CVM Explanatory Note 04: New Concept of Publicly Held Corporation

CVM EXPLANATORY NOTE NO. 4.
Ref.: RESOLUTION NO. 457 of the Central Bank of Brazil.
New concept of Publicly Held Corporation (Sociedade Anônima de Capital Aberto).

The expression "Publicly Held Corporation" (Sociedade Anônima de Capital Aberto) was created in 1964 by a tax law (Law No. 4,506 of November 30, 1964), in order to provide tax incentives to companies that had their shares dispersed among the public.

With the advent of the Capital Markets Law (Law No. 4,728 of 1965), the specific requirements determined by the Tax Law were eliminated, and it was established that the National Monetary Council (CMN) was authorized to periodically institute the conditions that corporations must meet to be considered as publicly held.

The CMN fixed the first conditions on February 10, 1966, in Resolution 16 of the Central Bank, subsequently amended by Resolution 106 of 1968.

Resolution 106 (now revoked by RESOLUTION NO. 457) established that publicly held corporations must have at least 20% of their ordinary shares distributed among the public. Furthermore, in order to continue enjoying tax incentives, the company had to prove, every two years, that the number of minority shareholders and their percentage of capital had increased by 10% relative to the shares previously held, until 49% of the company's capital was in the hands of the public.

With the advent of the new Corporation Law, however, a new concept was introduced into the legislation—the concept of Open Company (Companhia Aberta).

According to Law No. 6,404 of December 15, 1976 (Corporation Law), an Open Company is one whose securities (shares or debentures) are admitted to trading on a Stock Exchange or in the Over-the-Counter market.
The Law further states that the company must be registered with the CVM (Securities and Exchange Commission) in order to have its securities traded in the market (Stock Exchange or Over-the-Counter).

The CMN, on June 20, 1977 (Resolution 436 of the Central Bank), decided that corporations already registered with the Central Bank, in the form of Resolution No. 88 of January 30, 1968, were automatically registered with the CVM and, therefore, would be considered Open Companies.

As recalled, Resolution 88 establishes that only shares or debentures of companies registered with the Central Bank may be traded in the market.

This Resolution 88 remains in full force. However, it will be revoked when the CVM issues the regulations regarding the registration of companies, as provided for in Article 21 of Law No. 6,385 of December 7, 1976 (the law that created the CVM).

CVM EXPLANATORY NOTE NO. 4.
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Therefore, two distinct concepts came to exist: that of Publicly Held Corporation (as defined by Resolution No. 106) and that of Open Company (as defined by the Corporation Law and RESOLUTION NO. 436).

The tax advantages of a Publicly Held Corporation are of two types—for the company itself and for the investor.

Regarding the company, the only incentive is the non-taxation of distributed profit. Non-incentivized corporations pay a 5% tax on distributed profit.

As an incentive for the investor, the main one is the possibility for the shareholder to opt for withholding tax on dividends at a rate of 15%, instead of 25%, in addition to incentives for those who subscribe to their shares.

Another significant advantage enjoyed by Publicly Held Corporations is that Fiscal Funds 157 can only apply their available resources to purchase shares in shares or convertible debentures issued by this type of corporation, with 75% of these resources being obligatorily applied in shares or convertible debentures of publicly held corporations controlled by national private capital, acquired through subscription or on a Stock Exchange.

In the Draft Decree-Law aimed at adapting the Income Tax Law norms to the new Corporation Law, the elimination of income tax on distributed profit is contemplated. Consequently, for the company, the fact of being a publicly held corporation ceases to have direct interest, leaving only the stimuli for the capitalization of the company through the application of Funds 157 and incentivized subscriptions, as well as the reduction of the dividend rate.

On the other hand, the Executive Branch intends to send to the National Congress, in the next legislative term, a bill that will reformulate the tax incentives for open companies and abolish the expression "Publicly Held Corporation."

For this reason and primarily aiming to strengthen national private enterprise, the CVM proposed to the National Monetary Council the unification of the concepts of Open Company and Publicly Held Corporation, so that a greater number of companies could enjoy stimuli for their capitalization, starting from January 1, 1978.

This is the reason for Resolution 457 of the Central Bank of Brazil.

With this new Resolution, the current number of Publicly Held Corporations increased from 552 to 1,086 (number of open companies).

RIO DE JANEIRO, DECEMBER 23, 1977.
Signed Original
ROBERTO TEIXEIRA DA COSTA
President