CVM Orienting Opinion No. 2

CVM ORIENTING OPINION NO. 2, OF FEBRUARY 15, 1979.

SUMMARY: Annual correction of the nominal value of shares of publicly held companies based on the monetary correction of share capital: its mandatory nature, through stamping or replacement of the respective certificates, except for the exceptional case of art. 297 of LAW NO. 6,404, of 12.15.76 (Law on Corporations). - Transitory nature of the capital reserve formed with the proceeds from the monetary correction of share capital. Competence of the ordinary general assembly to examine the matter. Circumstances in which the distribution of bonus shares is still legitimate.

1. The present opinion examines the implications of the rule in art. 167 of LAW 6404/76, by which the monetary expression of the paid-up share capital must be annually updated at the time of the ordinary general assembly that approves the balance sheet, without this reason causing, in the publicly held company, a modification in the number of issued shares.

2. The Brazilian securities market always revolved, during the validity of DECREE-LAW NO. 2627, of September 26, 1940, around the mystique of share bonuses, commonly known as "filhote" (pups).
   With the advent of Law 6404, there was no logical reason for such a fact to continue occurring.
   On the contrary, all the useless operational complexity represented, for publicly held companies, by the continuous issuance of more and more certificates representing the simple conversion of reserves into capital, without any modification of the company's asset structure, implied fostering, in the words of the Justification Statement of the Innovations of the Bill that became LAW NO. 6404, an undue "illusion of gains that contributes to hindering the functioning of the market".

3. With the advent of the new Law, the entire accounting mechanism intended to maintain the integrity of share capital as a guarantee for creditors was simplified, adopting a system much more agile and clear than the previous one of monetary correction of fixed assets, of fiscal origin, which became even more intricate with the advent of the mechanism for maintaining working capital.

4. Now, inflation, as an element reducing the purchasing power of the national currency, is reflected in the company's accounting through the monetary correction of permanent assets (including not only the fixed asset subgroup, as before, but also investments and deferred assets), to which the monetary correction of equity will be opposed, in which share capital is located, whose monetary update, in particular, will be maintained as a capital reserve until it is capitalized, in accordance with art. 182, § 2º of LAW 6,404, which expressly refers to the "caput" of art. 167 of the same statute.

5. A systematic examination of the aforementioned art. 167 leaves its imperative nature glaringly obvious: at the end of each fiscal year, a capital reserve shall be constituted in the balance sheet drawn up by the company, to be

CVM ORIENTING OPINION NO. 2, OF FEBRUARY 15, 1979.
2 obligatorily capitalized by resolution of the ordinary general assembly that approves the aforementioned balance sheet and the other financial statements.

6. It must be noted, first of all, what has not received the necessary attention from some publicly held companies, that the traditional competence of ordinary general assemblies is now augmented by a new item, in accordance with art. 132, IV of LAW NO. 6404: the approval of the correction of the monetary expression of share capital, which will result, within 30 (thirty) days of the said OGA, in the simple registration of the increase in the Trade Registry.
   Exactly because the statute remains intact, there is no justification for convening an extraordinary general assembly intended to amend it, the holding of which would go against the express and legally granted competence of the ordinary general assembly to proceed with the capitalization of the proceeds from the monetary correction of share capital.

7. The very creation of the aforementioned capital reserve already represents, moreover, an artifice intended to preserve the purity of the legal system, according to which share capital can only be modified by resolution or with the authorization of the general assembly. Indeed, monetary correction is reflected, generically, directly on the balance of equity accounts (Law No. 6404/76, art. 185, § 2º), with the exception of that pertaining to share capital, whose alteration will be conditioned by the aforementioned ordinary social resolution, through the incorporation into capital of the capital reserve registered in the financial statements.

8. Note, therefore, that the aforementioned capital reserve has a necessarily transitory nature, and its normal period of existence cannot exceed the initial four-month period of the fiscal year, within which the OGA must be held, except for the balance corresponding to fractions of cents of the nominal value of shares or to fractions of percentage points of share capital, when there is no such nominal value.
   It is impossible, for this reason, the claim of some publicly held companies not to carry out the annual capitalization of the proceeds from the monetary correction of share capital, giving an illegal extended life to the reserve formed with its value, in blatant offense both to the text of art. 5º of LAW NO. 6,404 and to the aforementioned art. 167, which refer respectively to the annual correction of the monetary expression of the value of share capital and to the capitalization of the reserve contained in the statements presented by the administration at the time of the OGA that approves such statements. Monetary correction of share capital, thus, will be carried out year by year, without this resulting in the distribution of bonus shares by publicly held companies, which will proceed, by stamping, or replacement of the respective certificates, to the alteration of the nominal value of the shares that have it, still obeying, in the case of simultaneously possessing shares with and without nominal value, the mechanism provided for in art. 167, § 3º of LAW NO. 6,404.

9. It is also worth noting, for the sake of truth, that the prohibitive regime for the distribution of new shares, applicable in the specific case of monetary correction of share capital, does not apply to the circumstances of capitalization of profits or other reserves, and the extraordinary general assembly, in view of the alternative opened by art. 169 of LAW NO. 6404, may deliberate to distribute bonus shares.

CVM ORIENTING OPINION NO. 2, OF FEBRUARY 15, 1979.
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For annual monetary correction, however, there is not the slightest doubt: the alteration of the nominal value will be mandatory through stamping or the replacement of the company's share certificates, when this value exists; in companies whose shares do not have a nominal value, neither this alteration, for obvious reasons, will be made, proceeding in the OGA to the simple approval of the new monetary expression of the account that records the paid-up share capital.

10. Art. 297 of LAW NO. 6,404 has been frequently invoked as an argument to exempt publicly held companies from the obedience due to art. 167 and its § 1º of the same law. This is not the scope of that exceptional rule, intended only to avoid the undercapitalization of companies existing on the date of validity of LAW NO. 6,404 (15.02.77), which cumulatively have satisfied two basic conditions: a) possess preferred shares with priority in the distribution of fixed or minimum dividends; b) have regulated in the statute, through adaptation carried out by 15.02.78, the participation of preferred shares in the annual monetary correction of share capital with observance of the norms of the four subsections of the same art. 297, expressly providing for the possibility that capitalization be carried out through the issuance of bonus shares.
    Unless in these particular cases, there is no way to understand that art. 297 serves as support for the use of the proceeds from the monetary correction of share capital in the distribution of bonus shares.

11. The thesis developed here regarding the almost generic extinction of bonus shares (with the exception of the aforementioned arts. 297 and 169 of LAW NO. 6,404) has wide incidence regarding all publicly held companies, with eventual special laws that have fixed the nominal value of shares of certain publicly held companies being derogated in this regard: the legal predetermination of this initial nominal value, which prevailed without alteration until the advent of LAW NO. 6404 (or more exactly until the full incidence of its provisions on financial statements), does not have the scope to prevent that, henceforth, the value may be readjusted, which will also reach shares issued in the future, for the clear reason that in a company it is not possible for shares with different nominal values to coexist (Law No. 6404, art. 11, § 2º).

12. Finally, it is worth noting that the principles regarding financial statements are in full force even with regard to societies whose fiscal years coincided with the recently ended civil year. The legislator's error in referring to fiscal years that would begin "after January 1, 1978" (Law No. 6404, art. 295, § 1º, a), excluding exactly those coinciding with the civil year, as those to which the new system of financial statements would initially apply (within which comes inscribed the provision for the annual monetary correction of the expression of paid-up share capital), was remedied by art. 67, XI of Decree-Law No. 1,598, of December 27, 1978, according to which the net profit of companies (a typically corporate concept, in opposition to the concept of real profit, of fiscal relevance, provided for in art. 6 of Decree-Law No. 1,598) is already calculated in accordance with LAW NO. 6,404 in fiscal years coinciding with the year 1978.

Signed originally by
PAULO CÉZAR ARAGÃO
Acting Legal Superintendent