In 2000, the BM&FBOVESPA introduced three special listing segments, known as Level 1 and 2 of Differentiated Corporate Governance Practices and New Market (Novo Mercado), aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the BM&FBOVESPA, by prompting such companies to follow good practices of corporate governance. The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders.
To be listed on the Novo Mercado, in addition to the obligations imposed by current Brazilian law, an issuer must meet all of the following requirements:
- Issue only common shares;
- Grant tag-along rights to all shareholders in connection with a transfer of control of the company, the acquirer being required to hold a public offer for acquisition of the shares to the other shareholders, at the same price per share paid for the controlling block;
- Ensure that shares of the issuer representing at least 25% of its total capital are effectively available for trading;
- Adopt offering procedures that favor widespread ownership of shares whenever making a public offering;
- Comply with minimum quarterly disclosure standards;
- Follow stricter disclosure policies with respect to transactions made by controlling shareholders, directors and officers involving securities issued by the issuer;
- Submit any existing shareholders‘ agreements and stock option plans to the BM&FBOVESPA;
- Disclose a schedule of corporate events to the shareholders;
- Have a board of directors comprised of at least five members with a term limited to one year;
- Within two years after listing shares on the Novo Mercado, prepare annual financial statements in English, including cash flow statements, in accordance with international accounting standards, such as U.S. GAAP or International Financing Report Accounting Standards (IFRS);
- Adhere exclusively to the arbitration rules of the BM&FBOVESPA, pursuant to which the BM&FBOVESPA, the company, the controlling shareholder, the management and the members of fiscal council, if any, agree to resolve by arbitration any dispute or controversy related to the Novo Mercado listing rules;
- Hold public meetings with financial analysts and any other interested third parties at least once a year to present information regarding its financial and economic position, projects and prospects; and
- If a decision to delist from the Novo Mercado is made, the issuer‘s controlling shareholder must launch a tender offer for the acquisition of all outstanding shares at a minimum price to be established based on an independent appraisal.
The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and securities markets, by the National Monetary Council and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are governed by the principal law governing the Brazilian securities markets, by the Brazilian Corporation Law, and by regulations issued by the CVM, the CMN and the Central Bank. These laws and regulations provide for, among other things, disclosure requirements, restrictions on insider trading and price manipulation and protection of minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as U.S. securities markets.
Under the Brazilian Corporation Law, a company is either publicly held and listed, a “companhia aberta”, or privately held and unlisted, a “companhia fechada”. All listed companies are registered with the CVM and are subject to reporting and regulatory requirements. To be listed on the BM&FBOVESPA, a company must apply for registration with the BM&FBOVESPA and the CVM and is subject to regulatory requirements and information publishing requirements.
A company registered with the CVM may trade its securities either on the Brazilian exchange markets, including the BM&FBOVESPA, or in the Brazilian over-the-counter market. Shares of companies listed on the BM&FBOVESPA may not simultaneously trade on the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to several limitations.
The Brazilian over-the-counter market, whether or not organized, consists of trades between investors through a financial institution registered with the CVM, and authorized to trade in the Brazilian capital market. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in the non-organized over-the-counter market. The CVM must receive notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.
The trading of securities on the BM&FBOVESPA may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of the BM&FBOVESPA or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a significant event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.
Pursuant to CVM Rule # 358, of January 3, 2002, the CVM revised and consolidated the requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies.
Such requirements include provisions that:
- Establish the concept of a material fact that gives rise to reporting requirements. Material facts include decisions made by the controlling shareholders, resolutions of the general meeting of shareholders and of management of the Company, or any other facts related to the Company’s business (whether occurring within the Company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade such securities or to exercise any of such securities’ underlying rights;
- Specify examples of facts that are considered to be material, which include, among others, the execution of shareholders’ agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the Company, and any corporate restructuring undertaken among related companies;
- Oblige the officer of investor relations, controlling shareholders, other executive officers, members of its board of directors, members of the audit committee and other advisory boards to disclose material facts;
- Require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading;
- Require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not to de-list the corporation’s shares, within one year;
- Establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholding stake; and
- Restrict the use of insider information.
Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including Smiles’ common shares, on BM&FBOVESPA provided that they comply with the registration requirements set forth in Resolution No. 2,689 of the National Monetary Council, which the Company refers to as Resolution 2,689, and CVM Instruction No. 325.
With certain limited exceptions, under Resolution 2,689 investors are permitted to carry out any type of transaction in the Brazilian financial capital market involving a security traded on a stock exchange, futures exchange or organized over-the-counter market. Investments and remittances outside Brazil of gains, dividends, profits or other payments under Smiles’ common shares are made through the new unified exchange rate market.
In order to become a Resolution 2,689 investor, an investor residing outside Brazil must:
- Appoint a representative in Brazil with powers to take actions relating to the investment;
- Appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and CVM; and
- Through its representative, register itself as a foreign investor with the CVM and the investment with the Central Bank.
Securities and other financial assets held by foreign investors pursuant to Resolution 2,689 must be registered or maintained in deposit accounts or in the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions involving securities listed on the Brazilian stock exchanges or traded in organized over-the-counter markets licensed by the CVM.
Each common share entitles its owner to one vote in Smiles general and special shareholders’ meetings. According to the agreement to be entered into with BM&FBOVESPA for the listing the Company’s shares in the Novo Mercado, Smiles cannot issue shares without voting rights or with restricted voting rights. Moreover, as determined in the Company’s by-laws and the Brazilian corporation law, Smiles shareholders have the right to receive dividends and other distributions made in connection with the Company’s common shares in proportion to their ownership interest in Smiles’ share capital.
Holders of Smiles’ common shares are entitled to be included in a public tender offer in the case that a controlling stake in the Company is sold and the minimum price to be offered for each share is 100.0% of the price paid per share of the controlling stake.
In event of Smiles dissolution, the Company’s shareholders have the right to receive payments proportional to their ownership interest in Smiles’ share capital, after the settlement of all the Company’s obligations. Owners of Smiles’ common shares have the right participate in the Company’s share capital increases, in proportion to their ownership interest in Smiles’ share capital, but are not obligated to subscribe to new shares in future share capital increases.
According to the Brazilian corporation law, neither Smiles’ by-laws nor actions taken at a shareholders’ meeting may deprive a shareholder of the following rights:
- The right to participate in the distribution of profits;
- The right to participate, in proportion to ownership interest in Smiles’ share capital, in the distribution of any residual assets in the event of the Company’s dissolution;
- The right to preemptive rights in relation to the subscription of shares, convertible debentures or subscription bonuses, except in the circumstances described in the Brazilian corporation law;
- The right to inspect, in the manner set forth in the Brazilian corporation law, the management of corporate business; and
- The right to sell their shares in the circumstances defined by the Brazilian corporation law.