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.