Brazil: The Brazilian Capital Market ~ Part 2

In order to constitute a Sociedade Anônima, it is necessary the existence of two shareholders and the subscription of at least ten percent of its capital.

The subscription may occur in a privately or publicly form. The private subscription is directed to a certain group of people and is not subjected to CVM's ³ regulation. The public shares emission is foreseen in Article 19 of Law No. 6385/76.

It is attested that a public securities emission must be registered at CVM, followed by the feasibility study of the venture, and it also must be intermediated by a financial institution (Article 82, of the Corporations Law).

The rules regarding the registration of the company at CVM are determined in CVM Instruction No. 202, of December 6, 1993.

The publicly emission is characterized by: (i) the use of lists or sale or subscription's bulletins, prospectus ⁴, leaflets or public advertisements; (ii) the search for shares' subscribers by means of by brokers or agents; and (iii) the negotiation in public establishment.

The founders are responsible for the shares issuance. They will create the prospectus and by-laws, promoting the publishing of this material in the official gazette and in other well known newspaper.

The Brazilian Corporate Law determines the obligation of, at least, one minutes of meeting of the shareholders per year (Assembléia Geral Ordinária), which must occur within the four months after the fiscal year closing.

The main attribution of this meeting is to verify and approve the accountancy presented by the company administrators (Article 122 of Law No. 6404/76). It is also foreseen the publication of this documents in the newspapers before the date set up for the meeting (Article 133 of Law No. 6404/76).

According to CVM rules, it is established that the companies listed on a stock exchange with publicly issued debt or equity securities are supposed to present quarterly and annual reports.

Article 177, § 3º of the Brazilian Corporate Law foresees that the annual report has to be audited by independent accountants and must be published in a newspaper, as well as contain data related to the management on the business of the company and the administrative issues occurred on the previous fiscal year. The Corporation Law also requires the presentation of an annual report to stockholders.

The quarterly report is not subjected to an audit.

Issue press releases are also foreseen and must be filed with the CVM and the main stock exchange.

According to CVM Instruction No. 31, in the case of a relevant event, such as restructuring, acquisitions or any contract which may not represent the standard activities of the corporation, issuers are required to issue press releases and to notify both CVM and the stock exchanges.

The company must also have certain books.⁵

Periodic disclosure is required in Brazil by the Corporations Law and regulations of the CVM.

According to Article 2 of the CVM Instruction No. 31 dated February 8, 1984, which regulates the disclosure and use of information on relevant acts or facts related with publicly held companies, the directors of a publicly held company are responsible for immediately communicating to the CVM and the Stock Exchange where its securities are most highly traded, in addition to disclosing by means of the press, any relevant act or fact that occurred to the company business.

CVM Instruction No. 31 considers relevant any decision taken by the stockholder's general meeting or the management bodies of a publicly held company, or any act or fact that occurred to its business that could appreciably influence (i) the quotation of securities issued by the publicly held company, (ii) the decision by investors to trade in the mentioned securities, or (iii) the decisions by investors in exercising any rights inherent to the ownership of securities issued by the company.

The relevant acts or facts that occur in the publicly held company business shall be disclosed by the press through a communication, published always in the same large circulation newspaper where the company makes the publications required under the Corporations Law.

The CVM Instruction No. 299 of February 9, 1999, provides arrangements for the disclosure of information on the selling of control and increases in the participation of controlling shareholders, manager and audit committee, develops rules for the trading of shares which it issues and controls public offers to acquire shares.

It establishes that any operation which leads to the selling of the control of shares in the publicly held company should be notified immediately by the acquiring part to the CVM, the Stock Exchanges or entities on the organized over-the-counter market where the securities issued by the company are traded. Such operations also need to be disclosed to the Press through immediate publication by the same acquiring part in the newspapers regularly used by the Company.

The execution of the agreement or contract to the transfer of the stockholding in the company and the concession of the option or mandate to allow this should also be notified and disclosed without delay by the controlling shareholders or those who represent them in any way. Notwithstanding, whenever the participation of the controlling shareholder of the publicly held company in the capital represented by its shares is raised, either in fact or potentially, by five per cent for any type and/or class of share, the event should be notified without delay by the same shareholder to the CVM, to the Stock Exchanges or entities on the organized over-the-counter market where the securities issued by the company are accepted for trading.

Together with all relevant acts or facts, annual reports to stockholders are required by the Corporations Law and must be published in a large circulation newspaper as well as in any Official Gazette. Information required to be disclosed in the annual report includes a report of the management on the business of the company, as well as the major administrative facts of the previous fiscal year and the report of independent auditors. The CVM reviews and comments on issuers annual reports, particularly changes in accounting policy.

The Brazilian legislation establishes that companies must publish its relevant information always in the same newspaper as well as provide them at its head-office. The CVM must also provide to the investors all information that it receives from the companies, except those that are considered confidential.

The trading of securities issued by corporations on the stock exchanges or on the over-the-counter market is subject to prior registration of the company with the CVM. Public companies have to be registered for trading on the over-the-counter market and for trading on the Stock Exchange (CVM Instruction No. 202).

Once registration has been conceded, the company should (i) send to the CVM, to the Stock Exchange at which its securities were originally admitted, to the Stock Exchange where they were most traded during the last fiscal year, and to other exchanges requesting them, periodical and occasional information and (ii) update CVM with any modification on the company data, within five days after such modification occurs.

The managers should ensure the simultaneous release to the entire market of all material information, including those pertaining to the companies activities, profitability forecasts, and variation in costs and expenses through any kind of broadcasting or in class entity meetings, in order to guarantee full and immediate disclosure.

The Securities Law (Law No. 6385/76) establishes that no public issue of securities shall be distributed on the market without prior registration with the CVM.

For the Securities Law "the sale, the promise to sell, the offer to sell or underwrite, as well as the acceptance of an order to sell or underwrite securities, when practiced by an issuing company, its founders, or persons considered equivalent to such, shall be considered acts of distribution..." (Law No. 6385/76, Article 19, 1st Paragraph).

With the registration of the securities with the CVM, all information about the securities and their issuance, such as their characteristics, value, places of issuance, percentages paid, issuers, etc., as well as the legality of the corporate acts that originated them are controlled by the CVM, in order to look after the investor and provide them safer information about the investments to be made.

All the information provided to the CVM is compiled in a prospectus which has to be published and provided to the investors. The Prospectus with information on the public issue of shares shall be provided by the issuer or by the financial institution that distributed the securities.

The CVM also accepts the preliminary prospectus which contains a summary of all information provided by the issuer to the CVM in order to register the securities to be offered. The preliminary prospectus is distributed to the investors before the registration of the securities with the CVM, but the securities will only be purchased after their registration.

The registration of secondary trade is similar to the registration of an issue of securities and it is destined to the distribution of securities that have been issued before and are out of the market.

The disclosure of the information about the secondary trade is made through a publication in a large circulation newspaper.

Resolution CMN ⁶ No. 2689 in its Article 3 establishes that before beginning activities, the non-resident investor shall (i) appoint one or more representatives in the country; (ii) complete an application form; and (iii) be registered with the CVM.

When the representative is an individual or non-financial company, the investor shall name an institution authorized to function by the BACEN ⁷.

The local representatives shall present monthly to the CVM, until the fifteenth business day of the subsequent month, by electronic means, information regarding non-resident investors, according to the data bank structure and computer programs supplied by the CVM.

Instruction CVM No. 325 establishes that a prior authorization of CVM is required if custody position changes between non-resident investors abroad as a result of mergers, incorporation, spin-offs and other corporate changes, as well as from inheritance matters.

Any other forms of transfer or cessation of ownership, abroad, of investments or of securities belonging to a non-resident investor, and in the country are prohibited.

Notwithstanding, account holders, their local representatives, and depository institutions, or custodians, or registrar of companies institutions shall provide to the CVM, upon request, the following information listed by individual participants: list of trading operations, portfolio composition, custody balance or any other additional information requested.

Funds invested in Brazil through DR programs must be used for the acquisition of shares of Brazilian public companies, either in the primary or secondary markets. The prior approval of the CVM is required for the establishment of DR programs as well as for agreements entered into between the Brazilian issuing company, the Brazilian custodian bank and the foreign bank issuing the DRs.

The DRs can be traded abroad in the currency and according to the regulations from the jurisdiction in which they are traded. According to the type of DR program established by the company, foreign investors may acquire DRs in the primary market upon issuance of new shares by the company or buy and sell DRs in the secondary market, either over-the-counter or in exchange transactions.

The registration with the BACEN of foreign investments related to DR programs is established by the custodian prior to the first transfer of money to Brazil with respect with the DRs.

It is the task of the custodian to maintain updated records at the disposition of the BACEN, demonstrating the operations of the custody account of the program and the respective exchange contracts, as well as inform the BACEN of withdraws, processing and transfers as defined in Resolution CMN No. 1927.

Brazilian Depositary Receipts ("BDR") are ruled by Resolution No. 2763 and by the Circular Letter No. 2996, of BACEN, both of August 9, 2000.

BDRs are certificates that represent securities issued by non-Brazilian publicly held companies (or similar entities) with headquarters abroad and issued by a depositary institution in Brazil.

A qualified foreign institution in its original country can act as custodian for such securities, while certain Brazilian institutions duly authorized by BACEN and CVM can issue BDRs representing the underlying securities held by the custodians.

Through this depository receipts program, shares of foreign companies are held in custody by a Brazilian depositary institution on behalf of a foreign custody institution. The Brazilian depositary institution issues depository receipts representing the company's shares. The depository receipts can then be traded.

Investments in BDRs must be registered with the BACEN. This registration allows remittance of currency abroad, as well as transfers to Brazil of payments made by the foreign company in connection with the securities underlying the BDRs and transfers to Brazil of the proceeds acquired upon sale of the underlying securities abroad. The depositary is responsible for the creation and proper maintenance of the registration with the BACEN.

The shares of a S.A. can be classified into various classes considering the rights and obligations attached to each specific class. The publicly held company may only have one class of common class. The closely held S.A. may have more than one class of common shares with or without voting rights. Both these companies may issue more than one class of preferred shares, with or without voting rights. According to Brazilian Law, the number of non-voting or restricted voting preferred shares can not exceed two-thirds of the total shares issued.

The shares of a publicly held S.A., as previous stated, must be registered with the relevant stock exchange(s), and may be publicly traded after 30% of the issue price is paid-up.

The shares of a closely held S.A. may not be publicly traded. Their sale may be restricted in the by-laws and these shares may also be the object of pledges and other encumbrances registered in the relevant share registry or with the deposit institution.

The Brazilian Corporate Law also foreseen the possibility, for the publicly held S.A., of issuance of other types of negotiable instruments, called: bônus de subscrição (subscription rights), debentures (debentures) and partes beneficiárias (beneficiary parts).

The subscription rights grants to its owner, for a certain time, the right to acquire shares of the issuance S.A. by a determined price based on a pre fixed criteria. It is a title of shares' subscription, which will be exercised or not by its owner.

Each title will enable the subscription of the number of shares foreseen in the certificate, after the payment of the issuance price set up before.

The Brazilian Corporate Law determines that the issuance of this title must respect the authorized capital limit (Article 75). After the issuance of the bônus de subscrição, the S.A. must create a shares' reserve, within the limits of the authorized capital, in order to have resources to permit the subscription of the new shares.

By means of the Debentures issuance, the S.A. can attract resources, that normally are destined to finance fixed investments. This alternative is usually applied to permit a capital increase when the market is not favorable for shares issuance or in the cases that the shareholders do not want to increase the company's capital with personal resources.

The issuance is subjected to shareholders approval, which will occur at an extraordinary general shareholders meeting and will be represented by certificates.

The beneficiary parts are titles by means of which their owners will have the right to receive an eventual credit, which will occur if the company presents profit at the end of each fiscal year. These titles have just one class and the profit's part which they will guarantee may not exceed 10% (ten percent) of the total obtained profits. It is also important to note that they may be issued both in the publicly or in the closely held S.A.s.

Disclosure of Acquisition of Substantial Holdings - The most important procedure involving the establishment of a joint venture or the acquisition of a Brazilian company is the due diligence investigation, which will involve the analysis of the company's present situation and the future risks. This procedure will occur before the execution of the agreement(s). All the necessary documents involving the acquisition can be obtained from the competent registries, such as the state commercial registry, the securities commission and the public notary registries. The government registration, which include federal, state and municipal must also be checked. The most usual kind of companies in Brazil are the Sociedade Anônima (S.A.) and the Sociedade por Quotas de Responsabilidade Limitada (Limitada).

Aquisition of a Limitada - In order to perform the acquisition of a Limitada it is necessary to file before the Commercial Registry an Amendment to the Articles of Association of the relevant company to reflect the quotas' assignment and transference to the new partners. It is also regular practice to execute a quotas purchase and sale agreement in which all the conditions and clauses will be specified.

Acquisition of an unlisted S.A. - The acquisition of this kind of company will occur after the approval and execution of a share transference in the Registered Share Transfer Book or, in the event of shares representation by a deposit with and issuing agent, after the notice to the pertinent agent. In this case a share purchase and sale agreement is executed, in order to determine the clauses and conditions which shall be observed on the sale.

Acquisition of a listed S.A. - The acquisition of a listed S.A. may occur privately among the interested parties or by means of a public offer. The former way dismiss the prior notice to CVM and need not extend to minority shareholders. On the other hand, the acquisition of a listed S.A. has to be informed to the CVM and published as a relevant event. The offer must occur intermediated by a financial institution, which will guarantee the observation of the offeror's obligation. The offering document, prepared and executed between the offeror and financial institution must be published and also has to stipulate the minimum or maximum number of shares object of the offer, price, payment terms and information on the offeror. According to Brazilian Law, the acquisition of determined companies, such as those which deals with energy, telecommunications and insurance, may require specific approvals.

Insider Trading and Fraud - The Brazilian Law protects the secrecy of information related to a company before it becomes public by means of its divulgation in the market. The company's administrators, the shareholders controllers and any other people who may obtain a favored information are supposed to keep it in secret until the formal divulgation occurs. These people are forbidden to obtain private advantages in securities negotiation, if based on any fact which has not been divulged yet. The company's administrators also have to control their subordinates, in order to avoid the undesirable divulgation. If this rule is not followed, CVM can punish those involved in.

Public Take-Over Bids - According to CVM Instructions, the acquisition of any class of shares must occur by a public offer, in the cases that the acquirer shareholder has a participation of at least 10% of a the shares object of the offer.⁸

The Brazilian Securities Market is governed by very specific rules, in order to preserve the equity in the negotiations, avoiding private advantages which may be obtained due to a certain position in a company.

CVM is the institution responsible, in the administrative sphere, for the verification of any infraction to its regulations.

In order to verify this infractions it is started an Administrative Inquisition (Inquérito Administrativo) which can follow two rites: the ordinary rite (rito ordinário) and the summary rite (rito sumário).

The ordinary rite is more detailed and it is applied in the verification of stronger infractions. On the other hand, the summary rite is used to verify simpler cases and its solution is faster.

The majority of the Inquisitions are initiated by the Gerência de Acompanhamento de Capitais, although other divisions have powers to do so.

If the ordinary rite is adopted, when all the proofs and evidences are collected the inquisition is remitted to the Collegiate of CVM, whose members will decide about the procedures' pursuit.

This commission is compound by an attorney (procurador), an inspector (inspetor), an annalist (analista) and a CVM's fiscal (superintendente de fiscalização da CVM). The decision (portaria) authorizing the continuation of the inquisition is published in the Official Gazette. Only in the ordinary rite this publication will occur. The inquisition will observe the contest and legal defense principles.

After the decision to continue the inquisition those who are involved in the investigation will be summoned to present a defense within 30 (thirty) days from the day after the summon date. This procedure will occur in camera and only those whose names are in the powers of attorney may examine the inquisition.

After the final decision it is possible to appeal to the Collegiate.

The Administrative Inquisition which will adopt the summary rite has fewer steps than the one ruled by the ordinary one.

According to Resolution No. 1657 of October 26, 1989, of the Central Bank of Brazil, the summary rite does not have a previous inquiry. It starts with the defendant's summon, who will have 10 (ten) days to present a written defense and a proof request. When this stage is finished, the supervisor, who is the competent authority to decide the matter, will have 30 (thirty) days to judge the case, and it is possible to present a review request of this decision, with suspensive effect, to the Collegiate, which would be a second tier. The defendant can also appeal to the Resource's Council of the National Finance System within 15 (fifteen) days from his knowledge of the Collegiate decision.

The limitation of action will occur in 5 (five) years, as it is established in Law No. 9.873/99.

It is also possible to verify responsibilities in the Jurisdictional sphere. In this case also will be observed the contest, the legal defense principles and the double degree of jurisdiction. The competent court will be the Justiça Federal, according to Article 109, I, of the Brazilian Constitution.

3 CVM means the Brazilian Securities and Exchange Commission.

4 The prospectus exists only in public subscription and generally it will divulge what represents the company and its success expectancy. It is compound by:

1. the capital amount to be subscribed and the form which this subscription will occur;
2. the part of the capital which will be subscribed by assets and the correspondent assets' values;
3. the number, kind and shares' classification of the company's capital;
4. the shares' nominal value and its issuance price;
5. the amount to be paid in the subscription;
6. the obligations assumed by the founders, the agreements already executed on behalf of the company and the amounts already expended and to be expended;
7. the private advantages which will be granted to the founders;
8. the government authorization, in order to enable the company's constitution (if necessary);
9. the terms to perform the subscription and the names of the financial institutions authorized to receive the amounts;
10. the solution to be applied in the case of subscription excess;
11. when will be made the incorporation meeting or the meeting of assets evaluation approval (if necessary);
12. the identification of the founding partners; and
13. the name of the financial institution which will intermediate the casting.

5 The Sociedade Anônima must have the following books:

1. Book of Registration of Nominal Shares (Livro de Registro de Ações Nominativas): this book must contain the name of the shareholder and the number of its shares, the value of the subscribed capital, the conversion of shares into another classification, the changes occured due to sell or shares transference, and liens over the shares.
2. Book of Nominal Shares Transference (Livro de Transferência de Ações Nominativas): this book will be used to register the shares transference and will contain the signatures of the assignor and the assignee.
3. Book of Registration/Transference of Nominal Founder's Shares (Livro de Registro/Transferência de Partes Beneficiárias Nominativas);
4. Book of Registration of the Shareholders Minutes of Meetings (Livro de Atas de Assembléias Gerais);
5. Book of Registration of Shareholders Appearance (Livro de Presença dos Acionistas);
6. Book of Registration of the Meetings of the Administrative Council, if it exists (Livro de Atas das Reuniões do Conselho de Administração); and
7. Book of Registration of the Meetings of the Board of Directors (Livro de Atas das Reuniões de Diretoria).

6 CMN means the National Monetary Council.

7 BACEN means the Central Bank of Brazil.

8 In view of Brazilian Law, while performing a Public Take-Over Bid, it is necessary the observation of the following rules:

1. the offer directed to the shareholders is subject to CVM's approval;
2. the validity term of the offer can not be inferior of 15 (fifteen) days. Third parties may analyze the conditions;
3. the offer advise must be published in the newspaper in which the company usually inform the substantial corporate acts;
4. the offer may be conditioned to a determined adhesion;
5. if the offer is limited to a determined share number, it is guaranteed an apportionment among the acquisitors;
6. if minority shareholders representing more than a third party of a determined share class accept the proposal, the acquirer is obliged to publish another advise postponing the validity of the former proposal;
7. any Public Take-Over Bid must be intermediated by an investment bank, a securities broker company or a multiple bank, which will guarantee the accomplishment of the proposal;
8. the offer must contain the qualification of the offeror, its activities, the shares composition, the price of the acquisition, the validity term and the minimum shares quantity to be acquired;
9. within ten days from the offer validity expiration the results must be informed by the intermediate institution to CVM and published in the same newspapers in which the public take-over bid was first informed;
10. if within two years from the first Public Take-Over bid the acquirer initiates a new offer, he has to pay for the first sellers the difference, if it exists, between the new price and the price paid; and
11. if the company deliberates any social event which may permit the right of recess within one year from the financial liquidation of the Public Take-Over bid, it is assured to the shareholders the payment of the difference, if it exists, between the price paid in the offer and the price paid for the dissenting.