Instruction CVM 436 (Revoked)

Adds Annex III and amends Instruction CVM No. 361, of March 5, 2002.

The PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION - CVM makes public that the Collegiate Board, in a meeting held on this date, and based on items V, VI, and VII of art. 4, items I and III of art. 8, item “a” of item II of art. 18, § 6 of art. 21, and items III, V, VI, and VIII of § 1 of art. 22 of Law No. 6,385, of December 7, 1976, and on arts. 4, 4-A, 30, § 2, 254-A, and 257 of Law No. 6,404, of December 15, 1976, resolved to issue the following Instruction:

Art. 1. Annex III to Instruction CVM No. 361, of March 5, 2002, is hereby added, as attached to this Instruction.

Art. 2. Art. 8 of Instruction CVM No. 361, of 2002, shall be effective with the following wording:

“Art. 8. ...
...
§3. The valuation report shall observe the provisions of Annex III of this Instruction, and shall indicate the valuation criteria, the comparison elements adopted, and the person responsible for its preparation, containing, in addition, at a minimum and cumulatively, the following:
...
§7. In the case of a swap offer, the valuation report of the company whose securities are being delivered in the swap must also be presented, including the information from Annex III of this Instruction, using the same valuation criterion for both companies.” (NR)

Art. 3. This Instruction enters into force on the date of its publication in the Official Gazette of the Union.

Signed original by
MARCELO FERNANDEZ TRINDADE
President

Annex to Instruction CVM No. 436, of July 5, 2006.

ANNEX III
Preliminary Provisions

I – The information contained in the valuation report shall be complete, precise, current, clear, and objective.

II – The valuation report of the target company shall reflect the appraiser’s opinion regarding the reasonable value or value range for the subject of the offer on the date of its preparation and shall consist of a reasoned value analysis, as established in this Annex. Said opinion shall not be understood as a recommendation of the offer price, which must be determined by the offeror.

III – The information contained in the valuation report shall be based on the audited financial statements of the evaluated company, and may additionally be based on managerial information regarding the evaluated company, provided by its administration, as well as on information available to the general public. The appraiser shall not be responsible for conducting an independent verification of the information received from the company or from third parties hired by it, and shall accept and use such information within the scope of its analysis, unless it deems them inconsistent.

IV – The text of the valuation report must be presented in Portuguese, in accessible and easy-to-understand language, which allows shareholders and the general public to form a reasoned judgment about the offer and the value of the evaluated company’s shares. Expressions in foreign languages must be mandatory translated in the Glossary.

V – The valuation report shall contain the signatures and identification of the professionals responsible for the valuation, as well as of the representative of the company responsible for the report.

VI – The valuation report shall present the information in the order established in this Annex, encompassing what is required by current legislation.

VII – The information required in this Annex is considered minimum information; the appraiser may extend compliance with this outline, supplementing such information with others deemed necessary and convenient to enrich and better support the content and results of the valuation report or to justify the values stated.

Index

VIII – The valuation report shall contain an index, encompassing the subjects and page numbering.

Executive Summary

IX – The valuation report shall contain an Executive Summary that shall, summarily, include at least the following information:
a) the main information and conclusions of the valuation report; b) the criteria adopted and the main premises used; c) the valuation method chosen; d) the discount rate used, if applicable; e) the value or value range determined in each of the valuation methodologies used, with presentation of a comparative table of the determined values; f) indication of the valuation criterion, among those contained in the report, that is considered by the appraiser as the most adequate in defining the fair price; if applicable; and g) the reasons why such criterion was chosen, in the case of a Public Tender Offer (OPA) for cancellation of registration;

Information about the Appraiser

X – The valuation report shall present the following information regarding the appraiser:
a) the institution responsible for preparing the valuation report with description of the specialized and properly equipped area, with proof of experience in valuing public companies, describing the valuations made in the last 3 (three) years and presenting the credentials that qualify it for preparing the valuation report, including recent experience in valuations of companies in the sector of activity of the evaluated company; b) a brief description of the internal approval process of the valuation report by the appraising institution; c) identification and qualification of the professionals responsible for the valuation report, mainly regarding the credentials and experience that qualify them for the preparation of the valuation report in question; and d) declaration by the appraiser:

1. regarding the quantity of securities issued by the target company that he himself, his controlling shareholder, and persons linked to them hold, or that are under their discretionary administration. In the case of a swap offer, the declaration must include the same information for the securities that will be offered in exchange;
2. commercial and credit information of any nature that may impact the valuation report;
3. that he has no conflict of interest that diminishes the independence necessary for the performance of his functions;
4. of the cost of the valuation report; and
5. of the values received from the offeror and the target company, as remuneration for any consulting, valuation, audit, and similar services, in the 12 (twelve) months prior to the registration request, discriminating, among the values received, those related to the preparation of the valuation report.

Valuation
Information about the Evaluated Company

XI – The valuation report shall contain the following information about the company:
a) brief history of the company (identification of the business, main lines of activity, competitive strategy, historical information, and historical performance); b) summary description of the market of operation: market growth in which it operates, market share, main products and clients; c) brief analysis of the sector in which the company operates; d) macroeconomic premises used in the preparation of the report; and e) relevant investment projects that have been considered in the valuation, with indication of the values involved and financial impact.

Value Determined by Different Criteria

XII – The valuation report shall indicate the value of the company according to the following criteria:
a) weighted average quotation price of the target company’s shares on the stock exchange or on the organized over-the-counter market, discriminating the prices of shares by type and class:

1. of the 12 (twelve) months immediately preceding the publication until the date of the relevant event; and
2. between the date of publication of the relevant event and the date of the valuation report.
   b) net asset value per share of the target company determined in the last periodic information (annual or quarterly) sent to the CVM; c) economic value of the evaluated company, with indication, including, of the value per share, calculated by at least one of the following methodologies:
3. discounted cash flow;
4. market multiples; or
5. multiples of comparable transactions, as deemed reasonably more adequate to the case of the company, in order to value it correctly.
   d) another valuation criterion chosen by the appraiser generally accepted in the line of activity of the evaluated company, provided for by law or accepted by the CVM, for the definition of the fair price or value range, if applicable, and not covered by the previous items.

XIII – The valuation report shall present:
a) the description of the valuation criteria and the comparison elements adopted, accompanied by an analysis of the applicability of each of the criteria referred to in item XII; b) the indication of the date of preparation of the report, on which the determined values shall be considered valid, unless indicated otherwise; c) the valuation criterion, among those contained in the report, that is considered by the appraiser as the most adequate in defining the fair price or value range, if applicable; and d) in the event that the valuation is in a range of minimum and maximum values, the justification for such interval, which shall not exceed 10%, based on the highest value.

Economic Value by the Discounted Cash Flow Rule

XIV – For the calculation of the economic value by the discounted cash flow criterion, the following must be observed:
a) the valuation report shall encompass the sources, foundations, and justifications of the information and data presented, indication of the equations used for the calculation of the cost of capital, as well as the calculation spreadsheets and projections used in the economic value valuation, highlighting the main premises used and justification for each of them; b) the premises and calculation methodology for fixing the discount rate used shall be explicit, according to the criteria usually adopted in finance theory; c) adjustments made for other assets and liabilities not captured by the operating cash flow shall be considered, including financial debt, contingencies, cash position, non-operating assets and liabilities, among others, whose values shall be supported; d) the assumptions for determining the residual value, calculated through the Cash Flow Perpetuity method, by multiples, or by another valuation criterion, shall be indicated, always considering the duration of the companies, established in their Bylaws, and, in the case of public service concession companies, the period established in the respective concession contract; e) it shall be informed whether the Cash Flow Statement and the discount rates were presented in nominal or real values; and f) the monetary unit of all values stated shall be informed.

Net Asset Value Evaluated at Market Prices

XV – The net asset value evaluated at market prices must be determined taking as a basis the sale or liquidation of assets and liabilities separately under the following conditions:
a) the market value must correspond to the value expressed in cash or equivalent to which the property (or any other asset or liability) could be exchanged between a willing buyer and a willing seller, with reasonable knowledge of both and no compulsion to buy or sell by one or both; and b) the value of the assets must be evaluated with reference to market prices under conditions of orderly liquidation, or of “current cash equivalents”, that is, the liquidation value under forced sale conditions, at any cost, shall not be considered.

XVI – The report shall discriminate the items of assets and liabilities calculated under negotiation conditions with debtors and creditors and shall contain the justification and calculation memos for each tangible and intangible, monetary and non-monetary item, which may be grouped only under conditions of similarity and relevance of the item.

XVII – The following valuation bases must be observed in the different classes of items:

a) monetary assets, such as cash, cash equivalents, and receivables, evaluated at fair value, that is, the value at which an asset could be negotiated between independent and interested parties, knowledgeable about the subject and willing to negotiate, in a normal transaction, without favoritism and free of other interests. If it is not possible to identify the market, these items may, as a second alternative, be evaluated by calculating the present value of receipts that reflects current market assessments regarding the time value of money and specific risks; b) non-monetary assets, such as land, buildings, properties, machinery, installations, as well as intangibles, such as trademarks and patents, at the probable realization value; c) monetary liabilities, such as debts, payables, evaluated at fair value, as defined in letter “a” of this item; and d) contingencies, such as lawsuits against the state on tax issues and other judicial issues, evaluated according to the most likely outcome.

XVIII – The demonstration of net asset value at market prices shall deductively discriminate assets and liabilities, leaving the Net Asset Value at market prices, which, divided by the number of shares, will indicate the net asset value at market prices per share.

Economic Value by the Multiples Criterion

XIX – For the calculation of the economic value by the Multiples rule, the steps shown below must be followed:
a) indicate the market multiples used, the criteria, and the sources for comparison, justifying the methodology used and presenting the calculation spreadsheets; b) whenever possible, present similar operations in the market of companies from the same segment (multiples of comparable transactions), citing sources, data, and dates of comparable transactions, as well as the criteria that demonstrate the relevance of the comparison; and c) present the average value and median of the values resulting from the sample used of market multiples and comparable transactions, making the necessary adjustments to calculate them, when applicable.

Glossary

XX – The report shall contain a glossary of technical terms, indicating the meaning of each technical term, acronym, or economic index cited.