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CESP follows practices superior to Level 1 of B3 Corporate Governance – special B3 segment where CESP is listed. Among the chief additional rights voluntarily offered by CESP, its adhesion to the Arbitration Court and full Tag Along for class B preferred shares (CESP6) are outstanding.

Arbitration Court

The Market Arbitration Court (CAM) is the most appropriate jurisdiction to solve corporate and capital market disputes.

The Market Court, as it became known, was initially conceived to solve disputes arising in the ambit of companies that participate in B3 listing special segments, known as Novo Mercado and Level 2 of Corporate Governance. However, it can also be used by other companies, listed in B3 or not, investors, institutional or not, or by anyone interested in solving his conflicts, whenever the dispute focus involves corporate issues or issues associated to the capital market.

Though its own rules, the CAM counts on the advantage of bringing more agility and economy, in addition to arbitrators specialized in the matters to be decided. Anyone interested, investor or company, open or not, can use this structure.

The CAM offers an independent environment, confidential, agile and economic to solve controversies, based on the Arbitration Act guidelines.
While voluntarily adhering to CAM, CESP reaffirms its commitment with its shareholders’ rights, submitting to the strictest and efficient rules of CAM, aligned with those to which the Novo Mercado companies submit.

Tag Along

According to the Brazilian legislation (Corporation Law, Article 254-A), the alienation of a company’s stock control can only occur under the condition that the acquiring shareholder is obliged to make public offer of acquisition of the other common shares, in order to assure to their holders only the minimum price of 80% of the value paid by the shares that integrate the control block.

Some companies voluntarily extend the tag along right also to holders of preferred shares and/or assure to common share holders a price superior to the 80%.

CESP grants to all shareholders of class B (CESP6) preferred shares the right to jointly sell (tag-along), in case of alienation of stock control, and the acquirer of Control must make public offer for acquisition of this class of shares to shareholders, offering the same conditions as those assured to the Control alienator, including the same price paid per share of the controller block.

So, CESP is among the group of companies that obey the strictest rules of good governance while offering a full tag along (that is, equivalent to 100% of the controller sale price) to class B preferred shares (CESP6). Such shares represent 96.28% of the total preferred shares (classes A and B) and 93.19% in the Free Float.

Level 1

Level 1 of B3 Differentiated Practices of Corporate Governance, as explained in detail below, is a segment of B3 listing destined to negotiation of shares issued by companies that voluntarily undertake to adopt corporate governance practices and disclose additional information regarding what is required by the legislation in force.

Differentiated Practices of Corporate Governance and Adhesion to Level 1

CESP is committed with transparence in its administration, according to the best principles of Corporate Governance.

In 2000, B3 introduced three special segments for negotiation of securities in the share market, known as Levels 1 and 2 of Differentiated Practices of Corporate Governance, Novo Mercado and Bovepa Mais. The objective was to create a secondary market for securities issued by Brazilian open companies that follow the best practices of corporate governance. The listing segments are destined to negotiation of shares issued by companies that voluntarily undertake to adopt good corporate governance practices and higher requirements of disclosure of information against those already imposed by the Brazilian legislation. In general, such rules increase shareholders’ rights and improve the quality of information provided to them.

As a result form the edition of the National Monetary Council Resolution n.º 2.829, of March 30, 2001 (“CMN Resolution n.º 2.829/01″), as amended (which established rules for application of resources of closed private pension entities), shares issued by companies that adopted differentiated practices of corporate governance, such as those whole securities are admitted for negotiation in the Novo Mercado special segment or whose classification of listing is Level 1 or Level 2 according to regulation issued by B3, can have higher participation in the investment portfolio of such pension funds. Thus, shares of companies that adopt differentiated practices of corporate governance started to be, since the edition of CMN Resolution n. º 2.829/01 and further alterations, an important and attractive investment for closed private pension entities, which are large investors in the Brazilian capital market. This fact can drive the Brazilian capital market development, benefitting companies whose securities are negotiated there, including CESP.

The Company adhered to the Level 1 of Differentiated Practices of Corporate Governance, B3 listing segment destined to negotiation of shares issued by companies that voluntarily undertake to adopt practices of corporate governance and disclose additional information according to what is already required by the legislation in force.

Level 1 rules of Differentiated Practices of Corporate Governance require, in addition to the obligations imposed by Brazilian legislation in force, compliance with the following requirements, among others:

  • maintenance in circulation a minimum portion of shares, representing 25% of capital;
  • making public offers to place shares by means of mechanisms that favor capital dispersion;
  • improvement of information provided quarterly, among which the requirement of consolidation and special review;
  • fulfillment of rules of information disclosure in operations involving assets issued by the company by controller shareholders or CESP administrators;
  • disclosing of shareholders’ agreements and programs of option of shares purchase; and
  • availability of an annual calendar with corporate events.

Regulation of the Brazilian Capital Market

The Brazilian securities market is regulated by CVM, which has authority to supervise and edit general norms and discipline the administration of stock exchanges and financial institutions registered with CVM, members of the Brazilian securities market, as well as by CMN and BACEN, which have, among others, power to authorize the constitution and functioning of brokerage firms and to regulate foreign investment and exchange operations.

The Brazilian securities market is regulated by the Law of Securities Market, as well as by the Corporation Law and by regulation issued by CVM, CMN and BACEN. These laws and regulations, among other things, determine the requirements for information disclosure, restrictions to negotiation of share upon use of insider information and manipulation of price and protection of minority shareholders. However, the Brazilian securities market does not present high level of regulation and supervision in North-American securities markets.

According to the Corporations Law, the joint-stock company is classified as open if the securities issued by it are admitted for negotiation in the Brazilian securities market, or closed, if there is no public negotiation of its securities in the Brazilian securities market. All open companies must be registered in the CVM and are subject to the regulatory and information disclosure requirements.

A company registered in the CVM can negotiate its securities in B3 or in the Brazilian over-the-counter market. It is necessary to request registration to B3 and CVM for a company to have its shares listed in B3. Shares of companies listed in B3 can’t be simultaneously negotiated in the Brazilian over-the-counter market. Shares of a company listed in B3 can also be negotiated in private operations, observing several limitations.

The Brazilian over-the-counter market, organized or not, consists of negotiations among investors, through financial institution authorized to operate in the Brazilian capital market, registered at CVM. No special requisition is necessary besides the registration at CVM, to negotiate open company securities in the non-organized over-the-counter market. CVM demands that respective mediators deliver notice on all negotiations made in the Brazilian over-the-counter market.

The negotiation of securities in B3 can be interrupted upon request by the issuing company before the publication of relevant fact. The negotiation can also be suspended by initiative of B3 or CVM, based on, or due to, among other reasons, signs that the company provided inappropriate information with regard to a relevant fact or provided inappropriate answers to questionings made by CVM or B3.

Disclosure and Use of Information

CVM Instruction 358 provides for the disclosure and use of information on relevant act or fact associated to open companies, regulating the following:

- 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;

  • establishes the concept of relevant fact, including in this definition any decision by controller shareholder, deliberation by general meeting or by open company administration bodies, or any other political-administrative, technical, business or economic-financial act or fact occurred or associated to the company businesses that may significantly affect: (i) the quotation of securities; (ii) investors’ decision to buy, sell or keep such securities; and (iii) investors’ decision to exercise any rights inherent in the condition of holders of securities issued by the Company;
  • provides examples of potentially relevant act or fact, including, among others, the signature of agreement or contract to transfer the company’s stock control, entry or exit of partner who keeps with the company contract or operational, financial, technological or administrative collaboration, incorporation, merge or split involving the Company or related societies;
  • obliges the Investors’ Relations Director, controller shareholders, directors, members of fiscal board and of any bodies with technical or consultant functions to inform any relevant fact to CVM;
  • requires the simultaneous disclosure of relevant facts in all markets where the company has its shares listed for negotiation;
  • obliges the acquirer of the open company stock control to disclose relevant fact, including his intention of cancelling the open company registration within one year counted from the acquisition date;
  • establishes rules associated to the disclosure of acquisition or alienation of relevant share in open company.
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