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CESP follows practices that are higher than Bovespa’s Level 1 Corporate Governance standards – a special segment in Bovespa where CESP’s shares are listed. Among the important additional rights CESP voluntarily offers its shareholders are its participation in the Market Arbitration Panel and total Tag Along rights for all preferred Class B shares (CESP6).

Market Arbitration Panel

The Market Arbitration Panel (CAM – Câmara de Arbitragem do Mercado) is the most appropriate forum to settle both corporate and stock market disputes.

The Market Panel, as it is known, was initially created for settling disputes among companies listed in the special segments of BOVESPA known as New Market (Novo Mercado) and Corporate Governance Level 2 (Nível 2 de Governança Corporativa). However, any company, whether listed in BOVESPA or not, institutional investors or otherwise, in short, anyone interested in settling disputes relating to corporate or stock market issues, may use it.

Through its rules, CAM provides agility and economy, in addition to arbitrators specializing in the matters to be decided. Any party interested, whether investor or a company not publicly-held, can use the structure.

CAM provides an independent, confidential, agile and cost-effective environment to settle disputes as per the directives of the Arbitration Law.

By voluntarily joining the CAM, CESP reaffirms its commitment to the rights of its shareholders by submitting itself to CAM’s stricter and more efficient rules in line with New Market companies.

Tag Along

According to Brazilian legislation (Lei das S.A., Article 254-A), if a majority shareholder sells their stake, then the acquirer undertakes to make a public offer for other common shares so that the holders of such shares are assured of only the minimum price of 80% of the price paid for the controlling stake.

Some companies voluntarily extend the tag along rights to holders of preferred shares and/or assure a price above 80% to holders of common shares.

CESP assures all holders of Class B preferred shares (CESP6), tag along rights in case of divestment of controlling stake. The acquirer of the controlling stake must make a public offer for these shares, offering the same conditions made to the seller, including the same price paid per share of the controlling stake.

Thus, CESP is among those companies that follow stricter good governance rules by offering total tag along rights (that is, 100% of the price paid for controlling stake) to holders of Class B preferred shares (CESP6), which represent 96.28% of the total preferred shares (Class A and B) and 93.19% of the total free float.


The Bovespa’s Level 1 Segment of Differentiated Corporate Governance Practices, as set forth below, is a listing segment of the Bovespa aimed at the trading of shares issued by companies that voluntarily adopt differentiated corporate governance practices and disclosure of additional information compared to what is required by the legislation.

Corporate Governance Practices and Adhesion to Level 1

CESP is committed to transparency in its administration while complying with the best principles of Corporate Governance.

In 2000, the Bovespa introduced three special listing segments, known as Levels 1 and 2 of Differentiated Corporate Governance Practices and Novo Mercado, aimed at fostering a secondary market for securities issued by Brazilian companies listed on the Bovespa, by prompting these 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.

As a result of CMN Resolution No. 2,829, of March 30, 2001, or the CMN Resolution No. 2,829, as amended to set forth rules for the use of proceeds of private pension funds, shares issued by companies that adopt differentiated corporate practices, such as those whose securities are admitted for trading in the special segment of the Novo Mercado or whose listing classification is Nível 1 or Nível 2 in accordance with the regulation of the Bovespa, may have a larger participation in the investment portfolio of such private pension funds. Therefore, since CMN Resolution No. 2,829, as amended, companies that adopt differentiated corporate practices are an important and attractive investment for private pension funds, large investors in the Brazilian capital markets. This may leverage the development of the Brazilian capital market and benefit the companies whose securities are traded here, including CESP.

The Company adopts the Nível 1 Differentiated Corporate Governance Practices, a listing segment of the Bovespa aimed at the trading of shares issued by companies that voluntarily adopt differentiated corporate governance practices and disclosure of additional information compared to what is required by the legislation.
The rules regarding Level 1 of Differentiated Corporate Governance Practices require, in addition to the obligations imposed by applicable Brazilian legislation, that the following requirements, among others, be met:

  • maintain a minimum free-float of shares representing 25% of capital;
  • adopt offering procedures that favor widespread ownership of shares;
  • improve quarterly disclosures of information, including consolidation and special review requirements;
  • comply with disclosure policies with respect to transactions made by controlling shareholders, directors and officers involving securities issued by the Company;
  • disclose any shareholders’ agreements and stock option plans; and
  • make available a schedule of annual corporate events.

Regulation of the Brazilian Securities Market

The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and securities markets, by the National Monetary Council and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are governed by the principal law governing the Brazilian securities markets, by the Brazilian Corporation Law, and by regulations issued by the CVM, the CMN and the Central Bank. These laws and regulations provide for, among other things, disclosure requirements, restrictions on insider trading and price manipulation and protection of minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as U.S. securities markets.

Under the Brazilian Corporation Law, a company is either publicly held and listed, a “companhia aberta”, or privately held and unlisted, a “companhia fechada”. All listed companies are registered with the CVM and are subject to reporting and regulatory requirements. To be listed on the Bovespa, a company must apply for registration with the Bovespa and the CVM and is subject to regulatory requirements and information publishing requirements.

A company registered with the CVM may trade its securities either on the Brazilian exchange markets, including the Bovespa, or in the Brazilian over-the-counter market. Shares of companies listed on the Bovespa may not simultaneously trade on the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to several limitations.

The Brazilian over-the-counter market, whether or not organized, consists of trades between investors through a financial institution registered with the CVM, and authorized to trade in the Brazilian capital market. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in the non-organized over-the-counter market. The CVM must receive notice of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries.

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.

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.

Investment in CESP’s shares by non-residents of Brazil

Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including CESP’s 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 CESP’s 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.