Equity capital markets in Brazil: regulatory overview

A Q&A guide to equity capital markets law in Brazil.

The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.

To compare answers across multiple jurisdictions visit the Equity Capital Markets Country Q&A tool

This Q&A is part of the Global Guide to Capital Markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-guide.

Eliana Ambrósio Chimenti, Alessandra de Souza Pinto and Marina Mendes Corrêa, Machado, Meyer, Sendacz e Opice Advogados
Contents

Main equity markets/exchanges

1. What are the main equity markets/exchanges in your jurisdiction? Outline the main market activity and deals in the past year.

Main equity markets/exchanges

The main equity market is the BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA) (www.bmfbovespa.com), which is responsible for:

  • Developing, implementing and providing systems for trading securities.

  • Acting as a central securities counterparty and guaranteeing financial liquidity for the trades executed in its markets.

  • Managing organised markets.

  • Registering, clearing and settling transactions carried out on its trading systems.

Market activity and deals

In 2014, there was one initial public offering (IPO) concluded (Ouro Fino Saúde Animal Participações S.A.) and one follow-on concluded (Oi S.A.), totaling around BRL15.4 billion, according to the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM). There were no Brazilian depositary receipts (BDRs) offerings.

During 2014, some companies elected to postpone equity offerings as a result of unfavourable equity market conditions, including the first equity offering under the CVM Instruction No. 476/09, as amended, which was launched but not concluded.

To postpone the offering, the lead underwriter and the issuer file a request with the CVM asking for the interruption of the offering. The CVM can interrupt the analysis only once, for up to sixty business days.

 
2. What are the main regulators and legislation that applies to the equity markets/exchanges in your jurisdiction?

Regulatory bodies

The securities markets are regulated by:

  • The National Monetary Council (Conselho Monetário Nacional) (CMN), which is the highest deliberative body of the financial system and responsible for, among other things, establishing general guidelines for the financial system.

  • The Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) (www.cvm.gov.br), which has regulatory authority over the stock exchanges and the securities markets generally.

The security markets are also regulated by some self-regulatory bodies such as:

  • The BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA) (see Question 1).

  • The BM&FBOVESPA Market Supervision (BM&FBOVESPA) (Supervisão de Mercados) (BSM) (www.bsm-autorregulacao.com.br), which, among other things, supervises the market managed by the BM&FBOVESPA to ensure compliance with the applicable laws, rules and regulations and, consequently, the proper functioning of the markets.

  • The Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA) (www.anbima.com.br), which represents the financial and capital markets players and regulates best practices regarding their products and services.

Legislative framework

The main securities markets laws, rules and regulations are the:

  • Law No. 6,385/76, as amended (Capital Markets Law), which is the principal law governing the securities markets.

  • Law No. 6,404/76, as amended (Corporate Law).

  • Regulations issued by the CVM, such as:

    • CVM Instruction No. 400/03, as amended, which regulates public offerings of securities;

    • CVM Instruction No. 480/09, as amended, which regulates the registration of issuers of securities that are traded on regulated securities markets; and

    • CVM Instruction No. 476/09, as amended, which regulates public offerings of securities with limited placement efforts.

  • Regulations issued by the ANBIMA, such as the ANBIMA Code of Regulation and Best Practices for Public Distributions and Acquisitions of Securities (Código ANBIMA de Regulação e Melhores Práticas para Ofertas Públicas de Distribuição e Aquisição de Valores Mobiliários).

 

Equity offerings

3. What are the main requirements for a primary listing on the main markets/exchanges?

Main requirements

A company seeking to list its shares must:

  • Obtain its registration as a publicly-held corporation (category A) with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM), except in some specific cases.

  • Obtain its registration and register its securities with BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA).

Companies can have their shares admitted for trading at the BM&FBOVESPA in the traditional segment or in one of the following special corporate governance segments of the BM&FBOVESPA:

  • Novo Mercado.

  • Nível 1.

  • Nível 2.

  • Bovespa Mais.

  • Bovespa Mais Nível 2.

The admission to any of these special corporate governance segments requires compliance with corporate governance rules that are more stringent than those required under the Law No. 6,404/76 (Corporate Law) and the regulations issued by the CVM.

Foreign companies can have their securities traded in Brazil through Brazilian depositary receipts (BDRs), which are certificates representing securities issued by foreign publicly-held companies. BDRs must be admitted for trading in one of the following programmes:

  • Sponsored programmes (levels I, II and III).

  • Unsponsored programmes.

Only companies seeking to list BDRs on levels II and III must register as a publicly-held corporation.

In addition, companies can seek to distribute their securities through a public offering (see Question 5).

Minimum size requirements

There are no minimum capital requirements for a company seeking to trade its securities. However, for a public offering, a financial feasibility study may be required by the CVM in the following situations:

  • The issuer is incorporated only on the conclusion of the public offering.

  • The issuer is in a pre-operating stage.

  • The expected proceeds of the offering will be used for activities that are not yet developed by the issuer.

Trading record and accounts

There are no trading records or accounts requirements for an issuer to go public.

Minimum shares in public hands

BM&FBOVESPA created special corporate governances segments (Novo Mercado, Nível 1, Nível 2, Bovespa Mais or Bovespa Mais Nível 2) that have more stringent corporate governance requirements than those under the Corporate Law and the regulations issued by the CVM.

Novo Mercado adopts the most stringent rules, followed by Nível 2 and Nível 1.

Bovespa Mais and Bovespa Mais Nível 2 were designed for small and mid-size companies that seek gradual access to the formal market. The rules for listing in Bovespa Mais are more demanding than for Bovespa Mais Nível 2.

Companies with shares admitted for trading in Novo Mercado, Nível 1 and Nível 2 must maintain, throughout the entire period in which the company is listed in any of these segments, a free float that represents at least 25% of the total issued capital stock of the company.

Companies with shares admitted for trading in Bovespa Mais and Bovespa Mais Nível 2 have seven years to reach a free float that represents at least 25% of the total issued capital stock of the company.

In 2014, according to BM&FBOVESPA, the total number of companies listed on all special corporate governance segments was 191, of which 133 were listed on Novo Mercado.

 
4. What are the main requirements for a secondary listing on the main markets/exchanges?

The main requirements for a secondary listing are the same as for a primary listing (see Question 3).

 
5. What are the main ways of structuring an IPO?

An IPO can be structured either or both as:

  • A primary offering, which is an offer of newly issued shares that is a result of a capital increase.

  • A secondary offering, which is an offer of existing shares from selling shareholders.

Additionally, an IPO can be structured as:

  • A public offering, under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03, as amended.

  • A public offering with limited placement efforts, under CVM Instruction No. 476/09, as amended.

Companies seeking to make an IPO (or a subsequent equity offering), under CVM Instruction No. 400/03, must register the public offering of securities with the CVM.

Although IPOs (and subsequent equity offerings) under CVM Instruction No. 476/09 are exempt from registration with the CVM, there are some specific restrictions related to these offerings, including that:

  • Only the Bovespa Mais or Bovespa Mais Nível 2 corporate governance segments of the BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA) are available to IPOs under CVM Instruction No. 476/09.

  • Only Brazilian depositary receipts (BDRs) level II can be publicly offered under CVM Instruction No. 476/09.

  • Only qualified investors, as defined by CVM Instruction No. 409/04 (until 1 October 2015) or professional investors (after 1 October 2015) can be contacted regarding the offering, except in some specific cases provided by CVM Instruction No. 476/09.

Qualified investors are defined as (CVM Instruction No. 409/04):

  • Investment funds.

  • Individuals or entities that subscribe or acquire at least BRL1 million in the offering and that confirm their status of qualified investors in writing.

  • Financial institutions.

  • Insurance firms and investment capital companies.

  • Pension entities.

  • Securities portfolio managers and securities consultants duly authorised by the CVM, regarding their own investments.

  • Social security systems created by the:

    • federal government;

    • states;

    • federal district;

    • municipalities.

The CVM enacted CVM Instruction No. 554 in December 2014 (as amended by CVM Instruction No. 564/15), which introduced changes to CVM Instruction No. 476/09. According to CVM Instruction No. 564, as of 1 October 2015, only professional investors (and not qualified investors as defined by CVM Instruction No. 409/04) will be entitled to subscribe or acquire the securities within the scope of the offering.

Professional investors are defined as:

  • Investment funds.

  • Individuals or entities that have at least BRL10 million in investments and that confirm their status of qualified investors in writing.

  • Financial institutions and other entities authorised by the Brazilian Central Bank to work.

  • Insurance firms and investment capital companies.

  • Pension entities.

  • Investment clubs managed by entities duly authorised by the CVM.

  • Independent investment agents, securities portfolio managers and securities consultants duly authorised by the CVM, regarding their own investments.

  • Non-resident investors.

 
6. What are the main ways of structuring a subsequent equity offering?

A subsequent equity offering (follow-on) can be structured in the same way as an IPO (see Question 5).

However, companies seeking to prepare subsequent equity offerings under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03 can submit the offering to a simplified procedure provided under an agreement entered into the CVM and the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA) under CVM Instruction No. 471/08.

Through the simplified procedure, which was designed exclusively for subsequent offerings under CVM Instruction No. 400/03, the company must submit the offering to ANBIMA for prior analysis before submitting it to the CVM's analysis.

The main advantage of the simplified procedure is that timing concerns are reduced when compared with the regular procedure under CVM Instruction No. 400/03.

 
7. What are the advantages and disadvantages of rights issues/other types of follow on equity offerings?

There are no "rights issues" as known in other jurisdictions.

However, publicly-held corporations can structure a private capital increase without having to register it with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM). Only shareholders can subscribe to the newly issued shares in at least the proportion of their respective equity interest in the company.

 
8. What are the main steps for a company applying for a primary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a listing for shares or depositary receipts?

Procedure for a primary listing

In order to apply for a primary listing of its shares, a company must simultaneously request its registration as a publicly-held corporation (category A) with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM). The main steps for a company applying for a primary listing are:

  • Preparation of financial statements in accordance with corporate law and the rules and regulations of the CVM.

  • Preparation of the annual form (formulário de referência) and other documents required by the CVM and the stock exchange.

  • Filing with the CVM and BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA) and responding to their comments.

Procedure for a foreign company

Foreign companies seeking to list securities can have their securities traded in Brazil by using Brazilian depositary receipts (BDRs), which are certificates representing securities issued by foreign publicly-held companies.

The main steps for foreign companies applying for a primary listing of its BDRs are substantially the same as for Brazilian companies applying for a primary listing of their shares.

 

Advisers: equity offering

9. Outline the role of advisers used and main documents produced in an equity offering. Does it differ for an IPO?

The main advisers in an equity offering are as follows.

Underwriters

There is usually one investment bank performing the role of lead underwriter and other banks, part of a syndicate, performing the role of underwriters or joint bookrunners. In most of the offerings, one of the underwriters also performs the role of stabilisation agent. The roles are as follows:

  • Underwriters. These typically assist in structuring the offering, as well as being responsible for marketing and distribution.

  • Lead underwriter. The Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03 distinguishes the role played by the lead underwriter from that played by the other underwriters. The lead underwriter must undertake specific obligations in addition to those undertaken by the other members of the syndicate. The level of liability assumed by the lead underwriter with respect to the information contained in the prospectus is also significantly higher than that of the other underwriters (see Question 13). The lead underwriter is responsible, among other things, for:

    • organising a plan of distribution for the offering;

    • filling with the CVM the documentation required for the registration of the offering; and

    • suspending the offering on the occurrence of any illegal fact or act.

  • Stabilisation agent. See Question 19.

Lawyers

Lawyers advise on structuring the offering and manage the legal aspects of the offering. Lawyers are also responsible for the legal due diligence:

  • Issuers' lawyers. These are responsible for advising the issuer. Issuers' lawyers typically draft (or update) and file the documents required for obtaining or maintaining the issuer's registration as a publicly-held corporation with the CVM and, in the context of an IPO, enabling the issuer to have its securities admitted for trading at the BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA). These documents include corporate acts of the issuer and the issuers´ reference form (formulário de referência), among other things. Issuers' lawyers also review the documents related to the offering prepared by the underwriters' lawyers.

  • Underwriters' lawyers. These are responsible for advising the underwriters. In an equity offering under the CVM Instruction No. 400/03, underwriters' lawyers typically draft and file the documents required for registering the public offering of securities with the CVM, including the:

    • prospectus;

    • underwriting agreement; and

    • stabilisation agreement.

Underwriters' lawyers also review the documents related to the offering prepared by the issuers' lawyers.

Auditors

Auditors are responsible for reviewing the issuer's financial statements prepared in the context of the offering and preparing a report, as well as issuing a comfort letter related to the issuer's financial information derived from the financial statements.

Main documents

The main documents required to obtain and maintain registration as a publicly-held corporation with the CVM are:

  • Annual form (formulário de referência).

  • Financial statements.

  • Disclosure and trading policies.

  • Updated bye-laws.

  • Agreement with the institution responsible for rendering the services of custody of the securities.

Foreign companies must present additional documents such as a power of attorney granted by the foreign company to a representative in Brazil. Under this document, the foreign company representative in Brazil accepts its designation and states that it is aware of all the powers and liabilities imposed by Brazilian law and regulation, among others.

The main documents required to register the public offering of securities with the CVM are:

  • Prospectus, unless there is an exemption (see Question 11).

  • Underwriting agreement.

  • Stabilisation agreement, if applicable (see Question 19).

  • Loan agreement.

  • Notice of beginning and notice of termination.

  • Veracity statement.

The main documents required for the issuer to have its securities admitted for trading in a special corporate governance segment of BM&FBOVESPA (only applicable in IPOs) are:

  • Adhesion agreement to the respective special corporate governance segment.

  • Code of conduct.

  • Calendar of corporate events.

Other documents that are required include:

  • Legal opinions issued by the lawyers.

  • Comfort letters related to the issuer's financial statements issued by the auditors.

 

Equity prospectus/main offering document

10. When is a prospectus (or other main offering document) required? What are the main publication, regulatory filing or delivery requirements?

Prospectus (or other main offering document) required

Unless there is an applicable exemption (see Question 11), a prospectus is always required on an equity public offering under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03.

A prospectus is not required in offerings under CVM Instruction No. 476/09.

Main publication, regulatory filing or delivery requirements

A written and an electronic version of the preliminary prospectus and of the final prospectus, meeting the requirements of CVM Instruction No. 400/03, must be delivered to the CVM and to the BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA).

The preliminary prospectus and the final prospectus must also be available electronically to investors on the websites of the:

  • Issuer.

  • Selling shareholder, if applicable.

  • Underwriters.

  • CVM.

  • BM&FBOVESPA.

 
11. What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document)?

A prospectus is not required for:

  • Offerings under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 476/09.

  • Private placements.

Although a prospectus is required in public offerings under CVM Instruction No. 400/03 (including Brazilian depositary receipts (BDRs)), the CVM can, at its sole discretion, acting in the best interest of the public, grant an exemption (waiver) from the requirements under the Instruction, including from the obligation of delivering a prospectus.

In order to grant these exemptions, the CVM must, on a case-by-case basis, analyse aspects such as the:

  • Amount of the offering.

  • Plan of distribution.

  • Target public of the offering.

 
12. What are the main content or disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?

The prospectus must contain all the information that an investor would likely deem important in determining whether to purchase the security, as well as meet the requirements of Exhibit III of the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03.

The main disclosure requirements for a prospectus set out in Exhibit III of CVM Instruction No. 400/03 are:

  • A summary and detailed description of the offering.

  • Identification of the issuer's officers, directors, consultants and independent auditors.

  • Use of proceeds.

  • Risk factors related to the offering.

  • An updated version of the issuer's annual form (formulário de referência) (attached or incorporated by reference).

  • The financial statements of the last three years and quarterly information statements, as the case may be (attached or incorporated by reference).

A working capital statement is not required.

 
13. How is the prospectus (or other main offering document) prepared? Who is responsible and/or may be liable for its contents?

The prospectus is prepared by the issuer and the underwriters and their respective advisers. The lawyers perform a full due diligence review of the issuer and its subsidiaries for disclosure purposes.

Under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03, the issuer, the selling shareholders and the lead underwriter participating in the offering are responsible for ensuring the veracity, consistency, quality and sufficiency of the information contained in the prospectus to allow the investors to make an informed decision regarding the offering.

Under Brazilian laws and regulations, the issuer, selling shareholders and underwriters participating of the offering may incur:

  • Administrative liability, if they fail to comply with their obligations under CVM regulations.

  • Civil liability, usually for negligent or imprudent actions or omissions that violate rights and cause damages to a third party.

  • Criminal liability, usually for actions or omissions with fraudulent intent.

While the issuer and the controlling selling shareholder are strictly liable for any material omission and misstatement in the prospectus, the non-controlling selling shareholders and the underwriter can rely on the due diligence defence. Therefore, to avoid liability, the non-controlling selling shareholders and the underwriters must show that any inaccurate or insufficient information in the prospectus did not result from their fault or willful misconduct.

 

Marketing equity offerings

14. How are offered equity securities marketed?

Offered equity securities are typically marketed using the following methods:

  • Pre-marketing. Usually, the lead underwriter, at an early stage, meets potential investors to establish relationships and improve dialogue regarding the offering, the issuer and the securities that will be offered (pilot fishing or investors' education).

  • Road shows. Underwriters and the issuer's management make presentations to a group of potential investors about the offering, the issuer and the securities that are being offered.

  • "One on ones". Underwriters and the issuer's management make presentations to individual potential investors about the offering, the issuer and the securities that are being offered.

  • Advertising. Advertisements targeted to the public, through any media or in any format.

No marketing material related to an offering under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03 can be distributed to the public without prior approval by the CVM. Any information contained in the marketing materials must be consistent with the information of the prospectus and caution investors to read the prospectus.

For public offerings with limited placement efforts (CVM Instruction No. 476/09), the following restrictions must be observed:

  • Only 75 qualified investors as defined by CVM Instruction No. 409/04 (until 1 October 2015) or 75 professional investors (after 1 October 2015) (see Question 5) can be contacted regarding the offering.

  • Only 50 qualified investors as defined by CVM Instruction No. 409/04 (until 1 October 2015) or 50 professional investors (after 1 July 2015) (see Question 5) can subscribe or acquire the securities regarding the offering.

  • Investors cannot be contacted through offices nor public means of communication (such as media, radio, television and internet).

 
15. Outline any potential liability for publishing research reports by participating brokers/dealers and ways used to avoid such liability.

Any research report prepared by the research departments of any of the underwriters must be filed with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM). Additionally, the research report must include a statement informing that the financial institution is working on the public offering.

 

Bookbuilding

16. Is the bookbuilding procedure used and in what circumstances? How is any related retail offer dealt with? How are orders confirmed?

Bookbuilding is the process by which the underwriters, based on demand, determine at what price to offer the securities. The price of equity offerings is usually determined through bookbuilding.

The book must be built after the offering is disclosed to the market. This means, in offerings under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03:

  • After the date the registration request is filed before the CVM.

  • After the disclosure of the preliminary prospectus.

Typically, orders made by retail investors are not price makers.

Subscription orders are binding and must include payment for the full amount. The shares are allocated by the underwriters and issuer after pricing.

 

Underwriting: equity offering

17. How is the underwriting for an equity offering typically structured? What are the key terms of the underwriting agreement and what is a typical underwriting fee and/or commission?

Equity offerings can be completed:

  • On a firm settlement commitment basis. If an investor does not pay for the shares at settlement, the underwriters pay for them.

  • On a firm placement commitment basis. When underwriters commit to purchase (at pricing) the offered securities at a price specified.

  • On a best efforts basis. When underwriters commit to make the best efforts to sell as many securities as possible to the public.

According to the the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03, the lead underwriter and the offeror must enter into a written underwriting agreement, which must contain certain minimum provisions as set out below. The lead underwriter can form a syndicate with other financial institutions. Such other syndicate members can either be parties to the underwriting agreement or adhere to its terms by executing a separate document.

The underwriting agreement must contain the following key terms (Exhibit VI, CVM Instruction No. 400/03):

  • Qualification of the issuer, underwriters and intermediaries hired by the underwriters to participate in the offering.

  • Description of the board of executive officers' meeting or the shareholders' meeting that approved the offering.

  • Characteristics of the placement of the securities, such as the commitment of the underwriters to purchase the securities and the price that they will pay for it.

  • Characteristics of the securities.

  • Description of the compensation payable to the underwriters and to the intermediaries hired by the underwriters to participate in the offering.

  • Description of the stabilisation agreement, if applicable.

There are no typical underwriting fees or commissions. Usually, these are divided into categories, such as:

  • Placement fee.

  • Firm commitment fee.

  • Incentive fee.

 

Timetable: equity offerings

18. What is the timetable for a typical equity offering? Does it differ for an IPO?

An equity offering process under the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03 can take between three to five months, depending on a number of factors, such as:

  • The time necessary to prepare the financial statements and other documents required to register the issuer and the offering (see Question 9).

  • The time the CVM and the BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA) take to analyse these documents.

  • Market conditions.

Companies seeking to prepare subsequent equity offerings under the CVM Instruction No. 400/03 can submit the offering to a simplified procedure provided under an agreement entered into by the CVM and the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais) (ANBIMA) under the CVM Instruction No. 471/08 (see Question 6). Under the simplified procedure, the timeline for the offering is faster and can be concluded, in approximately 45 days, depending (among other things) on the factors described above.

Since an equity offering under the CVM Instruction No. 476/09 has never been concluded, it is not possible to say how long such offerings usually take.

 

Stabilisation

19. Are there rules on price stabilisation and market manipulation in connection with an equity offering?

Offerings under CVM Instruction No. 400/03

The stabilisation activities on offerings pursuant to the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 400/03 are only allowed if they are formalised in a stabilisation agreement duly approved by the CVM and BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA). All stabilisation activities must be reported to the CVM and are subject to certain trading limits.

Under the CVM Instruction No. 400/03, the issuer can grant to the intermediary institutions, through the underwriting agreement or a specific agreement, an option (greenshoe) to distribute a predetermined amount of shares that cannot exceed 15% of the quantity of shares initially offered (excluding the hot issue). The greenshoe shares are usually used for stabilisation activities.

Typically, the stabilisation agreement is executed simultaneously with the underwriting agreement.

Offerings under CVM Instruction No. 476/09

The CVM Instruction No. 476/09 is silent on stabilisation activities and the possibility of granting an option (greenshoe) to distribute a predetermined amount of shares. The CVM has not yet carried out an analysis of this matter and it is currently not possible to determine what will be its final position.

 

Tax: equity issues

20. What are the main tax issues when issuing and listing equity securities?

Investors may be subject to withholding income tax on:

  • Capital gains on the disposition of the shares.

  • Distribution of interest on capital.

  • Dividends (on limited circumstances).

Rates vary from zero to 25% and will apply depending on the type of investment and the domicile of the investor.

Also, the law imposes the tax on financial operations (imposto sobre operações financeiras) (IOF) on the conversion of Brazilian real into foreign currency and on the conversion of foreign currency into Brazilian real. Currently, for most exchange transactions, the rate of IOF is 0.38%.

 

Continuing obligations

21. What are the main areas of continuing obligations applicable to listed companies and the legislation that applies?

Publicly-held companies must comply with continuing obligations set out in Law No. 6,404/76 (Corporate Law) and the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) Instruction No. 480/09. The key obligations are described below.

Periodic information

Any publicly-held corporation must submit to the CVM, at least once a year, information such as:

  • Financial statements containing information on the last fiscal year and, if applicable, consolidated financial statements, accompanied by:

    • the management report;

    • the opinion of an independent auditor;

    • fiscal council's opinion, if applicable;

    • capital budget proposal, if applicable;

    • officers' statement regarding the independent auditor's opinion and the financial statements; and

    • audit committee's opinion, if applicable.

  • Updated registration form (formulário cadastral).

  • Updated annual form (formulário de referência), a document that covers all aspects of the company's life, including information about significant transactions and related party transactions and shareholder voting restrictions.

  • Standardised financial statements (demonstrações financeiras padronizadas) (DFP) containing information on the last fiscal year.

  • Quarterly information report (formulário de informações trimestrais) (ITR) containing information on each quarter of every fiscal year.

  • Minutes of the ordinary shareholders' meeting.

Occasional information

Publicly-held corporations must also submit to the CVM occasional information, such as a:

  • Notice of relevant act or fact.

  • Notice calling for an extraordinary or special shareholders' meeting, and summary of the decisions and minutes of the extraordinary or special shareholders' meeting.

  • Shareholders' agreement.

  • Trading and disclosure policies.

Related party transactions

Under the Corporate Law, the managers of a company cannot favour an affiliate to the detriment of their own company, and must ensure that such a transaction is equitable or compensated by adequate payment. These managers, in any event, are liable to the company for any loss resulting from an infringement of these principles. In addition, all relevant related party transactions of publicly-held corporations must be fully disclosed (CVM Instruction No. 480/09).

 
22. Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?

The continuing obligations of publicly-held corporations (see Question 21) are only applicable to foreign companies that sponsor Brazilian depositary receipts (BDRs) programmes level II and III.

 
23. What are the penalties for breaching the continuing obligations?

Any failure to comply with the continuing obligations (see Question 21) may subject the company to daily fines of BRL500.

If the company or its directors and officers repeatedly fail to comply with the continuing obligations, the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) can impose the following sanctions for such violations:

  • Suspension of directors or officers.

  • Temporary prohibition, of up to 20 years, to act as directors or officers.

  • Suspension of the licence to operate in the securities' market.

  • Revocation of the licence to operate in the securities' market.

  • Temporary prohibition to provide services to entities duly registered with the CVM, for up to 20 years.

  • Temporary prohibition to trade in the capital market, for up to ten years.

 

Market abuse and insider dealing

24. What are the restrictions on market abuse and insider dealing?

Restrictions on market abuse/insider dealing

Generally, insider trading occurs whenever a person trades securities of a publicly-held corporation in the market using material non-public information.

Information is deemed to be "material" or relevant if it can have a significant influence on the trading prices of the securities of a corporation or on investors' decisions to buy or sell such securities. Information is considered "non-public" if it is not widely spread in the market normally through a notice of relevant act or fact sent out to the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) and the BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA).

The trading restriction is applicable to all "insiders", meaning persons that have any type of employment relationship with a publicly-held corporation or its controlling shareholders or controlled companies and affiliates and have knowledge of insider information. Persons that receive insider information from insiders (tippees) are also subject to insider trading restrictions.

Penalties for market abuse/insider dealing

Violating the restrictions related to insider trading may result in administrative, civil or criminal sanctions, which may be applicable to both insiders and tippees as the case may be.

Administrative penalties include, among others:

  • Notices

  • Fines.

  • Suspension of management functions.

  • Prohibition to trade in the capital market for up to ten years.

Fines cannot exceed BRL500,000 or three times the economic advantage or loss derived from the illegal trading.

From a civil perspective, any third party with whom the insider or tippee traded in the market that was in possession of insider information can sue the insider for the applicable damages.

From a criminal perspective, the judicial authorities, following the due process of law, can also impose, exclusively to insiders that have fiduciary duties to the corporation and who obtained benefits from the illegal trading:

  • One to five years of imprisonment.

  • Monetary fines equivalent to three times the economic benefit resulting from the criminal offence.

 

De-listing

25. When can a company be de-listed?

De-listing

The voluntary cancellation of the publicly-held corporation registration (de-listing) must be preceded by a tender offer by the controlling shareholder or the company itself for the acquisition of the entire free float.

The tender offer must be registered with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM) and must be made at fair value, which is determined by an independent valuation, based on one or a combination of the criteria set out in Law No. 6,404/76 (Corporate Law).

The tender offer must be necessarily conditioned to the adherence or the agreement of shareholders representing at least two thirds of the free float taking part in the tender offer. If this ratio is not achieved then this will limit the offeror's right to acquire the company shares to one third of the free float and means that the de-listing is not obtained.

If the tender offer is successful, within three months following the tender offer the minority shareholders that have not adhered to the offer can sell their shares to the controlling shareholder under the same terms and conditions as the tender offer.

Companies that have securities admitted for trading in any of the special corporate governance segments of BM&FBOVESPA S.A. (Bolsa de Valores Mercadorias e Futuros) (BM&FBOVESPA) must follow additional rules regarding de-listing, such as acquisition of the shares at their economic value established in a valuation report made by a financial institution chosen by the minority shareholders.

Suspensions

If a publicly-held corporation fails to comply with its continuing obligations (see Question 21) for more than 12 months, the CVM can suspend its registration as securities issuer. There is a notice and hearing process and the corporation has the opportunity to demonstrate compliance with its continuing obligations.

Publicly-held corporations that have their registration suspended cannot have their securities admitted for trading on regulated markets, such as BM&FBOVESPA.

The CVM can de-list publicly-held corporations that:

  • Were dissolved.

  • Had their registration suspended for more than 12 months.

The corporation, its controlling shareholders, as well as its directors and officers, are liable for their actions and omissions until the cancellation of the publicly-held corporation registration.

In 2014, according to the CVM, there were 30 de-listings, including both compulsory and voluntary.

 

Reform

26. Are there any proposals for reform of equity capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

There are currently no proposals for reform.

 

Online resources

Palácio do Planalto

W www2.planalto.gov.br/acervo/legislacao

Description. Official website maintained by the federal executive branch, which contains up-to-date texts of laws.

Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM)

W www.cvm.gov.br

Description. Official website maintained by the CVM, which contains up-to-date texts of laws and regulations related to the capital markets.

CVM (English language translations)

W www.cvm.gov.br/subportal_ingles/menu/investors/regulation.html

Description. Official website maintained by the CVM, which contains free translations into English (potentially out-of-date) of the main laws and regulations related to the capital markets.



Contributor profiles

Eliana Ambrósio Chimenti, Partner

Machado, Meyer, Sendacz e Opice Advogados

T +55 11 3150 7035
F +55 11 3150 7071
E echimenti@machadomeyer.com.br
W www.machadomeyer.com.br

Professional qualifications. Brazil, Lawyer, 1984

Areas of practice. Capital markets; securities; mergers and acquisitions; corporate.

Recent transactions

  • Assisting Telefônica Brasil S.A. in its primary public offering of common and preferred shares, which raised R$15.81 billion.

  • Assisting underwriters in the public offering of common and preferred shares, as well as american depositary shares representing common and preferred shares, of Oi S.A., which raised R$13.96 billion.

  • Assisting LATAM in its capital increase, which involved US$1 billion.

  • Assisting Tupy S.A. in its primary public offering of common shares, which raised R$523 million.

  • Assisting Banco Santander (Brazil) and BTG Pactual in the public tender offer to acquire all the outstanding shares of Arteris S.A, involving R$1.9 billion.

  • Assisting TAM in the de-listing of TAM shares through the exchange for BDRs issued by LAN.

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar; International Bar Association (IBA).

Alessandra de Souza Pinto, Senior Associate

Machado, Meyer, Sendacz e Opice Advogados

T +55 11 3150 7093
F +55 11 3150 7071
E asp@machadomeyer.com.br
W www.machadomeyer.com.br

Professional qualifications. Brazil, Lawyer, 2003

Areas of practice. Capital markets; securities; mergers and acquisitions; corporate.

Recent transactions

  • Assisting Telefônica Brasil S.A. in its primary public offering of common and preferred shares, which raised R$15.81 billion.

  • Assisting LATAM in its capital increase, which involved US$1 billion.

  • Assisting Banco Santander (Brazil) and BTG Pactual in the public tender offer to acquire all the outstanding shares of Arteris S.A, involving R$1.9 billion.

  • Assisting TAM in the de-listing of TAM shares through the exchange for BDRs issued by LAN.

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar; International Bar Association (IBA).

Marina Mendes Corrêa, Associate

Machado, Meyer, Sendacz e Opice Advogados

T +55 11 3150 7248
F +55 11 3150 7071
E mcorrea@machadomeyer.com.br
W www.machadomeyer.com.br

Professional qualifications. Brazil, Lawyer, 2012

Areas of practice. Capital markets; securities; corporate.

Recent transactions

  • Assisting underwriters in the public offering of common and preferred shares, as well as American depositary shares representing common and preferred shares, of Oi S.A., which raised R$13.96 billion.

  • Assisting Tupy S.A. in its primary public offering of common shares, which raised R$523 million.

Languages. Portuguese, English

Professional associations/memberships. Brazilian Bar; International Bar Association (IBA).


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