Under Brazilian law solely Brazilian publicly-held corporations can participate of initial public offerings (IPOs) and listings on stock exchanges.
A Brazilian corporation will be publicly held or closely held depending on whether its securities are accepted for trading in the securities market. Only securities issued by a corporation registered in the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) may be traded in our local securities market. No securities may be publicly distributed in the market without previous registration with CVM. In addition to the registration for public issue and distribution of securities, CVM maintains a registration for trading on the stock exchange.
Pursuant to CVM Instruction No. 480, of December 7, 2009, there are two different categories of registry:
- category A, which authorizes the trading of any types of securities; and
- category B, which excludes shares and share certificates of deposit as well as securities which attribute to the holder the right to acquire shares and share certificates of deposit as a result of the conversion or the exercise of inherent rights, provided that these securities are issued by the same issuer or by a company belonging to its economic group.
The placement of shares of Brazilian companies abroad occurs by means of the Depositary Receipts (DRs) mechanism, which is governed by the Regulation attached as Exhibit V to Resolution No. 1289, of March 20, 1987, issued by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN). These companies must be registered in category A. CVM is the regulatory body responsible for examining and approving the DRs´ programs.
To better understand how the DRs´ mechanism works in Brazil it is important to define certain terms as used in the CMN Regulation as follows:
- DRs are certificates that represent shares or other securities representing rights to shares issued abroad by a depository institution, with ballast in specific securities deposited in custody in Brazil. Therefore, the shares or other securities representing rights to shares evidenced by the DRs issued by the depository institution are kept in custody in Brazil by the custodian institution;
- depository institution, also known as depository bank or issuing bank, is the institution abroad that based on the securities deposited in custody in Brazil issues the corresponding DRs;
- custodian institution is the institution that in Brazil is authorized by CVM to provide custodian services for the specific purpose of issuance of DRs; and
- sponsoring company is the Brazilian publicly-held corporation that issues the shares or securities subject to the DRs´ program and signs the specific contract with the depository institution.
For the purposes of registration in the DRs´ programs, the funds remitted to Brazil will qualify to the extent that they are effectively used for the acquisition, in both the primary and the secondary market, of shares or other securities representing rights to shares, and provided that these securities are traded on stock exchanges and issued by publicly-held corporations registered with CVM.
The following documents must be submitted to CVM for obtaining the prior approval of the DRs´ program:
- contract signed by the depository institution;
- contract signed by the custodian institution;
- in the case of a sponsored program, contract signed by the company that has issued the securities that serve as ballast to the issuance of DRs; and
- any other documents or information that may be required at the discretion of CVM.
These contracts will have to include a clause contemplating the obligation of the contracting parties to supply to CVM and to the Central Bank of Brazil (Banco Central do Brasil – Bacen), at any time and within the term established by such authorities (CVM and Bacen), of any information and documents pertaining to the approved programs and to the issued securities.
For each program, there will be only a single kind or class of securities.
The rules about registration at CVM of the DRs´ programs to be traded abroad are set forth by CVM Instruction No. 317, of October 15, 1999, as amended by CVM Instruction No. 334, of April 6, 2000, and CVM Instruction No. 341, of July 13, 2000.
The main rules are outlined below:
- DRs´ programs representing shares issued by Brazilian publicly-held corporations and listed on stock exchanges can only be traded on stock exchanges abroad, if there is an agreement between the national and the foreign exchanges. This agreement must be sent to CVM;
- the issuance of certificates of deposit abroad is waived, whenever the records of the stock positions are held in book-entry account by the foreign stock exchange or by the respective clearing and settlement entity;
- it is the duty of the companies that have obtained registration of DRs´ programs to adopt the minimum time limit of 15 days between the first convocation and the date of the general shareholders´ meeting, in order to enable non-Brazilian resident shareholders to attend the meeting and exercise their voting rights;
- pursuant to the provisions of paragraph 1 of article 125 of Law No. 6404, of December 15, 1976, "a shareholder may be represented at a general shareholders´ meeting by a proxy appointed less than one year before, who shall be a shareholder, a corporation officer or a lawyer; in a publicly held corporation, the proxy may also be a financial institution. A condominium shall be represented by its investment fund officer". Usually the signatures of the proxy instruments granted by the shareholders must be duly certified by a Notary Public. However, the companies that have obtained registration of DRs´ programs may waive the notarization and certification of signatures in the proxy instruments granted by its shareholders, provided that there is a statutory provision in the company´s bylaws regulating this matter.
The above-mentioned rules must be followed by any Brazilian company that decides to participate of an IPO or to be listed on a stock exchange in New York, London, Hong Kong or any other international financial center outside Brazil.
The main factors that can be attractive for Brazilian companies to be listed in a foreign stock exchange are the following:
- reasonable costs and time required to list;
- diversification of sources for fund raising;
- economic status of the exchange´s jurisdiction;
- market liquidity;
- ability of raising the company´s profile with investors and its costume base; and
- industry focus of particular exchanges.
Therefore, the decision to participate of an IPO or to be listed on an international stock exchange will depend as to whether the conditions offered by each stock exchange are considered attractive compared to the requirements of the local exchange and should be examined on a case-by-case basis.
* Notes prepared by the author for the panel IPOs and Listings on International Stock Exchanges to be held on Wednesday, April, 2, 2014, 9:00 am – 10:15 am, at the Waldorf Astoria New York Hotel, at the ABA Section of International Law 2014 Spring Meeting in New York City.
** Walter Stuber is Co-Chair of the International Financial Products and Services Committee and Country Membership Representative Deputy Officer of the Membership Committee of the ABA Section of International Law for 2013-2014.
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