Volume 6, Number 6, Page 4

Brazil: New Measure Provides for Re-Sale of Shares at Pre-Determined Values

IN n. 190 of the Brazilian Securities Commission’s CVM aims at protecting investors in case of sudden decrease in share prices in the securities market. Benefits related to the option for purchase and sale of shares, which previously applied only to capital companies whose shares were available for public sale, are now available to other open capital companies as a result of innovations brought about by Normative Instruction n. 190.

Under the terms of the provisions foreseen in the referred Normative Instruction, public companies are authorized to issue purchase and sale options relating to their own shares for the purpose of their cancellation, disposal or acquisition as treasury shares.

Although the Instruction apparently does not include any innovations, the measure does provide improvements for investors that re-sell shares held in the market as the shares will have a minimum value, predetermined by the company, as an option to purchase.

Thus, investors may benefit from a security guaranteed by the issuer with a minimum price, thus avoiding excessive losses resulting from sharp downturns in the market. In the event market prices fluctuate the investor will have the guarantee that his/her shares will be acquired by the issuer for a minimum pre-determined value.

In order for a company to take advantage of the new regulations, it must first comply with some of the requirements foreseen in sections I, II, III and IV of article 3 of the referred Normative Instruction, (IN) such as:

(i) The quantity of sales options to be issued, if multiplied by the respective agreed price cannot exceed 30% of the total amount of profit reserves or of the capital reserves as set out in the last financial statement;

(ii) The exercise price of sales options (deducting the premium) cannot be superior to 5% of each class of shares circulating in the market, respecting the maximum limit established in the referred CVM IN. 190;

(iii) The exercise price of sales options (deducting the premium) cannot be superior to the market value of the shares at the date of the option issue;

(iv) The operations must be performed in an organized market, private operations being prohibited;

(v) the maturity term of the options cannot be superior to 90 days, counted from the date of the agreed operation; and,

(vi) shares held in treasury during the term of the operation must guarantee issued purchase options;

These requirements must be observed, under penalty foreseen by Law n. 6.385 of December 07, 1976. Furthermore, the issuance of a purchase option is prohibited when sale options have been previously issued; as is acquisition of purchase options if sale options were previously acquired.