The trading of stocks and other private securities is carried out on the Bolsa de Valores do Estado de São Paulo (‘BOVESPA’), while trading of public securities takes place on the Rio de Janeiro Stock Exchange. The other regional exchanges focus on market development and providing services to the local markets.
At the end of September 2006, there were approximately 341 companies listed on BOVESPA.
Foreign companies can only list its Brazilian Depositary Receipts (‘BDRs’) in Brazil. At present, two companies have BDRs listed on BOVESPA.
In 2004, the total equity volume traded on BOVESPA amounted to approximately 9.153 billion Brazilian reais.
During 2005, the Securities and Exchange Commission (Comissão de Valores Mobiliários, ‘CVM’), registered 13 issuances of shares in the Brazilian market, amounting to approximately 4.4 billion Brazilian reais.
In 2004, no public takeover took place in Brazil.
2.1 Laws and regulations governing the issue and offering of securities
The main pieces of legislation governing the Brazilian capital markets are: (i) Law No. 6.385, dated 17 December 1976, which regulates the Brazilian capital market and creates the CVM (‘LCVM’); and (ii) Law No. 6.404, dated 15 December 1976, which regulates the incorporation and operation of corporations in Brazil (‘LSA’).
Article 1 of the LCVM establishes the legal framework for: (i) the issuance and distribution of securities in the Brazilian market; (ii) the negotiation and intermediation of securities in the market; (iii) the negotiation and intermediation in the market of derivatives; (iv) the organisation of a stock exchange; and (v) the organisation of a commodities and futures exchange.
Instruction CVM 400, dated 29 December 2003, (‘ICVM 400’) sets out the definition of a public offering and the requirements that such offer must fulfil. Any offering of securities that does not comply with it is considered a private offering and does not require the approval of the CVM.
Apart from BDRs, a foreign entity may not issue any security in Brazil.
In order for a company to be registered with the CVM as a public company, it must be incorporated in Brazil and must appoint a director for the office of relations with investors (‘Director of Relations with Investors’) that shall be responsible for providing information to the investors, to the CVM, and to stock exchange or OTC markets, as the case may be.
This registration shall be carried out through filing documents and information, such as:
(i) main features of the distribution of securities, if the registration is applied for together with the application for the registration of a public offer or dispersion of stocks of the company, indicating the form used for distributing them in the market, jointly with a list with the names of the shareholders and their respective participation in the stock capital of the company, and other reasons that justify the request for registration; (ii) the by-laws; (iii) financial statements prepared in accordance with the LSA; (iv) management report, regarding the last financial year; (v) report prepared by an independent auditor duly registered with the CVM; (vi) minutes of all General Shareholders Meetings that took place 12 months before the request for registration with the CVM; (vii) fax of the certificates of all types of securities issued by the company and a copy of the agreement with the financial institution depositary of the shares.
Should the request for registration be filed together with the request for the listing of securities, the request shall include a statement by the company, informing that listing has been granted subject only to the registration of the company as a public company with the CVM.
The company may submit its predictions. If disclosed, such predictions shall follow the provisions set forth in ICVM 202.
As mentioned above, with the exception of BDRs, a foreign entity may not issue any securities in Brazil. The foreign issuer of BDRs must be registered before the CVM as a public company and must appoint a local representative with full powers regarding any issue related to the distribution of BDRs and with powers to accept the legal process.
The CVM has been working in a completely new legal framework regarding listing requirements. The correspondent regulation is expected to be submitted to a public hearing very soon.
In the event that the securities are listed, a listing of securities before the corresponding secondary market is also necessary. Moreover, should the listing be simultaneous to a public offering of the securities, an approval of such offering will have to be obtained by the public company before CVM and the corresponding secondary market.
The following are deemed to be securities according to article 2 of the LCVM:
The Brazilian clearing system presents certain segmentation. The clearing systems described below are used for the settlement of securities traded on the Brazilian stock exchanges and OTC markets (it does not contemplate inter-bank funds transfer settlement systems).
CBLC
It is responsible for the clearing and the settlement of securities transactions carried out at BOVESPA, Rio de Janeiro Stock Exchange and SOMA. However, with regard to government securities, the transfers are made in the Selic environment (see below). In addition, CBLC develops depository and risk management activities in the Brazilian capital markets. It is the only Central Securities Depository (CSD) for the equity market and provides the same services for the fixed income market.
Banks, brokers and dealers are clearing members, which are separated into two categories, self-clearing members (settle only trades conducted by them for their own or on behalf of their clients) and full clearing members (settle, additionally, operations conducted by other brokers and special clients, such as mutual funds).
To settle its financial positions, a non-bank participant must use the services of an institution holding a reserve account at the Bacen (‘Reserve Account’), according to a contract agreed between them.
With regard to responsibility, CBLC has a ‘principal-to-principal’ relationship only with clearing members. Clearing members should assume the eventual default of brokers associated to them, and brokers, in turn, should assume the default of their clients. As a general rule, all participants must deposit collateral to cover their open positions, and based on the deposited collaterals, CBLC determines the credit limit to each clearing member. The clearing member distributes this limit to the brokers tied to it and each broker, in turn, to its clients. At each level, the limit can be divided among different markets.
Multilateral netting is normally used to settle operations, but in specific situations settlement can be carried out on a real-time basis, operation-by-operation. In the event of multilateral netting, CBLC acts as central counterparty and ensures the settlement of operations among clearing members.
Centre for Custody and Financial Settlement of Securities (Câmara de Custódia e de Liquidação Financeira – ‘Cetip’)
This entity is responsible for the settlement of transactions with corporate bonds, derivatives, state and municipal government securities and securities that represent National Treasury’s special responsibilities, carried out in OTC markets other than SOMA.
Commercial banks, universal banks, savings banks, investment banks, development banks, brokers and dealers, leasing companies, insurance companies and institutional investors, besides other institutions that are also authorised to operate in financial and capital markets, participate in Cetip.
Cetip settles all transactions in the same day they are made and offers its participants four financial settlement alternatives, depending on the type of transaction: (i) Real Time Gross settlement in the Reserves Transfer System (Sistema de Transferência de Reservas - ‘STR’);
(ii) Real Time Gross settlement via book transfer (money transfer between participants accounts in a single settling bank); (iii) Multilateral netting at Cetip; (iv) Bilateral netting at Cetip for all OTC derivatives transactions, settlement in STR or by book transfer.
Brazil also has a Special System for Settlement and Custody (Sistema Especial de Liquidação e de Custódia – ‘Selic’), for the settlement of government securities and clearing systems operated by the Brazilian Commercial and Futures Exchange (BC&F), for the instruments created by and traded in the BC&M.
The following institutions have powers oner the Brazilian securities markets: (i) The National Monetary Counsel (Conselho Monetário Nacional, ‘CMN’); (ii) the Brazilian Central Bank (Banco Central do Brasil, ‘BACEN’) and the CVM. The competence of such authorities in the supervision of the market are foreseen in the LCVM and Law No. 10.214, dated 27 March 2001.
CMN
It has powers to:
Bacen
Bacen is responsible for implementing the policies and guidelines set forth by the CMN as well as supervising the compliance with such policies and guidelines by the market participants.
CVM
This entity is a governmental agency connected to the Ministry of Finance and is responsible for the regulation and supervision of the securities market. In particular, article 8 of the LCVM establishes that the CVM has powers to:
Public offering of all securities are subject to the regulations foreseen in ICVM 400 (‘Public Offer’). The registration of a Public Offer before CVM shall be requested by the incorporators or the offeror, together with the leader institution of the distribution (‘Leader Institution’), and shall be provided with the documents and information foreseen in ICVM 400 such as:
the legal representative of the offeror and the Leader Institution; and • other information or documents that the CVM may request.
Prospectus
The prospectus shall contain complete, precise, truthful, updated, clear, objective and necessary information, which shall be drafted in an ‘accessible language’, enabling investors to make their decisions.
The prospectus must not omit relevant facts, and must not include misleading information. The prospectus must include, among others, information regarding:
Should the prospectus include information related to: (i) the development of activities and the results of the issuer; or (ii) the development of the price of the securities subject to the Public Offer, such information shall be supported by a report prepared by an independent auditor.
CVM is empowered to determine the inclusion in the prospectus of any additional information it considers appropriate, as well as warnings and considerations that it deems reasonable for the analysis and comprehension of the prospectus by the investors.
Please note that, as indicated above, in the event that no official form of prospectus is approved for a specific security, the interested parties may request that the CVM indicates the minimum content of the prospectus for such security.
The preparation of a prospectus is usually carried out by the issuer and the Leader Institution with the collaboration of its advisors (including auditors, banks and their respective lawyers). The preparation of the prospectus is made to a great extent in the course of the drafting sessions.
In the preparation of a prospectus, due diligence is carried out on the issuer, based on the documents provided by it. The timing to carry out such activity will vary depending on the type of business of the issuer and its characteristics (eg, the size of its activities).
The issuer, offeror or the entity that requests the listing of the securities, as well as their respective directors, will be responsible for the veracity, consistency, quality and sufficiency of the information contained in the prospectus.
Moreover the Leader Institution shall be liable in the event that it does not act with diligence in assuring that the information contained in the prospectus is true, consistent and sufficient.
Please refer to section 3.1.
The company must include statements regarding its ongoing investments as well as any information regarding its future projects if such information is important so that investors can judiciously form their investment decisions.
The prospectus shall also follow the rules foreseen in ICVM 400.
The company must disclose its dividend policy for the last five years, including the details of the way of payment, prescription, rights in the event of non-payment.
The inclusion of disclaimers is uncommon in Brazilian prospectuses.
Any public offer in Brazil must fulfil the requirements of ICVM 400 and therefore CVM will not acknowledge a prospectus drafted in accordance with foreign law.
As mentioned above, any offer within the Brazilian market must be carried out by a company duly registered before CVM. Moreover, the offer itself must be registered with CVM and comply with the provisions of ICVM 400. Apart from this, Brazilian distribution systems follow international practice.
Unless expressly waived by CVM, the public distribution of securities can only be performed with the mediation of the institutions taking part in the securities distribution system as per article 3.2 of the ICVM 400.
In Brazil, mainly financial institutions (even though other corporations may also be licensed) are engaged in the activity of distributing securities either as: (i) agents of the issuing corporation; or (ii) for their own account, underwriting or purchasing the issue in order to introduce it into the market.
These are established in the agreement for the distribution of securities (which must expressly disclose such information in accordance with ICVM 400).
Distribution of securities can only be carried out by entities duly authorised by CVM as per article 16.1 of the LCVM.
The Leader Institution is usually the entity that coordinates the drafting of the offering documents as well as the discussions with CVM for the approval of the offer.
CVM is legally bound to analyse the petition for registration of a Public Offer within a maximum term of 20 working days from the date on which all documents and information required are submitted. Should the CVM not decide within the aforementioned term, registration with the Public Offer Registry shall be deemed granted automatically.
The 20-day term may be suspended once by CVM to request the submission of additional documents, amendments or information.
The new requirements ought to be complied with within a 40-working day term. This term may be extended once, for a maximum term of 20 working days, through the prior submission of a justified request by the party.
As from receipt of the documents complying with CVM’s requirements, it shall have 10 working days to express its opinion regarding the request, which shall be deemed automatically granted if the CVM does not render a decision within the referred term. If the interested party carries out amendments not required by the CVM, the agency shall have 20 working days to analyse the request.
The Leader Institution and the offeror are entitled to request one interruption of the abovementioned deadlines from CVM.
All marketing materials (‘Advertising Material’) need the previous approval of the CVM. Advertising Material must not contain information other than or inconsistent with that contained in the prospectus.
The language used in the Advertising Material shall be ‘composed and reasonable’, warning its readers about the investment risks. Furthermore, ICVM 400 establishes that the Advertising Material shall state that it is only ‘marketing material’ and shall inform the readers about the existence of the prospectus and the way to obtain it.
Even after Advertising Material has been approved, the CVM is entitled to request amendments, rectifications or the cease of marketing activities. Documents used to support presentations aimed at investors are not considered marketing material, although they must be sent to the CVM before being used.
Public offers of debentures are subject to the provisions foreseen in ICVM 400.
Payments to debenture holders are made in accordance with the rules foreseen in article 69 of the LSA.
Debenture holders are organised in and represented by a fiduciary agent exhaustively regulated by the LSA.
Listing of securities depends on the previous registration of the company with the CVM as a public company (refer to section 3.1). In addition to that, a listing of securities before the corresponding secondary market is also necessary. Finally, in the event that the listing is simultaneous to a public offering of the securities to be listed, an approval of such offering will have to be obtained by the public company, as described above, before CVM and the corresponding secondary market.
As regards the request for listing on BOVESPA, the period for obtaining the listing is approximately four weeks.
As mentioned above (section 5.1), in case of a listing together with a public offer, one of the documents that must be submitted is a prospectus.
Please refer to section 8.2 above.
Please refer to section 8.1 above
Stock exchange
The stock exchanges are corporations that provide an electronic system for the negotiation of securities issued and distributed in accordance with Brazilian law.
The stock exchanges are owned by brokerage firms. In Brazil, the stock exchanges have executed an integration agreement that has integrated the Brazilian stock markets nationwide.
BOVESPA currently trades stocks, stock options, rights and subscription receipts, subscription warrants, fund units, corporate bonds and BDRs.
The stock exchanges are entitled to establish rules and procedures, including those related to conduct, and monitor their compliance by brokerage firms, listed companies and investors.
Trading of securities on BOVESPA can only be made through authorised brokerage firms.
OTC market
The OTC market is regulated by CVM through ICVM 243.
OTC markets may be organised or unregulated. One of the most important organised OTC markets in Brazil is the Asset Market Operating Company (Sociedade Operadora do Mercado de Ativos – ‘SOMA’) that mainly trades stocks and units of closed funds that are settled by CBLC.
The purpose of unregulated OTC markets, according to article 21.3 of LCVM, is the trading of securities, outside a stock exchange or systems managed by entities of the organised OTC market, by: (i) financial institutions and other corporations engaged in the activity of distributing securities issues; (ii) corporations engaged in the activity of purchasing securities available in the market, in order to resell them on their own account; and (iii) corporations and independent agents engaged in intermediation activities in the trading of securities.
Commodities and futures exchange
Certain derivatives, such as spot, forward, futures, options and swaps are traded in the Brazilian Commodities and Futures Exchange (Bolsa de Mercadorias & Futuros – ‘BM&F’). They mostly refer to interest rates, foreign exchange rates, and price and stock indices.
The documentation mentioned in section 8.1 will also be the basis for the application for listing of the securities of a company on BOVESPA or on an organised OTC market. Notwithstanding this, with regard to, for instance, BOVESPA, additional documents, that will vary depending on the corporate governance listing segment chosen by the public company, will be requested.
Please refer to section 8.2 above.
Below is a summary of the quarterly official fees that a public company must pay to CVM:
NET WORTH EXPRESSED IN REAIS FEE EXPRESSED IN REAIS
| Public company | Up to 8,287,000.00 | 1,243.05 |
| From 8,287,000.01 to 41,435,000.00 | 2,486.10 | |
| Above 41,435,000.00 | 3,314.80 | |
| Investment funds | Up to 2,500,000.00 | 600.00 |
| From 2,500,000.01 to 5,000,000.00 | 900.00 | |
| From 5,000,000.01 to 10,000,000.00 | 1,350.00 | |
| From 10,000,000.01 to 20,000,000.00 | 1,800.00 | |
| From 20,000,000.01 to 40,000,000.00 | 2,400.00 | |
| From 40,000,000.01 to 80,000,000.00 | 3,840.00 | |
| From 80,000,000.01 to 160,000,000.00 | 5,760.00 | |
| From 160,000,000.01 to 320,000,000.00 | 7,680.00 | |
| From 320,000,000.01 to 640,000,000.00 | 9,600.00 | |
| Over 640,000,000.01 | 10,800.00 | |
| Investment funds | Up to 2,500,000.00 | 300.00 |
| issued by | From 2,500,000.01 to 5,000,000.00 | 450.00 |
| investment funds | From 5,000,000.01 to 10,000,000.00 | 675.00 |
| From 10,000,000.01 to 20,000,000.00 | 900.00 | |
| From 20,000,000.01 to 40,000,000.00 | 1,200.00 | |
| From 40,000,000.01 to 80,000,000.00 | 1,920.00 | |
| From 80,000,000.01 to 160,000,000.00 | 2,880.00 | |
| From 160,000,000.01 to 320,000,000.00 | 3,840.00 | |
| From 320,000,000.01 to 640,000,000.00 | 4,800.00 | |
| Over 640,000,000.01 | 5,400.00 |
The corresponding secondary market will also charge fees for the listing of securities. In the case of BOVESPA, the following annual fees for the listing of shares will be applicable: LEGAL CAPITAL FIXED PART VARIABLE PART
| Minimum | Maximum | ||
|---|---|---|---|
| X | 10,000,000 | 5,000 | X |
| 10,000,001 | 50,000,000 | 5,000 | 0.00914% |
| 50,000,001 | 100,000,000 | 8,655 | 0.00832% |
| 100,000,001 | 200,000,000 | 12,812 | 0.00757% |
| 200,000,001 | 500,000,000 | 20,380 | 0.00689% |
| 500,000,001 | 1,000,000,000 | 41,043 | 0.00627% |
| 1,000,000,001 | 3,000,000,000 | 72,385 | 0.00571% |
| 3,000,000,001 | 7,000,000,000 | 186,486 | 0.00519% |
| 7,000,000,001 | X | 394,173 | 0.00473% |
An investor shall be entitled to claim compensation for damages and losses suffered as a result of misstatements or the omission of information that should have been disclosed in accordance with the applicable law. Liability for the content of the prospectus shall rest with the issuer or offeror and the Leader Institution, as explained in 5.5 above.
Legal actions may be filed against the issuer within three years.
A legal action will be heard by the ordinary courts in a proceeding called processo de conhecimento. In the event that the decision is issued in favour of the investor and the corresponding compensation is not paid, the investor may file a claim (processo de execução) to enforce the decision.
9.4 Criminal liability
It is unlawful in Brazil to engage in fraudulent transactions or other deceitful acts, which aim is to artificially alter the regular operation of the securities markets to obtain undue advantages or profits for oneself or others, or to cause damage to third parties.
It is also an offence to act in the securities market as an institution belonging to the distribution system, as a collective or individual portfolio manager, self-employed investment agent, independent auditor, securities analyst, fiduciary agent or to exercise any position, profession, activity or function without being so authorised by or registered at the applicable administrative authority, when required by law or regulation.
For insider trading, please see section 12 below.
10. CONTINUING REQUIREMENTS
10.1 Nature of requirements – financial statements
A public company shall provide regular information to the CVM as described below:
• other information requested by the CVM.
10.3 Required interim disclosure
The public company shall inform the CVM, and also the stock exchange and entities of the OTC in which the securities issued by the public company are traded, of any and all relevant facts as per Instruction CVM 358, dated 3 January 2002 (‘ICVM 358’). Relevant facts are defined as any decision by majority shareholders, general shareholders meetings, or by officers of a public company, as well as any other acts or facts of a political-administrative, technical, business or financial nature related to the relevant business that may significantly influence:
Such disclosures shall be carried out through publications in wide-circulation newspapers usually used by the public company and they shall be made in a summarised way indicating the addresses on the internet, on which the complete information shall be available to all investors. Moreover, such disclosures shall take place, whenever possible, before the beginning or after the closing of the transactions of a stock exchange and entities of the OTC in which the securities issued by the public company are traded.
10.4 Proxies
The LSA establishes that in case of public solicitation of proxies, the following rules shall be observed:
0.5 per cent of the share capital shall be entitled to request a list of the addresses of the shareholders.
10.5 Certain disclosures on directors
Upon a director’s appointment, he/she shall declare the number of securities issued by the corporation, by a controlled corporation or by a corporation belonging to the same group, which he/she owns.
In the event that the shareholders representing five per cent or over of the capital so request, a director shall disclose to the annual general meeting:
Moreover, a director shall immediately inform, as specified by CVM, to such commission and to the corresponding Stock Exchange or OTC market entities, any changes to their ownership positions in the company.
10.6 Substantial shareholding reporting
Controlling shareholders must notify CVM and the corresponding stock exchange or OTC market entity of any increase equal or exceeding five per cent in their holdings positions. The information must include, among others, the number of shares purchased, the price at which the securities were acquired and any agreement related to the exercise of voting rights.
The threshold for non-controlling shareholders is 10 per cent. Above such threshold, any increase of five per cent must be disclosed.
10.7 Requirements of transfer agent, clearing, paying agent
Some reporting and filing obligations in connection with the trades in which such parties participate are required.
10.8 Other continuing obligations
The public company that has its securities listed on BOVESPA is also subject to its continuing reporting obligations. Such obligations include, in any case, the obligation to report to BOVESPA the standard and other information that must be presented to CVM. Nevertheless, additional information may be requested depending on the corporate governance listing segment in which the securities are listed.
11. CORPORATE GOVERNANCE
11.1 Code/law
The following sources of law shall be followed by Brazilian companies regarding its corporate governance duties:
Among the non-mandatory codes published, the Recommendations on Corporate Governance, issued by CVM, and the Brazilian Code on Corporate Governance, issued by the Brazilian Institute on Corporate Governance should be borne in mind.
11.2 One or two-tier board
The LSA, in its article 138 et. seq., allows corporations to be managed solely by managers (directors) or by managers and a Board of Directors.
If the company is managed by managers solely, the by-laws should determine the number of managers (minimum of two) and their powers, which could be subject to a prior approval of the shareholders meeting. Managers shall have powers to represent the corporation vis-àvis third parties.
The Board of Directors is not mandatory, except for public corporations, and it does not have powers to represent the corporation vis-à-vis third parties. According to article 142 of the LSA, it shall have competence to:
11.3 Publication of internal regulations
Public companies must send to CVM and the corresponding stock exchange or OTC market, among others, the minutes of the shareholders meetings, its by-laws and shareholders agreement. Please also refer to section 10 above.
11.4 Responsibility of directors
Among other duties, directors shall:
Should the director act with negligence, malice or in violation of the law or the corporation’s by-laws, he or she could be held personally liable for the damages caused to the company, its shareholders and any other third parties.
11.5 Committees
According to article 139 of the LSA, the responsibilities of the managers, Board of Directors and Audit Committee cannot be delegated. Nonetheless, the by-laws may create committees that should have powers solely to advise the administrators of the corporation.
11.6 Consent of shareholders meeting
According to the LSA the following matters shall be decided by the Shareholders Meeting, among others:
11.7 Extent of information. Proxy solicitation
Please see question 10.4 above.
11.8 Appointment/dismissal of directors
Under LSA, the appointment and dismissal of directors falls under the exclusive competence of the shareholders meeting. Nonetheless, the Board of Directors would be competent should the corporation have one.
On the other hand, the appointment and dismissal of the members of the Board of Directors falls under the exclusive competence of the shareholders meeting. In the event that a director is dismissed or resigns from his/her office before the end of the term for which he was appointed, the board is entitled to appoint a director until the next shareholders meeting is held.
11.9 Income and options for directors
The shareholders meeting has competence to determine the remuneration of the directors, taking into account their background, skills and responsibilities.
On the other hand, the Brazilian Code on Corporate Governance regulates this matter in greater detail, envisaging protecting the financial status of the company but also the fair remuneration for the directors that duly comply with their duties. In addition, financial institutions are not allowed to grant loans to its managers.
The New Market of BOVESPA also requires the disclosure of any and all contracts between the company and its managers that fit in with the conditions foreseen in the rules of the New Market.
11.10Earnings guidance
Please refer to section 11.9.
11.11Directors liability
According to article 133 of the LSA all members of the board of directors shall be jointly and severally liable against the company, the shareholders and the creditors of the company for any damage caused as a consequence of acts or omissions contrary to the law or the Articles of Association, as well for those carried out in breach of the duties inherent to their office. Only those members of the board who can prove that they were not involved in the execution or approval of the damaging act or resolution and were unaware of it, or knowing about it, did everything to prevent the damage or expressly opposed it, may be exonerated from such liability.
12. INSIDER TRADING
12.1 Laws and regulations
Article 155 of LSA regulates the duty of loyalty of officers, directors and members of the auditing committee and other technical or consulting committees, as well as insider trading. Article 157 of LSA regulates the duty of disclosure of officers, directors and members of the auditing committee and other technical or consulting committees. ICVM 358 details the rules and procedures applicable to the disclosure of relevant information and to the negotiation of securities pending such disclosure.
The administrative trial of inequitable practices incurred by officers, directors, members of the auditing committee, shareholders and market intermediaries is regulated in article 9-V of LCVM. The insider dealing criminal offence is regulated in article 27-D of LCVM.
12.2 Codes of conduct
ICVM 358 primarily governs the disclosure of relevant information by corporations. Additionally, ICVM 358 contains general rules for the prevention of insider dealing.
According to article 15 of ICVM 358, any corporation (by means of its board of directors) may adopt internal guidelines to govern the negotiation of its securities by (direct and indirect) controlling shareholders, officers, directors and members of the auditing committee and other technical or consulting committees. On the other hand, all corporations (by means of their board of directors) must adopt a policy of disclosure of relevant information, contemplating procedures to maintain the secrecy of yet undisclosed relevant information (article 16 of ICVM 358). Such policy must be addressed to and adhered to by their managing bodies and those who have access to relevant information by virtue of their position in the corporation, its controlled, controlling or affiliated companies.
12.3 Definitions
Article 155 of LSA provides that:
• officers and directors of a corporation shall keep secret any information not yet disclosed to the public, which they obtained by virtue of their position and which may significantly affect the quotation of securities, and shall not make use of such information to obtain any advantages for themselves or for third parties by purchasing or selling securities;
• officers and directors shall ensure that the abovementioned secrecy is not infringed by a subordinate or third party enjoying his confidence; and
• any individuals who receive relevant information not yet disclosed to the public shall not make use of such information to obtain any advantages for himself or for third parties in the securities markets.
Therefore, insiders are: officers and directors; members of the auditing committee and other technical or consulting committees; people subordinated to the previously mentioned individuals; third parties enjoying the confidence of the previously mentioned individuals; controlling shareholders; and any individuals who receive relevant information not yet disclosed to the public.
Article 157 defines relevant information as facts involving one corporation’s business affairs which may substantially influence the decision of market investors to sell or buy securities issued by such corporation. Also, it sets forth that officers and directors shall immediately inform the stock exchange and disclose to the press any deliberation of a general meeting or of the corporation’s management bodies. Article 157 has been further developed by ICVM 358. Article 2 ICVM 358 contains a non-exhaustive list of relevant pieces of information, until the disclosure of which insiders may not deal with the corporation’s securities.
12.4 Sanctions
Brazilian law provides for civil, administrative and criminal liability for insider trading.
Civil liability consists of the payment of material damages by the inside information’s beneficiary (tippee) to the investors harmed as a result of the insider trading. In addition to individual law suits proposed by investors, the District Attorney’s Office may initiate a class action to obtain reparation for the damages. Also, if there is evidence that officers or directors (tippers) contributed to the leaking of relevant information, they will be jointly and severally liable with the tippees for the material damages.
Administrative sanctions for insider trading may consist of: warning; fine; suspension of members of management bodies and auditing committee of corporations, entities taking part in the distribution system, or other entities which require authorisation by, or registration with, the CVM; temporary impediment (up to 20 years) to act as a member of management bodies and auditing committee of corporations, entities taking part in the distribution system, or other entities which require authorisation by, or registration with, the CVM; revocation of authorisations/registrations granted by CVM; temporary prohibition (up to 20 years) for entities taking part in the distribution system to carry out business activities; and/or temporary prohibition (up to 10 years) to directly or indirectly participate in transactions in the securities markets.
Criminal sanction consists of imprisonment from one to five years and fine amounting up to three times the profit obtained with the criminal offence.
LSA and LCVM do not provide for the annulment of insider dealings.
12.5 Defences
Brazilian statutes do not provide for any defences for insider dealing.
12.6 Major shareholders in case of takeover
Major shareholders are subject to all insider trading regulations.
12.7 Trading in certain periods
Prior to the disclosure of relevant information regarding a corporation, the following individuals/entities are prohibited from dealing with securities issued by such corporation: (direct or indirect) controlling shareholders; officers, directors and members of the auditing committee and other technical or consulting committees; individuals who have access to relevant information by virtue of their position in the corporation, its controlled, controlling or affiliated companies; and individuals who become aware of relevant information and know it is still undisclosed to the market (especially independent auditors, analysts, consultants and market intermediaries) (article 13, ICVM 358). Direct or indirect controlling shareholders, officers and directors are also prohibited from dealing with securities issued by the corporation whenever an acquisition or sale of shares issued by such corporation is carried out by the corporation itself, its controlled or affiliated companies or company under common control, or an option or mandate is granted for the same purpose. However, such prohibitions are not applicable to dealings carried out pursuant to the corporation’s internal guidelines governing the negotiation of securities (see 12.2 above) by the corporation itself, its (direct and indirect) controlling shareholders, officers, directors and members of auditing committee and other technical or consulting committees.
Notwithstanding any internal guidelines, the prohibition always applies to the negotiation of securities in the 15 days before the publication of the corporation’s quarterly and annual statements.
12.8 Buying before launch of takeover bid
Buying before the launch of a takeover bid would be subject to the general rules on insider trading.
12.9 Buying after closing of takeover bid
The target company, the controlling shareholder and the individuals and entities that also represent the controlling shareholder’s interests may not carry out a new public offer for the shares aimed at a previous public offer until one year as from the auction for the previous public offer, except if they are obliged to do it or they offer the same conditions as the new public offer to those who accepted the previous public offer, thus paying the updated price balance.
12.10Analysts
Article 13, paragraph 1 of ICVM 358 sets forth that, prior to the disclosure of relevant information regarding a corporation, analysts who know such undisclosed information may not deal with securities issued by such corporation.
13. MUTUAL FUNDS AND UNITS
13.1 Exceptional regulation for mutual funds
ICVM 409 contains the basic legal framework on the creation, administration and operation of investment funds, including those that invest in units issued by investment funds. ICVM 409 does not apply to some funds, such as Receivables Investment Funds, Private Equity Funds and Real Estate Investment Funds, as they are subject to specific regulations.
Moreover, and without prejudice to the applicable regulations issued by the competent authorities, the constitution of a fund must also comply with the provisions set forth in the law and in the Brazilian Civil Code, which regulates the operating rules applicable to condominiums (condomínio).
13.2 Controlling agency
Investment funds are subject to the CVM.
13.3 Regulated functions
Instruction CVM 306, dated 5 May 1999 (‘ICVM 306’) which regulates the management of funds, defines such function as ‘the professional administration of resources or securities, subject to the control CVM, granted to the manager, authorising him/her to purchase or sell securities on the account of the investor.’
The management of a fund shall only be carried out by individuals or legal entities duly registered with the CVM, which must be domiciled in Brazil, as set forth in articles 4 and 7 of ICVM 306.
13.4 Exemptions
Any investment fund that fits in with the definition of investment fund foreseen in ICVM 400 or in other applicable law must be regulated by such rules. The so-called ‘investment clubs’ are not considered to be investment funds even though they are under the surveillance of the CVM when related to securities institutions (Instruction CVM 40, dated 7 November 1984).
13.5 Requirements
The operation of an investment fund depends on its previous registration with the CVM, upon request of its manager. The request for registration shall be sent to the CVM through the Documents Filing System available on the CVM website, and shall be considered automatically granted as from its respective filing date. Among the documents that should be presented, the following should be highlighted: (i) fund by-laws, prepared in accordance with ICVM 409; (ii) prospectus (unless it is a fund addressed exclusively to institutional investors and the fund’s by-laws expressly determine that no prospectus will be produced); and (iii) name of the independent auditor.
On the other hand, the distribution of units of an open fund does not depend on prior registration with the CVM but shall be carried out by intermediary institutions. Distribution of units of a close fund which is not aimed exclusively at institutional investors shall need a prior registration of the Public Offer. Such registration shall comply with the requirements foreseen in ICVM 400. The registration of the distribution of units of a close fund aimed exclusively at institutional investors depends on the filing of certain documents, through the Documents Filing System, and shall be considered granted as from the date of its filing.
13.6 Special requirements for foreign entities
As a general rule, investment funds can only have their units traded on the Brazilian market in the event they are created in Brazil and duly registered at the CVM. Therefore, investment funds that have not been previously registered with the CVM may not be marketed or sold in Brazil.
13.7 Relationship with clients
ICVM 409 contains detailed regulations concerning the rights of and the information that must be provided to investors. That the manager is obliged to immediately inform the unit-holders, by post, about all relevant acts or facts, in order to assure that all unit-holders have access to information that may, directly or indirectly, influence their decisions regarding their continuity in the fund or, in the case of other investors, regarding the acquisition of units.
13.8 Reporting/guarantee systems
Relevant facts shall be immediately notified to the CVM through the Document Filing System, and they shall be published on the CVM website.
ICVM 409 also establishes the obligations of the funds to notify the CVM of certain information, such as: (i) sending the CVM, on a monthly basis, balance sheets, composition of the portfolio and monthly profile; (ii) sending to the CVM, on an annual basis, the respective financial reports, and accounting reports along with a report prepared by an independent auditor; and (iii) sending to the CVM a standard form with basic information regarding the fund, whenever there is an amendment in the fund’s by-laws.
13.9 Extra disclosure requirements
The fund and its manager are subject to certain specific disclosures, such as the yearly preparation of its accounting records, making them available to all interested parties that require such information.
13.10Types of schemes
A fund can be divided into two main categories:
13.11Registration and requirements for managers
The management of a fund shall only be carried out by individuals or legal entities duly registered with the CVM.
13.12Registration and requirements for custodians
Custodians may be corporations domiciled in Brazil and duly authorised by the CVM.
13.13Registration and requirement of redemption agent
The redemption of units of funds is carried out by the manager.
13.14Regulation of investment powers
ICVM 409 contains detailed regulations concerning in what types of assets, securities or rights may a fund invest and what percentages and coefficients of investment apply to the different types of funds (please also refer to section 13.10).
14. SECURITIES INSTITUTIONS
14.1 Regulation of securities institutions
Securities institutions are governed by Law 4.728, dated 14 July 1965, the LCVM and by the regulations issued by the CMN (specially Resolution 1.120, dated 4 April 1986, and Resolution 1.655, dated 26 October 1989) and the CVM (especially Deliberation 20, dated 15 February 1985 and Deliberation 105, dated 22 January 1991).
14.2 Controlling power
Securities institutions are under the control and surveillance of the CVM and Bacen.
14.3 Regulated functions
The following are deemed to be functions of securities institutions: (i) distribution of securities
(a) as agents of the issuing corporation or (b) for their own account, underwriting or purchasing the issue in order to place it on the market; (ii) purchasing securities available on the market, in order to resell them on their own account; (iii) intermediation activities in the trading of securities, on stock exchanges or OTC markets.
14.4 Exemptions
The activities listed in 14.3 above are reserved to entities duly registered with CVM and Bacen.
14.5 Requirements
The exercise of each activity as mentioned above requires the previous authorisation of the CVM and Bacen that sets forth different requirements for each activity (please refer to section 14.1).
14.6 Foreign entities
Foreign entities cannot be registered as securities institutions in Brazil.
14.7 Relationship with clients
The rules of conduct, information obligations, registration of orders and other aspects of the relationship of securities institutions with their clients are regulated by the legislation mentioned in section 14.1 above.
14.8 Guarantee system
Please refer to section 3.4 above.
15. NOTIFICATION OBLIGATIONS
15.1 Notification of substantial shareholdings
For shareholders, please refer to section 10.6 above. Regarding the administrators, two situations may be applicable:
15.2 Thresholds
For shareholders, please refer to section 10.6 above.
For managers, according to 15.1(i), it shall disclose any and all of the abovementioned information. With regard to section 15.1(ii), the threshold is five per cent.
15.3 Publicity of notifications
The information is available at CVM and the corresponding Stock Exchange or OTC market entity.
Exclusively for the purposes of the information disclosed by administrators at the request of the shareholders meeting (15.1(i)), the information disclosed shall be made available to the shareholders of the company that shall use such information solely to attend its (or the company’s) legitimate interest.
15.4 Substantial holdings in credit institutions
In the event of a merger, an increase of the legal capital, the transfer of control or any other act that results in a modification of the shareholder structure of a financial institution, the name of the controlling shareholder, the shareholders that hold at least five per cent of the legal capital, the number of shares held by its managers and by its foreign shareholders shall be disclosed to the Brazilian Central Bank.
16. PUBLIC TAKEOVERS
16.1 Applicable laws and regulations
Public takeovers are governed by articles 257 to 263 of the LSA and by ICVM 361.
16.2 Competent authority
The takeover must only be authorised by the CVM if it involves an exchange offer (nonetheless, in any case, the takeover shall comply with the general requirements foreseen in ICVM 361).
16.3 Thresholds
A takeover bid must be launched when: (i) the controlling shareholder, any person empowered by him/her, and others which act together with the controlling shareholder or person empowered by him/her, acquire, by means other than a takeover bid, shares which represent over one-third of the total shares of each type or class in circulation; (ii) there is direct or indirect alienation of control.
16.4 Obligation to offer the same amount
The Public Offer shall have uniform value, except when different prices for different classes and types of shares have to be fixed. Moreover, such difference shall be based on an appraisal carried out by the company or by an express declaration of the offeror in relation to the reasons of such difference.
16.5 Timing
The offer shall be published at least once and shall be notified to CVM (that shall also receive, within this period, a copy of the offer) within a period of 24 hours after its publication. The offer shall be valid for a minimum term of 30 days and maximum term of 45 days. Four business days after the end of said period, the relevant stock exchange or the OTC market entity shall send the outcome of the offer to the CVM.
16.6 Strategy
The strategy will depend on whether the takeover bid is ‘hostile’ or ‘friendly’. In any event, public takeovers are unusual in Brazil since the control of a public company is only in very rare cases dominant in the market.
16.7 Irrevocables
The use of irrevocables in public takeovers is unusual in Brazil. In any event, according to the law, if there is a competing bid, its publication would avoid any sale orders already signed having to be accepted.
16.8 Prohibitions to buy on exchange
If the bidder purchases shares at a price greater than the offer price, that fact will entail an automatic increase.
16.9 First announcement
As mentioned above, the first announcement shall be published at least once and shall be notified to CVM within a period of 24 hours after its publication.
16.10Period between first announcement and offer document
Please refer to section 16.9 above.
16.11Offer document content
The takeover prospectus will contain information on: (i) the minimum number of shares which the bidder intends to acquire and, as the case may be, the maximum number; (ii) the price and the conditions of payment; (iii) the condition relating to a minimum number of acceptors and the method of apportionment among the acceptors if their number exceeds the maximum established; (iv) the procedure to be adopted by the accepting shareholders to express their acceptance and to effect the transfer of the shares; (v) the period of validity of the offer, at least 20 days; (vi) information about the bidder.
16.12Drafting of offer document
The prospectus is usually drafted by the financial and legal advisors of the bidder, in close cooperation with the directors of the bidder.
16.13Addressees of offer documents
The announcement of the bid must contain the essential data of the offer and must be published in the newspapers in which the target usually publishes articles as set forth by law.
16.14Due diligence
The carrying out of a due diligence report of the offeree will depend on the particular circumstances, eg, whether the bid is friendly or hostile.
16.15Conditions
The offer can be subject to conditions, provided that the implementation of such conditions does not depend on a direct or indirect performance by the offeror or of people entitled to it.
16.16Obligation of financing: cash, shares and mixed
The offer must be guaranteed by a financial institution in accordance with article 257 of the LSA.
16.17Break-up fees
Break-up fees are unusual in public takeover bids in Brazil.
16.18The Takeover Directive
Not applicable.
16.19Defence mechanisms
By virtue of the lack of public takeovers in Brazil, defence mechanisms are not regulated by CVM. Nonetheless, the current legislation that applies to Brazilian corporations permits the implementation of some poison pills in the target’s by-laws, such as a share purchase rights plan and limitations on the voting rights of shareholders representing over a specific percentage of the legal capital of the target.
16.20Nature of listed securities
All listed shares must be book entry shares.
17. FOREIGN INVESTMENT
17.1 Foreign control restrictions
Brazilian law prohibits or restricts foreign investment in a significant number of sectors, among others: nuclear energy, newspaper, magazines, television and radio, rural areas and aerospace industry.
Moreover, foreign investment in financial institutions is subject to the prior approval of the Brazilian government.
Foreign investments must be registered with the Brazilian Central Bank through an electronic registration system established by Circular 2,997, dated 15 August 2000, issued by the Brazilian Central Bank. This registration is necessary for purposes of remittance of dividends abroad, repatriation of the capital invested and registration of profit reinvestment.
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