Decree-Law no. 226-A/97, of 29 of August

Published in D.R. number 199 (Series I-A, 1St Suplement) of 29 August 1997

Ministerio das Finanças (Ministry of Finance)

Decree-Law

(This is not an official translation of the law)

Portugal Telecom, S. A. was created through a merger, whose terms were regulated by Decree-Law nr. 122/94 from May 14.

The first phase of the privatisation process of Portugal Telecom, approved by Decree-Law no. 44/95 from February 22, and regulated by the Cabinet resolution no. 43-A/95 from May 4, consisted of the sale of shares representing about 27.26% of the respective share capital. During the 2nd phase of the privatisation, which was approved by Decree-Law nr. 34-A/96 from April 24, and regulated by the Cabinet resolutions no. 67-A/96 from May 10, and 75-A/96 from May 24, the sale of shares corresponding to about 21.74 of the share capital took place.

Both phases mentioned were carried out through an initial public offer in the domestic market and a direct sale to both Portuguese and foreign financial institutions, which executed the following dispersion of the shares purchased to institutional investors in the domestic and international markets.

Concerning Portugal Telecom, the privatisations program 1996-1997, which was approved by the Cabinet resolution no. 21/96 from March 5, foresees the participation in Portugal Telecom s share capital of a global strategic partner and of several other strategic partners for specific business areas alongside the general objective of dispersing the company s capital -, to the extent that the majority of the share capital of the companies that pursue their business within the telecommunications area no longer required being held by public entities. Nonetheless, it foresees the maintenance by the State of a participation in the company s share capital.

Meanwhile, Law no. 46/77 from July 8 which established, under the terms of the Constitution, access limits to the freedom of the private economic initiative-, was cancelled by Law no. 88-A/97 from July 25, which established the existing legal framework concerning this matter. After the above mentioned modification, the access to the telecommunications sector is no longer absolutely forbidden to private entities. In fact, it was withdrawn the legal requirement of the majority of the share capital of the companies that pursue business in the telecommunications sector being held by public entities. It was therefore intended to create the necessary conditions to ensure and promote the competitiveness of the domestic telecommunications sector, namely concerning Portugal Telecom Portugal s single operator in the business areas of this sector that, until then, had limitations to the private economic initiative -, within the growing liberalisation and competition scenario of the sector world-wide. Also, conditions were created to allow the execution of a 3rd phase of the privatisation process an essential step towards the accomplishment of that objective after which the State shall remain as a reference shareholder, though holding a minority participation in the share capital.

Meanwhile, Law no. 88/89, of 11 of September  was also cancelled, and the general bases for the establishment, management and exploitation of the telecommunications networks and the provision of telecommunications services are now defined under Law no. 91/97 of 1 of August.

It is within this context that the 3rd phase of the privatisation process of Portugal Telecom is approved, which shall be carried out through an initial public offer in the domestic market and two direct sales, which are operations that shall permit the sale of ordinary shares representing a percentage of not more than 26% of the company s share capital.

Within the initial public offer, share lots shall be reserved for purchase by company workers, small subscribers and emigrants, holding TP and PT bonds and holding CTT and TLP participation certificates. The remaining shares shall be offered to the general public. In one of the direct sales the institutional direct sale shares shall be sold both to domestic and foreign financial institutions, which shall be bound to carry out the respective dispersion through institutional investors in both the domestic and international markets. It is therefore intended to build a diversified and effective shareholding structure, ensuring, likewise, the presence of Portugal Telecom in international markets.

In the other direct sale operation the strategic direct sale it is intended to accomplish one of the aspects of the strategic alignment process of Portugal Telecom through which it is attempted to provide the company with the necessary conditions to compete in a world-wide telecommunications market, namely regarding the policy of strategic alliances and the performance of the research and development activities of the sector in Portugal. Thus, shares shall be sold to one financial institution, which shall thereafter sell them to telecommunications operators previously pointed out by the Cabinet.

After the conclusion of this 3rd phase of the privatisation process of Portugal Telecom, the State shall keep a reference shareholding position in the company s share capital of about 25%.

It was once more considered the importance that the ADR (american depositary receipts) and the GDR (global depositary receipts) have been assuming in the stock market. Considering their specificity and the not always easy articulation with the norms of the Corporate Law, it was intended to specify accurately, in a supplementary manner, some aspects of the said articulation, within the objective of achieving a complete continuity in relation to solutions adopted in previous privatisation operations and with the sole purpose of preventing adequately any possible interpretation doubts.

All this without prejudice of a future reflection with the purpose of weighting general solutions concerning the aspects at stake, as long as the conditions for that are created, involving still the necessary articulations with the rules of supervision of the credit institutions and financial corporations, of the insurance companies and of the stock market.

Thus:

Under the terms of subparagraphs a) and c) of paragraph 1 of article 201 of the Constitution, the Government hereby decrees the following:

Article 1
Object

It is hereby approved the 3rd phase of the liberalisation process of the share capital of Portugal Telecom, S. A., hereinafter merely referred to as PT, which shall be regulated by this Decree-Law and the resolutions of the Cabinet that establish the final and specific conditions of the necessary operations for its execution.

Article 2
3rd phase

1.It is hereby authorised the sale of ordinary shares representing a percentage of not more than 26% of PT s share capital.

2. PARTEST Participações do Estado, SGPS, S. A., shall execute the sale of PT shares established in the previous paragraph, according to the rules referred to in article 1.

3. The number of shares to be sold within the scope of the 3rd phase of the liberalisation process of PT shall be established through a Cabinet resolution, in conformity with the terms of paragraph 1.

4. The sale referred to in paragraph 1 shall be carried out through:

5. One initial public offer in the domestic market;

6. One direct sale to a set of financial institutions, which shall be bound to carry out the following dispersion of the shares, part of which in international markets, with the purpose of consolidating PT s desirable degree of internationalisation and affirm the presence of this country and its companies in the international stock markets, hereinafter referred to as direct institutional sale;

7. Another direct sale to one financial institution, which shall be bound to transfer the shares to strategic partners of PT that are telecommunications operators and are committed to contributing in a positive way to the modernisation and increase of competitiveness of PT, within a global alliances scenario, hereinafter referred to as direct strategic sale.

8. Without prejudice of the limit established in paragraph 1, one supplementary lot destined to the direct institutional sale may also be sold, as long as it is deemed necessary to insure the compromises assumed by the financial institutions following their duty of dispersing the shares.
9. PT shall request the admission for quotation of all the shares sold in the official quotations market of the Lisbon Stock Exchange, as well as the foreign Stock Exchanges that it comes to select.

Article 3
Initial public offer

1. The number of shares that shall be the object of the initial public offer shall be established through a Cabinet resolution.

2. A lot of shares shall be reserved for purchase by PT workers, small subscribers and emigrants.

3. Those PT workers, small subscribers and emigrants that keep the shares purchased within the scope of the reserve established in the previous paragraph for a one year period from the day of the special Stock Exchange session destined to the execution of the initial public offer shall be entitled to receive from PARTEST Participações do Estado, SGPS, S. A., PT shares in the proportion that comes to be established through a Cabinet resolution, considering the limit established in paragraph 1.

4. For the purpose of the terms of the previous paragraphs, it shall be considered as PT workers the persons that, under the terms and within the scope of article 12 of Law no. 11/90 from April 5, are or have been working for Portugal Telecom, S. A., for the companies that originated its merger or the entities that originated the latters.

5. A lot of shares shall be reserved for purchase by those holding TP and PT bonds and those holding CTT and TLP participation certificates, at the price that comes to be established for the general public.

6. For the purposes of the previous paragraph, it is considered as holders of TP and PT bonds, holders of CTT and TLP participation certificates the entities that, on 30 June 1997, held at least 100 of any of the certificates at stake that, at the date of beginning of the initial public offer, are admitted for quotation on the Lisbon Stock Exchange and maintain the said certificates until the term of the initial public offer.

7. The shares that are the object of the initial public offer which are not included in the reserves referred to in paragraph 2 and 5, as well as any shares not sold within the respective scope, shall be offered to the general public.

Article 4
Unavailability regime of the shares reserved to workers, small subscribers and emigrants

1. The shares purchased within the scope of the reserve established in paragraph 2 of article 3 shall remain unavailable for a three month period, when purchased:

2. By workers;

3. By small subscribers and emigrants, in case they benefit from special purchasing conditions, namely regarding the price.

4. The unavailability period shall count from the day of the special Stock Exchange session destined to the execution of the initial public offer.

5. During the unavailability period, the respective shares cannot be onerated nor be the object of legal deals aiming at the transfer of the respective ownership, regardless of whether having but future effectiveness.

6. Any and all deals concluded in violation of the previous paragraph, regardless of whether concluded before the beginning of the unavailability period, are void.

7. In case the situation foreseen in subparagraph b) of paragraph 1 takes place, the shares purchased by small subscribers and emigrants within the scope of the reserve referred to in paragraph 2 of article 3, shall not provide the right of vote, during the unavailability period.

8. During the unavailability period, the voting rights that are inherent to shares purchased by PT workers may not be executed by third parties.

9. Any and all deals through which the workers are obliged to execute the voting rights, which are inherent to the shares referred to in the previous paragraph, in a certain way during the unavailability period, are void, regardless of whether if concluded before that period.

10. The annulments foreseen under paragraphs 4 and 7 may be judicially declared, after request by the Public Ministry, without prejudice of the respective invocation by any interested party, including PT itself, under the general terms of the law.

Article 5
Direct institutional sale

1. The shares that are not destined to the direct strategic sale and the shares that are not destined to the initial public offer, as well as those that are not sold within the scope of that offer, shall be the object of direct sale to a set of both Portuguese and foreign financial institutions.

2. The purchasing financial institutions shall be bound to carry out the following dispersion of the shares that are the object of the direct sale to institutional investors.

3. Part of the shares of the dispersion referred to in the previous paragraph should be placed international markets.

4. The definition of the specific conditions that shall regulate the direct institutional sale and the following dispersion of the shares that are its object shall be included in a tender book to be approved through a Cabinet resolution.

5. For the purpose of registering shares, as well as subjecting to the payment of any fees, emoluments or commissions that are legally due, it is considered as a single transaction the direct institutional sale and the following dispersion referred to in the previous paragraph.

Article 6
Alteration of the objects of the initial public offer and of the direct institutional sale and sale of a supplementary lot

1. Should the demand of the initial public offer exceed the shares that are its object, the lot destined to the direct institutional sale may be reduced in a percentage of not more than 30% of the one that, under the terms of paragraph 1 of article 3, is destined to the initial public offer, the number of shares taken from the former being added to the latter.

2. Should the demand shown in the process of prior collection of buying intentions exceed the shares that are the object of the direct institutional sale, the lot destined to the latter may be increased in a percentage of not more than 30%, reducing in the corresponding amount the lot destined to the initial public offer.

3. The sale of a supplementary lot of shares may be contracted with the purchasing financial institutions, as long as such sale is deemed necessary to ensure the compromises assumed by the financial institutions, bearing in mind the fulfilment of the obligation of dispersion of the shares referred to in paragraph 2 and 3 of article 5, without prejudice of the limit established in paragraph 1 of article 2.

4. The supplementary lot referred to in the previous paragraph may not have as object a percentage superior to 10% of the number of shares that, under the terms of subparagraph d) of paragraph 2 of article 8, is destined to the initial public offer and the direct institutional sale.

5. The sale of the shares that are the object of the supplementary lot referred to in paragraph 3 should be carried out within 30 calendar days from the date of signature of the direct sale and placement contracts.

6. The regime and unit price of sale of the shares that are the object of the supplementary lot shall be equal to those of the shares that are the object of the direct institutional sale.

Article 7
Direct strategic sale

1. The shares that are neither destined to the initial public offer nor to the direct institutional sale shall be the object of the direct strategic sale.

2. The purchasing financial institution is bound to transfer the shares to strategic partners of PT, which should be telecommunications operators that are committed to contributing in a positive way to the modernisation and increase of competitiveness of PT, within a global alliances scenario.

3. The definition of the specific conditions that shall regulate the direct strategic sale shall be included in a tender book, to be approved through a Cabinet resolution.

4. For the purpose of registering shares, as well as subjecting to the payment of any fees, emoluments or commissions that are legally due, it is considered as a single transaction the direct strategic sale and the following transfers to PT s strategic partners referred to in paragraph 2.

Article 8
Regulation of the 3rd phase of the privatisation

1. The final and specific conditions of the necessary operations for the execution of the 3rd phase of the privatisation process of PT shall be established by the Cabinet, through the approval of one or more resolutions.

2. In the resolutions referred to in the previous paragraph, the Cabinet should, namely:

a). Establish the number of shares to be sold in the 3rd phase of the privatisation process of PT, under the terms of paragraph 3 of article 2;

b). Establish, under the terms of paragraph 1 of article 3, of paragraph 1 of article 5 and of paragraph 1 of article 7, the number of shares destined to the initial public offer, the direct institutional sale and the direct strategic sale, without prejudice of the execution of the possibilities established under paragraphs 1, 2 and 3 of article 6;

c). Determine the forms of establishment of the sale prices;

d)). Establish, in conformity with article 24 of Law no. 11/90 from April 5, the terms in which the original holders of public debt certificates deriving from the nationalisations and expropriations may use, at par value, the respective compensation certificates for the payment of the PT shares to be sold within the scope of the 3rd phase of the privatisation process.

3. Concerning the initial public offer, the Cabinet resolutions foressen in paragraph 1 should, namely:

a). Establish, under the terms of paragraph 2 of article 3, the number of shares reserved for purchase by PT workers, small subscribers and emigrants;

b). Establish, under the terms of paragraph 5 of article 3, the number of shares reserved for purchase by holders of TP and PT bonds and by holders of CTT and TLP participation certificates;

c). Establish, under the terms of paragraphs 1 and 7 of article 3, the number of shares to be offered to the general public;

d). Establish the pro rata distribution criteria;

e). Expect the transfer to the remaining parcels of the offer any shares not sold within the scope of any parcel;

f). Establish the special purchasing conditions of shares that the PT workers shall benefit from and, if necessary, the small subscribers and emigrants, namely concerning the price and with regards to the workers, the payment term;

g). Regulate the terms in which shares may be purchased by holders of TP and PT bonds and by holders of CTT and TLP participation certificates;

h)15. Establish the proportion and delivery conditions of the shares referred to in paragraph 3 of article 3;

i). Establish the minimum and maximum number of shares that may be purchased by each person or entity within the categories of investors referred in subparagraphs a), b) and c).

4. Regarding the direct institutional sale, the Cabinet resolutions referred to in paragraph 1 should, namely:

a). Approve the tender book foreseen in paragraph 1 of article 5;

b). Identify the financial institutions that shall purchase shares within the scope of the direct sale, in agreement with paragraphs 1 and 2 of article 5;

c). Establish, under the terms of paragraphs 3 and 4 of article 6, the maximum number of shares that may be the object of the supplementary lot.

5. Concerning the direct strategic sale, the Cabinet resolutions referred to in paragraph 1 should, namely:

a). Approve the tender book foreseen in paragraph 1 of article 5;

b). Identify the financial institution that shall purchase shares within the scope of the direct sale, in agreement with paragraphs 1 and 2 of article 7;

c). Identify the strategic partners to which the purchasing financial institution shall be bound to transfer the shares that are the object of the direct sale;

d). Establish the number of shares to transferred by the purchasing financial institution to each of PT s strategic partners;

Article 9
Price determination

1. The Cabinet shall establish the unit prices of the sale of the PT shares within the scope of the initial public offer, the direct institutional sale and the direct strategic sale, in agreement with the criteria that are determined under the terms foreseen in subparagraph c) of paragraph 2 of article 8.

2. The price to be established for the shares that are the object of the direct institutional sale may not be inferior to the one established for the shares that are the object of the initial public offer.

3. The price to be established for the shares that are the object of the direct strategic sale shall e equal to the one established for the direct institutional sale.

4. The responsibility referred to in paragraph 1 may be delegated to the Minister of Finance, with the possibility of sub-delegation to the Secretary of State of the Treasure and Finance.

Article 10
Limit to the participation in the share capital

1. No entity, whether single person or corporate body, may purchase, within the scope of the operations foreseen in this Decree-Law, shares representing more than 5% of PT s share capital, thus being reduced to this limit any purchase proposals that exceed it.

2. For the purposes of the previous paragraph, it is considered as the same entity two or more entities that have between themselves relationships based on sole participation or of reciprocal participation in an amount superior to 50% of the share capital of one of them or that are controlled by the same partner.

3. The terms of paragraph 1 are not applicable:

a). To the institutions that, in the case of issue of American Depositary Receipts (ADR) or of Global Depositary Receipts (GDR) and, within the respective scope, act as depositary entities or holding custody of PT shares and that hold accounts on their behalf at the Stock Central;

b). To the international payment Exchanges concerning the PT shares registered on the stock accounts open on their behalf in custody institutions affiliated to the Stock Central.

Article 11
Advertisement of participations

Within 60 days from the date of the special Stock Exchange session destined to the execution of the initial public offer, PT shall publish, under the terms of paragraph 2 of article 339 of the Stock Market Code, the list of shareholders whose participation is equal to or over 1% of the respective share capital, indicating the number of shares held by each of the said shareholders.

Article 12
Delegation of power

Without prejudice of the terms of article 8 and 9, the powers required to determine the remaining accessory conditions that are deemed convenient and to carry out the execution acts that are deemed necessary for the accomplishment of the operation shall be delegated to the Minister of Finance, with the possibility of sub-delegation to the Secretary of State of the Treasure and Finance, bearing in mind the performance of the privatisation operation foreseen in this Decree-Law.

Article 13
ADR or GDR depositaries and fulfilment of voting rights

1. Within the scope of American Depositary Receipts (ADR) or Global Depositary receipts (GDR) programs, whose object are PT shares, it shall be considered as PT shareholders, for the due purposes and in conformity with the following paragraph, the holders of American Depositary Receipts (ADR) or Global Depositary Receipts (GDR) and, as their mere representative, the entity whose name is written on the shares.

2. Due to the terms of the previous paragraph:

a). It is applicable to the entity whose name is written on the shares that serve as the basis for the issue of American Depositary Receipts (ADR) or Global Depositary Receipts (GDR) programs the terms of article 385 of the Commercial Corporations Code for the representative;

b). The limitation of vote counting that is established in the law or by-laws shall refer to the votes executed on the account of each holder of American Depositary Receipts (ADR) or Global Depositary Receipts (GDR), regarding which the situations foreseen in article 530 of the Stock Market Code shall be considered, for the purposes of the terms of article 18 of Decree-Law no. 44/95 from February 22.

3. The limitation of counting of votes issued by an entity representing a third party is not applicable to entities whose name is written on PT shares that are the basis for American Depositary Receipts (ADR) or Global Depositary Receipts (GDR) programs.

4. PARTEST Participações do Estado, SGPS, S. A., is put on par with the State for the purposes of the terms of paragraph 3 of article 384 of the Commercial Corporations Code.

Article 14
Exemptions from fees and emoluments

1. Any and all public deeds and alteration registrations of PT s partnership agreement deriving from the terms of this Decree-Law are exempt from any fees and emoluments.

2. For the purposes of the previous paragraph, it is considered, namely, the conversion of type A shares in ordinary shares, as well as any and all alterations of the partnership contract that are contemporary to that.

3. The transfer of PT shares from the State to PARTEST Participações do Estado, SGPS, S. A., destined to be sold within the scope of the 3rd phase of the privatisation process of PT is exempt from the payment of an out of Stock Exchange operation fee.

Article 15
Effectiveness

This Decree-Law shall become effective the day after its publication.

Seen approved in the Cabinet meeting of August 7, 1997. António Manuel de Carvalho Ferreira Vitorino António Luciano Pacheco de Sousa Franco.

Enacted on August 25, 1997.

Let this be published.

The President of the Republic, JORGE SAMPAIO.

Countersigned on August 28, 1997.

 The Prime Minister, António Manuel de Oliveira Guterres.