S e r v i ç o P ú b l i c o F e d e r a l

1. S e r v i ç o P ú b l i c o F e d e r a l “Protecting Those Who Invest in the Future of Brazil”

2. 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. CURRENT ISSUES ON DELISTING REGULATION

3. NUMBER OF DELISTINGS

4. Lack of liquidity and high concentration of volume traded in a few stocks. MAIN CONCERNS WITH THE DELISTING PROCESS

5. Low free-float • Lack of equity culture. No retail market • Petrobras recent issue helped fuel Brazil`s equity Culture • Internet trading MAIN CONCERNS WITH THE DELISTING PROCESS

6. 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. DISGUISED DELISTING #1 -- BYPASSING INSTRUCTION 229

7. 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. DISGUISED DELISTING #2 -- PROBLEMS WITH INSTRUCTION 299

8. 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). DISGUISED DELISTING #2 -- PROBLEMS WITH INSTRUCTION 299

9. 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. DISGUISED DELISTING #2 -- PROBLEMS WITH INSTRUCTION 299

10. Many companies were artificially delisted with this scheme and sometimes were left with less than 5% of free-float in the market. DISGUISED DELISTING #2 -- PROBLEMS WITH INSTRUCTION 299

11. 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. DISGUISED DELISTING #2 -- PROBLEMS WITH INSTRUCTION 299

12. 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. MORE PROBLEMS WITH “OLD” TENDER OFFER INSTRUCTIONS #229 AND #299

13. 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. FIRST STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

14. 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. FIRST STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

15. 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: FIRST STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

16. n FIRST STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

17. n SECOND STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

18. n SECOND STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

19. n SECOND STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

20. n SECOND STAGE OF REFORM OF INSTRUCTIONS #229 AND #299

21. 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. CONCLUSIONS ABOUT DELISTING AND TENDER OFFFER PROCESSES

22. CHANGES IN CAPITAL STRUCTURE

23. 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. REGULATION ON STOCK ISSUANCE

24. 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. EXPERIENCE WITH RESPECT TO STOCK ISSUANCE

25. 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. MAIN CONCERNS IN STOCK ISSUANCE

26. 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. SHARE BUY-BACKS

27. http://www.cvm.gov.br