Regarding the transaction between Linx and Stone
As holders of roughly 3% of Linx S.A.’s capital, FAMA Investimentos publicly addresses its concerns about the terms of Linx’s announced transaction with Stone.
In the 1970s, Alfredo Lamy Filho and José Luiz Bulhões Pedreira, co-authors of the Lei das S/A (the federal law that regulates corporations in Brazil), stated in a letter to the Minister of Finance, Mário Henrique Simonsen: “the difference between controlling and minority shares is generally relatively small, since, unless control is abused for the benefit of the controlling shareholder, it does not guarantee economic advantages that would justify a significantly higher value to the controlling shares.”
In the decades that followed, unfortunately, this understanding was not enough to curb a series of M&A transactions in which controlling shareholders managed to extract a significant control premium in detriment of minority shareholders.
The advent of the Novo Mercado tried, among other things, to curb these practices by requiring that companies listed in it offer full (100%) tag along rights to minority shareholders, a mechanism that guarantees minority shareholders the right to sell their shares under the same conditions as those offered to controlling shareholders.
Unfortunately, neither the spirit of the Lei das S/A nor the rules of the Novo Mercado have been able to suppress creative stratagems aimed at circumventing this obligation.
It is in this context that we regret and strongly refute the proposed terms of the transaction between Linx and Stone, disclosed yesterday.
Several issues surprised us and made us uncomfortable with the agreement. Not only do these violate good corporate governance principles, but they also offend the moral and ethical conduct we expect and require from the companies we invest in.
We are deeply concerned and disappointed that three Linx directors have negotiated, by means of “Non-Compete Contracts” and “Executive Job Offers”, an economic benefit from the transaction that far exceeds that of minority shareholders.
The “Job Offer” extended to Mr. Alberto Menache has a value of approximately BRL 75 million, in addition to a monthly salary of BRL 416,000.00 (plus other side benefits for a period of three years in which he is to work only four days per week in the first year, three days in the second and two days per week in the third year). It is important to note that according to Linx’s regulatory fillings the highest annual compensation packages at the company in 2017, 2018, and 2019 were BRL 9.8 million, BRL 5.1 million, and BRL 18.2 million, respectively.
Considering the closing prices of Stone's shares on August 11th, the “Non-Compete Contracts” for of the three directors (Mr. Alberto Menache, Mr. Nércio Fernandes, and Mr. Alon Dayan) are valued at approximately BRL 240 million.
Thus, this group, consisting of 3 of the 5 board members of Linx, will receive, in aggregate, approximately BRL 315 million from these arrangements.
These same members, according to the regulatory filings, own approximately 26 million shares of Linx. Therefore, according to the terms of the transaction, as shareholders the three members of the Board will receive almost BRL 900 million in exchange for their shares (considering the price of BRL 34 per share, extendable to all minority shareholders).
If we add the arrangements and their stakes in Linx, the three board members will receive approximately BRL 1.2 billion from the transaction, which would amount to nearly BRL 46 per share, a premium of approximately 35% when compared to the price offered to minority shareholders.
In the case of Mr. Alberto Menache, if we consider the amount of the “Job Offer’, his premium rises to an exorbitant 63% of the price offered to minority shareholders. (1)
Furthermore, it is difficult to understand the logic of someone being awarded both an employment contract and a “non-compete.” How could he compete with himself?
For years FAMA Investimentos has been advocating for ethical principles and good governance, where shareholders should always be treated with equality and respect. The transaction in question hurts what we believe to be our most important principle: ethics.
It is regrettable and unacceptable that the last act of a company marked by tremendous entrepreneurial success will be permanently tainted by such nefarious creativity that should have been relegated to the past.
The world in which we live in is increasingly vigilant with issues of respect and ethics, and does not tolerate practices that aim to circumvent the rules of the game.
(1) The calculations above do not consider any deferred options or shares that may be owned by the Directors.