S erv i ço Pú b li c o Fed era l
“Protecting Those Who Invest in the Future of Brazil”
1
CURRENT ISSUES ON
DELISTING REGULATION
 The
need to strengthen the delisting regulation was
highlighted by the growing number of delistings that
took place since the end of 1998.
 This
process began with privatization and the general
capital restructuring that started to take place in Brazil
in the mid 90s.
 The
low valuation of companies in Brazil created an
opportunity for foreign controllers to buy back shares,
thus delisting the Brazilian subsidiary, since they could
raise capital at much better valuations in their country
of origin.
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NUMBER OF DELISTINGS
3
MAIN CONCERNS WITH THE
DELISTING PROCESS
 Lack of liquidity and high concentration of volume
traded in a few stocks.
1998
1999
2000
Market Capitalization (US$billion) (1)
160.9
228.5
225.5(dec)
Daily Volume–BOVESPA (US$million) (1)
569.0
347.6
410.2
Brazilian ADRs ( listed in NYSE)–Daily
Volume (US$ million) (2)
Market Capitalization/GDP(4)
385.8
214.7
291.9
21.6%
41.2%
38.9%
Concentration (10 most negociated) (3)
77.1%
56.7%
55.4%
(jan-nov)
(1)Bovespa; (2)Bovespa; (3) CNBV/Bovespa; (4)Bovespa
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MAIN CONCERNS WITH THE
DELISTING PROCESS
Low free-float
 Lack of equity culture. No retail market
Petrobras recent issue helped fuel Brazil`s equity Culture
Internet trading
Bovespa's Traded Volume in 2000 by Type of Investor
Companies
4%
Institutional
Investors
17%
Other
1%
Financial
Institutions
37%
Individuals
19%
Foreign Investors
22%
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DISGUISED DELISTING #1 -BYPASSING INSTRUCTION 229
 Controllers
were delisting companies in a disguised
way by circumventing CVM Instruction 229 of 1995,
which regulated the delisting process.
 They
would simply acquire shares in the market until
no liquidity remained and them they would make a
tender offer to buy the remaining shares.
6
DISGUISED DELISTING #2 -PROBLEMS WITH INSTRUCTION 299
 CVM
puts out Instruction 299 in February 1999 to
regulate voluntary regular tender offers.
 According
to Instruction 299, if a controller wants to
buy more than 10% of the free-float, he has to make
an offer to acquire all shares in the market.
 This
gave birth to another kind of disguised
delisting, which we will call disguised delisting #2.
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DISGUISED DELISTING #2 -PROBLEMS WITH INSTRUCTION 299
In “disguised delisting #2”, controllers offer to acquire all
free-float, but without intending to cancel the CVM
registration, i.e., to officially “go private”.
At this point it is important to mention that companies
can buyback all shares and still be rated as a “public
company”. Many companies go public in Brazil to issue
debt instruments, but they do not list shares in the stock
exchange.
As we mentioned before, Instruction 229 regulates the
process of going private (also known as delisting).
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DISGUISED DELISTING #2 -PROBLEMS WITH INSTRUCTION 299
Controllers would file for Instruction 299 (voluntary
tender offfer) and not for Instruction 229 (going
private). The difference is that the former is much less
protective than the latter.
According to Instruction 229, the delisting is only
possible if 67% of free-float agrees to sell. In this
case, a put option is offered to the shareholders
remaining in a private company. Instruction 299 did
not have such provisions.
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DISGUISED DELISTING #2 -PROBLEMS WITH INSTRUCTION 299
Many companies were artificially delisted with this
scheme and sometimes were left with less than 5% of
free-float in the market.
% of ON freefloat acquired
Coelba
Cesp
Paranapanema
CPFL
% of ON
shares left
% of PN freeover as Freefloat acquired
float
% of PN
shares left
over as
Free-float
94,5%
98,5%
5,5%
1,5%
75,8%
95,9%
24,2%
4,1%
81,1%
63,6%
18,9%
36,4%
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DISGUISED DELISTING #2 -PROBLEMS WITH INSTRUCTION 299
This new kind of artificial delisting created what we call
“the liquidity dilemma”.
In deciding whether or not to sell their shares in a tender
offer, minority shareholders would no longer see the
fairness of the price offered as the only variable to be
taken into account.
Minority shareholders would have to find out whether or
not large shareholders will agree to sell. In case they do,
the risk of remaining with an illiquid stock, drives minority
shareholders’ decision to sell even if they think the price
is unfair.
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MORE PROBLEMS WITH “OLD” TENDER
OFFER INSTRUCTIONS #229 AND #299
Liquidity issues also reduced the protection effect of
Instruction 229 (delisting), because:
If a group of shareholders was active enough to join some
35% of free-float against the delisting process and therefore
no official delisting would occur, it may seem that this group
was successful in their aim, but what did they really got out
of it?
The answer is: a huge problem, since 65% of the free-float
would have been bought by the controller and the remaining
35% would not have the put option since the delisting did
not occur.
Thus, the 35% “successful” group was left with an illiquid
stock.
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FIRST STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
Instruction 345 of September 2000 rescued the spirit of
the delisting and tender offer instructions through the
reestablishment of an effective protection against the
“liquidity dilemma”.
Currently, over a period of 2 years, a controller unable to
acquire 67% of the free-float, will not only lose the
opportunity to delist the company, but he also will only be
allowed to buy 1/3 of the free-float.
In this way, there is no buy-back between 33% and 67%
of the free-float. 33% seems to be a reasonable figure to
avoid liquidity shrinks and 67% seems to be a number
high enough to legitimate the choice for delisting. 13
FIRST STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
Furthermore, Instruction 345 has also eliminated
“disguised delisting #2”.
It allows controllers to acquire all shares without
officially delisting the company. They will file for
instruction 299 with CVM. However, in order to
acquire all shares, he will always also have to follow
rules included in instructions 229 and 345, which are
more strict and determine that there is no buying back
between 33% and 67%.
Some controllers might wish to acquire all shares
without officially delisting the company in light of
privatization rules forbidding delisting and/or wish to
remain “public” to issue debt instruments.
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FIRST STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
Another critical change introduced by instruction 345
was the granting of a put option to everyone remaining in
the company after a 67% buyback -- even if the
controller did not wish to officially delist the company.
However, instruction 345 was issued in a hurry in order
to immediately cease the “liquidity dilemma”. There are
several other issues deserving significant changes in
instructions 229 and 299.
A new and complete reform of all delisting instructions
(229, 299 and 345) should be issued in April. The main
changes compared to the present rules should be:
15
FIRST STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
n
Current
In order to delist a company,
more than 2/3 of minority
shareholders
stating
their
opinion about the delisting
must agree with the proposal.
Example: In a company with
100 shares, the controller has
51 shares. Out of the 49
shares composing the freefloat, only 21 shares replied to
the proposal. Out of this 21, at
least 14 shares have to agree
with the delisting or the deal
is canceled.
Future
In order to delist a company,
more than 2/3 of the entire freefloat have to be in favor of the
delisting.
Example: In a company with 100
shares, the controller has 51
shares. Out of the 49 shares
composing the free-float, 2/3 or
33 shares must agree with the
proposal. If only 21 shares show
up to state its opinion, this will
not be enough to reach the
minimum quorum. The controller
will have to look for the
remaining 12 shares (33-21) and
convince them to agree with the
delisting. We believe this will
significantly
enhance
the
guaranty of a fair price.
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SECOND STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
Current
Future
The auction is set up
with a given price which
cannot be changed if the
2/3
quorum
is
not
reached.
Another proposal can
only be made in 2 years
time.
If, during the auction, the
proposed price is only able to
convince less than 67% of the
free-float to sell their shares,
the controller will have the
option to offer a higher price
right away and see if he can
get 67% to agree. All this will
occur during the auction. If the
controller does not wish to
raise his offer price to reach
the 67% minimum quorum,
then, another offer will only be
possible in 2 years time.
n
17
SECOND STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
n
Current
The
broker
dealer
advising the controller
has to declare if he has
any mutual funds under
his
management
possessing shares of
the company to be
delisted. If he has, this
shareholder
position
has to be disclosed and
the intention to accept
the offer or not has also
to be disclosed.
Future
We are broadening the
concept by including not
only funds under the
advisor management, but
also groups linked to the
advisor,
such
as
insurance
companies,
asset managers and so
on. But they will not have
to disclose their intention
as to wheter or not to
accept the offer.
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SECOND STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
n
Current
The controller chooses
the offer price and
provides CVM with a
valuation
report
justifying the price.
There is no explanation
for the valuation criteria
chosen, neither any
information about what
the price would be
under other criteria.
Future
The controller has to deliver
a
valuation
report
disclosing the price under 3
criteria: i) net worth; ii)
average of stock price
during the last 12 months;
iii)
economic
value
(discounted cash flow or
multiples). Then, he has to
justify why he chose any of
these criteria.
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SECOND STAGE OF REFORM OF
INSTRUCTIONS #229 AND #299
n
Current
The shareholders list
is not included as a
necessary document
to be delivered to
CVM in order to get
our approval.
Future
Shareholders list will
be included as a
necessary document
to be delivered and it
will be available for
the public during the
offer.
This
will
facilitate a proxy fight.
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CONCLUSIONS ABOUT DELISTING
AND TENDER OFFFER PROCESSES
 A guiding principle for equitable treatment of shareholders in
delisting or tender offer processes is to ensure that investors
will be able to focus on the fairness of the price offered instead
of having their decision influenced by other factors such as a
“liquidity dilemma”.
 It is not the task of the regulator to avoid delistings and tender
offers -- in fact, in our opinion, if a company does not have the
proper culture to be a “public company”, then it should really
file to go private or to acquire all its shares.
 However, the regulator has to ensure that the rules of the
process are fair and that the disclosure level is appropriate to
feed investors with sufficient information to decide whether to
sell or not.
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CHANGES IN CAPITAL
STRUCTURE
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REGULATION ON STOCK ISSUANCE
According to our Corporate Law, (Article 168) the
Bylaws can rule about the authorization to increase
capital. This authorization should specify:
the limit of increase
whether the GSM or the Board of Directors will be
responsible for deciding about the issues
in which conditions shareholders will have preemptive rights
or not (article 172).
Article 172 determines that the Bylaws can provide for
a capital issuance with no preemptive rights if:
the sale is made either on the stock exchange or through a
public offering.
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EXPERIENCE WITH RESPECT TO
STOCK ISSUANCE
The majority of companies choose to grant
preemptive rights in capital issuance.
In case of significant capital increases aiming to reach
a large number of new investors, most companies
grant 30 days to current shareholders to exercise their
preemptive rights.
However, there are cases of small capital increases or
newly listed companies disclosing a need to raise
capital constantly, in which preemptive rights of only 2
to 5 days are granted.
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MAIN CONCERNS IN STOCK
ISSUANCE
The guiding principle for equal treatment in capital
increases has been the fairness of the dilution
resulting from the capital increase.
The regulator has been focusing on ensuring the
enforcement of article 170, which establishes that the
issue price has to be determined by one of the
following parameters: (1) market value; (2) book
value; (3) profitability perspectives.
The aim is to avoid an unjustifiable dilution of the
stake of minority shareholders.
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SHARE BUY-BACKS
CVM Instruction 10 established that companies are
allowed to buy back a maximum of 5% of outstanding
shares.
In 1997, CVM amended instruction 10 to allow a buy
back of 10% of outstanding shares because the
overall stock market was going through a low
valuation period (Asian crisis).
A return of the 5% limit is under study -- however, the
10% limit could be allowed in cases of a later cancel
off of the shares acquired.
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http://www.cvm.gov.br
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