CVM Orienting Opinion No. 3 of March 15, 1979

CVM ORIENTING OPINION NO. 3, OF MARCH 15, 1979.
SUMMARY: Interpretation of Article 297 of Law No. 6,404 of December 15, 1976 (Corporations Law). Exceptional nature of the provision.

1. This Opinion examines the foundations of Article 297 of LAW NO. 6,404, of December 15, 1976, its scope of application, and the manner in which its provisions may reflect on the situation of shareholders of open companies, a matter related to capital increases resulting from the incorporation of the monetary correction reserve of the capital of such companies.

2. Under previous legislation (Decree-Law No. 2,627, of September 26, 1940), preferred shares, when characterized by the right to a fixed or minimum dividend, had such dividends calculated on their nominal value. Still in accordance with the same system, the capitalization of reserves (mandatory only when certain limits, based on social capital, were reached) gave the company, whose capital was divided into ordinary and preferred shares, the option to either bonus shareholders with new shares of determined species according to the proportion of existing shares, or to alter this proportion, even by bonusing them through the exclusive issuance of ordinary shares. In other words: if preferred shares existed, the corresponding bonus could be granted only in ordinary shares.
   In this regard, it is noted that the repealed legislation allowed the company to bonus only through the issuance of ordinary shares, avoiding the increase in obligations it had regarding preferred shares with fixed or minimum dividends. Preferred shareholders, thus, did not have any certainty of adjustment of their profitability, an adjustment that would arise only in the event that bonuses were distributed in shares identical to those they held.

3. Note, therefore, that the capitalization of the product of monetary correction, in the manner prior to the new corporate legislation, was not annually mandatory, nor did it necessarily increase the profitability primarily assured to holders of preferred shares, since it was permitted to bonus such preferred shareholders with ordinary shares.

4. The new law, however, made annual monetary correction of the capital of all corporations mandatory, as stated in CVM Orienting Opinion No. 02, published in the Official Gazette on February 22, 1979. The new law, furthermore, as mentioned in that Opinion, determined, as a general rule, that the capitalization of the result of this correction, in the case of open companies, should proceed exclusively through the simple monetary correction of the nominal value of existing shares, prohibiting the issuance of new shares in such circumstances. As a consequence of the introduction of this rule, the dividend of preferred shares of open companies existing at the date of the entry into force of LAW NO. 6,404 would, in principle, always be calculated on the nominal value adjusted year by year. This would grant these preferred shares a previously non-existent advantage: the annual adjustment of the dividend set on the nominal value, with repercussions on the economics of open companies, whose shareholders had not had such a situation in mind when creating preferred shares, and whose buyers, in turn, did not have such an adjustment assured when acquiring them.

CVM ORIENTING OPINION NO. 3, OF MARCH 15, 1979.
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5. For this reason, it became indispensable to establish a special treatment for companies existing at the date of the entry into force of the new Law (15.02.77) that had preferred shares, a treatment that was embodied, exactly, in the rule of Article 297, referred to above.

6. According to such provision, and aiming to solve the problems pointed out above, it was granted to such companies in certain cases the exemption from the annual capitalization of the value of monetary correction, thereby avoiding the necessary and unforeseen annual increase in the value of dividends of such preferred shares.
   This capitalization could now be postponed until the balance of the reserve account originating from the monetary correction of social capital reaches 50% of its value. Once this 50% limit is exceeded, the capitalization of the excess becomes mandatory, resulting in the increase of the nominal value of shares, which will be reflected in the amount of dividends of preferred shares calculated on such nominal value, or the issuance of new shares.

7. As verified, the norm embodied in Article 297 has a clear exceptional content, failing to subject the profitability of preferred shares to adjustments arising from the process of currency devaluation, keeping them in a situation similar to that in which they were before the advent of LAW NO. 6,404, when their holders did not have any secure expectation of right to such adjustment. The exceptional nature of this rule is, moreover, corroborated by the requirement announced in its text that the certificates of the company's shares contain the exceptional statutory conditions of restricted participation of preferred shares in capital increases resulting from the annual monetary correction of social capital, participation that, not being able to be suppressed (according to the express reference made by Article 297, III to Article 17, § 4, both of LAW NO. 6,404), may be postponed for a certain period.

8. It is necessary, however, to clarify that the mere existence of preferred shares with fixed or minimum dividends is not enough, as some have thought, to make the capitalization of the result of monetary correction unnecessary each year, nor, when this capitalization is carried out, to allow the distribution of bonuses in shares.
   On the contrary, and as sustained in CVM Orienting Opinion No. 02, this basic condition must be added another, no less fundamental, namely that the company has expressly adapted its bylaws, by February 15, 1978, to the exceptional system of Article 297, clearly and precisely providing, for the information of the investor, the possibility that the capitalization of the result of the monetary correction of social capital be carried out outside the normal periodicity (i.e., year by year), and, furthermore, the possibility that such capitalization be reflected in the issuance of new shares or in the increase of the nominal value of existing shares.

9. Without such explicitation, or without express reference to Article 297, preferred shares will participate in the same manner as usual in the annual correction of the result of the monetary correction of social capital, altering year by year their nominal value and, therefore, the dividend based on it, with the bonus in new shares being prohibited.

CVM ORIENTING OPINION NO. 3, OF MARCH 15, 1979.
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10. Reverting to the detriment of the holders of preferred shares, the adoption of the particular discipline provided for in Article 297 is, in sum, always conditioned to a restrictive interpretation of the text of the company's bylaws that intends to benefit from such exceptional treatment. It must contain not only mention of the existence of preferred shares, but also the express exemption from the normal regime of annual monetary correction without the increase in the number of shares. The law thus provides for the interest and full information of the investor, who must always be aware that, by acquiring preferred shares of a company in such a situation, he will be subject to a special treatment, less favorable than the common one.

11. Finally, it is necessary to clarify the situation of companies that possessed, at the time when LAW NO. 6,404 entered into force, preferred shares with an advantage embodied in the right to a priority dividend up to a certain percentage on their nominal value.

12. Such shares cannot be considered as preferred shares with fixed or minimum dividends. Consequently, the issuing companies of such shares could never claim to benefit from the special system of Article 297. For such companies, it seems unquestionable their full submission to the general rule provided for in Article 167 and its §§ of LAW NO. 6,404: they are obligated to the annual capitalization of the monetary correction reserve of social capital, and to the exclusive and consequent increase in the nominal value of their shares.

Signed originally by
PEDRO HENRIQUE TEIXEIRA
Legal Superintendent