brazilian pension funds, Telecom Italia SpA and CVC Opportunity Equity Partners, a Brazilian venture capital firm, voted themselves a management fee to be paid out of the company's net revenue.
This infuriated Mr. Mobius and other minority shareholders. "They voted themselves a payment in their own self-interest," he said. Making it even worse, according to Mr. Mobius, is that the fee was set to come out of net revenue instead of profits, which would hurt the minority shareholders more.
"We told them (the controlling shareholders) that `you guys are not going to have any private investors left if you ignore shareholders' rights,' " said Mr. Mobius.
"We told them, `What we want is no fee, but if there has to be a fee, why isn't it tied to profits so the minority shareholders benefit?' "
Templeton and other minority shareholders complained to the Comissao de Valores Mobiliarios, Brazil's equivalent of the U.S. Securities and Exchange Commission, which ordered the company to have another vote taken on the management fee, with only the minority shareholders voting.
Carlos Rebelo, an official with the CVM in Rio de Janeiro, said, "according to our laws, controlling shareholders can't vote on a measure like that. It's a conflict of interest."
The CVM at first ordered the company to have the vote taken at a shareholders' meeting May 23. However, the CVM received complaints from many foreign shareholders that they would be unable to vote by that date, according to Mr. Rebelo.
So the CVM ordered Telecentro Sul to postpone the shareholders' vote on the management fee until July.
Gustavo Stenzel, who represents Templeton's interests in Brazil, said representatives of the controlling shareholders have contacted him and other minority shareholders to tell them the management fee is fair and would benefit the company.
They also said part of the fee was going to Telecom Italia as payment for technology transfers to Telecentro Sul.
"We said if they want to pay Telecom Italia for technology transfers they should pay them a regular fee, not pay them out of the net revenue of the company," said Mr. Stenzel.
In addition, the controlling shareholders made the management fee retroactive to August 1998, when the privatization took place, he said.
The management fee was set to be 1% of net revenue for 1998 to 2000, 0.5% of net revenue in 2001 and 2002 and 0.2% of net revenue from 2003 on.
Valder Nogueira, an investor relations official with Telecentro Sul, insisted none of the shares that make up the official controlling shareholders stake was voted at the April 28 meeting because that is expressly against the law.
However, he acknowledged some members of the controlling shareholders group voted shares they owned that were outside the official controlling shareholders stake.
After the complaints from the minority shareholders, the CVM ruled that those votes were illegal as well because of the conflict of interests.
Mr. Nogueira defended the management fee, saying Telecentro Sul is the only Brazilian telephone company that doesn't charge a management fee. He said Telecom Italia, in particular, deserved the fee because it has "brought technology and value to the company."
He said Telecom Italia has incurred a variety of expenses, as well as using its name for bargaining clout when negotiating contracts for Telecentro Sul.
"The minority shareholders are against it because they think it (Telecom Italia) should get its money from an increase in the stock price," said Mr. Nogueira.
He also said Telecentro Sul would announce another date for the shareholders' meeting soon.
"We're happy to see we've gotten some action on this, but this story is not over yet," said Mr. Mobius.
Marcos Ferreira, an official with CVC Opportunity Equity Partners, did not respond to a request for comment.
