|Mauricio Teixeira Dos Santos||Ronald Herscovici|
On September 17 2015, the Brazilian Securities Exchange Commission (CVM) enacted a regulation (CVM instruction number 567) setting out a new regulatory framework applicable to share repurchase transactions.
The new rule updates a framework that was in place for more than 35 years. It consolidates principles, interpretation and construction of administrative proceedings resulting from the CVM's enforcement division. It also integrates the local and international practices by adopting the IOSCO guidelines on share buybacks.
An important innovation is the recognition of emerging trends in corporate pay-out strategies by defining and bringing within the scope of the norm derivative-based share buyback.
Another novel feature of the new regulation is the possibility of share buybacks through private trading and private negotiations unconnected to prevailing asked/offered prices at the stock exchange. However, private transactions may only be conducted within certain permitted levels; bargains, which may result in price increments or discounts exceeding those margins, will require approval at a higher level by shareholders in a general meeting.
Under the previous regulation, CVM authorisation was required for private trade buybacks. However, the new regulation permits such negotiations to be carried out subject to general shareholder approval whenever: the share price is 10% higher in the case of purchases; 10% lower in the case of sales; or the trade, or a group of trades, encompasses five percent or more of the free float of a given class of shares during an 18-month period, or the counterpart in the trade is a related party of the company.
Apart from these exceptions, or if otherwise stated in a company's bylaws, the board of directors remains the competent body to approve share buyback programmes.
The new regulation also requires that, whenever the trading of the company's shares is conditional upon the approval of the board of directors, the board of directors must subsequently inform the market of, among other things, the purpose of the transaction and the economic impact expected. Whenever the threshold for the approval at the general shareholders meeting is met, the new regulation establishes that this information must be included in the board of directors' proposal.
In addition to preserving the restriction on the suspension of the political and economic rights of those shares held in treasury as a result of the buyback, the new regulation expressly provides for the exclusion of those shares from the computation of installation and resolution quorums and also introduces the permission for treasury shares to perceive bonus shares.
More than 70 share buyback programmes were announced by Brazilian public companies in the first nine months of 2015 as a result of a bearish market.
Mauricio Teixeira Dos Santos and Ronald Herscovici