CVM Orientation Opinion 5: Capital Increase with Diverse Issuance Prices for Different Share Types

SUMMARY: Capital Increase. Scenario of diversity of issuance prices based on the diversity of types (species, classes, or forms) of shares to be issued by a public company. "Justified dilution" of shareholders' participation. Application of paragraph 1 of Article 170 of LAW No. 6,404, of 12/15/76.

1. In matters concerning the setting of the issuance price of shares in a capital increase by subscription, when shares of various species, classes, and/or forms are issued, the general rule is the establishment of a single price for all shares.

This principle appears logical because, regarding shares of the capital of the same company, two of the legal factors determining the issuance price will always be equal (according to § 1 of Art. 170 of LAW No. 6,404, of December 15, 1976), namely, the value of net equity and the profitability prospects of the issuing company. Only the third factor, namely, the market quotation value of each of the types of shares to be issued, may vary, occasionally.

2. Exceptionally, however, the diversity of issuance prices in the same capital increase will appear admissible in this scenario. This exception, however, whose analysis will be the subject of this Opinion, must be restricted to cases where the various types of shares to be issued:

1. present significantly disparate market quotations; and
2. possess, all of them, significant trading volumes.

3. This Orientation Opinion, based on the interpretation of the aforementioned § 1 of Art. 170 of LAW No. 6,404/76, aims to demonstrate the possibility, from a legal standpoint, of the aforementioned procedure (i.e., the diversity of issuance prices in the same capital increase).

4. Regarding the aforementioned legal provision, reference is made here to CVM Orientation Opinion No. 1, the reading of which is indispensable for a good understanding of the guidance that follows.

5. According to the aforementioned § 1 of Art. 170, the shares subject to issuance during capital increases shall have their issuance price fixed based on the market quotation of the shares, the value of net equity, and the profitability prospects of the company, specifically to avoid unjustified dilution of the participation of former shareholders, even if they have secured the right of preference.

6. CVM Orientation Opinion No. 1, seeking to interpret some aspects of the aforementioned legal provision, clarified that, despite the mandatory nature of the norm that determines the observance of the three parameters mentioned, in practice, when setting the issuance price, there will be a "prevalence of one of those parameters over the others, according to the development stage of the stock market, as well as the type of behavior of a particular share in such market (trading volume index)".

7. In the universe of public companies, for example, among the three parameters enunciated by § 1 of Art. 170 of LAW No. 6,404/76, the one related to the quotation of shares in the market will tend to assume special importance. This is because, above all, the viability of capitalizing a company through the securities market will always be extremely linked and dependent on the situation of its papers in such market. In other words, and as already mentioned in the aforementioned CVM Orientation Opinion No. 1, the issuance of shares at a price higher than the market price, for example, would make the intended capitalization unviable. The issuance of shares, on the contrary, at a price lower than the market price, would obviously cause, in addition to a probable drop in the quotation level of the company's shares in the market, an unjustifiable shock to the patrimony of the shareholders of such company, who would see the portion of their patrimony represented by such shares devalued by an act of the company itself. It is thus seen that the parameter "quotation of shares in the market" will tend to represent, in the case of public companies, the main parameter of the three enunciated by the analyzed § 1 of Art. 170 of Law 6,404/76.

8. In favor of the relevance of the parameter "quotation of shares in the market", also militates the distinction between the virtual and actual patrimony of the shareholder. Indeed, the shareholder's participation in the net equity of the company, which results in the patrimonial value of their shares, consists, in reality, in a virtual participation, which will only become actual at the moment when the shareholder has the opportunity to exercise some of the exceptional rights conferred upon them by the ownership of the shares vis-à-vis the patrimony of the company, such as the right of reimbursement or the right to participate in the net assets of the company in the event of its liquidation. The quotation of shares in the market, on the contrary, consists of a fundamental element for the exact assessment of the shareholder's actual patrimony. It represents the real "economic value" (of exchange) of the share referred to in the Statement of Reasons of the draft project that became Law 6,404/76.

9. The above considerations are reinforced by the conclusion reached in the aforementioned Opinion that the objective of § 1 of Art. 170 of Law 6,404 was to require the observance of the three parameters enunciated by that device whenever possible, a fact that led to another conclusion: the law, when referring to the scenario of "unjustified dilution" of the participation of former shareholders, admitted, a contrario sensu, the possibility of the occurrence of a scenario of "justified dilution". And the issue will always be circumscribed to knowing, in the event of the detection of a dilution of the participation of former shareholders, whether it was justified or not.

10. Regarding the parameter "quotation of shares in the market", however, one must consider the scenario of the occurrence of diversity of quotations of the different types (species, classes, or forms) of shares that a public company intends to issue through a capital increase. This diversity of quotations usually stems basically from the specific characteristics of each type of share, whether of an eminently economic nature, such as the profitability attributed to the share, or of indisputable economic repercussion, such as its respective trading volume index. In fact, the specific characteristics of each type of share, although they do not have repercussion on their patrimonial value, undoubtedly influence their quotations in the market due to their intrinsic financial and economic components.

11. In view of these considerations, it is necessary to analyze the problem of setting the issuance price of shares of a company, when these are differently quoted in the market. In other words: how to set the price of such shares? Can different prices be set based on the different types (species, classes, or forms) of shares?

12. Before any legal considerations regarding the possibility of adopting one or the other criterion, the factual consequences of the two possible and following procedures are analyzed: a) setting a single issuance price; or b) setting specific prices for each type of share.

a) Criterion of setting the same issuance price for shares differently quoted in the market.

Let us imagine the scenario of a company whose capital is divided into ordinary shares - quoted at Cr$ 2.00 - and preferred shares - quoted at Cr$ 4.00.

Let us analyze, first, the consequences of the issuance of shares of both species at the single price of, for example, Cr$ 2.00 (quotation value of ordinary shares).

The consequences of setting the single price of Cr$ 2.00, in this case, are obvious: (1st) no significant obstacles to the placement of the capital increase; (2nd) regarding the preferred shares, however, their placement at a price significantly lower than their market quotation (Cr$ 4.00) will cause a negative (bearish) influence on the quotation of such shares, in addition to an illegitimate and consequent shock to the actual patrimony of the holders of these shares. Finally, and already from the standpoint of the company, with a reflection, obviously, on its shareholders, it must be mentioned that such a procedure will result, with regard to the issuance price relative to the preferred shares, in an illogical and high cost of capital, as these shares would be placed, unjustifiably, at a price expressively lower than their quotation value.

Let us now analyze the consequences of the issuance of shares of both species at the single price of, for example, Cr$ 4.00 (quotation value of preferred shares).

Here, the consequences of such a procedure will be as follows: (1st) in principle, the unviability of the placement of ordinary shares, obviously because issued at a price significantly higher than the value of their quotation in the market; (2nd) no eventual problem regarding the placement of preferred shares.

Regarding the pointed risk of non-placement of ordinary shares, if it occurred, it would have as a consequence the impossibility of the capital increase being homologated, for not having been entirely subscribed.

Finally, let us analyze the scenario of the consequences of the issuance of both species of shares at the single price of Cr$ 3.00 (intermediate value between the quotation value of ordinary shares and that of preferred shares).

The consequences of setting the single price of Cr$ 3.00, under the above-mentioned conditions, are clear: (1st) unviability, in principle, of the placement of ordinary shares (obviously because issued at a price higher than their quotation): and (2nd) easy placement of preferred shares, however with a negative (bearish) influence on the quotation of these shares in the market, in addition to an illegitimate and consequent shock to the actual patrimony of the holders of such shares. There would be, in addition to the risk of non-full subscription of the increase (ordinary shares without subscription), with the consequent impossibility of the capital increase being homologated, also a probable drop in the quotation of preferred shares (issued at a lower value), as the consequent damage to the patrimony of the owners of these shares.

Summarizing, we have that the adoption of the procedure of setting a single issuance price for shares that, of various types, possess distinct quotations in the market, will result in: either the unviability of capitalization of the company through the market (due to the non-full subscription of the capital increases); or a high and illogical cost of capital (when one of the species of shares is placed at a price significantly lower than its quotation); or an unjustified shock to the patrimony of the shareholders holding the species of shares issued that come to be placed at a price lower than the value of their quotation.

b) Criterion of setting diverse issuance prices for shares differently quoted in the market.

Still present the aforementioned example, it is necessary to examine the adoption of the criterion of setting two issuance prices for the same case. The shares would be issued at prices compatible with the respective quotations, that is, the ordinary shares would be issued at the price of Cr$ 2.00 and the preferred shares at the price of Cr$ 4.00. What are the consequences of such a procedure?

Assuming that such shares had a nominal value of Cr$ 1.00, the premium paid by the subscribers of preferred shares would end up being divided among the subscribers of ordinary shares as well, generating a privilege for the latter and, for this very reason, a loss for the takers of preferred shares.

Despite this, however, a conclusion stands out immediately: this criterion, unlike the previously examined one (uniformity of issuance price), would never, in principle, make the placement of the company's shares unviable, not preventing its capitalization through the securities market.

13. With the above conclusion established, and with the problem already situated under an exclusively legal approach, the question that arises is to know, in light of the current legislation, and interpreted from its mainly teleological angle, what weight and meaning the factor of enabling the capitalization of a company through the securities market possesses in the legal context, in front of the other provisions and principles contained therein.

14. Now, it appears as indisputable the fact that all the new legislation sought, primarily, to provide the joint-stock company with better conditions for its capitalization through the securities market, a factor considered by the Statement of Reasons of the draft project that became the new Law of Joint-Stock Companies as "indispensable to the survival of the private enterprise in the current phase of the Brazilian economy". Indeed, the new legislation, through the reformulation of the various existing corporate instruments, as well as by the creation of new ones, sought to generate an instrument that, in addition to inducing, would enable the capitalization of companies in the securities market.

15. Apart from the aforementioned approach, it must also be observed, regarding the scenario analyzed in this Opinion (several issuance prices in the same capital increase), that, of the three parameters enunciated by paragraph 1 of Art. 170 of LAW No. 6,404/76, only one may occasionally vary: the quotation value of the shares in the market. And more, that varying this parameter in relation to the types of shares of the capital of the same company, the final result of the application of the three parameters mentioned in that legal device will inevitably vary. In other words, existing several types of shares, and differently quoted in the market, the result of the consideration of the three parameters referred to in § 1 of Art. 170 of Law 6,404 obviously will not be the same for each type of share. Therefore, even abstracting from the philosophical and economic policy aspects that have been guiding the government's measures in this field, Law 6,404 itself, by determining the criteria that must be specifically observed in setting the issuance price of shares to be placed in the market, leads us unquestionably to face the scenario of the occurrence of several issuance prices for shares that, from the capital of the same company, find themselves differently quoted due to their diverse typicity.

16. Considering, therefore, (a) that the philosophy of all new legislation resides in the enabling of the capitalization of companies through the securities market; (b) that the faithful observance of the three parameters enunciated by § 1 of Art. 170 of Law 6,404/76 will always result in a diversity of issuance prices if the types of shares to be issued by a company are diverse and the respective quotations of such types of shares are diverse; and that (c) the adoption of the criterion of a single issuance price for shares of several types and diverse quotations would make their placement in the market unviable with serious damages to the company and its shareholders; it does not seem possible to deny legitimacy to the criterion of adopting more than one issuance price in the scenario of shares that, of diverse types and diverse quotations, a company intends to issue.

17. The above conclusion, however, will only appear as valid, as said initially, if the various types of shares to be issued by a company:

1. present significantly disparate market quotations; and
2. possess, all of them, significant trading volumes.

18. Regarding the first condition (necessity of the existence of a significant difference in the quotation of each of the shares to be issued), in addition to appearing as obvious, it is necessary to clarify that the expressiveness of the quotation difference must have as its cause the intrinsic and exclusively economic characteristics of the shares, and not originate from intentions or specific behaviors of their holders. If there is legitimacy in the difference of quotations of the various types of shares, given their distinct characteristics, there will be legitimacy in charging distinct prices to issue titles, in sum, of distinct values.

Controlling shareholders, for example, often have no interest in placing ordinary shares on the market, resulting from this procedure a reduced liquidity for such shares, as a consequent influence on the value of their quotation, dissociating this from the characteristics proper to the shares. The issuance of ordinary shares at prices lower than those of other shares, in this scenario, would result in an undue benefit for the controllers in terms of resource contribution and maintenance of control.

19. Regarding the second condition (all shares with significant trading volume index), it appears as logical because linked to the necessary and indispensable representativeness of the parameter "quotation of shares in the market". If the trading volume index of one of the types of shares in the market is tiny, logically the parameter "market quotation" will be inexpressive as a factor to be considered for setting the price of that type of share.

Original signed by
PEDRO HENRIQUE TEIXEIRA
Legal Superintendent