CVM Explanatory Note 08

CVM EXPLANATORY NOTE NO. 8.
Ref.: CVM Instruction No. 3 of August 17, 1978 which provides for the cancellation of Company Registration.

Law No. 6,404, of December 15, 1976 (Corporations Law) states that a company is public if its securities are admitted to trading on a stock exchange or in the over-the-counter market (Article 4).

It also establishes that the securities of a company may only be traded in the market if the company has previously registered with the Securities and Exchange Commission (§ single paragraph of Article 4).

It is therefore concluded that all companies registered with the CVM are public companies for the purposes of the Corporations Law.

Resolution No. 436 of the National Monetary Council, of July 20, 1977, considered automatically registered with the CVM all companies that were registered at that time with the Central Bank of Brazil, in accordance with Resolution No. 88, of January 30, 1968.

Therefore, a public company wishing to become closed must obtain the cancellation of its Registration with the Securities and Exchange Commission.

The aforementioned Resolution No. 436 made it clear that Companies could not obtain the cancellation of a registration before the CVM issued the conditions to be met by companies for this purpose.

The CVM's competence to issue norms regarding the cancellation of company registration derives from § 6 of Article 21 of Law No. 6,385.

Instruction No. 3, issued by the Securities and Exchange Commission, defines the conditions to be met by the public company so that it can obtain the cancellation of its registration and consequently be considered a closed company.

Every public company has at some point captured a portion of public savings, using a market mechanism, made available to it by the State.

When an investor applies their savings to a company, they expect that the securities they receive will be tradable in the market and that the company will disclose to the public all necessary information about their investment, regardless of its value.

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This investor expectation cannot be reversed by the simple will of controlling shareholders or by the company's administrators themselves. It is necessary that minority shareholders be protected through the option to sell their shares at a fair price or through a mechanism that gives a substantial minority shareholder block the power to prevent the cancellation of the registration.

Instruction No. 3, in its Item I, establishes the conditions to be cumulatively met by companies to obtain the cancellation of the Registration.

First, it is necessary that the manifestation to cancel the company's registration comes from the majority of the company's shareholders, regardless of the type or class of shares they hold, assembled in a General Meeting. This is an important decision for the life of the company and, therefore, must be endorsed by its shareholder majority.

Secondly, a condition for the "closing" of the capital is that the controlling shareholder, and not the company, makes a public offer to purchase the shares of minority shareholders and that, at least 75% of minority shareholders sell their shares or agree to the cancellation of the registration.

On the other hand, the Instruction provides for the scenario where minority shareholders, holders of registered shares, can prevent the cancellation of the registration, if their number and percentage of shares in circulation are relevant. This scenario is the recognition that the public company must meet the interests of all shareholders, even if some constitute only a portion of the minority.

Item II defines, for the purposes of the Instruction, what is a minority shareholder, shares in circulation in the market, and controlling shareholder.

Items III and IX deal with the mechanism of the public offer and the information to be provided to minority shareholders.

The system of information to be disclosed through the public offer instrument is similar, in many aspects, to that required during the registration of a public issuance.

The fact that the CVM registers the public offer does not imply that it is approving the purchase price offered per share. Registration means that the offeror has provided the necessary information for the investor to decide on the opportunity to accept or not the offer. It is therefore up to the investor to examine the information provided and make their own judgment about the offer.

Given this fact, the Instruction obliges the intermediary financial institution to carry out an evaluation of the price of the offered shares, so that the shareholder can compare the analysis elements pointed out in the evaluation document with the value stated in the public offer (letter "g" of Item IX).

Items X and XI concern the manner in which minority shareholders can oppose the cancellation of the registration or accept it without selling their shares.

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Items XIII and XIV refer to the registration of the public offer with the CVM.

Items XV and XVI discuss the mechanics of the settlement of the purchase of the shares subject to the public offer.

Item XVII provides for the possibility of a second public offer, in case the first was not successful. This second offer is independent of new CVM registration, as the information will be the same as the first, with only the offered price being modified. It should be noted that registration of the second offer with the CVM will not be required only if it is carried out within 30 days of the end of the first offer.

If the company manages to meet the requirements for the cancellation of the registration, even minority shareholders who did not accept the offer will still have the right to sell their shares to the controlling shareholders at the same offered price. However, the price will be paid 90 (ninety) days after the manifestation of such shareholders. This is prescribed by Item XX of the Instruction.

The cancellation of registration of companies that have issued debentures or subscription warrants must observe the provisions of Items XXII and XXVII.

In order to avoid successive requests for registration and cancellation, Item XXVIII provides that a company whose registration has been cancelled, in accordance with the Instruction, may only obtain new registration after 3 (three) years from the date of cancellation.

The Instruction also provides for the possibility of cancellation of the registration of a company, whose capital is reduced or whose number of minority shareholders is small and with a percentage not exceeding 5% of the share capital (Item XXIX).

For these companies to cancel their registration, it will be necessary for the controlling shareholders to pay the minority shareholders the book value of their shares, under the same rules of the redemption right provided for in the Corporations Law (Item XXX).

In fact, Items XXIX and XXX constitute an exception to the general rule of the norms to be followed by the public company for the cancellation of its registration.

For a public company that falls under the cited items, the costs do not compensate for the benefits of being public, given its reduced capital or because it has few minority shareholders. On the other hand, one could not require these companies to receive the same treatment as those in which the capital is more dispersed among the investing public.

INSTRUCTION NO. 3 also provides that all expenses and costs related to the cancellation of the registration will be the exclusive responsibility of the controlling shareholder, and cannot be transferred to the company (Item XXXI) and that the disclosures and publications provided for therein must observe CVM INSTRUCTION NO. 02, of May 4, 1978.

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It should be emphasized that the aforementioned CVM Instruction No. 3, like the other instructions issued by the Securities and Exchange Commission, were the subject of comments, criticisms, and suggestions from interested parties, during the public hearing period, as provided for in Article 26 of the CVM Internal Regulations.