Afya's Share Buyback Program: A Case Study in Governance and Capital Allocation in Dual-Class Structures

In the ever-evolving landscape of corporate governance, the interplay between capital allocation and shareholder value creation remains a critical focal point. Afya Inc., Brazil's leading medical education group, offers a compelling case study in how a dual-class equity structure can be leveraged to balance founder control with disciplined capital management. The company's recent share buyback program, announced in August 2024, underscores this dynamic and raises important questions about the alignment of governance frameworks with investor interests.

The Dual-Class Dilemma: Control vs. Accountability

Afya operates under a dual-class share structure, a model that grants its founders and insiders disproportionate voting power relative to their economic ownership. This structure, while enabling long-term strategic execution, has historically drawn criticism for entrenching management and diluting shareholder accountability. Yet, Afya's governance framework—marked by a board with independent directors and a commitment to risk management—suggests a nuanced approach to mitigating these risks.

The company's 2025 buyback program, which authorizes the repurchase of up to 4 million Class A shares, is a testament to this balance. By returning capital to shareholders through buybacks, Afya signals confidence in its financial health while adhering to regulatory safeguards under Rule 10b-18. The program's rationale—supporting employee stock options, facilitating business combinations, and optimizing capital structure—aligns with broader governance principles of transparency and accountability.

Capital Allocation in Action: Strategic Rationale and Financial Discipline

Afya's decision to initiate the buyback program amid a 24% year-to-date stock price decline reflects a strategic response to perceived undervaluation. With gross profit margins of 64% and a free cash flow yield of 19%, the company has the financial flexibility to execute the program without compromising operational growth. This disciplined approach to capital allocation—prioritizing buybacks over dividends—resonates with long-term investors who value reinvestment in core operations.

The buyback also serves as a tool to manage the company's dual-class structure. By repurchasing shares held by public shareholders, Afya can reduce the dilution of voting power for its controlling stakeholders while still rewarding broader ownership. This duality is not without controversy, but Afya's governance framework, including its transition to KPMG as auditor and robust ESG initiatives, provides a layer of credibility to its capital allocation decisions.

Governance in Practice: Board Oversight and Risk Management

Afya's board, co-chaired by Nicolau Carvalho Esteves and Kay Krafft, has maintained stability despite the resignation of Shobhna Mohn in 2024. The reappointment of independent directors—João Paulo Seibel de Faria, Vanessa Claro Lopes, and others—ensures a checks-and-balances system that tempers founder influence. The Audit, Risks, and Ethics Committee (CARE) further reinforces this oversight, with a mandate to monitor risks ranging from regulatory compliance to cybersecurity.

The company's risk management policy, which categorizes threats into operational, financial, and ESG domains, demonstrates a proactive approach to governance. For instance, Afya's challenge to Brazil's new tax law (Law 15,079/2024) highlights its willingness to engage with regulatory risks while protecting shareholder value. Such actions underscore the board's role in aligning capital allocation with long-term strategic goals.

Investor Implications: Balancing Optimism and Caution

For investors, Afya's buyback program presents both opportunities and risks. On the positive side, the company's strong EBITDA margins (52.5% in Q1 2025) and $1.15 billion cash reserves suggest a robust financial position. The integration of acquired institutions like Funic and Unidom is expected to drive enrollment growth and margin expansion by 2026, further enhancing the case for buybacks.

However, dual-class structures inherently pose governance challenges. While Afya's board has shown a commitment to transparency, investors must remain vigilant about potential entrenchment. The absence of a time-based sunset provision for its dual-class structure—a feature advocated by groups like the Investor Coalition for Equal Votes (ICEV)—leaves room for future governance risks.

Conclusion: A Model for Dual-Class Governance?

Afya's share buyback program exemplifies how a dual-class structure can be managed to enhance shareholder value when paired with strong governance and disciplined capital allocation. The company's ability to navigate regulatory challenges, maintain financial transparency, and align buybacks with strategic objectives positions it as a case study in effective corporate governance.

For investors, the key takeaway is clear: Afya's success hinges on its ability to sustain its governance framework while executing on its capital allocation strategy. While the dual-class structure remains a double-edged sword, Afya's current trajectory suggests that it can be a force for long-term value creation—if the board continues to prioritize accountability alongside control.

In the end, Afya's story is not just about buybacks or voting rights—it's about the delicate art of balancing power and purpose in an era where corporate governance is under relentless scrutiny.