Insight

Related-Party Transactions in Chile

A significant change in law and practice.

Related-Party Transactions
RK

Roberto Guerrero V. and Tomás Kubick

August 31, 2017 03:35 PM

The last large amendment of the Chilean Corporations Act has been enforced since 2010. New rules were added to perfect the corporate governance of listed corporations and closely-held companies. One of the major changes that were introduced to the law was the treatment of related-party transactions (RPT).

Under this new regulation, closely-held corporations and listed corporations have different procedures to enter into transactions that have the nature of RPT.

The rules set for listed corporations and how have they been interpreted and applied by the Chilean Superintendencia de Valores y Seguros (SVS), which is a governmental entity that supervises the capital markets and compliance of securities regulations by listed corporations, are analyzed below.

If we follow the written language of the Chilean Corporations Act, we should understand that the procedure to approve an RPT is intended for cases in which a corporation acted as a party in the transaction. A clear example would be a purchase agreement in which there was a conflict of interest (as defined in the Chilean Corporations Act). In that case, both parties would be acting with opposed interests in the transaction.

Nevertheless, and as a consequence of specific cases that occurred in 2012 and 2015, the SVS issued two different instructions under which operations that had a listed corporation as the object of the transaction and was a party to it had to be treated as RPTs and therefore follow the procedure set for that type of operation.

The first case appeared during the corporate reorganization carried on by a foreign multinational that had interest in several utilities in Chile and Latin America. Part of that reorganization depended on the capital increase of a Chilean listed corporation, which was intended to be paid in kind (with assets of the controlling shareholders and not in cash). Pension funds that were minority shareholders objected the transaction (the capital increase) before SVS on the basis that a capital contribution in assets should be treated as an RPT and requested the company and its shareholders follow the procedure to approve an RPT with the procedure for a capital increase paid in kind altogether.
The second case was also connected to a corporate reorganization process. One of the steps of that process consisted of the merger of two subsidiaries that were related to the same controlling shareholder. Again, pension funds estimated that this process would harm the interests of minority shareholders and requested the SVS to issue an opinion whether the merger was an RPT and, if so, whether it needed to follow certain steps instead of the standard shareholder procedure for merger approval. In this case, the SVS determined that, even though the merger was an RPT, it should not follow the procedures to approve an RPT but rather the merger approval process, because the special rules about mergers applied in this case.1 Pension funds presented a case before the Santiago Court of Appeal, which eventually barred the SVS opinion and ruled that the special process determined by law to approve RPTs should be applied, because it was a more specific process than a merger and, in addition, it had to follow the process set for mergers. In other words, both processes should be followed to materialize a merger between two related entities.

These two cases completely changed the way RPTs had been treated up to that moment. The first clear rule that is currently being applied is that every transaction between related parties in which a listed corporation is involved should follow the process set out for RPTs, even if there are other rules that may apply (and potentially conflict with them). In this line, it would not make a difference if the subject matter of the operation was solved only among shareholders. In those cases, even if the company is the object of the transaction, shareholders should take into account the interest of the minority shareholders of the corporation.

Also, parties should be aware that two different procedures with different timings must be considered and consolidated. The experience has shown that it is possible to combine both processes into one. This may lead to a lengthier and bureaucratic process in time, due to preparatory steps, and more steps must be adopted, as well as additional compliance expenses, since every related party must request the opinion of an independent evaluator for the review of the board members and of the shareholders. The independent evaluator must address the conditions of the RPT (whether it is arm’s length and contributes to the interest of the listed corporation), its effects, and potential impact for the corporation.

Finally, since two different processes may need to be applied, the protective measures of each process must be fulfilled. Therefore, both in the cases of mergers and of capital contributions that are paid with assets of an existing shareholder must have, in addition to the opinion of the independent evaluator, the opinion of an expert who valuated the entities or the assets depending on the transaction.

The natural question is whether minority shareholders are better protected with this broad interpretation of the RPT statute by the SVS and the courts. We believe that the answer is no. What it did was to denaturalize the law and apply it to cases that were not intended by the legislator, adding costs to any corporate reorganization process that is supported by all shareholders. Moreover, shareholders had protective measures with the opinion of the experts, and they could always have requested members of the board to be held liable in case of breach to their fiduciary duties. Furthermore, the Chilean Corporations Act obliges shareholders to exercise their corporate rights considering the rights of the company and the rights of other shareholders, which we believe was the rule that the SVS and the court should have applied to solve the problems it faced in the mentioned cases.

--------------------------

1 Under the Chilean Corporations Act, mergers must be approved by the shareholders of the involved corporations after review of an independent expert report. Approval requires the affirmative vote of at least two-thirds of the outstanding shares.

Related Articles

The Best Lawyers in Chile™ 2022


by Best Lawyers

The results include an elite field of top lawyers and firms.

The Best Lawyers in Chile™ 2022

Summer Voting Season Is Here!


by Best Lawyers

Summer 2021 voting is open to all lawyers listed in Best Lawyers in Chile, Colombia, Peru, Brazil, Mexico, Portugal, South Africa and Spain.

How To Vote On Your Best Lawyers Ballot

Announcing the 2021 Best Lawyers in Chile, Colombia, and Puerto Rico


by Best Lawyers

Find the top legal talent in Chile, Colombia, and Puerto Rico.

Best Lawyers in Chile, Colombia, Puerto Rico

Effect of Anti-Suit Injunction in Cross Border Litigation


by Cariola, Díez, Pérez-Cotapos

What is the purpose of an anti-suit injunction, and how can it work with cases in different countries?

Anti-Suit Injunctions in Cross Border Cases

On the Cutting Edge After a Century in Business


by Best Lawyers

Manuel Carvallo of Estudio Carvallo Abogados discusses his firm's 130-year-old history, adapting to the latest technologies, and its 2019 "Law Firm of the Year" award for Insurance Law in Chile.

Estudio Carvallo Law Firm of the Year

Why Cariola Díez Pérez-Cotapos Developed Its Own Legal Tech


by Best Lawyers

Juan Pablo Matus of Cariola Díez Pérez-Cotapos, 2019 "Law Firm of the Year" award for Corporate and M&A Law in Chile, discusses his firm's joint venture with Cognitiva in creating Lexnova, a legal AI system.

Cariola Díez Pérez-Cotapos Interview

Baraona Fischer & Cia on the Changes Coming to Tax Law in Chile


by Best Lawyers

Juan Manuel Baraona of the 2019 "Law Firm of the Year" award-winner for Tax Law in Chile discusses forthcoming regulations, career highlights, and his secrets to success in an interview with Best Lawyers CEO Phillip Greer.

Baraona Fischer & Cia LFOTY

The New Electric System in Chile


by Alejandro Vergara Blanco

Electric System in Chile

Trending Articles

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

The U.S. Best Lawyers Voting Season Is Open


by Best Lawyers

The voting season for the 31st edition of The Best Lawyers in America® and the 5th edition of Best Lawyers: Ones to Watch® in America is officially underway, and we are offering some helpful advice to this year’s voters.

Golden figures of people standing on blue surface connected by white lines

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

2021 Best Lawyers: The Global Issue


by Best Lawyers

The 2021 Global Issue features top legal talent from the most recent editions of Best Lawyers and Best Lawyers: Ones to Watch worldwide.

2021 Best Lawyers: The Global Issue

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

The Best Lawyers in Australia™ 2024 Launch


by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

The Upcycle Conundrum


by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

Wage and Overtime Laws for Truck Drivers


by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US

Inflation Escalation


by Ashley S. Wagner

Inflation and rising costs are at the forefront of everyone’s mind as we enter 2023. The current volatile market makes it more important than ever to understand the rent escalation clauses in current and future commercial lease agreements.

Suited figure in front of rising market and inflated balloon

A Celebration of Excellence: The Best Lawyers in Canada 2024 Awards


by Best Lawyers

As we embark on the 18th edition of The Best Lawyers in Canada™, we are excited to highlight excellence and top legal talent across the country.

Abstract image of red and white Canada flag in triangles

8 Different Types of Criminal Defenses in Law


by Best Lawyers

Learn about the different types of criminal defenses available in law, including innocence, self-defense, insanity and more. Protect your rights today.

Silver handcuffs laying on finger printed papers

Announcing The Best Lawyers in South Africa™ 2024


by Best Lawyers

Best Lawyers is excited to announce the landmark 15th edition of The Best Lawyers in South Africa™ for 2024, including the exclusive "Law Firm of the Year" awards.

Sky view of South Africa town and waterways

Unwrapping Shrinkflation


by Justin Smulison

Through the lens of the United States, we take a closer look at the global implication of companies downsizing products while maintaining and often raising prices.

Chocolate bar being unwrapped from foil