Published in D.R. number 209 (Series I-A, 1St Sup) of 9 September 2000

Ministerio das Finanças (Ministry of Finance)

Decree-Law

(This is not an official translation of the law)

Portugal Telecom, S. A., abbreviated as PT, was created through a merger, whose terms were regulated by Decree-Law no. 122/94 of May 14.

The first phase of the privatisation process of PT, approved by Decree-Law no. 44/95 of February 22, and regulated by the Council of Ministers resolution no. 43-A/95 of May 4, consisted of the sale of shares representing about 27.26% of the respective share capital. During the 2nd phase of the privatisation, that was approved by Decree-Law no. 34-A/96 of April 24, and regulated by the Council of Ministers resolutions no. 67-A/96 of May 10, and 75-A/96 of May 24, the sale of shares corresponding to about 21.74 % of the share capital took place. In the 3rd phase of the privatisation, which was approved by Decree-Law no. 226-A/97 of August 29, and regulated by the Council of Ministers Resolutions no. 149-A/97, of September 11, and 167/97, of October 6, about 26% of the share capital was privatised. In the 4th phase of privatisation approved by Decree-Law no. 119-A/99, of April 14 and regulated by the Council of Ministers resolutions no. 56/99, of June 2, 70/99 of July 1, 81/99, of July 8, and 87/99 of July 15, shares were sold corresponding to around 13.5% of the share capital.

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

The 3rd phase also include a strategic direct sale via which shares were sold to telecommunications operators in the ambit of PT's strategic partnership agreements.

The 5th phase of the privatisation process of Portugal Telecom is now approved. This phase is to be carried out, in similarity with previous phases, through a public offer of sale in the domestic market, direct institutional sale and direct strategic sale, which are operations that shall permit the sale of all PT ordinary shares to be privatised, excepting 500 shares that shall remain in the ownership of the State.

Within the public offer of sale, share lots shall be reserved for purchase by company workers, small subscribers and emigrants, as well as holders of PT bonds. The remaining shares shall be offered to the general public. In the direct sale shares shall be sold both to domestic and foreign financial institutions, which shall be bound to carry out the respective distribution to institutional investors in both the domestic and international markets. It is thus intended to build a diversified and effective shareholding structure, ensuring, likewise, the presence of Portugal Telecom in international markets.

In the other direct sales operation - the direct strategic sale - the object is to strengthen the shareholdings of strategic shareholders, thus giving the company the necessary conditions to compete in the multi-faceted global telecommunications market. In this manner, shares will be sold to a financial institution, that will subsequently transfer the shares to entities that may include financial investors and telecommunications operators, previously identified by a Council of Ministers resolution.

The two direct sales operations aim to further the strategies defined for PT itself and for the sector in which PT operates, in particular to implement the objectives of the Council of Ministers Resolution no. 71/2000, of June 1, published in the Diário da República, 1st series on July 1, 2000.

Given that PT is a company whose share capital has not been fully privatised, during the 5th phase of privatisation permission is granted to increase the company's share capital. The implementation of this operation, that does not have to necessarily take place at the same time as the sale of shares, shall be governed in general terms by a decision of the company's shareholders. In the event of a decision in favour of such operations, the State and PARTEST are authorised to sell the preference shares that they hold under the conditions to be established by a Council of Ministers resolution.

Thus:

Under the terms of the legal regime established by Law no. 11/90 of April 5 and paragraphs a) and c) of point 1 of article 201 of the Constitution, the Government hereby decrees the following:

Article 1
Object

The 5th phase of the privatisation process of the share capital of Portugal Telecom, S. A., hereinafter called PT, is hereby approved. This process shall be regulated by this Decree-Law and the resolutions of the Council of Ministers that establish the final and specific conditions of the necessary operations for its implementation.

Article 2
5th phase

1. The sale of all PT shares to be privatised, with the exception of 500 category A shares specified in the company's articles of association is hereby authorised.

2. The State as shareholder renounces through the present diploma the privileges inherent to the category A shares to be sold under the terms of the previous point, deciding their conversion into ordinary shares.

3. PARTEST Participações do Estado, SGPS, S. A., shall execute the sale of PT shares specified in point 1, according to the rules referred to in article 1.

4. The number of shares to be sold within the scope of the 5th phase of the privatisation process of PT shall be established through a Council of Ministers resolution, in conformity with the terms of point 1.

5. The sale referred to in point 1 shall be carried out through the following:

a) a public offer of sale in the domestic market;

b) a direct sale, hereinafter called direct institutional sale, to a set of financial institutions, which shall be bound to carry out the following distribution of the shares, partly in international markets, with the purpose of consolidating PT's desired degree of internationalisation and affirm the presence of this country and its companies in the international capital markets;

c) Another direct sale, hereinafter called direct strategic sale, to a financial institution, that shall be bound to transfer the shares to PT's strategic shareholders;

d) An offer in the domestic stock market of the shares referred to in point 3 of article 3, that are not effectively attributed, as well as shares corresponding to the supplementary lot contracted under the terms of point 3 of article 6 that are not effectively sold within the scope of the exercise of the respective option.

6. Without prejudice to the limit established in point 1, one supplementary lot destined to the direct sale may also be sold, in the event that it is deemed necessary in order to uphold the commitments assumed by the financial institutions following their duty to distribute shares.

7. The 5th phase of the privatisation of PT's share capital may also include, in the event that PT's competent governing bodies so decide, an increase in PT's share capital through new entry of cash.

8. The sum of the nominal value of shares that may be issued following the operations specified in the previous point may not exceed 15% of PT's current share capital.

9. For the purposes of the present Decree-Law, the current share capital is to be calculated with the inclusion of any increase in share capital as the result of incorporation of reserves that has been decided prior to the said operations or that is decided simultaneously with such operations.

10. Any of the operations specified in point 7 may be carried out before, simultaneously, or after the sale specified in point 1.

11. PT shall request that all shares sold or issued following the operations specified in point 7 be quoted in the Lisbon and Oporto Stock Exchange and other foreign stock markets chosen by it. 

Article 3
Public Offer of Sale

1. The number of shares that shall be the object of the public offer of sale shall be established through a Council of Ministers 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 point for a one year period from the day of the special Stock Exchange session destined to the execution of the public offer of sale shall be entitled to receive from PARTEST Participações do Estado, SGPS, S. A., PT shares in the proportion to be established in a Council of Ministers resolution, in accordance with the limit established in point 1.

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

5. A lot of shares shall be reserved for purchase by those holding PT bonds, at the price that is to be established for the general public.

6. For the purposes of the previous point, holders of PT bonds are considered to be entities that, on December 31 1999, held at least 100 bonds that, at the date of beginning of the public offer of sale, have been admitted for quotation in the Lisbon and Oporto Stock Exchange and maintain the said bonds until the end of the period of the public offer of sale.

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

8. The shares destined for attribution as specified in point 3 of the present article, that are not effectively attributed may be sold in the domestic stock market, under the terms of paragraph d) of point 5 of article 2. 

Article 4
Period of unavailability for shares reserved to workers, small subscribers and emigrants

1. The shares purchased by company workers, small subscribers and emigrants, within the scope of the reserve specified in point 2 of article 3 shall remain unavailable during a three-month period.

2. The period of unavailability shall be calculated from the day of the special Stock Exchange session for the execution of the public offer of sale.

3. During the period of unavailability, the respective shares shall not be burdened or subject to legal deals aiming at the transfer of the respective ownership, even when such deals only enter into force at a future date.

4. Any and all deals concluded in breach of the previous point, regardless of whether concluded before the beginning of the period of unavailability, are null and void.

5. Shares purchased by small subscribers and emigrants within the scope of the reserve referred to in point 2 of article 3, shall not confer voting rights, during the period of unavailability.

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

7. Any and all deals through which workers are obliged to exercise voting rights that are inherent to the shares referred to in the previous point, in a specific manner during the period of unavailability, are null and void, regardless of whether they were concluded before that period.

8. The annulments foreseen under points 4 and 7 may be judicially declared, after request by the Public Prosecutor, without prejudice to their application, under the general terms of law, by any interested party, including PT itself.

Article 5
Direct institutional sale

1. The shares that are not intended for the public offer of sale, 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 distribution of the shares that are the object of the direct sale.

3. Part of the shares to be distributed as specified in the previous point shall be placed in the international markets.

4. The definition of the specific conditions that shall regulate the direct sale and the following distribution of shares that are its object shall be included in book of specifications to be approved through a Council of Ministers resolution.

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

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

1. Should the demand of the public offer of sale exceed the number of shares that are its object, the lot of shares destined for public offer of sale may be increased by a percentage to be set by the Council of Ministers resolution specified in article 9, reducing the lot of shares destined for direct institutional sale by the same amount.

2. Should the demand shown in the process of collection of prior buying intentions exceed the number of shares that are the object of the direct sale, the destined lot may be increased by a percentage to be set by the Council of Ministers resolution, reducing by the corresponding amount the lot destined to the public offer of sale.

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

4. The supplementary lot referred to in the previous point may not have as its object a percentage higher than 15% of the number of shares that, under the terms of paragraph b) of point 2 of article 9, is destined to the public offer of sale and the direct institutional sale.

5. The sale of the shares that are the object of the supplementary lot referred to in point 3 shall 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 identical to that of the shares that are the object of the direct institutional sale.

7. The sale of the shares that are the object of the supplementary lot referred to in point 3 that are not effectively sold in the scope of the exercise of the respective option may be sold in the stock market, under the terms of paragraph d) of point 5 of article 2. 

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 financial institutions or telecommunications operators.

3. The definition of the specific conditions that shall regulate the direct strategic sale shall be included in book of specifications, to be approved through a Council of Ministers 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 point 2. 

Article 8
Increase in share capital

1. The increase in share capital specified in point 7 of Article 2 should observe the following conditions:

a) Should be carried out in the modality of new entry of cash, and should be fully paid-up in the act of subscription;

b) Should not exceed 15% of PT's current share capital.

2. The increase in share capital may be carried out with the suppression of shareholders' preference rights, if PT's general meeting so decides, and should in this case be offered to public subscription without prejudice to the terms of point 4.

3. If the increase in share capital is carried out without suppression of shareholders' preference rights, the State and PARTEST are authorised to sell the respective rights, inherent to the shares that they hold, under the terms and conditions to be established via a Council of Ministers resolution.

4. Irrespective of whether or not there is suppression of shareholders' preference rights, a part of the increase in share capital and/or the shares that are not placed within the scope of the public offer of sale may be destined for distribution via financial institutions to institutional investors, including part in international markets. 

Article 9
Regulation of the 5th phase of the privatisation

1. The final and specific conditions of the necessary operations for the execution of the 5th phase of the privatisation process of PT shall be established by the Council of Ministers, through the approval of one or more resolutions.

2. In the resolutions referred to in the previous point, the Council of Ministers shall, namely:

a) Establish the number of shares to be sold in the 5th phase of the privatisation process of PT, under the terms of point 4 of article 2;

b) Establish, under the terms of point 1 of article 3, of point 1 of article 5 and point 1 of article 7, the number of shares destined to the public offer of sale, direct institutional sale and direct strategic sale without prejudice to implementation of the possibilities established under points 1, 2 and 3 of article 6;

c) Determine the forms whereby the sale prices shall be established;

d) Establish, in accordance with article 24 of Law no. 11/90 of 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 5th phase of the privatisation process;

e) Establish, under the terms of point 1 of article 6, the percentage by which the lot of shares destined for direct institutional sale may be reduced and added in the same amount to the lot destinated for public offer of sale;

f) Establish, under the terms of point 2 of article 6, the percentage by which the lot of shares destined for public offer of sale may be reduced and added in the same amount to the lot destinated for direct sale.

3. Concerning the public offer of sale, the Council of Ministers resolutions specified in point 1 shall, namely:

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

b) Establish, under the terms of point 5 of article 3, the number of shares reserved for purchase by holders of PT bonds;

c) Establish, under the terms of points 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) Foresee the transfer to the remaining lots of the offer any shares not sold within the scope of any lot;

f) Establish the special purchasing conditions of shares that PT workers, small subscribers and emigrants, shall benefit from in particular the price, and with regards to the workers, the payment term;

g) Regulate the terms in which shares may be purchased by holders of PT bonds;

h) Establish the proportion and delivery conditions of the shares referred to in point 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 paragraphs a), b) and c).

4. Regarding the direct institutional sale, the Council of Ministers resolutions referred to in point 1 shall, namely:

a) Approve the book of specifications specified in point 4 of article 5;

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

c) Establish, under the terms of points 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 Council of Ministers resolutions referred to in point 1 should, namely:

a) Approve the book of specifications specified in point 3 of article 7;

b) Identify the financial institution that shall purchase shares within the scope of the direct strategic sale, in agreement with points 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 strategic sale;

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

6. In the event that it is decided to increase the share capital, under the terms of point 7 of article 2 and point 3 of article 8, without suppression of PT shareholders' preference rights, the Council of Ministers resolutions referred to in point 1 shall establish the sale conditions of the preference rights inherent to the shares held by the State and by PARTEST. 

Article 10
Price determination

1. The Council of Ministers shall establish the unit prices of the sale of the PT shares within the scope of the public offer of sale and the direct institutional sale and direct strategic sale, in accordance with the criteria that are determined under the terms specified in paragraph c) of point 2 of article 9.

2. The price to be established for the shares that are the object of the direct institutional sale shall not be lower than the price established for the shares that are the object of the public offer of sale.

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

4. The power specified in point 1 may be delegated to the Minister of Finance, with the possibility of sub-delegation to the Secretary of State of the Treasury and Finance.

Article 11
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 the limit.

2. For the purposes of the previous point, are regarded as the same body two or more companies which between themselves enjoy a relationship of simple interest or reciprocal interest of a sum higher than 50 % of the share capital of one of them or a majority of which is held by the same partner.

3. The terms of point 1 do not apply:

a) To institutions which in connection with the issue of programmes of the American Depositary Receipts (ADR) or the Global Depositary Receipts (GDR) act as depositaries or custodians of PT shares and hold accounts in their name at the Securities Exchange;

b) To international settlement houses for PT shares registered in the securities accounts open in their name in institutions of custody, registered with the Securities Exchange. 

Article 12
Advertisement of participations

Within 60 days from the date of the special Stock Exchange session destined to the execution of the public offer of sale, PT shall publish, under the terms of article 5 of the Securities 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 13
Delegation of powers

Without prejudice to the terms of article 9 and 10, the powers required to determine the remaining accessory conditions that are deemed convenient and to carry out the execution of acts that prove necessary for the accomplishment of the privatisation 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, in order to conduct the privatisation operation specified in this Decree-Law.

Article 14
Exercise of voting rights

1. For the purposes of the terms of paragraph b) of point 2 of Article 384 of the Companies Code, the votes of the shares held by entities in the situations specified point 1 of article 20 of the Securities Market Code shall be considered to be subject to the counting limit, whereas the limit of each entity covered shall be proportional to the votes to be issued.

2. The entities that, under the terms of point 1 of article 20 of the Securities Market Code, establish a shareholding equal or higher than 10% of the voting rights of share capital of PT, must communicate this fact to the board of directors within five days after the date in which this ownership is established, and the respective voting rights may not be exercised until such communication has been made.

3. For the purposes of the terms of the previous points, PT's shareholders have the duty to provide the company's board of directors with all information requested by the latter, in writing and in a complete, objective clear and truthful manner, so as to fully satisfy the request made.

4. Failure to comply with the duty to provide information specified in points 2 and 3, results in a prohibition to use all voting rights, that under the terms of article 346 of the Securities Market Code, shall be considered to include the shareholding of the entity that is in breach of its obligation.

5. Registration shall be made in the minutes of the general meeting in regards as to whether the shareholders owning shares that are to considered to be included within the holding were present or not, or were represented in the general meeting, and whether they exercised their voting rights and in this case the manner in which votes were cast, as well as information in relation to each shareholder, on the voting rights that were not counted, under the terms of point 1.

6. Any decision taken using prohibited voting rights or voting rights that may not be counted is annulled, unless it can be proved that the identical decision would have been taken if such rights had not been exercised or counted.

7. The terms of point 3 of article 19 of Decree-Law no. 44/95, of February 22 remains in force.

8. PARTEST - Participações do Estado, SGPS, S. A., is considered to be equivalent to the State for the purposes of point 3 of article 384 of the Companies Code.

Article 15
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 point, 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 point:

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 Companies Code for the representative;

b) The limitation of vote counting that is established in the law or articles of association shall refer to the votes executed on the account of each holder of American Depositary Receipts (ADR) or Global Depositary Receipts (GDR), considering for this purpose the situations specified in point 1 of article 20 of the Securities Market Code.

3. The limitation of counting of votes issued by an entity representing a third party does not apply 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. The terms of points 1 to 6 of Article 14 apply to the holders of ADR or GDR, and the information therein referred should be requested by the entity mentioned in paragraph a) of point 2 of the present article and should be provided via this entity. 

Article 16
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 point, it is considered, namely, the conversion of type A shares in ordinary shares, as well as any possible modifications intended to confer to PT's board of directors the powers specified in point 1 of article 350 and point 1 of article 456 of the Companies Code as well as all alterations of the partnership contract that are decided or executed contemporary to that.

3. The present Decree-Law is sufficient legal basis for PT's board of directs to conduct, without need for further formalities, the public deed and respective commercial registration that reflects, in the company's articles of association, the new number of ordinary shares and category A shares. 

Article 17
Entry into force

This Decree-Law shall enter into force the day after its publication.
 
Seen and approved in the Council of Ministers meeting of August 31, 2000. - António Manuel de Oliveira Guterres - Luís Manuel Ferreira Parreirão Gonçalves - Joaquim Augusto Nunes Pina Moura - António Luís Santos Costa.

Enacted on September 6, 2000.

Let this be published.

President of the Republic, JORGE SAMPAIO.

Counter-signed on September 7, 2000.

Minister of State and Foreign Affairs, Jaime José Matos da Gama.