Corporate Governance Practices and Level 2 of BM&FBOVESPA

According to the Brazilian Institute of Corporate Governance (IBGC), corporate governance is a system by which companies are directed and monitored, concerning Shareholders, the Board, Directors, Independent Audit and Fiscal Council. Good practices of corporate governance aim to increase the value of the company facilitate its access to capital and contribute to its sustainability.

The Corporate Governance practices are based on principles of fairness, transparency, accountability and corporate responsibility. The adoption of these practices favors increasing the company‘s value, improving the company‘s performance, facilitating their access to capital at lower costs and contributes to its sustainability

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

Joining a company to Level 2 is voluntary and is realized with the signing of a contract between the company, its controlling shareholders, directors and BM & FBOVESPA. Under the agreement, the parties agree to abide by the Rules of Practice of Corporate Governance Level 2, which consolidates all additional requirements of this segment and also adopt arbitration for the settlement of corporate conflicts that may arise. So it was constituted by the Exchange to the Market Arbitration Chamber, officially installed on 7/27/2001. In the event of termination by the company, it frees up the commitments and, as compensation, investors shareholders will be entitled to receive a takeover bid for their actions, at least the economic value.

Disclosure of information:

Another important set of commitments that companies listed on Level 2 take before investors refers to the provision of information to assist in the evaluation of the value of the company.

Additional Information on ITRs: The Quarterly Information (ITR) form is a document that is sent to the CVM and BM&FBOVESPA quarterly by all companies listed on the Bovespa exchange market security. In this document, beyond the economic and financial information as required by law, the company‘s Level 2 should include the following:

  • Consolidated financial statements.
  • Statement of cash flows of the company and consolidated.
  • Disclosure of the equity position, by type and class, any shareholder who holds more than 5% of the shares of each type and class of share capital, either directly or indirectly, to the individual level.
  • The quantity and characteristics of the securities issued by the company owned by groups of controllers, members of the Board of Directors, officers and members of the Fiscal Council Board.
  • Evolution of the position described above in relation to the previous 12 months.
  • Number of shares outstanding, by type and class, and their percentage in the total issued shares.
  • Special Review Report issued by an independent auditor.
  • Information of the existence and linkage to Arbitration Clause.

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Additional information on DFPs:

The Standardized Financial Statements (DFP) form is a document that all listed companies must submit to the CVM and to the Bovespa Stock Exchange by the end of March each year. This document contains the financial statements for the year ended and other comments deemed important.

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Additional information in the reference form:

The reference form is a document that all listed companies deliver the CVM and the Bovespa Stock Exchange by the end of May each year, containing corporate information. Along with content already required by law, companies in Level 2 must also submit the following data:

  • The quantity and characteristics of the securities issued by the company owned by groups of controllers, members of the Board of Directors, officers and members of the Fiscal Council Board.
  • Evolution of the position described above in relation to the previous 12 months.
  • Information of the existence and linkage to Arbitration Clause.

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Disclosure of financial information on the international standard:

With the intention of increasing its visibility and focusing especially on foreign investors, the company must:

  • At the end of the fiscal year, prepare financial statements or consolidated, as provided for in international accounting standards, accepting the IFRS or U.S. GAAP. To fulfill this requirement, depending on its complexity, there is a grace period of approximately two years.
  • Prepare quarterly financial statements in accordance with international standards or disclose the ITRs, the standard of Level 2, translated into English.

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Disclosure of other information:

  • The company must hold at least one annual public meeting with analysts and other interested parties to submit their financial situation, projects and perspectives. The purpose of these meetings is to promote closer ties with investors.
  • The company must also disclose, by the end of January each year, an annual calendar which shall contain the dates of major corporate events, such as Shareholders and General Meetings, disclosure of quarterly financial results and annual public meeting with analysts, Board of Directors meetings, among others. The purpose of this calendar is to facilitate the monitoring of the activities of the company by investors and other stakeholders.
  • The controlling shareholder shall disclose, monthly, any trades in securities issued by the company and its derivatives that may be made. The purpose of these disclosures is to ensure transparency to business people who may have access to

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Arbitration Panel‘s Market:

The chamber was established by the Bovespa Security Exchange in order to expedite the resolution of corporate conflicts. Offers its participants a group of referees specialize in corporate matters, saving time and hence resource.

Participants in the chamber: the company listed in Level 2, their controllers, shareholders, administrators, members of the Fiscal Council and the Bovespa stock exchange. Participants are required to resolve through arbitration any dispute or controversy that may arise between them, related to or arising, in particular, the application, validity, effectiveness, interpretation, violation and effects of the provisions contained in the Act S.As. (Lei das S.As), the company‘s Bylaws, the rules issued by the National Monetary Council, the Central Bank of Brazil and the Brazilian Securities Commission, as well as other rules applicable to the operation of the capital market in general and those contained in Regulation of Differentiated Corporate Governance Practices Level 2 of the Rules of Arbitration and Contract for Adoption of Corporate Governance Level 2. The parties also undertake not to resort to the courts, except in cases provided for in Regulation of the Market Arbitration Chamber, thus ensuring agility in conflict resolution. It is noteworthy that the rules of the Market Arbitration Chamber comply with Law 9.307/96 (Arbitration Law).

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Rights of Common Shares of Hotels Othon SA:

Shares of Hotels Othon SA guarantee their holders the following rights:

  • Right to vote at general meetings of the Company;
  • entitled to an annual dividend of not less than 25% of net income adjusted pursuant to Article 202 of the Corporations Act;
  • In case of transfer, directly or indirectly, for consideration of the Company‘s control, whether through a single transaction or through successive operations, the right to sell their shares under the same conditions afforded to the Shareholders alienating (tag along with 100.0% of the price);
  • In case of cancellation of registration as a public held company or cancellation of listing on Bovespa Level A, the right to sell their shares in a public offering to be launched by the Controlling Shareholders, for their respective economic value determined by preparation of an appraisal report by specialized and independent company with proven experience and chosen by the Shareholders Meeting, holding shares outstanding from a list of three submitted by the Board of Directors, and the costs of preparing the valuation report must be paid by the Controlling Shareholders;

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Regulation of the Brazilian Capital 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.

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Disclosure and Use of Information:

Pursuant to CVM Rule N¬ļ 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.