CVM Orienting Opinion No. 1 of September 27, 1978

CVM ORIENTING OPINION NO. 1, OF SEPTEMBER 27, 1978.

SUMMARY: Interpretation of Article 170, Paragraph 1 of LAW NO. 6,404, of December 15, 1976 - (CORPORATE LAW) - Issuance price of new shares fixed based on the "economic value" of the share - hypothesis of "justified" dilution of the participation of former shareholders.

1. The matter concerns the interpretation to be given to Paragraph 1 of Article 170 of LAW NO. 6,404.

2. The Law in such device established that, in the case of capital increases through the issuance of new shares, the issuance price of the shares shall be fixed taking into account the following three parameters: the value of the quotation of the shares in the market; the value of net equity; and the profitability prospects of the Company. All specifically with a view to avoiding an "unjustified dilution of the participation of former shareholders, even if they have the right of preference to subscribe to them."

3. Regarding the interpretation to be attributed to the aforementioned legal device, it is recalled, from the outset, the following excerpt from the statement of reasons of the aforementioned LAW NO. 6,404, which states: "New shares must be issued at a price compatible with the economic value of the share (exchange, net asset or profitability value) and not at nominal value. The issuance of shares at nominal value, when the company can place it at a higher price, leads to unnecessary and unjustified dilution of the shareholders' participation, who do not have the ability to keep up with the increase. The existence of the right of preference does not always offer adequate protection to all shareholders. The issuance of shares at economic value is the solution that best protects the interests of all shareholders, including those who do not subscribe to the increase, and therefore must be adopted by the competent bodies to deliberate on the capital increase."

4. Regarding the consideration of the three parameters enunciated by the aforementioned legal device, however, it must be understood that, although of cumulative observance, there will be the prevalence of another of those three parameters over the others, when fixing the price of a new issuance of that share, according to the stage of development of the stock market, as well as the type of behavior of a particular share in such market (trading index).

5. Indeed, in a developed and efficient securities market, that is, one presided over by a broad and effective information system "Company-public investor", and in which a particular share has a high trading index, the parameter "share quotation" will indeed assume a practically total prevalence over the other parameters. This is because, in this case, all information about the issuing company, as well as about the share issued by it, is fully known to the public investor, and is reflected in the quotation of the share in the market, a value that is truly representative of the "economic value of the share" referred to in the statement of reasons of the Law.

CVM ORIENTING OPINION NO. 1, OF SEPTEMBER 27, 1978.
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6. On the other hand, as soon as the market for a particular title presents a low trading index, the "quotation" parameter ceases to present great significance, bringing to the fore the other two parameters (Net Asset Value and Profitability Prospects) as deserving of greater consideration in fixing the issuance price.

7. Regarding the paragraph "Profitability Prospects" of the company, furthermore, it is necessary to bear in mind that, in addition to the normal hypothesis of its consideration in the aforementioned terms, it will assume great significance in cases where, even in an efficient market, changes in such perspectives have occurred without the market having full knowledge or properly assimilated them. In such cases, such parameter must be considered significantly in fixing the issuance price of the company's shares.

8. In any case, however, the observance of the three aforementioned parameters, with the due prevalence of one or another over the others, specifically aims to prevent that, on the occasion of a new issuance of shares, the price fixed for the subscription thereof may result in a dilution of the participation of the company's former shareholders who, even having the right of preference for subscription, do not exercise it. This is the main philosophy of the aforementioned paragraph 1 of art. 170.

9. However, a more in-depth examination of the text of the cited legal device, as well as of the statement of reasons of LAW NO. 6,404/76, in the part referring to that device, reveals that the legislator's intention was to require the observance of the three mentioned parameters whenever possible. Without a doubt, such an inference is drawn by the CVM from the expressions "unjustified dilution" contained in the text of paragraph 1 of art. 170, as well as from the following phrase used in the statement of reasons: "The issuance of shares at nominal value, when the Company can place it at a higher price, leads to unnecessary and unjustified dilution."

10. Therefore, it must be understood that the legislator, when referring to the hypothesis of "unjustified dilution", admitted, "a contrario sensu", the possibility of the occurrence of the hypothesis of "justified dilution". And the issue will always be limited to knowing, in the event of the detection of a dilution of the participation of the former shareholders, whether it was justified or not. This will, really, be the greatest issue to be considered regarding the effectiveness of paragraph 1 of art. 170 of the relationship of a Company with its shareholders.

11. In principle, a hypothesis of "justified" dilution of the participation of the former shareholders should be admitted in the hypothesis where, presenting itself as unfeasible to place in the market an issuance at a price fixed based on the aforementioned paragraph 1 of art. 170, a lower price is adopted. To understand otherwise would mean prohibiting the company from capitalizing via the Market. However, the "unfeasibility" of placing the shares at a price fixed in obedience to paragraph 1 of art. 170 must be real. The simple justification that "it is unfeasible to launch on the market at a value higher than that accepted by the market itself", with the consequent and unrestricted adoption of the quotation value as the only parameter to be observed in fixing the issuance price, is not sufficient. This is because the simple contingency of a market will not always be sufficient justification to dilute the participation of the former shareholders, on the occasion of an issuance of shares.

CVM ORIENTING OPINION NO. 1, OF SEPTEMBER 27, 1978.
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12. What should be expected of an Open Company is that it does not remain indifferent to the market for its shares. Through, mainly, constant dissemination of its real situation and potentialities, the company will be contributing to the emergence of a real market, for its shares, that is, a more efficient and natural path for its capitalization. Attending to this philosophy, therefore, is why it must be considered as the duty of the Open Company to always exert its greatest efforts in the sense of making the market come to reflect the real value of its shares. And it is within this principle that the occurrence of the aforementioned hypothesis of "justified dilution" of the participation of the former shareholders, a hypothesis indirectly admitted by the aforementioned paragraph 1 of art. 170, should always be analyzed.

13. Finally, as no securities market regulatory body should arrogate itself to be an evaluator of market prices, it will not be the intention of the CVM to enter into the merits of the issuance price of shares, interfering, thus, in the market. What the CVM will require, however, is that the issuance price of the new shares is always justified, clearly and precisely, on the occasion of the general assembly that deliberates on the authorization of the capital increase. If the fixing of such price is attributed to the company's board of directors, the justification of the price must also appear, equally clear and precise, in the opinion to be issued by the Council.

Signed original by
PEDRO HENRIQUE TEIXEIRA
Legal Superintendent