Brazil: The "Quiet Rule" And Other Recent Changes Introduced by The Brazilian Regulator in Public Offerings

The "Quiet Rule" And Other Recent Changes Introduced by The Brazilian Regulator in Public Offerings

On April 5, 2010, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 482, which amends the regulation on public offerings for distribution of securities set forth by CVM Instruction No. 400, of December 29, 2003.

The main purpose of the changes introduced by CVM Instruction 482/2010 is to harmonize CVM Instruction 400/2003 with: (i) CVM Instruction No. 476, of January 16, 2009, which deals with securities distributed with limited underwriting efforts; and (ii) CVM Instruction No. 480, of December 7, 2009, which establishes rules for registry of issuers of securities admitted for trading in the local regulated markets. It also reflects the aggregate experience of the regulator (CVM) in the application of CVM Instruction 400/2003 since its enactment.

In any public offerings there are conduct norms that must be followed and are expressly listed in article 48 of CVM Instruction 400/2003 as amended by CVM Instruction 482/2010. These norms are outlined below and apply to all the participants, comprising the issuing company, the offeror, the intermediary institutions (the latter since the signing of the contract) involved in any finalized or project public offering distribution, and the people working with them or advising them in any way (financial consultants, lawyers, accountants, auditors, etc.). In addition, the issuing company must also comply with the disclosure obligation of furnishing the periodical and eventual information required by CVM.

While the public offering has not been released to the market, the participants shall limit: (a) the release of information related to the offer to what is necessary for the objectives of the offer by alerting the recipients of the reserved character of the information transmitted; and (b) the use of the reserved information strictly to the purposes related to the preparation of the offer1.

Up to the publication date of the Distribution Closure Notice, the participants shall abstain from negotiating with securities issued by the issuing company or the offeror, or referenced in such securities. However, there are certain cases that constitute an exception to this general rule and are not subject to such restriction. These cases are the following: (i) execution of a stabilization plan duly approved by CVM; (ii) total or partial disposal of securities lot that is the object of firm commitment; (iii) negotiation for the account and order of third parties; (iv) transactions clearly destined to accompany a share index, certificate or receipt of securities; (v) transactions destined to protect positions assumed in total return swaps contracted by third parties; (vi) transactions made with a market maker in the terms of the current CVM regulations; or (vii) discretionary administration of third parties` portfolio. The number of admitted exceptions has been revised and increased by CVM2. Furthermore, this specific norm of conduct now applies to the controllers, controlling companies and corporations under the same control of the intermediary institutions, acting in the financial market and these entities must adopt adequate procedures to assure such norm compliance3.

The participants must present to CVM any research or public reports that they have eventually prepared about the issuing company and the transaction4. Likewise, this other norm of conduct has also been extended to apply to the controllers, controlling companies and corporations under the same control of the intermediary institutions, acting in the financial market and these entities must adopt adequate procedures to assure such norm compliance5 .

The participants shall abstain from communicating in the media about the offer or the offeror until the publication of the Distribution Closure Notice within sixty days prior to the filing of the offering registration request or since the date in which the offer was finalized or projected, whichever occurs later. This is the so-called silence period or "quiet rule". There were many doubts in the past about how this silence period should be counted and now the term has been clearly defined by CVM6. This prohibition is not applicable to any information which must be usually disclosed in the normal course of activities of the issuing company7.

From the moment the offer becomes public, when releasing information related to the issuing company or the offer, the participants must: (a) observe the principles relative to the quality, transparency and equality of access to information; and (b) clarify their connections with the issuing company or their interest in the offer, the issuing company or the securities8.

For all the effects described above, the issuing company, the offeror and the intermediary institutions shall assure the precision and adequacy of any information supplied to any investor, regardless of the medium used, with the information contained in the Prospectus. They must direct such documents and information to the CVM9.

Furthermore, CVM also determined that the administrators of the intermediary institution leading the offer, of the offeror and of the issuing company, within their legal and statutory attributions, are responsible for the compliance of all the obligations imposed to such entities by CVM Instruction 400/2003 as amended by CVM Instruction 482/201010.

Other relevant modifications made by CVM which need to be highlighted are the following:

  • The reference form (formulário de referência) instituted by CVM Instruction 480/200911 must be incorporated to the distribution Prospectus.
  • It is no longer necessary to update annually the Distribution Program.
  • The procedure for registration of any public offering submitted by the so-called "great exposure to the market issuer" (emissor com grande exposição ao mercado - EGEM)12 will be automatic and will produce legal effects after 5 business days of the date of filing of the application at CVM.
  • The rules for automatic exemption from registration of a single and indivisible lot of securities and securities issued by small and micro sized companies have been improved.

The new rules introduced by CVM Instruction 482/2010 will be valid and in full force and effect as of August 1, 201013.


1 This norm was already contained in item I of article 48 of CVM Instruction 400/2003 and has not been changed.

2 Items (v), (vi) and (vii) have been introduced by CVM Instruction 482/2010.

3 These rules are contained in new paragraphs 2 and 3 added to article 48 of CVM Instruction 400/2003.

4 This norm was already contained in item IV of article 48 of CVM Instruction 400/2003 and has not been changed.

5 Please refer to the previous note, which is also applicable in this case. These rules are contained in new paragraphs 2 and 3 added to article 48 of CVM Instruction 400/2003.

6 The "quite rule" has been established by the new wording of item IV or article 48 of CVM Instruction 400/2003.

7 This rule is contained in new paragraph 1 added to article 48 of CVM Instruction 400/2003.

8 This norm was already contained in item V of article 48 of CVM Instruction 400/2003 and has not been changed.

9 This norm was already contained in article 49 of CVM Instruction 400/2003 and has not been changed.

10 These rules are set forth by the new articles 56-A, 56-B and 56-C of CVM Instruction 400/2003.

11 The reference form must identify the independent auditors and describe selected financial information; risk factors; market risks; historic data about the issuer; the company´s activities; the economic group; relevant assets; comments of the directors; forecasts; general shareholders´ meeting and administration (corporate governance); directors´ compensation; human resources; controlling shareholders; transactions with related parties; capital stock structure; different types of securities; repurchase and treasury securities plans; securities negotiation policy; information disclosure policy; and any extraordinary business. The reference form must be updated annually within 5 months as from the closing date of the relevant fiscal year or within 7 business days as of certain facts, and delivered at the time of the registry application of any public distribution of securities. These facts, in the case of a category A issuer, include: (i) change of manager or of a member of the audit committee of the issuer; (ii) any amendment of the capital stock; (iii) issue of new securities, even if subscribed privately; (iv) change in the rights and advantages attributed to the issued securities; (v) change of the direct or indirect controlling shareholders or variations in their shareholding positions equal or exceeding 5% of the same kind or class of shares of the issuer; (vi) whenever any individual or legal entity or group of persons representing the same interest reaches the 5% threshold, provided that the issuer is aware of such change; (vii) any variation in the shareholding position of any of the persons mentioned in (vi) above exceeding 5% of the same kind or class of shares of the issuer, provided that the issuer is aware of such variation; (viii) merger, incorporation of shares, consolidation or spin off involving the issuer; (ix) alterations in the forecasts or estimates or divulgation of new forecasts or estimates; (x) signing, amendment or termination of shareholders agreement filed at the issuer´s headquarter or in which the controlling shareholder is a party regarding the exercise of voting rights or power of control of the issuer; and (xi) decree of bankruptcy, judicial recovery plan, liquidation or judicial ratification of an extrajudicial recovery plan. In the case of a category B issuer, the facts to be reported are limited to those mentioned in items (i), (iii), (v), (viii), (ix) and (x).

12 Pursuant to CVM Instruction 480/2009, the EGEM must comply with the following cumulative requirements: (a) it must have shares traded in the stock exchange for at least three years; (b) it shall have complied timely with its periodical obligations for the last 12 months; and (c) the market value of its shares in circulation shall be equal or above R$ 5 billion, pursuant to the closing quotation of the last business day of the three-month period before the date of the securities public offering distribution application request. In this context, the expression "securities in circulation" or "shares in circulation" means all the securities or shares of the issuer, other than those hold by the controlling shareholder(s), the persons linked to the controlling shareholder(s), the administrators of the issuer and those securities or shares kept in treasury. "Linked person" (pessoa vinculada) means any individual or legal entity, fund or universality of rights acting for and representing the same interest of the individual or legal entity to whom/which such person is linked.

13 The date of validity of CVM Instruction 482/2010 is mentioned in its article 13.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
Adriana Maria Gödel Stuber
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