Corporate M&A 2022 Comparisons

Last Updated April 21, 2022

Contributed By CMS Carey & Allende

Law and Practice

Authors



CMS Carey & Allende works alongside global colleagues organised in 19 practice areas and sector groups. The firm offers its clients the latest legal knowledge and best practices worldwide. In the Latin America region, CMS has over 220 lawyers providing local and regional advice from its five locations: Santiago, Lima, Bogotá, Mexico City and Rio de Janeiro. With 23 lawyers, its corporate/M&A practice group enjoys a regional reputation of excellence and an in-depth expertise, advising some of the leading Chilean companies on mergers and acquisitions and on cross-border transactions. With 75 offices located in 43 countries, 4,800 lawyers and 1,100 partners, CMS is one of the world's largest firms, present in Europe, Africa, the Middle East and Asia-Pacific.

In a 2020 marked by the COVID-19 pandemic, economic activity worldwide was significantly affected and the M&A market was no exception. Both the pandemic and local political instability brought on by protests in 2019 had a significant effect on local markets, yet signs of recovery and positive outlooks, mostly led by the optimism brought on by the successful government vaccination programme, were already starting to kick in during the first quarter of 2021.

As forecast, 2021 saw a significant increase in M&A activity in Chile. According to independent experts, around 350 transactions were either announced or closed in Chile during 2021, for an aggregate amount above USD18 billion, representing a deal volume increase of 49% and an aggregate amount increase of 42% compared to 2020.

The ongoing pandemic generated opportunities due to the unprecedented valuations of certain companies that gave an edge to international investors.

Although it is expected that the good run will continue during the first half of 2022, and Chile remains one of the favourite options for investors in Latin America, political instability associated with the discussions on a new constitution could be seen as a risk that may discourage new investors. Nonetheless, investors’ confidence in Chile remains strong; as copper prices keep rising, the pandemic's worst face seems to be part of the past and Chile’s new government takes office with promises for gradual change, trust for further growth in the local market seems to be increasing.

During 2021, the Chilean M&A market experienced steady growth with the energy, financial, insurance and technology sectors having the highest levels of M&A activity in the market, as financial results for Chilean companies were better than initially expected. Some of these better results are related to the sales boom experienced by the retail sector during the period – caused largely by a statute enacted by the Chilean Congress in 2020 – and continued through 2021, allowing people to partially withdraw their pensions funds savings to cope with the negative effects that the pandemic has caused in employment and, consequentially, giving the Chilean economy a healthy push in the short term.

In line with such recovery, the main trends in the thriving local M&A market are:

  • optimistic expectations for the mining industry, driven by historic rises in the prices of copper and lithium;
  • high hopes for the renewable energy market, due to the country’s unique advantages in wind and solar energy resources and government plans to shut down coal-powered power plants by 2040;
  • infrastructure investments projects announced by the Chilean government for 2021 and 2022; and
  • increasing activity in the Latin American venture capital sector that has brought funds such as Softbank and Greenoaks to invest in some of Chile's nascent tech businesses, some already surpassing the USD1 billion valuation mark.

During 2021, the M&A market experienced strong activity in the energy industry, with a set of large-sized transactions such as the USD1.295 million acquisition of Colbun Trasmisión S.A. by APG Energy Investments S.L and Celeo Redes S.L.U, a major player in the Chilean energy transmission sector.

The constantly growing renewable energy market is a sector to watch out for; its growth can be largely attributed to stable and efficient regulations and by (i) the self-imposed goals of the Chilean government to reach an energy matrix with 70% of renewable energies by 2030 and (ii) plans to shut down coal-powered energy plants that have historically had a significant share of the Chilean energy matrix.

Among other transactions, KKR, a major global investment company, acquired 60% of the fibre-optic network of Spanish multinational telecommunications company in Chile, Telefonica, in a deal valued at USD1 billion.

On top of that, a Chilean start-up and health benefits platform, Betterfly, closed a USD125 million investment series led by Glade Brook Capital, with a total valuation of more than USD1 billion, and Chilean human resources management software, Buck, closed an investments series that valued the company at USD417 million.

In addition, Dreams S.A. and Enjoy S.A., the two major casino and hotel operators in Chile, announced to the market in January 2022 their binding agreement for the merger of both companies into the largest casino operator in Chile and one of the major actors in the hotels and leisure industry in Latin America. The transaction is expected to close in late 2022, subject to the approval of the transaction by the Chilean antitrust authority.

In terms of the COVID-19 pandemic, tourism remains one of the most badly affected industries, as restrictions for travelling and physical distancing (such as limited capacity in restaurants and bars) have not yet been lifted. Another sector that has had major issues has been the local aviation industry, with the Chilean-Brazilian Company and a major player in the Latin American Aviation industry, Latam, struggling to reach an agreement with its creditors, in its Chapter 11 reorganisation process in New York City.

Notwithstanding the above, the beginning of 2022 has already seen signs of loosening sanitary/social restrictions, and the number of passengers flying, while not reaching pre-pandemic levels yet, experienced steady growth during 2021 and reached 72% of pre-pandemic numbers.

There are a number of transaction structures that can be used to acquire a Chilean company, mainly stock purchases, asset purchases and mergers. The rules vary depending on whether the target company is publicly traded or privately owned and in connection with certain industry-specific regulations.

Generally, transactions that imply the acquisition of a controlling interest in a Chilean listed company are implemented through a mandatory tender offer to all shareholders on a pro rata basis, unless certain restrictive exceptions apply. The terms and milestones of the process, the disclosure requirements of the offer, the circumstances under which a bidder may back off from an offer and other elements of the tender offer, are regulated in detail by the Securities Market Law No 18,045 (the Securities Market Law) and accessory regulation issued by the Financial Market Commission (the CMF or the Chilean Securities Regulator). Squeeze-out rights are available for bidders that reach 95% acceptance from the target’s shareholders.

Mergers involving publicly listed companies are not as common as tender offers in Chile, even though a few of them have seen the light in recent years and many others have busted before being announced. Such mergers have been structured as what other jurisdictions call "one-step" mergers, where the target company will merge with the buyer (or a subsidiary of the buyer formed for the purpose of acquiring the target company) and the target company’s shareholders will receive shares of the merged entity at the agreed-upon exchange ratio in exchange for their shares by operation of law.

Mergers in Chile are implemented pursuant to a negotiated merger agreement that must be submitted to the target company’s shareholders for approval by two-thirds of the voting shares. Those shareholders that do not approve the merger are entitled to statutory appraisal rights that allow them to compulsorily tender their shares to the target company at market price.

In practice, as Chilean corporations usually have a clear controlling shareholder, almost all takeover attempts commonly begin with an agreement between the acquirer and the controlling shareholder in order to ensure that the controlling shareholder tenders its shares to the acquirer or votes favourably for a merger. Therefore, hostile takeovers in Chile are rare.

An acquisition of a privately-owned company in Chile is often structured as a stock or asset purchase. In a stock purchase, the buyer will purchase the target company’s outstanding stock directly from its shareholders pursuant to a negotiated stock purchase agreement that is signed by the buyer and the target shareholders.

In an asset purchase, the buyer purchases the target company’s assets pursuant to the terms of a negotiated asset purchase agreement that is signed by the buyer and the target company. If the target company is selling all or substantially all of its assets, the approval of the target company’s shareholders is generally required. The asset purchase structure allows parties to aim for specific assets and liabilities to be included within the scope of a transaction and exclude general liabilities that may come with the corporate entity of the target, which saves time and effort in due diligence.

The usual acquisition process for unlisted targets generally starts with a non-binding expression of interest, confidentiality and exclusivity (if it is not a competitive process), due diligence, and a binding offer, that gives way to a fully-negotiated purchase and sale agreement that may or may not be subject to conditionality, price adjustment, escrow accounts, seller representations and indemnities, and closing.

The CMF is the primary government agency responsible for regulating, implementing and enforcing the Corporations Law No 18,046, the Securities Market Law, Banking Law and applicable accessory regulation. Only the CMF has powers to oversee publicly held corporations and other entities that either voluntarily or by legal obligation are subject to its rules.

There is no government agency in charge of enforcing corporate governance rules compliance in privately held corporations, with any dispute being a matter of arbitration under the rules and the procedure set forth in each corporation’s own by-laws.

Pension funds administrators (AFPs) are very influential shareholders that often push for governance reforms or CMF involvement in certain matters. Pension funds have been the most active of the institutional investors, working both in concert and individually. They are obliged by law to attend shareholders’ meetings of the companies they invest in and their vote must be noted in the minutes of the shareholders’ meetings.

There are no well-known proxy advisory firms or other shareholder activist groups. However, there are several academic groups developing studies on the matter that have become influential, particularly as they conduct courses and conferences that receive attention from directors of important companies.

Acquisitions by foreign entities are neither restricted nor specifically regulated in Chile. Nevertheless, there are certain requirements to perform acquisitions of banks, pension fund administrators (AFPs), insurance companies, media companies and casinos, which vary depending on the industries and are equally applicable to Chilean and foreign investors.

In addition, any investor, including foreign entities, must comply with the Securities Markets Law in case it acquires an open stock corporation or another entity subject to such law. If the transaction raises antitrust issues, the Competition and Antitrust Acts may also impose additional restrictions.

Cross-border investment and lending is not restricted in Chile, but it must be channelled thought the legal framework of Chapter XIV of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile. Foreign exchange transactions may be freely carried out by any person, even though transactions equal or higher to USD10,000 must be reported to the tax authorities by commercial banks and other authorised entities, and must also be reported to the Central Bank of Chile.

Antitrust regulation in Chile is mainly contained in Decree Law No 211 (the Antitrust Act). Under the Antitrust Act it is mandatory to notify business combinations to the Fiscalía Nacional Económica, the Chilean antitrust authority (the FNE or Antitrust Authority) if they are deemed an economic concentration and include entities that exceed certain annual turnover thresholds. 

The turnover thresholds are the following: (i) the joint annual turnover in Chile of the parties equals or exceeds CLF2.5 million during the business year prior to the transaction report to the FNE; and (ii) at least two of the entities of involved in the transaction, considered separately, have an annual individual turnover in Chile equal or above CLF450,000 during the business year prior to the transaction report to the FNE. Please note: CLF (Chilean Unidad de Fomento) is a Chilean currency unit indexed according to inflation.

In the event the above-mentioned conditions are met, the parties should jointly report the transaction to the FNE before closing or materialisation. The notification procedure before the FNE may last from 30 administrative days (not including weekends or holidays) up to approximately six months, depending on the complexity of the transaction, the relevant market and the effects on local competition. The FNE may clear the transaction, request remedies, or block it. In the event the FNE blocks a transaction, the parties may file an appeal before the Competition Tribunal.

Labour laws in Chile are rather rigid as compared to other jurisdictions. The labour relationship is mainly regulated by the Labour Code, which is in general terms mandatory and does not allow for the parties to tailor industry-specific matters or other arrangements.

There are many workers' rights that cannot be opted out from, not even with the approval of both parties. Regarding nationality and quotas, non-national unskilled workers are subject to certain limits, even though skilled staff and executive-level employees have a more liberal regime, especially in connection with hiring and firing. So far there are no quotas based on ethnicity, race or gender, even though governmental and self-imposed regulation is developing on the matter in various industries.

Workers' unions have increased their bargaining power in recent years and new regulation has also contributed to that end.

There is no formal scrutiny of a transaction under national security standards other than very specific cases such as real estate adjacent to borders with neighbouring countries and defence industry providers. However, due to major investments by Chinese state companies in entities that have a great relevance in the Chilean market and economy, some concerns have been raised to expand restrictions regarding the maximum participation that foreign entities may have in certain relevant industries in Chile.

From a regulatory perspective, the CMF recently enacted a rule that simplifies the securities registration process by exempting certain offers from registration, allowing companies to expedite the issuing process and offer securities provided that certain conditions are met. Also, reporting duties regarding bond issuers have been relaxed due to the COVID-19 pandemic.

See 2.4 Antitrust Regulations regarding recent changes affecting M&A activity in Chile. In addition, on 24 February 2020 a new and comprehensive tax reform was enacted, which includes various matters that may impact M&A.

Given the presence of a controlling shareholder in most listed Chilean companies, stakebuilding strategies are not particularly effective in achieving a successful acquisition and therefore are not commonly used.

In addition, any acquisition of shares by the buyer during 30 days prior to the launch of a tender offer at a price or terms more beneficial to the bidder than those of the offer will allow any shareholder who sold prior to the launch of the tender offer to claim the price differential or forgone benefits, as applicable, resulting in an added deterrence for stakebuilding.

The main material shareholding and disclosure thresholds and filing obligations are the following:

  • any direct or indirect acquisition that allow the acquirer to reach 10% of the shares of a listed company must be reported – any disposal of shares thereof by such substantial shareholders must be likewise disclosed;
  • any direct or indirect acquisition or disposition of shares of a listed company by its directors, liquidators, key executives and management must be disclosed, regardless of their shareholding;
  • the intention to take over a controlling interest of a listed company by any means other than a tender offer must also be disclosed.

Regulatory hurdles to stakebuilding are a minimum that shareholders may increase by means of including such restrictions in the by-laws of the company. There are a few examples in Chile of listed companies’ by-laws that limit the amount of shares that a single beneficial owner can hold directly or indirectly, in order to promote liquidity or to different ends.

Dealing in derivatives are generally allowed, subject to compliance with the Securities Market Law.

There is generally no way around filing and reporting obligations by means of dealing with derivatives instead of a direct investment in shares issued by a listed company. Therefore, any transaction that exceeds the applicable thresholds in which the value of the derivative instrument is linked to, or its underlying assets are linked to, shares of a listed company must be disclosed.

In general, a shareholder performing acquisitions that allow them to reach a 10% shareholding, directly or indirectly, must disclose the transaction itself and whether the intention is to acquire a controlling stake. On the other hand, tender offer disclosure rules require a bidder to disclose its plans for the company, including whether the intention is to take the company private or not.

As a general rule, targets have no legal obligation to disclose deals under Chilean law unless they are listed companies. Publicly traded companies have the general obligation to disclose to the Securities Regulator and the market any information that a rightful investor may consider important to assess its investment decision (hecho esencial). Regarding deals on which a listed company is the target, the disclosure obligation will be triggered to the extent the target is a party of the definitive binding documentation (which is not normally the case) and upon its execution.

In addition, in case a bidder aims to review information that is not publicly available, the manager approving the delivery of such documentation shall inform the Securities Regulator, which could be done in a confidential basis provided some conditions are met.

Market practice on disclosure of M&A deals normally follows the same timing as the legal requirements set forth above. Upon fulfilment of the obligation to report to the Securities Regulator, the information will be also available to the general public and therefore the information will be released to the market. However, as noted, the reporting obligation to the Securities Regulator could be made on a confidential basis if it complies with the legal requirements – ie, the information being disclosed (i) has to be related to pending negotiation and (ii) its disclosure to the public may damage the company’s interest.

The due diligence process is the first step in almost every M&A transaction. The scope of the due diligence review may vary depending on a range of factors – for example, the client (level of internal compliance), the transactions (publicly held companies normally require a lower level of scrutiny than privately held companies) and the industry.

In most M&A deals, due diligence will normally be made on a high-level analysis of the contingencies related to the target and its business. The report for this high-level due diligence will mainly focus on highlighting the most relevant legal issues or “red flags” that could either affect an investor’s decision to invest or entail risks that should be dealt with in the relevant transaction documents. Full descriptive due diligence reports are not as usual as red flags reports.

Regardless of the level of scrutiny, in most cases potential buyers will conduct a financial, legal and tax due diligence; the legal part will normally cover corporate, contractual, regulatory, labour, environmental, intellectual property and tax matters. For that purpose, it is a common practice that the parties execute a non-disclosure agreement that protects the information disclosed between the parties during the due diligence and negotiation process of the proposed transaction.

In a crisis-based environment like the current one, certain aspects of a standard due diligence can be modified.

Identifying and differentiating issues that have the potential of becoming a permanent risk from issues that are only the product of the current crisis environment and that should not jeopardise the future of the company once the pandemic is over, can be paramount when calculating the risk in a specific M&A operation. Standard risks and evaluation analyses must adapt to reflect the reality of a company identifying those issues that should be solved once the pandemic is over and those that will remain even after the current health crisis.

For certain industries, a due diligence process in the COVID-19 crisis environment must consider the key driving forces for the future in a specific market as a consequence of the pandemic. Some changes brought on by the pandemic will affect industries permanently and so a due diligence process must take this into account when evaluating certain aspects of a company or industry.

Also, certain due diligence processes require physical visits to the target’s facilities or central offices. In a pandemic context, these visits will either have to be put on hold or done, if possible, with the help of technology (ie, remotely).

Mainly due to the time and resources spent during the due diligence and negotiation process, prospective investors usually demand exclusivity to prevent simultaneous negotiations with third parties over the target. This exclusivity is regularly included as a clause in the non-disclosure agreement referred to above, and limited to a certain timeframe that allows the investor to carry out due diligence process and the parties to reach an agreement on the transaction documents.

Notwithstanding, it is common to find M&A transactions that are structured as competitive bids, in which case exclusivity, if applicable, is limited to the bidders participating in the formal process and is applicable while the process is in place.

Standstill clauses restricting the bidder are not frequently implemented in the Chilean M&A market; however, they are generally permitted by Chilean law provided that the target’s management duties are not altered.

In Chile, market tender offers are not as usual as they are in other jurisdictions since most M&A deals are between private companies not subject to transaction regulation. Moreover, even in case of publicly traded companies, tender offers are commonly limited to transactions in which the securities law provides for mandatory public tender offers and therefore private transaction directly between two parties is not permitted.

The information and form in which a tender offer needs to be undertaken is strictly regulated by the Chilean regulator. However, in practice it is common to find that the bidder and the majority shareholders of the target execute definitive agreements regulating the terms and conditions of the subsequent tender offer to be made. The main purpose of these agreements is to secure a minimum stake in the subsequent tender offer to be formally launched to the market.

The length of an acquisition process will depend on the target and on the regulatory approvals or clearances involved. A private deal could be completed within a few months, depending on the extensions of the negotiation period.

In a public deal, not considering the negotiating period of any definitive agreement, once the tender offer is launched it shall be open for at least 30 days; payment afterwards normally takes place within a few days, depending on the offering memorandum released to the market.

When it comes to the COVID-19 pandemic's effects on the duration of the different processes for acquiring and or selling a business, it is safe to say that – except for some technical difficulties brought on by teleworking – the benefits of technology have meant that the length of these processes has not been altered significantly when compared to pre-COVID-19 transactions. In line with these new requirements, and as a response to the increasing share of the workforce that is teleworking, in early 2020 the Chilean legislature modified the labour code in regard to teleworking, regularising the way this type of work is carried out and, by doing so, facilitating the remote interaction with the different institutions involved in an M&A transaction.

Under Chilean law, mandatory offer requirements are governed by Chilean rules concerning tender offers – ie, the offer submitted by a security-holder or third party to the security-holders of a listed corporation in order to acquire a certain number of shares in the corporation, or securities convertible to such shares, at a certain price and during a specific term, generally conditioning the success of the offer to obtaining a certain ownership percentage in order to take over or reinforce control over such corporation.

The following direct or indirect security purchases of one or more series, issued by a listed corporation, must necessarily be submitted to the mandatory offer procedure:

  • those allowing someone to take the control of a corporation;
  • the offer that the controlling security-holder must tender when it reaches or exceeds two-thirds of the issued and subscribed securities eligible to vote of a corporation or of the respective series;
  • when someone intends to take control of the parent corporation (and controlling security-holder) of a listed corporation, and such listed corporation represents 75% or more of the value of its consolidated assets, it should previously make an offer to the security-holders of the latter corporation in accordance with the rules of the takeover bids, for an amount not lower than the percentage that makes it possible to obtain such control;
  • when the security-holder that took control of a corporation intends to acquire 3% or more of the securities in the corporation within 12 months following the change of control; and
  • those acquisitions of a series of securities that have pre-eminence in the control of the corporation that trigger the obligation to make a joint tender offer for an equivalent percentage for the remaining classes of securities.

A security-holder is exempt from the obligation to submit a tender offer if:

  • acquisitions related to a capital increase through the issuance of new securities, which, because of their number, would allow the security-holder to obtain control of the corporation;
  • the acquisition of the securities sold by the corporation's controlling securities-holder, provided that these securities have market presence and the purchase price is payable in cash and is not substantially higher than the market price;
  • acquisitions made as a consequence of a merger;
  • acquisitions that take place by reason of death;
  • acquisitions that arise from foreclosure proceedings; and
  • acquisitions that arise from preferential rights for the purchase or sale of securities contained in registered shareholders’ agreements prior to 20 December 2000.

Normally, consideration is payable in cash, even though share-for-share deals and cash-shares combinations are feasible under the existing regulation. See 2.1 Acquiring a Company.

In a context of uncertainty and higher than normal risks, value gaps can emerge between the parties. There are different ways to make it easier for the parties to reach an agreement and bridge those gaps, such as including an earn-out-based price adjustment clause, where a specific portion of the purchase price is based on the future performance of the target (eg, conditional on the effect of the pandemic or the future performance of the target). By including these clauses parties can regulate the effects of potential risks in a business, leaving the final determination of the purchase price to a later stage of the process while also imposing on the seller the obligation or incentive to stay involved in the management of the target for a longer period of time.

Private transactions are not regulated in terms of conditions and therefore follow more or less the same structure as in the USA and many other jurisdictions. See 2.1 Acquiring a Company.

On the other hand, tender offers for listed entities are binding and firm, but objective conditions may be included. Typical tender offer conditions are:

  • the tender of a minimum number of shares (typically assuming that the controlling shareholder will tender its shares under a prearranged agreement with the bidder, under the same terms of the tender offer);
  • the receipt or expiration of applicable regulatory approvals or waiting periods;
  • there being no law or governmental order prohibiting the consummation of the offer;
  • the target not having suffered a material adverse effect;
  • there not having occurred significant disruptions or declines in securities or currency markets (a so-called "market out" condition).

The receipt of sufficient financing is not an accepted condition for a tender offer, nor is the absence of a competing takeover offer, as may be the case in other jurisdictions.

The bidder must declare a revocation cause or condition prior to the third day following the last day of the tender period.

The relevant control thresholds in Chile are absolute majority (50% plus one) and two-thirds of the voting shares. Minimum acceptance conditions tend to be either 100% or one of these two thresholds. Please see 2.1 Acquiring a Company regarding common structures, given the fact that most listed Chilean companies have a clear controlling shareholder.

Private transactions can be subject to conditions that the parties freely agree. Regarding tender offers for listed companies, they are irrevocable by law. Consequently, even though conditioning a tender offer to obtain financing is not expressly forbidden, it may conflict with the objectivity requirement that the law generally imposes to tender offer conditions. In practice, tender offers in Chile have not been subject to financing obtention conditions.

In the promise to tender agreement that typically precedes tender offer, the bidder and the controlling shareholder of the target company can agree to deal security measures as they see fit, provided that none of them provides the controlling shareholder with any value that the rest of the shareholders that may tender their shares will not obtain. Once the tender offer is launched, the target company is restrained by law from redeeming shares, incorporating subsidiaries, selling assets representing more than 5% of total assets, or incurring indebtedness beyond 10% of its existing indebtedness.

When it comes to the effects of the pandemic in deal securities, no major changes have been observed. From a regulatory perspective, the CMF recently enacted a rule that simplifies the securities registration process by exempting certain offers from registration, allowing companies to expedite the process for issuing and offer securities provided that certain conditions are met. Also, reporting duties regarding bond issuers have been relaxed due to the COVID-19 pandemic.

Please see 6.3 Consideration regarding some contractual considerations or tools for managing risk.

See 6.5 Minimum Acceptance Conditions regarding relevant controlling shareholdings below 100%. Regarding rights out of a bidder’s own shareholding, an acquirer may seek to secure shareholding agreements with those shareholders that will not tender their shares and have a similar view of the business of the target or strategy.

Shareholders can vote by proxy in Chile.

Bidders that acquire 95% or more of the target’s shares via tender offer may squeeze out shareholders that have not tendered their shares, provided that (i) the by-laws of the target company had a squeeze-out clause in place, and (ii) the residual shareholders had acquired their shares after the squeeze-out provision was adopted in the by-laws. In addition, a bidder can launch subsequent tender offers and may even buy shares out of a tender offer, provided that the price is equal or higher than the offer and that the number of shares acquired do not exceed 3%.

Given the structure of the Chilean securities market, in which the majority of the listed companies have a clear controlling shareholder with more than 50% of the shares, commitments to tender between a bidder and the controlling shareholder of the target company are very common. The contents of such commitments vary widely from case to case, but they typically include an irrevocable obligation to launch an offer, on the one hand, and an obligation to tender on the other hand, subject to common conditions precedent.

Regarding private companies, mergers or stock purchases are not commonly informed to the public in their negotiation. Limited information duties arise when business combination transactions are executed.

Regarding stock purchases, involved parties have the duty to inform them to the Chilean IRS, who will register the new share ownership of the company. This information duty is provided to allow the Chilean IRS to charge the respective taxes to current shareholders for the dividends that the company eventually distribute to them. Third parties and the general public will not be notified if a stock purchase has been executed, unless the involved parties inform such transaction on a voluntary basis or the Shareholders Registry of the company has been delivered to them.

Regarding mergers, the execution of the business combination must also be informed to the Chilean IRS, who will perform valuations to the involved companies and register the new share ownership for the same aforementioned purposes. Additionally, mergers must be registered before the Commercial Register and must be published in the Public Gazette. Consequently, third parties and general public can only be notified of a merger if they constantly review the Commercial Registry or the Public Gazette, if the involved parties inform such a transaction on a voluntary basis or if the Shareholders Registry of the company has been delivered to them.

Regarding a listed company, tender offers for its control become public when the bidder decides to announce the transaction, or when the bidder launches the offer, or earlier when the CMF requires the target company or its shareholders to disclose the transaction in certain specific events.

Regarding mergers that involve a listed company, the executed business combination is made public when the controllers disclose to the CMF and to the market the execution of the letter of intent, the memorandum of understanding or other initial documents in which the intention of the parties to merge the company is included. Additionally, and on the same date, the board of directors must inform to the CMF the prospective transaction and its conditions as an “hecho esencial”, which can be reviewed by all the market in the website of such public body.

Regarding a merger that involves only private companies, the business combination will only be made public once it is registered before the Commercial Register and is published in the Public Gazette.

Regarding a merger that involves a listed company, the issuance of shares has to be made public when the board of directors of the involved listed company adopts the decision to summon an extraordinary shareholders meeting of the company, in which shareholders will review and decide if a merger will be executed. On the same day, the board of directors must inform to the CMF the prospective transaction and its conditions as an “hecho esencial”, which can be reviewed by all the market on the website of the aforementioned public body. 

In a public tender offer, summarised financial information for the two preceding fiscal years of the bidder and its controller must be included in the respective prospectus.

In any merger, the board of directors of all involved companies must provide the shareholders with audited financial statements, which are prepared according to the IFRS (if it is a listed company) and according to Chilean accepted accounting principles (if it is a private company), dated no longer than six months before the shareholders meeting is held, or 90 days in listed companies. Also, the board of directors must provide the shareholders with a pro forma balance sheet post-merger.

In a merger of public or private companies, and before the celebration of the extraordinary shareholders meeting that approves the business combination, the board of directors must provide the shareholders with a copy of the merger agreement that will be executed with the other involved companies, in which are included the terms and conditions of the business combination and the exchange ratio for the shares. Regarding listed companies, the board must also inform the objectives and expected benefits of the merger.

Regarding a stock purchase in private companies, there is no obligation to disclose any transaction document that has been executed by the parties.

Regarding a tender offer in a listed company, the general rule is that no transaction document in full has to be disclosed. However, CMF is entitled to request the bidder to disclose transaction documents during the course of the offer. Additionally, the prospectus must provide a brief description of all prior agreements related to the tender offer that were executed by the bidder with the target and its related parties.

Chilean company law establishes several fiduciary duties for both bidder and target companies' directors in a business combination, including the duty of impartiality and the duty of loyalty.

According to the duty of impartiality, directors must act for the benefit of all shareholders and are prohibited from protecting the interests of a specific shareholder or group of shareholders, especially those who vote to appoint the relevant director. If an act benefits certain shareholders and negatively affects others, the board must refrain from acting, as it could be interpreted as a breach of this duty. Therefore, directors would not be able to take any action to protect a group of shareholders that could prejudice other shareholders in a business combination, especially by the deployment of defensive measures, even if the prejudice is fair and not arbitrary. This duty has been established only for the benefit of the shareholders, and not for any person that could have an interest in the company. 

Additionally, and according to the duty of loyalty, the directors must avoid any conflict of interest and must perform their duties in the sole interest of the company and its shareholders, refraining from executing acts for their own benefit and interests. For example, if a business combination could be implemented in the company, the directors must co-operate if they believe that the business combination will grant benefits to the company and/or shareholders. This duty of loyalty has not been established for the benefit of other stakeholders of the company.

Furthermore, related to the duty of loyalty, Chilean law has provided procedures in order to avoid conflicts of interest between the company and the directors. A director must not adopt any decision, take any action or be involved in any contract in which they have a conflict of interest with the company. These procedures and prohibitions have a special importance in business combinations such as de facto mergers.

Finally, regarding a public tender offer, each director of the target company has the duty to issue a non-binding recommendation to the shareholders in which a statement on the convenience of accepting or rejecting a bidder's offer is included. In this recommendation, each director must indicate their relationship with the controller of the company and the interest that they may have in the business combination.

Business combinations are negotiated and agreed exclusively by the shareholders of the company. The role of the board is extremely limited in the preparation, negotiation and execution of the respective agreements or mergers. However, the board and the executives of the company can implement certain committees, whose role is to prepare and provide information concerning the company to the counterparty. The role of such committees is limited and is established only to provide certain help in the negotiation of the business combination.

In Chile, the board's decisions are not shielded (as in the Delaware jurisdiction), since a court is entitled to review and sanction them, and the law does not presume that the board's actions were adopted without conflict of interests, in good faith, with loyalty to the shareholders and company, with a sense of urgency, and based on the directors' informed and reasoned business judgement. If the decision of a board causes any damage or loss to the shareholders, to the company or to third parties, the court is entitled to sanction the directors. In order to review and eventually sanction a decision of the board, the court must be required by a shareholder, stakeholder or a third party. The court cannot review and sanction a decision of the board on a voluntary basis.

In Chile, is common that investment banks advise the shareholders and, in exceptional cases, the board, in the negotiation and execution of a stock purchase or merger. The help that these entities provide covers the approach between target and bidder, the preparation and provision of information (ie, due diligence), advice on developing the negotiation, the valuation of the target company (in a shares transfer) or of both companies (mergers), among others.

Also, audit companies are contracted by the companies in order to review the financial situation of the involved companies, which includes a valuation of the entities, the determination of the current condition of their assets and debts.

However, the advice is mainly provided to the shareholders of the companies, as the board of directors has a limited participation in the negotiation and execution of a business combination.

Regarding shareholders, all matters related to conflict of interests that could affect a business combination are regulated in the Securities Market Law. Those conflicts of interests are mainly related to the use of privileged information to acquire shares and to execute business combinations. The law provides strict sanctions to those shareholders and third parties that use privileged information.

Regarding directors, the Corporations Law has provided multiple provisions to sanction directors in case they act with a conflict of interests with the company. According to this law, and in general terms, each director must not adopt any decision or to take any contractual action in regard to which they have a conflict of interest with the company. Therefore, if a director has a conflict of interests regarding a business combination of the company, they must refrain from participating in any act or contract that is related to such transaction.

If these provisions are not complied with by shareholders and directors, the court is entitled to apply monetary sanctions to them, and could revoke the executed acts.

Currently, by the application of general company law principles and public tender offers regulation, the Chilean approach is closer to a shareholders' primacy approach. In most cases, directors are not entitled to deploy any action that could frustrate the bid. Consequently, in the majority of cases, shareholders are the solely entitled persons who can decide on the offer.

However, Chilean law has not provided a general prohibition for the directors to adopt defensive measures, as in the UK's board neutrality rule. Therefore, Chilean regulation remains open and certain defensive measures can be deployed. Additionally, Chilean law has entitled the board to issue a non-binding recommendation to the shareholders in which the directors can communicate their opposition to the bid. This recommendation, if it is well funded, could convince shareholders to reject a bid and could act as an indirect defensive measure.

Notwithstanding the above, hostile takeovers are uncommon as the vast majority of Chilean public and private companies have a concentrated ownership and controlling shareholders (mainly pension funds and family offices). Controllers will elect the majority of directors, so the will of the board in a takeover will be identical to the shareholders' intention. Therefore, if the shareholders' intention is to sell the company, the board's recommendation will be to comply with this intention.

In Chile, the board cannot execute the majority of defensive measures in a hostile takeover, the shareholders being the solely entitled persons to negotiate and dispose of the shares of the company. 

This approach is the result of the application of general principles contained in the Corporations Law, and of the provisions of Law No 19,705 (the Tender Offer Act), which constitutes a reform of the Securities Market Law.

Corporation Law Restrictions

Corporation Law constitutes the main restriction for the board, as multiple provisions limit the possibility to create and deploy defensive measures.

The general principle regarding the board's involvement in any disposal of shares is contained in Article 12 of the Corporations Law. According to this provision, the board cannot intervene or make any pronunciation over a transfer of shares. Its role is limited to registering the respective transfer in the Shareholders Registry.

This principle was maintained in the Tender Offer Act, in which the negotiation and transfer of shares is limited exclusively to the unilateral decision of shareholders, restraining the board's role only to issuing a non-binding recommendation to shareholders. 

Likewise, the majority of the relevant transactions that substantially impact the direction and internal organisation of the company must be agreed or authorised by shareholders through an extraordinary meeting. Consequently, the scope of performance and powers of the board is extremely limited in Chile, where the supremacy of shareholders' will is evident. For this reason, almost all current takeover defences cannot be implemented by the limited powers of the board. As an example, Chilean company law does not entitle the board to make capital amendments, or grant warrants, issue shares or rights to convert securities into shares. According to the Corporations Law, the capital and the number of shares of a company will be established in its by-laws, which can only be amended by the shareholders. In the same way, any issue of shares and its price will be freely determined in a shareholder' meeting. 

These restrictions limit the board of directors to implement the most common and effective takeover defence of Delaware law, the "poison pill". As the application of a poison pill will require the granting of warrants, the issuance of shares, and the respective approval of the shareholders in an extraordinary meeting, its execution in a Chilean hostile takeover is highly improbable; it is also irrelevant, because shareholders can avoid the implementation of the poison pill procedure just by saying no to a bidder's offer.

In addition, the Corporation Law's provisions do not only refer to the board role but also to the composition, appointment, removal and duration of the board of directors. These regulations serve also as a restriction to implement takeover defences. Directors in this jurisdiction can be appointed and removed at any time by approval of a shareholders' meeting, and the term length of the board of directors will be determined in the respective by-laws, with a maximum duration of three years.

Furthermore, under Chilean law, the appointment and removal of the board must be complete and absolute, so directors cannot be appointed or removed independently. If shareholders intend to remove one director, they must remove all of them in a meeting and appoint a new entire board for a new period. Additionally, according to Article 39 of the Corporations Law, the board cannot be classified, therefore all the directors will be appointed at the same time, and will have identical rights and obligations.

These provisions do not allow the application of staggered boards, which are boards that are composed of different classes of directors, in which each director-class has a different term length, and is elected at different times. Staggered boards are important to deploy takeover defences, especially when they are combined with poison pills, as its implementation on companies means that the bidder will have to spend several years to obtain management control by winning each class of directors' election. Also, as a shareholders' meeting can remove the entire board of directors at any time, the poison pill could be redeemed and other takeover defences measures can be disapplied immediately by the current shareholders or by the bidder, by means of the election of a new board.

Chilean company law establishes several fiduciary duties, which have been duly explained in 8.1 Principal Directors' Duties.

Specific Restrictions on the Tender Offer Act

Another limitation to deploy defensive measures are the provisions contained in the Tender Offer Act. In the discussion of this law, the Congress did not treat the deployment of defensive measures. Therefore, an exception or confirmation of the general rule outlined in Article 12 of the Corporations Law was not provided.

According to the Tender Offer Act, each director has to issue an individual written report, which contains their informed opinion about the convenience of the offer for shareholders, indicating their own relationship with the company's controller and with the bidder, and the interest that the director could have in the transaction. Therefore, the board of directors has a limited role: it may only give a recommendation to the shareholders, who will decide at their own discretion whether or not to accept the offer.

In addition to the limitations set forth above, the Securities Market Law provides four exhaustive restrictions by which both the company, through shareholders' meeting's decisions, and the board are subject during the tender offer's term. The prohibitions consist in:

  • acquiring the company's shares of own issuance;
  • incorporating subsidiary companies;
  • selling assets that represent more than 5% of the total company's value; and
  • acquiring new debt that surpasses by more than 10% the current company's indebtedness.

Regarding selling assets, above, the board will not be entitled to deploy the denominated “crown jewel” defence, which consist in the disposal of valuable assets that are considered essential for the bidder, and whose transfer could provoke the loss of interest to acquire the company. The last prohibition listed above will restrict the board to apply the “poison debt” defensive measure, which consists in the issuance of debt securities or in the acquisition of substantial debt that contains terms and conditions that discourage the bidder in its intention to acquire the company.

Defensive measures are uncommon in Chile as the companies mainly have concentrated ownership and controlling shareholders. Also, the majority of typical defensive measures recognised and utilised in Delaware law cannot be implemented in Chile, as previously explained.

However, there is some room to deploy certain takeover defences such as white knights, white squires and golden parachutes. The most common defensive measure in Chile is the white knight, in which the board or certain minority shareholders find a third party which make an additional offer and competes with the bidder in the acquisition of the company. In case that shareholders accept a third-party offer, the original bidder's offer is frustrated and defeated.

Nevertheless, because in Chile most defensive measures cannot be implemented, the pandemic has not brought any significant changes when it comes to these matters.

Chilean company law establishes several fiduciary duties – mainly, the duty of impartiality and the duty of loyalty will restrict the implementation of takeover defences. See 8.1 Principal Directors' Duties.

In Chile, shareholders are always the solely entitled persons to negotiate and dispose of the shares of the company. In any case, the directors cannot frustrate a bid without the authorisation and participation of the shareholders.

Litigation in connection with M&A deals is very uncommon in Chile. Civil courts do not have expertise in complex commercial transactions such as M&A deals. Consequently, parties commonly (i) agree penalty clauses in the respective agreements to enforce liability, and (ii) provide that any conflict that could arise regarding a business combination will be reviewed and resolved by arbitration. Chilean arbitrators have sufficient expertise to handle complex business combinations in an effective manner. The problem arises as arbitration courts do not have enough enforcement tools to obligate a party to compensate any damage and loss that could provoke its counterparty.

On the other hand, CMF is entitled to review and sanction business combinations that are executed in listed companies. The sanctions that this superintendence can apply have an administrative nature. However, it is very uncommon that the CMF revoke or suspends a business combination. Fines are the usual sanctions that the superintendence applies to offenders.

Finally, criminal procedures are fast and effective in case there is enough merit to prosecute a case. However, these procedures are uncommon; in extremely few cases are business transactions reviewed and eventually prosecuted in criminal courts.

Regarding civil litigation, it has been brought in the initial stages of the business combination negotiation. Uncommonly, pre-contractual liability is alleged when a party does not comply with exclusivity and confidentiality arrangements. Also, third parties can request the granting of injunctive relief, where an evident damage could be caused and a violation of law is committed if the business combination is executed.

Regarding arbitration, administrative litigation before the CMF and criminal procedures, it has been brought when the business combinations have been materialised, and the damages and violation of law have been duly certified.

In the past year, it has been academically discussed if material adverse change (MAC) clauses could be invoked or triggered due to the COVID-19 crisis. According to MAC clauses in the context of M&A, a buyer that has executed an agreement with a deferred closing could be entitled to step out from the respective transaction if some negative event or circumstance affects considerably the target business in the interim period, thereby losing the buyer's benefit in the bargain.

Academic discussions on the matter have made a distinction between MAC clauses that are drafted on a general or specific basis, and between MAC provisions entered into before the COVID-19 outbreak and the ones executed into thereafter.

On one hand, where parties have duly singularised and specified in the agreement the events that will trigger the right to step out from the transaction, the answer is clear: application of a MAC clause will depend on whether the parties have included (or excluded) a pandemic as a MAC-triggering event. On the other hand, there is no consensus in doctrine in cases where MAC clauses were drafted on a general basis, focusing more on the effects of the respective event rather than the event itself (ie, disproportionate effect on the target company). However, according to Chilean legal practice and our experience, it is unlikely that a generic MAC clause will cover the impact of the COVID-19 crisis as they usually exclude events that cause general market effects (such as pandemics).

The other distinction that it is necessary to review is between MAC provisions entered into before the COVID-19 outbreak and the ones executed thereafter. Regarding MAC clauses that were negotiated before the outbreak of the pandemic, it is necessary to apply the distinction that was made in the previous paragraph. Regarding MAC clauses that were drafted and executed after the outbreak of COVID-19, it has been interpreted that parties already knew the impact of the pandemic – therefore, they had the opportunity to regulate the effects of this event and were free to allocate risks as they deemed appropriated.

However, this discussion has only taken place in academia, since it is not publicly known if the courts have resolved litigation related to this matter.

Pension fund administrators (AFPs) in Chile are an important force. They tend to align their individual influences in order to have a single voice in the companies that they invest in. In addition, certain local private equity investors have also been very influential in the corporate governance of Chilean-listed companies, becoming in some cases a counterbalance to the controlling shareholders. There are also several academic groups developing studies on the matter that have become influential, particularly as they conduct courses and conferences that receive attention from directors of important companies.

In the case of private equity houses and other strategic investors, there have been a number of high-profile situations where a shareholder activist has publicly pushed for certain conducts of the company and of other shareholders regarding a specific M&A opportunity. In these situations, the activist has sought an increase in the purchase price payable to the target company’s shareholders (or other modifications to the agreed transaction terms) or to block a proposed merger with a view to the target company pursuing an alternative transaction or strategy.

Out of the M&A field, shareholder activists also regularly target asset allocation, governance, executive compensation and operational matters.

This dynamic has not been changed due to the COVID-19 crisis.

See 11.2 Aims of Activists.

CMS Carey & Allende

Avda. Costanera Sur 2730, Piso 9
Parque Titanium, Las Condes
7550000 Santiago
Chile

+562 2485 2000

contacto@cms-ca.com www.cms.law
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Law and Practice in Chile

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CMS Carey & Allende works alongside global colleagues organised in 19 practice areas and sector groups. The firm offers its clients the latest legal knowledge and best practices worldwide. In the Latin America region, CMS has over 220 lawyers providing local and regional advice from its five locations: Santiago, Lima, Bogotá, Mexico City and Rio de Janeiro. With 23 lawyers, its corporate/M&A practice group enjoys a regional reputation of excellence and an in-depth expertise, advising some of the leading Chilean companies on mergers and acquisitions and on cross-border transactions. With 75 offices located in 43 countries, 4,800 lawyers and 1,100 partners, CMS is one of the world's largest firms, present in Europe, Africa, the Middle East and Asia-Pacific.