CVM Explanatory Note 02

CVM EXPLANATORY NOTE NO. 2.
Ref.: Resolution No. 436 Concept of Open Company and Capital-Open Society.

Law 6,404, of December 15, 1976 (Corporations Law) establishes that only the securities of companies registered with the Securities and Exchange Commission may be distributed in the market and traded on an exchange or in the over-the-counter market (Article 4, sole paragraph).

On the other hand, the same law states that for the purposes of Law 6,404, a company is open or closed depending on whether the securities it issues are or are not admitted to trading on an exchange or in the over-the-counter market (Article 4).

One might conclude that from Law 6,404 onwards, only the securities of companies that would register with the Securities and Exchange Commission (while it was not yet installed, in the Central Bank) in accordance with the norms of Law 6,385, of December 7, 1976 (created the CVM), could be traded in the market.

According to this interpretation, many companies that currently have securities traded in the exchange or over-the-counter market could claim that they are not open companies simply because they did not register with the CVM after the promulgation of Laws 6,404 and 6,385. Hence the need to clarify the concept of open company, through a decision of the National Monetary Council in accordance with Resolution 436.

The basic idea of the Resolution was to consider as an open company that which was registered with the Central Bank until the installation of the CVM and, after installation, the company registered with the Commission.

As there are companies that have their issued securities traded on an exchange, without registration with the Central Bank, as item XXIV of Resolution No. 88 allowed them, item I, letter "b" of the Resolution obliges them to register within 90 days.

The norm provided for in item II of the draft is a consequence of Article 4 of Law 6,404 itself.

As Law 6,385 in its Article 21 establishes two types of registration, one for trading its titles on an exchange and another for trading in the over-the-counter market, item III of Resolution 436 considers automatically registered with the CVM, for trading its securities on the Exchange, companies already registered with the Central Bank and whose titles are traded on the Exchange.

Companies that register their issuance with the Central Bank but do not have their securities traded on an exchange will be considered as registered with the CVM for trading their titles in the over-the-counter market.

CVM EXPLANATORY NOTE NO. 2.
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The norm of item IV of the Resolution establishes the rule that securities admitted to trading on a stock exchange cannot be traded in the over-the-counter market, with the exception of the placement of new share issuances during the period of their distribution to the public.

Item V of the aforementioned Resolution aims to oblige open companies to provide the Central Bank (and subsequently the CVM) with information on relevant events that may interest the investing public.

As a deep analysis by the CVM is necessary so that it can set the conditions for open companies to become closed through the cancellation of registration provided for in the Resolution, item VI makes it clear that open companies cannot unilaterally close before pertinent norms are issued.

Considering that, after the advent of Law 6,404 promulgated in December 1976, many companies had the expectation that the National Monetary Council would extend to open companies the concept of capital-open society for tax purposes, some of them did not renew their S.C.A. certificates in accordance with the norms of Resolution No. 106, in the hope that the mentioned certificate would no longer be necessary. On the other hand, other companies, even if they wanted to, could not renew their certificate because they would not be able to proportionally increase the dispersion of their shares among their minority shareholders. Hence item VII of the Resolution.

As is known, according to Article 59 of Law 4,728, it is up to the National Monetary Council to periodically set the conditions under which, for tax purposes, the joint-stock company is considered Capital-Open.

For the fiscal year of 1978 - base year 1977, it was stipulated that companies that on January 1, 1977 already possessed the certificate of Capital-Open Society, (regardless of its validity period) or that come to obtain it during the year 1977 maintain the condition, for tax purposes, of capital-open society.

By December 31, 1977, the CVM will present a new proposal to the C.M.N., suggesting the conditions to be met by open companies to enjoy tax benefits in the fiscal year of 1979 onwards.