CVM ORIENTING OPINION NO. 34, OF AUGUST 18, 2006.

Prohibition of voting in cases of particular benefit in merger operations and share incorporations where different values are assigned to the shares issued by the company involved in the operation, according to their species, class, or ownership. Interpretation of §1 of art. 115 of Law 6.404/76.

Object of this Orienting Opinion

Frequently, the Securities and Exchange Commission (CVM) has been called upon to rule on the themes of conflict of interest and the prohibition of voting in corporate deliberations. These themes are addressed in art. 115 (regarding shareholders) and 156 (regarding administrators) of Law 6.404/76. Thus, over the years, this subject, which is complex in itself and the object of controversy in legal doctrine, has been the subject of intense discussions, with predominant interpretations varying according to the composition of the CVM Board. The main discussion concerns the existence, or not, of a prohibition that prevents a shareholder from voting on issues where there may be a conflict of interest.

The controversy has not, however, reached the prohibition on voting for the approval of the asset valuation report with which the shareholder contributes to the formation of social capital and the approval of their own accounts as an administrator. These hypotheses are expressly provided for in art. 115, §1, of Law 6.404/76. In these cases, there is no doubt, either in legal doctrine or in CVM decisions, that the shareholder (who will integrate the capital or who is an administrator, as the case may be) is previously prohibited from voting.

There is also no greater controversy regarding the existence of a third hypothesis of voting prohibition, namely, that relating to deliberations that could benefit the shareholder "in a particular manner."

The controversy arises in the analysis of concrete cases, as there is no unanimous objective criterion that distinguishes hypotheses "that could benefit [the shareholder] in a particular manner" from hypotheses where the "interest [of the shareholder] is conflicting with that of the company" (§ 1 of art. 115).

A portion of legal doctrine understands that, in the latter hypothesis, it is possible for the vote to be given and, subsequently, its validity to be analyzed.

In summary: it is reasonably settled that the hypothesis of particular benefit is different from the hypothesis of conflict of interest, in the text of art. 115, § 1, of Law 6.404/76. It is also reasonably settled that in the case of particular benefit, the shareholder is previously prohibited from voting. But it is normally difficult to distinguish the hypotheses of particular benefit from the hypotheses of conflict of interest.

Recently, operations have begun to occur in the Brazilian market aiming at the unification of the species of shares of companies and, also, at the migration of companies listed in traditional trading segments of the São Paulo Stock Exchange – Bovespa to the special segment known as Novo Mercado (and potentially also to that known as Level 2). These movements are salutary because they reduce the hypotheses in which shareholders' interests may oppose each other and because such special listing segments are based on stricter criteria than those of Law 6.404/76 and have the purpose of better corporate governance for the open companies listed in them.

In this sense, the CVM understands that its action, including from the point of view of the legal regulation that falls to it, should facilitate such procedures of unification and migration, especially with regard to the revision of norms designed for other situations, and another market reality, that may restrict the occurrence of migration operations without palpable benefits for the shareholders of Brazilian open companies.

However, the mechanisms envisaged by the market for the realization of such migration operations must always obey the legislation, and ensure, to the extent provided for in the law and regulation, an adequate opportunity for participation of non-controlling shareholders in the decision-making process, especially when they involve differentiated treatment among shareholders holding shares of the same species and class, or rely on valuations that consider not only the economic or political rights attributed to the shares, but also assumptions of overvaluation of shares held by certain shareholders not proven by effective negotiations between independent parties.

For these reasons, this Orienting Opinion aims to disseminate the CVM's interpretation regarding the incidence of the prior voting prohibition referred to in § 1 of art. 115 of Law 6.404/76 in certain deliberations that may particularly benefit controlling shareholders or proponents of merger or share incorporation operations.

Prohibition of Voting

Art. 115, § 1 of Law 6.404/76 states:

"Art. 115. (...) omissis

§1. The shareholder may not vote in the general assembly deliberations regarding the asset valuation report with which they contribute to the formation of social capital and the approval of their accounts as an administrator, nor in any others that could benefit them in a particular manner, or in which they have an interest conflicting with that of the company."

The finding of the voting prohibition does not involve a judgment on the legality of the deliberation to be taken. The potentially favored shareholder will be prohibited from voting even if it is, as expected, deliberating on perfectly lawful benefits, which may coincide with the interest of the company.

Indeed, the approval of administrators' accounts, or the capital increase in assets, may (and indeed should) benefit the company, but the law expressly prohibits the vote of the interested party in these cases. Similarly, the issuance of beneficiary shares (now prohibited for open companies) has always been viewed by doctrine as a hypothesis of particular benefit that prohibits voting, without prejudice to the fact that, evidently, the issuance of such titles is provided for in law on the assumption that it would incentivize founders to act in the interest of the company.

The voting prohibition, therefore, occurs due to the specificity of the benefit, the particularity of its effects on one shareholder compared to the others. And even in such cases, if the precautionary prohibition of voting fails, and the prohibited shareholder votes, the deliberation will only be voidable if the vote of the potentially benefited shareholder was decisive for the formation of the quorum or the assembly majority.

Corporate operations of merger and share incorporation with disproportionate exchange ratios.

Proposals for merger (art. 223 of Law 6.404/76) or share incorporation (art. 252 of Law 6.404/76) have been submitted to shareholders' meetings of open companies (hereinafter simply referred to as Company or Companies) in which, normally based on a valuation report, an exchange ratio is submitted to the general assembly that assigns a different (and higher) value to the shares issued by the Company that are owned by the acquiring company (or incorporated, in the case of reverse incorporation), even when the only asset, or only relevant asset, of such company (hereinafter referred to as Holding Company) are these same shares issued by the Company.

The valuation of shares, for the purpose of the exchange ratio, has been done as follows: first, the value of the Company is defined, normally by economic value based on discounted cash flow. In a second moment, a value is assigned to the shares owned by the shareholders of the Company (by market quotation or other criterion, and sometimes with different values for different species of shares), without considering the shares owned by the Holding Company, determining the value of the set of such shares. Finally, the remaining shares, owned by the Holding Company, are assigned a value equivalent to the difference between the value of the set of shares of the other shareholders, determined in the manner described above, and the total valuation value of the Company, determined first.

Alternatively, the same final result can be achieved if the disproportionate exchange ratio results, totally or partially, from the fact that the number of shares issued by the Holding Company before the merger operation is proportionally larger than the number of shares issued by the Company held by it before the operation, issuing the shares of the Holding Company, in the capital increase resulting from the merger, or from the share incorporation without adjusting such disproportion.

It is this more favorable exchange ratio for the Holding Company, without it having other assets to justify this differentiated treatment, that can be considered as the particular benefit referred to in § 1 of art. 115 of Law 6.404/76. The justification used to justify the more advantageous relationship has been the recognition, by art. 254-A of Law 6.404/76, that shares held by the controlling shareholder have a higher value than shares not part of the control block, to the extent that the alienation of control does not require the realization of a public acquisition offer for holders of shares of the species without voting rights, and obliges a public acquisition offer for shareholders holding shares with voting rights with a 20% discount relative to the price paid to the controlling shareholder.

The CVM understands that such justification is valid within the scope of a tender offer for alienation of control, because the law so determines, but it is not sufficient to remove the voting prohibition for particular benefit when, instead of an independent party (such as the third acquirer of control), it is the very shareholder benefited who confirms the premium on the shares owned by the Holding Company, by voting in the merger assembly.

Mechanisms have been adopted aiming to allow a significant portion of the non-controlling shareholders of the Company, even holders of shares without voting rights, to have the possibility to veto the operation, provided they attend the assembly in significant numbers (normally 50% plus one issued share, excluding the shares of the Holding Company), and vote against the merger.

The CVM understands, however, that such mechanisms would only be effective to remove the discussion about the voting prohibition of the Holding Company in the operations described if the merger, or the share incorporation, were only approved by the affirmative vote of unaffected shareholders who individually completed the legal quorum, as in this hypothesis the vote of the shareholder benefited in a particular manner would be irrelevant, and a third party (the set of other shareholders) would have confirmed the premium granted to the shares owned by the Holding Company.

The CVM also understands that, if the proposal for merger (or reverse incorporation) of the Company, or of its shares, contemplates different exchange ratios considering the different species of shares held by shareholders who are not shareholders of the Holding Company, attributing, for example, different values to the other shares with voting rights and the shares without voting rights, the shareholders holding shares with voting rights, even if they are not shareholders of the Holding Company, will also be prohibited from voting, unless the difference in exchange ratio is based on objectively verifiable criteria (such as discounted future cash flow, or various quotations in organized markets) and not just on the eventual right to alienate their shares in public offers for alienation of control.

Conclusion

In situations where the aim is the unification of the species of shares of the company or migration to special listing segments where the shares of the controlling shareholder, or of the proponent of the operation, are held by a company whose only asset, or only relevant asset, are these same shares (Holding Company), and the deliberation of merger (or reverse incorporation) of the Company, or of its shares, in the Holding Company is submitted for approval by the assembly, the Holding Company and its shareholders (if they hold direct participation in the Company) will be prohibited from voting, in accordance with art. 115, § 1, of Law 6.404/76, if the proposal for merger (or reverse incorporation) of the Company, or of its shares, considers an exchange ratio that assigns different values to the shares issued by the Company that are owned by the Holding Company, and to the other shares of the same species and class issued by the Company.

Similarly, the Holding Company and its shareholders (if they hold direct participation in the Company) will be prohibited from voting, in accordance with art. 115, § 1, of Law 6.404/76, if the proposal for merger (or reverse incorporation) of the Company, or of its shares, considers an exchange ratio that assigns different values to the shares issued by the Company that are owned by the Holding Company, and to the other shares issued by the Company, even of different species or class, if the difference in value is not based on a report that considers the different economic values of each of the shares based on objectively verifiable criteria (such as discounted future dividends, or various quotations in organized markets).

The same voting prohibition must apply if the operation is carried out in a manner to confer the same number of shares of the Holding Company to all species and classes of shares issued by the Company, but the number of shares issued by the Holding Company before the operation is proportionally higher than the number of shares of the Company that it holds before the transaction, resulting, in practice, in the same disproportion that determines the existence of the particular benefit for the Holding Company and its shareholders referred to in this Orienting Opinion.

Additionally, if the proposal for merger (or reverse incorporation) of the Company, or of its shares, contemplates different exchange ratios considering the different species of shares held by shareholders who are not shareholders of the Holding Company, attributing, for example, different values to the other shares with voting rights and the shares without voting rights, the shareholders holding shares with voting rights, even if they are not shareholders of the Holding Company, will also be prohibited from voting, unless the difference in exchange ratio is based on objectively verifiable criteria.

The CVM, although considering that the exchange tender offer would be the most appropriate means for carrying out migration operations as described in this Orienting Opinion, will not act to repress merger (or reverse incorporation) operations of Companies, or of their shares, if it is provided, including in the notice of the assembly, that approval will depend on the affirmative vote of the other shareholders, including for the formation of the legal quorum, observing both the voting prohibition of the Holding Company and its shareholders (if they directly hold shares of the Company), as well as, if applicable, the voting prohibition of other shareholders holding shares with voting rights, referred to in the previous paragraph.

Approved by the Board in a meeting on August 18, 2006.

Signed original by

MARCELO FERNANDEZ TRINDADE
President