By Walter Douglas Stuber1
Current legislation expressly allows publicly-held companies to negotiate put and call options referenced on their own shares, for cancellation, maintenance in treasury or disposal. That kind of transaction is presently regulated by the Brazilian Securities and Exchange Commission ("CVM") by its Instruction nº 390, of 8 July 2003. Options may be negotiated so long as the company’s charters expressly provides that the Board of Directors may authorize negotiation with its own shares, or, in the absence of any such provision, in the presence of specific deliberation by a Shareholders’ Meeting. Under special circumstances, CVM may give prior consent to transactions not meeting the requirements in Instruction CVM 390.
Instruction CVM nº 10, of 10 February 1980, which deals with acquisition by publicly-held companies of shares they issue, for cancellation or maintenance in treasury, and respective disposal, sets forth that a deliberation by the Board of Directors authorizing the negotiation (acquisition or alienation) of company’s own shares must specify, as the case may be: (a) the company’s intended end with the transaction; (b) number of shares to be acquired or disposed of; (c) deadline for carrying out authorized transactions, which may not exceed 365 days; (d) number of outstanding shares; and (e) name and address of financial institutions to act as intermediaries. Outstanding shares means the total of shares representing the company’s capital less those owned by the controlling shareholder.
Under the terms of Instruction CVM 390, deliberation of the Board of Directors, or Shareholders’ Meeting, that authorizes publicly-held companies to negotiate shares is a material fact therefore, in addition to the requirements in Instruction CVM 10, must indicate at least the following: (i) the number of put and call options, by class and type of shares, to be offered or acquired, settlement procedure and how maturity dates and price are established; (ii) deadline to carry out transaction, which may not exceed six months; (iii) intended use of proceeds of offer and negotiations; (iv) options that companies have already offered or keep; and (v) company’s certificate that no material fact remains undisclosed.
When authorizing option negotiations, the deliberation may also allow the company’s management to negotiate other shares and options referenced on its own shares solely to protect its outstanding option positions or reverting them (an alternative provided under § 4 of art. 2 of Instruction CVM 390).
Companies authorized to negotiate options must follow the procedure described below:
- Total treasury stock, including stock the company may acquire by exercising, on its own behalf or on behalf of counterparts, put and call options, may not exceed 10% of each type or class of shares outstanding as of the date of the Board of Directors or Shareholders’ Meeting approval.
- Options transaction must be carried out on markets where the company’s shares are listed, no private transaction allowed. However, the charters may allow the company to grant put and call options to its officers or employees or individuals rendering services thereto or to company under its control, all within the authorized capital limit and as approved by a Shareholders’ Meeting.
- An option maturity date may not exceed 365 consecutive days from the date transaction is contracted.
- Options may only be exercised on their respective maturity dates.
- Call options offered and put options acquired must invariably be backed on treasury stock during the option exercise time. The only exception to that rule is that provide under § 4 of art. 2 of Instruction CVM 390.
- The company may not offer more than one series of call option and one series of put option for each maturity date.
- Except for the alternative provided in § 4 of art. 2 of Instruction CVM 390, companies may not carry out transactions on the spot or options markets in direction opposite to that indicated for the options transactions, from the date of transaction to the date of option exercise.
Exclusively financial settlement of transactions is allowed when it involves offered or acquired options referenced on the company’s own shares, upon their respective exercise, as per instruction of the stock exchange or organized over-the-counter entity, but not before the company has prior authorization from CVM. Physical settlement of options will be conditioned on the existence of profit balance or available reserves on the latest approved balance sheet in amount sufficient to cover the transaction concerned.
During the time from the authorization to and the settlement of options transactions, negotiation with company’s stock, or referenced thereon, by direct or indirect controlling shareholders, officers and members of the Board of Directors may only be carried out under the terms provided in the negotiation policy approved by deliberation of the Board of Directors, with express acceptance of the beneficiaries, and provided that the company cannot act as counterpart, as per provisions in Instruction CVM nº 358, of 3 January 2002.
Deliberations authorizing the company to negotiate options must be grounded on study justifying the transactions to be carried out and their conditions, noticeably the propriety and exercise price thereof. The company must make that document available to CVM for examination.
On the Explanatory Notes to its financial statements and to the Quarterly Information Report Form – ITR, the company will inform: (a) the purpose of such option transactions; (b) the number, per class and kind of shares, of options acquired or offered and exercised during the fiscal year; (c) premiums and exercise prices paid and received; (d) changes in the number of shares in treasury, including those the company may acquire by exercising, on its own behalf or on behalf of counterparts, put and call options, informing initial and end balances; (e) dates of transactions, tenors and maturity dates; (f) net result of disposal or acquisition taking place in the fiscal year, deriving from the option transactions; and (g) any position offered or acquired in the preceding fiscal year still outstanding.
The options transactions, premiums received and or paid as a result of such transactions must be accounted for as follows:
- In the case of physical exercise of option, the premium will added to the cost of acquisition or sale of treasury stock, as the case may be;
- In the event of financial exercise of the option, the premium will be added to the transaction net income/loss. Income will be accounted as capital reserve credited to specific account. Loss will be debited to reserve or profit accounts recording the origin of funds invested in the acquisition;
- If option is not exercised, premium received will be accounted to capital reserve under the heading "Option Premium – Own Shares" or other similar heading clearly indicating the nature of the option. Premium paid will be deducted from reserves available, that is, all income or capital reserves, except for legal reserve, unrealized income reserve, revaluation reserve and special mandatory undistributed dividend reserved.
1 Walter Douglas Stuber is a partner of Stuber – Advogados Associados.
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