Governance

Corporate Governance Practices and Novo Mercado

In 2000, the Bovespa 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 Bovespa, 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:

  • To maintain only common shares in its capital stock;
  • To grant all shareholders the joint sale right (tag-along), in the event of sale of the Share control. The acquirer of the Control shall carry out a public offering of shares (OPA) of the other shareholders, offering the same conditions ensured to the seller of the Control, including the same price paid by share of the Controlling block;
  • To ensure that the shares, representing at least 25% of the total capital are outstanding shares;
  • To adopt offering procedures that favor the share dispersal;
  • To comply with minimum standards of quarterly disclosure of information;
  • To disclose the negotiations carried out monthly by the controlling shareholders, involving securities issued by the Company;
  • To make available to shareholders a calendar of corporate events;
  • To limit the term of office of all members of the Company’s board of directors to, at most, 2 years. Reelection is allowed. Exceptionally and for transition purposes, when the Control Power of the company is exercised in a diffuse manner, the members of the Board of Directors may be elected only once with a term of office of up to 3 years;
  • To limit the composition of the Board of Directors to, at least, 5 members, and, at least, 20% of them shall be independent;
  • To prepare, as of the second fiscal year ended after the admission in the Novo Mercado, annual financial statements, including cash flow statements, in English, in accordance with the international accounting rules, such as the U.S. GAAP or the IFRS; and
  • To adhere to arbitration to solve any dispute or controversy that may arise between them related or coming, specially, from the application, validity, efficiency, interpretation, violation and its effects, of the provisions in the Corporation Law, in the Company’s Bylaws, in the rules issued by the Brazilian Monetary Council (CMN), by the Brazilian Central Bank (BACEN) and by the Brazilian Securities and Exchange Commission (CVM), as well as in the other rules applicable to the operation of the general capital markets, in addition to those in the Novo Mercado Regulation, the Agreement of Participation in the Novo Mercado and the Arbitration Regulation of the Arbitration Chamber of corporate conflicts;
  • To hold, at least once a year, a public meeting with analysts and any other interested parties, to disclose information as to its respective economic-financial conditions, projects and perspectives; and
  • In the event of delisting from the Novo Mercado, for the shares to be traded out of the Novo Mercado, the Controlling Shareholder must carry out a Public Offering of Shares (OPA) for acquisition of outstanding shares, at least by the economic value ascertained upon appraisal report prepared by a specialized company.

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Regulation of the Brazilian Securities Market

The Brazilian securities market is regulated by the Brazilian Monetary Council (CMN) and by the Brazilian Securities and Exchange Commission (CVM), which have authority to regulate the stock exchanges and securities market, as well as by the Brazilian Central Bank, which has, among other powers, authority to license securities brokerage firms and to regulate foreign investments and foreign exchange operations.

The Brazilian securities market is regulated by the Corporation Law and by Law no. 6,385, as of December 7, 1976 (which is the main law that regulates the Brazilian securities market), as amended by Law no. 10,411, as of February 26, 2002, an by regulations of the Brazilian Securities and Exchange Commission (CVM), the Brazilian Monetary Council (CMN) and the Brazilian Central Bank. These law and regulations, among others, determine requirements of disclosure of information applicable to issuers of securities publicly traded, the sanctions and penalties by trading of shares using inside information, price manipulation, and the protection of minority shareholders. However, the Brazilian securities market does not have the high regulation and supervision level of the North American securities markets.

In accordance with the Corporation Law, a company may be public or private (and not listed). All companies listed are registered in the Brazilian Securities and Exchange Commission (CVM) and are subject to the obligations of periodic disclosure of information of any material fact.

A company registered in the Brazilian Securities and Exchange Commission (CVM) may trade its securities on the São Paulo Stock Exchange (BOVESPA) or in the Brazilian over-the-counter market. The shares of companies listed on the BOVESPA may not be simultaneously traded in the Brazilian over-the-counter markets. The shares of a listed company may be traded out of the stock exchange, in compliance with the several limitations imposed to this type of trading.

The trading of securities on the Bovespa 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 Bovespa 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 Bovespa.

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Disclosure and Use of Information

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.

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Investment in common shares by non-residents of Brazil

Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including PDG Realty’s common shares, on Bovespa 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 PDG Realty’s 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.

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Rights of PDG Realty’s common shares

Each common share entitles the holder to one vote at the Company’s annual shareholders’ general meetings and any special shareholders’ general meetings. Furthermore, according to PDG Realty’s bylaws, the Brazilian Corporate Law and the listing rules of the Novo Mercado, the holders of the Company’s common shares are entitled to be included in a public tender offer in case its controlling shareholders sell their controlling stake in PDG Realty, and the minimum price to be offered for each common share shall be 100% of the price paid per share for the controlling stake (“tag along”).
In addition, the holders of PDG Realty’s common shares have the right to receive dividends and other distributions, as well as residual assets in case the Company is liquidated, in proportion to their respective holdings. Upon its liquidation, the shareholders shall receive the payments related to the capital reimbursement, in proportion to their respective holdings, after the payment of all its obligations. PDG Realty’s shareholders are not obliged to subscribe for shares in future capital increases, but the Brazilian Corporate Law ensures them the preemptive right to do so in proportion to their respective holdings.

Pursuant to the Brazilian Corporate Law, the Company’s bylaws and the listing rules of the Novo Mercado, the following shareholders rights may not be restricted:

  • to participate in the distribution of dividends, in proportion to their respective interest;
  • to participate in the distribution of remaining assets upon PDG Realty’s termination, in proportion to their respective interest;
  • to preemptive rights to subscribe new shares, convertible debentures and subscription bonds (bonus de subscrição), except under limited circumstances provided for by the Brazilian Corporate Law.
  • to monitor the management of its activities, in accordance with the Brazilian Corporate Law;
  • to vote in the general shareholder’s meetings; and
  • to withdraw from PDG Realty, as provided by the Brazilian Corporate Law.
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