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CHAMBERSGlobal Practice Guides

Contributed by Morales & Besa

Corporate M&A

2017

CHILE

LAW & PRACTICE: p.3Contributed by Morales & Besa

The ‘Law & Practice’ sections provide easily accessible information on navigating the legal system when conducting business in the jurisdic-tion. Leading lawyers explain local law and practice at key transactional stages and for crucial aspects of doing business.

Law & Practice cHiLeContributed by Morales & Besa Authors: Guillermo Morales, Michel Diban, Matías Langevin,

Maria José Henríquez

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Law & PracticeContributed by Morales & Besa

cONteNtS1. Trends p.4

1.1 M&A Market p.41.2 Key Trends p.41.3 Key Industries p.5

2. Overview of Regulatory Field p.52.1 Acquiring a Company p.52.2 Primary Regulators p.52.3 Restrictions on Foreign Investment p.62.4 Antitrust Regulations p.62.5 Labour Law Regulations p.62.6 National Security Review p.6

3. Recent Legal Developments p.63.1 Significant Court Decisions or Legal

Developments p.63.2 Significant Changes to Takeover Law p.8

4. Stakebuilding p.84.1 Principal Stakebuilding Strategies p.84.2 Material Shareholding Disclosure Thresholds p.84.3 Hurdles to Stakebuilding p.84.4 Dealings in Derivatives p.84.5 Filing/Reporting Obligations p.84.6 Transparency p.8

5. Negotiation Phase p.85.1 Requirement to Disclose a Deal p.85.2 Market Practice on Timing p.95.3 Scope of Due Diligence p.95.4 Standstills or Exclusivity p.95.5 Definitive Agreements p.9

6. Structuring p.96.1 Length of Process for Acquisition/Sale p.96.2 Mandatory Offer Threshold p.106.3 Consideration p.106.4 Common Conditions for a Takeover Offer p.106.5 Minimum Acceptance Conditions p.10

6.6 Requirement to Obtain Financing p.106.7 Types of Deal Security Measures p.106.8 Additional Governance Rights p.116.9 Voting by Proxy p.116.10 Squeeze-Out Mechanisms p.116.11 Irrevocable Commitments p.11

7. Disclosure p.117.1 Making a Bid Public p.117.2 Types of Disclosure p.117.3 Requirement for Financial Statements p.127.4 Disclosure of the Transaction Documents p.12

8. Duties of Directors p.128.1 Principal Directors’ Duties p.128.2 Special or Ad Hoc Committees p.128.3 Business Judgement Rule p.138.4 Independent Outside Advice p.138.5 Conflicts of Interest p.13

9. Defensive Measures p.149.1 Hostile Tender Offers p.149.2 Directors' Use of Defensive Measures p.149.3 Common Defensive Measures p.159.4 Directors' Duties p.159.5 Directors' Ability to "Just Say No" p.15

10. Litigation p.1510.1 Frequency of Litigation p.1510.2 Stage of Deal p.16

11. Activism p.1611.1 Shareholder Activism p.1611.2 Aims of Activists p.1611.3 Interference with Completion p.16

cHiLe Law & PracticeContributed by Morales & Besa Authors: Guillermo Morales, Michel Diban, Matías Langevin, Maria José Henríquez

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Morales & Besa acts as outside counsel to domestic and in-ternational business entities including publicly traded cor-porations, privately held companies and other types of cor-porate entities engaged in a wide variety of industries and activities. The firm has extensive experience and in-depth knowledge of the development of sophisticated corpo-rate structures, business combinations, joint ventures and shareholder arrangements, especially within the context

of foreign direct investments. Lawyers provide extensive counsel in corporate governance matters, regulatory com-pliance and corporate restructurings, with particular exper-tise in resources advisory, and the planning and execution of cross-border transactions. The team advises large and medium-sized multinational corporations on the corporate affairs (both establishment and ongoing) of their local busi-ness entities or associations with local partners.

authorsGuillermo Morales is a founding partner at the firm, with vast experience in advising both significant national and international companies on planning and negotiation processes and on executing acquisition transactions and mergers,

securities offerings, debt emission and corporate restruc-turings, as well as restructuring of liabilities. He is also honorary legal counsel to the British Embassy in Santiago.

Michel Diban concentrates his practice on corporate and commercial matters, mainly in mergers and acquisitions. Mr. Diban has participated in major acquisition, sale and merger processes of Chilean and foreign companies, in several domestic

and cross-border financings, and permanent advisory work to corporations and investment funds, both national and foreign.

Matías Langevin focuses his practice in the areas of mergers and acquisitions, capital markets and banking and finance. Recently, he has advised local and interna-tional corporations in purchase and sale transactions. In the capital markets field,

he has advised both issuers and underwriters in debt securities issuance under 144 A / Reg S transactions.

Maria José Henríquez specialises in competition law/antitrust, with vast experience in litigation and advising on matters regarding competition law, mergers and acquisitions, and compliance. She has experience representing clients

before the Chilean competition authorities on M&A transactions and in complex investigations of anticompeti-tive conduct.

1. trends1.1 M&a MarketDespite economic growth slipping, this year has seen a sig-nificant increase in large and medium-sized M&A deals. Large corporations are being bought, sold or merged, espe-cially by international buyers thanks to the Chilean peso's depreciation, which allows them to even have access to con-solidated markets in Chile such as banking, insurance and utilities. There has been a relative decline in the number of small-sized deals. On the other hand, the depreciating peso has affected cross-border private equity-related M&A deals positively.

1.2 Key trendsIn general, the top M&A-related trends in Chile in 2015-16 are (i) the enactment and publication of Law No. 20,945 introducing a mandatory pre-merger notification regime (discussed in detail at 3.1 Significant court Decisions or Legal Developments) and (ii) the perceived adverse impact of the tax reform that the government promulgated this year (discussed below).

tax reformAfter certain adjustments, the Tax Reform law became effec-tive in February of 2016. Now the implementation of the leg-islation and its 1,125 clauses and fine print will determine the more precise application and construction of this new law. Below, we briefly discuss the main aspects relevant to M&A.

The current rate of income tax is 24%, which remains fully creditable against the 35% withholding tax on distributions to non-residents, regardless of their jurisdiction of residence. Starting from January 2017, two income tax regimes will be available to non-residents. Under the “Attributed Income” regime, companies with natural persons or non-resident owners exclusively will be subject to a 25% rate of income tax, which will be fully creditable against the 35% withhold-ing tax on dividends. However, the 35% tax will apply even if no actual distributions are made. Under the “Partially Integrated” regime, the corporate tax will apply at a 27% rate (25.5% for 2017 only), which will be creditable against the 35% withholding tax but with a cap of 65%, for a final overall tax burden of 44.45%. However, if the non-resident owner is a resident of a jurisdiction with which Chile has a



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double taxation treaty in force, the corporate tax will be fully creditable against the withholding tax, such that the overall tax burden will remain at 35%. Until 31 December 2019, the limit of 35% for withholding taxation will also apply if distributions are made to a person resident in a country with which Chile has signed a double taxation treaty, even if it has not become effective (as is the case with the treaty with the USA). Under the Partially Integrated regime, the withhold-ing tax applies to effective distributions.

New thin capitalisation rules (applicable to foreign financ-ing subject to a 4% preferential rate on interest on banking debt) have been in force since January 2015. New rules for related borrowing have been included and the ratio between debt and equity must now be calculated considering virtually all the debt that the borrower has, including foreign, local, related and unrelated debt. In another significant change to the previous regime, interest subject to limited taxation due to the application of double taxation treaties may now be subject to the thin capitalisation rules. Note, however, that the thin capitalisation rules continue to affect only the local borrower and not the non-resident lender; the latter contin-ues to be subject to the 4% preferential withholding tax or the relevant treaty rate.

Effective from 1 January 2016, the Stamp Tax applicable on financing operations such as loans, credit facilities and other money credit operations, which was previously capped at 0.4%, is capped at 0.8%.

A general anti-abuse rule has been effective since 30 Septem-ber 2015, under which the Chilean Internal Revenue Service has broad recharacterisation powers if a given act or series of acts is constitutive of abuse or simulation, in order to avoid, elude, defer or otherwise manipulate the relevant tax burden.

1.3 Key industriesThe industries experiencing significant M&A activity, in or-der of magnitude, are energy (eg the Endesa/Enersis merger; Gas Natural Fenosa's acquisition and tender offering of CGE; State Power Investment Corporation's acquisition of Pacific Hydro assets; and GE's acquisition of 50% of Power Plant Los Guindos), retail (eg Mexican retail company Femsa's acquisition of a majority stake in Chilean pharmacy chain Cruz Verde; and Essilor International's acquisition of 100% of Optics Place Vendome), financial services (eg the Itau/Corpbanca bank merger), utilities (eg EPM's acquisition of Aguas Antofagasta), mining (eg Antofagasta Minerals’ ac-quisition of a 50% stake in the Zaldívar copper mine from Barrick Gold), and industrial (eg Amcor's acquisition of Teckpack).

2. Overview of regulatory Field

2.1 acquiring a company In the area of private acquisitions – where the target compa-ny is a private company which is not subject to the structures and regulatory overview of public/listed companies – the approach to acquisitions is not significantly different from that of acquisitions taking place in any major jurisdiction, save for a few idiosyncrasies. Generally, there is a privately negotiated process including an initial stage that starts with a more or less binding expression of interest, confidentiality and exclusivity (if it is not a competitive process), due dili-gence, and a binding offer that culminates in a fully negoti-ated purchase and sale agreement that may or may not be subject to conditionality, price adjustment, escrow accounts, seller representations and indemnities, and closing.

In the area of acquisitions of listed companies, usually a mandatory tender offer to all shareholders on a pro rata ba-sis (known as an “OPA”) will be the only means to take over the control of a Chilean listed company. The disclosure of the offer, the timing of the process, the strength of the offer and other elements of an OPA are tightly regulated by the Securities Market Law, and its secondary regulations are is-sued by the Superintendency of Securities and Insurance or “SVS” (the Chilean securities market regulator).

2.2 Primary regulators There is no regulatory agency that is dedicated to supervising M&A activity in Chile per se. However, there are several reg-ulatory and supervisory agencies that can be involved in the process. For example, the competition authorities, whether it is the National Economic Prosecutor's Office (Fiscalía Na-cional Económica, or “FNE”) or the Competition Tribunal, could review an M&A transaction either before or after its completion.

The other relevant agency for transactions involving listed or registered companies is the SVS. The SVS plays an active role in the supervision of the disclosure obligations and corpo-rate governance obligations, as well as the conduct of OPAs for listed companies that lead to a change of their control.

There are a myriad of industry and sector regulatory agen-cies that may be relevant during an M&A process. An ob-vious example of this is when a state-owned asset is sold or privatised - here the development and holding company agency, Corporación de Fomento de la Producción (or “COR-FO”) is usually the key intervening agency. In public infra-structure concessions, any transfer or sale of control of a concessionaire company during construction of the relevant concession will require the approval of the Ministry of Public Works. Acquisitions of state-owned real estate property or land require the intervention of the Ministry of National Land while acquisitions in the banking system need the prior


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approval of the Superintendency of Banks and Financial In-stitutions. In a change of control of a private pension fund manager (ie an “AFP”), the transaction requires the prior approval of the Superintendency of Pensions.

2.3 restrictions on Foreign investment There are no restrictions on foreign investment in Chile, ex-cept in specific sectors or industries that are reserved to the state, such as the ownership of oil and gas upstream deposits and nearly everything concerning nuclear energy. There are also some restrictions on foreign ownership of media and property adjacent to the border with neighbouring coun-tries. Otherwise, Chile has a very liberal regime regarding ownership by foreign individuals and entities.

2.4 antitrust regulations Decreto Ley No. 211 (DL 211) is the Chilean Competition Statute. As mentioned, currently there is no mandatory requirement in Chile that the parties pursuing an M&A transaction must consult with, or obtain clearance from, the antitrust agencies beforehand. The Chilean antitrust law is very succinct; the body of the antitrust law is found in the jurisprudence or decisions of the Competition Tribunal and the FNE, which over the years have been interpreting the general provisions and further defining their scope and construction. The Competition Tribunal's decisions are a continuing balancing act between two major criteria which are used to assess whether an intended transaction is likely to have an adverse effect on competition in the relevant market. These criteria are, on the one hand, consumer welfare and, on the other, objective concentration in the marketplace. In other words, Chilean antitrust authorities will seriously consider the argument that a given transaction may in fact result in more concentration in the relevant marketplace by objective standards, and still not find an antitrust offence if it is persuaded that consumer welfare will nevertheless be favourably impacted as a result of the combination based on sound economic analysis. Recent decisions from the an-titrust authorities have focused on unilateral price effects by estimating the incentives of the firms to increase prices after the transaction. Additionally, the Supreme Court of Chile, which may revise the decisions of the Competition Tribunal, usually follows a rather more formalistic approach.

2.5 Labour Law regulations Like most Latin American countries, Chile has quite rigid la-bour laws. It is cumbersome but not impossible to terminate workers' employment. The Labour Code attempts to regulate every aspect of the employment relationship, thereby leav-ing very little space for the parties to accommodate special arrangements suitable to a particular industry, activity or type of enterprise. These rigid rules apply across the board and are not subject to waiver or amendment by the parties concerned. There are quotas for the hiring of non-national unskilled workers. Skilled staff and executive-level employ-

ees have a more liberal regime, especially in connection with hiring and firing.

Union laws have increased the bargaining power of unions and the reach of their association. From what used to be an admittedly very liberal regime in the past, Chile has been gradually and steadily moving in the direction of adopting European-style laws and regulations regarding labour rights and benefits, “stability” in employment, and strength of un-ion organisation.

2.6 National Security review Apart from national security-sensitive areas such as airports, seaports, property adjacent to the border with neighbour-ing countries, explosives, and the defence industry generally, there are no security reviews of acquisitions in Chile.

3. recent Legal Developments3.1 Significant court Decisions or Legal Developments Mandatory pre-merger controlFollowing the recommendations of a report from the OECD on ‘Assessment of Merger Control in Chile’ published in July 2014, the government sent a bill of law to Congress in March 2015 amending the Chilean Competition Act, which aims to establish a mandatory pre-merger control regime similar to other jurisdictions. The bill of law was recently passed by Congress and is currently in its last steps awaiting to be published in the Official Gazette.

Today there is no mandatory requirement in Chile that the parties pursuing an M&A transaction must consult with or obtain clearance from competition authorities. However, the FNE and the Competition Tribunal have long dealt with M&A transactions. The flaws that necessitated the amend-ment of the existing review system are mainly related to lack of certainty and predictability. In fact, merger control relies on legal provisions and procedures designed for other purposes. The administrative agency in charge of investigat-ing antitrust matters - the FNE - began actively reviewing mergers after the issuance of ‘Guidelines for the Analysis of Concentration Operations’ in 2012, which established a vol-untary pre-merger review system and analyses transactions based on the Herfindahl-Hirschman Index (HHI). On the other hand, parties to the transaction and even third parties or the FNE may submit the transaction to a complete judicial review before the Competition Tribunal.

The bill of law aims to give more predictability. The new mandatory pre-merger regime will require notifying the FNE before proceeding with an M&A transaction. The Competition Tribunal’s powers will be limited to review-ing the FNE’s decision in the event that it blocks a transac-tion. Predictability is improved by including a definition of



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concentration transactions in the law, by establishing clear notification thresholds, by creating a notification procedure, and by defining the powers of the FNE and the Competition Tribunal.

As to the definition of concentration transactions, the bill defines the concept in broad terms as every act or agreement which causes previously independent economic entities that do not belong to the same economic group, to cease to be independent. In this regard, the amendment will subject the following transactions to mandatory notification:

•Mergers, whatever the form of corporate organisation of the merging entities or entity resulting wherefrom;

•Direct or indirect acquisition by a company of rights that allow it to individually or jointly decisively influence the management of another;

•Association of two or more entities, forming a distinct in-dependent economic agent which will perform its func-tions permanently; or

• If one or more entities gain control over the assets of an-other, for whatever reason.

The bill provides that prior notification will be mandatory to the parties of transactions that are above certain turnover thresholds. The turnover thresholds will be set by regula-tion of the FNE. In case of mergers, the notification will be mandatory if the following two joint conditions are met: first, their joint annual turnover in Chile exceeds certain thresholds; and second, at least two of the entities considered separately had individual annual turnover in Chile above certain threshold. In the case of mergers, the entities rev-enues include revenues in Chile from their economic group, that is, including every related person. We do not have any official or unofficial information regarding the thresholds to be set by the FNE.

M&A transactions will have to be notified to the FNE before they are perfected and their effects will be suspended while the notification procedure is still ongoing. The bill further describes the duration of the stages of the notification pro-cedure.

The process could end with the FNE approving the trans-action unconditionally or conditioning the approval of the transaction upon certain remedies offered by the parties in writing. The FNE could also prohibit the transaction. In this last case, the parties to the transaction will be able to chal-lenge the decision before the Competition Tribunal.

Enforcement of the new notification regime is secured by incorporating new rules of conduct in the competition stat-ute. Failure to submit the transaction to the mandatory no-tification procedure, completing the transaction during the notification procedure, violating approval conditions and

providing false information during notification before the FNE will be considered violations of Chilean competition law and could be sanctioned with fines, divestiture or termi-nation of the relevant contracts. This is not irrelevant since the bill will also amend the fines provision of the competi-tion statute. When the amendments come into force, the parties could be punished by a fine of up to twice the value of the economic benefits arising from the infringement or a fine equivalent to 30% of their turnover corresponding to the relevant products or services for the duration of the infringe-ment or, if it is not possible to calculate either, with a capped fine, the amount of which is still under review by Congress.

The mandatory pre-merger notification regime will enter into force 6 months after the FNE publishes the turno-ver thresholds. Our rough estimation is that the turnover thresholds will be published by the end of 2016 and that the notification obligation will enter into force by mid 2017. Any M&A transaction which has not closed before that date and that is over the thresholds will have to be notified to the FNE and suspended during the notification procedure.

A relevant M&A transaction was recently reviewed by the Competition Tribunal, which through a decision issued on 16 April 2016 approved a consultation filed by the FNE regarding the acquisition of Sheraton Santiago Hotel and Convention Centre and San Cristobal Tower by Inversiones Hoteleras Holding S.p.A. The acquiring company is admin-istered by Whitesands S.A. and participates either directly or indirectly in the property of other hotels: Intercontinental, Ritz Carlton and Crowne Plaza. By way of background, in 2013 the FNE closed an investigation regarding the acquisi-tion of said hotels but warned about the effects on competi-tion that further acquisitions by the same fund could cause.

In its decision the Competition Tribunal made a distinction between the rights over the facilities and the rights over the administration of the hotels. The tribunal concluded that the administration of the hotels to be acquired did not depend directly on the owner of the facilities (the investment fund) and, therefore, the effects over competition arising from the transaction would be limited.

However, and in order to dismiss further risks, the tribunal analysed the possible effects on competition arising from the transaction assuming that ownership of the facilities gave administration powers. Still under that scenario the Com-petition Tribunal found that the transaction would not have significant effects on competition since the relevant market had low barriers to entry and low concentration indices.

The case is relevant because in its decision the Competition Tribunal discarded almost every argument presented by the FNE, most significantly the definition of the relevant market argued by the FNE in its consultation. ‘


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3.2 Significant changes to takeover Law There have been no significant changes to takeover law in 2014, 2015 or YTD 2016.

However, legislation under review could result in significant changes in the coming 12 months since it is expected that the bill of law that introduces a mandatory pre-merger review regime will be passed by Congress during the first half of the year. Pursuant to the bill, takeovers may have to be submitted to mandatory prior approval by the FNE if the transaction is above certain thresholds.

4. Stakebuilding4.1 Principal Stakebuilding StrategiesIt is not customary for a bidder to build a stake in the target prior to launching an offer because very quickly the poten-tial bidder may reach the thresholds (10%) that will require public disclosure of the purchases or may even trigger an untimely obligation to launch an OPA (mandatory tender of-fer). In general, Chilean securities regulations require abun-dant dissemination of information to the public by listed or registered companies and intermediaries, all of which may compromise the confidentiality of the bidder’s intentions and makes it unnecessary to engage in stakebuilding to pre-pare for a takeover.

Another important provision to bear in mind is that the Se-curities Market Law provides that if, during the 30 days prior to the launch of an OPA, the bidder directly or indirectly acquires shares of the target at a price or conditions more beneficial to the bidder than the price or conditions of the offer, the shareholders who sold prior to the launch of the OPA shall have the right to claim the price differential or forgone benefits, as the case may be.

4.2 Material Shareholding Disclosure Thresholds(a) A direct or indirect acquisition that reaches 10% of the shares of a listed company by any person or entity (“sub-stantial shareholder”) must be reported to the SVS and the stock exchanges where such shares are listed for trading. Any disposal of shares by such substantial shareholders must be likewise disclosed.

(b) Regardless of any percentage interest, any direct or indi-rect acquisition or disposition of shares of a listed company by its directors, liquidators, key executives and management (“insiders”) must be disclosed.

(c) When a person who has a joint action agreement by themselves or with others may appoint at least one of the board members on a listed or registered company, they must report the acquisition or disposal of shares of such company.

(d) A person who directly or indirectly intends to take over the “control” of a listed or registered company, in whatever manner, means or form of acquisition other than an OPA, must disclose the intended transaction at least ten business days prior to the closing and, in any event, as soon as any negotiations towards the intended transaction have been for-malised or access to material non-public information of the target is granted to the buyer. The disclosure has to be made by means of a communication to the target company, its controller, the entities controlled by the target, the SVS and the relevant stock exchanges. In addition, the buyer must publish an advertisement in two national newspapers and on the target company's website.

4.3 Hurdles to StakebuildingIn general, reporting thresholds are a matter of statutory law, and general regulations provide minimum standards that the parties may not alter. However, by the action of the shareholders in an extraordinary shareholders' meeting (“EGM”), a company may introduce a lower (stricter) re-porting threshold as a provision in its articles of incorpora-tion or by-laws, and this stricter standard will be binding on the company and its shareholders.

4.4 Dealings in Derivatives Dealings in derivatives are generally allowed, subject to minimum disclosure requirements under securities laws.

4.5 Filing/reporting Obligations There is no obligation to file/report derivatives transactions under securities disclosure and competition laws unless one of the persons referred to in 4.2 Material Sharehold-ing Disclosure Thresholds paragraphs (a) and (b) enters into or liquidates a derivatives transaction in which the value of the derivative instrument is linked to, or its underlying assets are, shares of a listed company. In such case, the per-son referred to has to disclose/report the relevant derivatives transaction to the SVS and the stock exchanges where such shares are listed for trading.

4.6 transparencyAny direct or indirect acquisition of shares of a listed com-pany by a “substantial shareholder” (ie a shareholder that holds 10% or more but less than a controlling stake) must be disclosed to the SVS and the market, indicating whether the acquisition is made with the intention to take over control of the company or if it is merely for financial purposes.

5. Negotiation Phase5.1 requirement to Disclose a Deal In private deals, the target company has no obligation to disclose. The target company is required to disclose a deal only if it entails a takeover of its control and if it is a listed or registered company, as mentioned in 4.2 Material Share-



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holding Disclosure Thresholdsparagraph (c). Even in that case, if the takeover is being pursued by a bidder by means of a tender offer or OPA, the target company could well be unaware of the impending transaction and therefore free of any disclosure obligation. However, in most instances, prior to the launch of its tender offer, a bidder will contractually bind the board of directors of the target and the latter will give the bidder access to material non-public information for due diligence purposes. In that case, a board may report to the SVS its resolution giving access to a bidder, but will typically do so on a confidential basis as a “hecho reservado” if the confidentiality request has the support of a special 75% majority vote. Nevertheless, it is at the SVS's discre-tion whether to grant such confidential treatment and for how long.

5.2 Market Practice on timing As a matter of practice, timing of disclosure is managed by the bidder. The triggering factor for the public disclosure of a takeover transaction is the execution of the relevant pur-chase and sale agreement or tender agreement between the bidder and the selling shareholders. Its execution has to be made known to the target company and to the SVS, which makes the deal public. For this reason, the parties defer ex-ecution until as late in the process as possible, ideally on or close to the day on which the bidder is ready to launch its tender offer or OPA. If everything is set but the launch is not yet possible because a condition precedent is pending satisfaction, or regulatory approval or consent is yet to be obtained, then the parties may wish to “announce” the OPA for launch at a later date and use the time to obtain satis-faction of the condition, regulatory approval or third-party consent, as the case may be.

Even if the parties expect that they can resolve all these issues during the confidentiality period and without going public, it could be that for whatever reason (typically unexplained movements in the share price that can be attributed to a leak of the impeding transaction or press articles report-ing on a potential transaction), the SVS will decide to lift the confidentiality of the “hecho reservado” and make public the target’s resolution giving the bidder access to its mate-rial non-public information - this is tantamount to making the transaction public and will likely force the bidder to an-nounce its intention to launch at a future date, launch right away, or call the deal off.

5.3 Scope of Due DiligenceIn a negotiated business combination, it would be expected that the parties will conduct a full due diligence review of the target entity. Typically, the EGM of a company taking over another by way of a merger will give its approval to the business combination, subject to a number of conditions. These would include (but are not limited to) a complete due diligence of the target company, and they would also delegate

to the board of directors the responsibility to oversee and complete these processes before the price or share exchange ratio is finally determined and closing takes place.

5.4 Standstills or exclusivityIn a negotiated business combination, standstills or exclusiv-ity are usually demanded and provided for. As a matter of practice, these contractual stipulations are usually contained in the initial documentation of the prospective transaction. Under Chilean law, there is no question that a non-breaching party should obtain a court order for specific performance in connection with these obligations, in addition to damages if such can be established in court.

5.5 Definitive agreementsIt is common in Chile for a tender offer to be previously negotiated and documented in a definitive agreement. Typi-cally, there will be a tender agreement or purchase and sale agreement between the prospective bidder and shareholders representing a majority of the shares.

They will agree on a process conducive to the launch of a tender offer by the bidder, which will contain: an irrevo-cable offer to purchase all or a percentage of interest in the target and the selling shareholders' standstill and obligation to tender their shares, subject to the bidder’s completion of a certain level of diligence on material non-public informa-tion of the target.

The tender offer itself may be conditional on the bidder achieving a certain threshold or minimum number of shares being actually tendered over and above the number of shares that have to be tendered by the selling shareholders. This is the market practice in most cases in Chile because the vast majority of Chilean listed companies have a controlling shareholder that may dispose of the control of the company. Under Chilean law the role of the board of directors is very limited. Their fiduciary duties are limited to speaking on an individual basis upon the mere adequacy of the terms of the tender offer, and no law, SVS regulation or court decision has even suggested that the board has any duty to negotiate better terms or mount a defence, let alone seek a rival or competing offer.

6. Structuring6.1 Length of Process for acquisition/SaleWithout any regulatory approvals or clearances involved in the process, a private deal should be negotiated and com-pleted within a few months, depending on the length of the negotiation of the transaction documents and the depth and exigencies of the due diligence review.

In a public deal, it may take a few weeks or months before a final purchase and sale agreement or tender agreement is


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finalised and a limited diligence completed. At that point, the ensuing launch and tender offer (OPA) process is brief: the mandatory period to tender is usually 30 days. On the third day following the expiry of the tender period, the bidder has to publish an advertisement giving notice that the OPA was successful (or otherwise). If declared successful, the transfer of the shares takes place on that same date. Payment of the shares may also take place on that date or shortly thereafter if it was so provided in the prospectus of the OPA.

6.2 Mandatory Offer ThresholdA buyer of shares in a company is obliged to launch a tender offer if the intended acquisition is aimed at or will result in the takeover of the control of the target and is not other-wise exempted under one of the cases provided for in the Securities Market Law (the most important exceptions are (i) a purchase of the control if the shares have market pres-ence, the price does not entail a premium of 10% above the current market price and such payment is made in cash, or (ii) in the case of a merger). “Control” for these purposes is generally defined as the ability to elect the majority of the directors or vote the majority of the shares of a listed com-pany or have decisive influence in the management of such listed company.

Even if not obliged to do so by law, any buyer of shares in a listed company may voluntarily launch a tender offer to achieve the purchase of a certain percentage of the shares of a target company.

Whether in a mandatory or a voluntary tender offer (OPA), there is no mandatory minimum or maximum offer thresh-old, except in the case when the tender offer is made as a result of the acquisition of two thirds of the outstanding shares with voting rights of a listed company, in which case the mandatory tender offer must seek 100% of the ownership of such company. A bidder is free to launch a tender offer (OPA) aimed at the purchase of all or any defined percentage of the shares of the target. Similarly, a bidder may subject the offer to the condition that shareholders tender and sell a defined minimum percentage of shares, below which the offer will be deemed withdrawn.

6.3 consideration Cash is more common than shares as consideration in Chil-ean deals.

6.4 common conditions for a takeover OfferA Chilean tender offer or OPA has to be firm. However, the law allows the bidder to include in its offer certain causes for revocation in the form of objective and specified events, the occurrence of which during the mandatory tender period may liberate the bidder from its otherwise irrevocable obli-gation to purchase all validly tendered shares on the closing date. A bidder may waive this revocation cause or condi-

tion. The typical revocation cause or condition is failure to achieve a specified minimum number of shares being validly tendered during the tender period. The bidder must declare a revocation cause or condition prior to the third day follow-ing the last day of the tender period.

In a recent OPA, the regulator did not object to a fairly ex-pansive use of revocation causes or conditions that almost replicated verbatim the exit mechanisms seen in a private deal.

6.5 Minimum acceptance conditionsA minimum of 50% plus one share of all issued shares is needed to achieve the requisite majority to adopt all ordinary decisions at the shareholder level and designate a majority of the board. However, there are companies with a substantial float - in this case, a lower percentage may just as well be sufficient to achieve operating control.

The next level that is typically seen is two thirds of all issued shares, which achieves the supermajority stipulated by the law or the by-laws of the target necessary to vote to adopt a list of extraordinary corporate actions at the shareholder level such as approving a merger, material disposition of company assets, approval of related party transactions, eq-uity contributions in kind and their appraisal, and so on.

6.6 requirement to Obtain FinancingA financing condition is legally possible in the context of a merger agreement.

A financing condition is also legally possible in the context of a tender agreement or purchase and sale agreement that pro-vides for the launch of a tender offer or OPA. However, the OPA itself is supposed to be firm and the bidder is obliged to purchase all validly tendered shares on the closing unless a revocation cause occurs during the process. Arguably, an objective failure to obtain financing could be structured in the offering documents (ie in the prospectus of the OPA) as a valid cause for the revocation of the offer and frustration of the OPA.

6.7 types of Deal Security Measures In the tender agreement (or purchase and sale agreement) that leads to the launch of a tender offer or OPA, a bidder may negotiate and obtain all kinds of deal security meas-ures, including break-up fees, match rights, non-solicitation provisions, etc. Furthermore, starting on the date of the an-nouncement and during the course of an OPA, and with-out any contractual arrangement in place, the law provides that the target company and its board of directors shall not redeem shares, incorporate subsidiaries, sell assets repre-senting more than 5% of total assets, or incur indebtedness beyond 10% of its existing indebtedness.



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6.8 additional Governance rights It is conceivable that a bidder may include, as an additional condition to closing, that the shareholders previously ap-prove an amendment to the by-laws of the target that reduces the number of the members of the board, or adopts a freeze-out provision or other suitable features that may expand the prerogatives of a shareholder stake that is short of the two-thirds majority or 100%, as the case may be.

6.9 Voting by Proxy All shareholders are free to designate an agent or proxy to represent the shareholder of record and vote its shares on its behalf in any shareholders' meeting, whether in an annual general meeting (“AGM”) or an EGM. Such proxies must comply with minimum requirements of character. Other than the examination of their form and integrity at the rel-evant meeting, there is no special disclosure, filing or other legal or regulatory requirement with respect to the solicita-tion, granting, issuance and revocation of proxies.

6.10 Squeeze-Out MechanismsA shareholder that launches a tender offer for 100% of the shares of a company and acquires no less than 15% of such shares and thereby achieves ownership of more than 95% of all the issued shares of the target company may force re-sidual shareholders to sell 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. Since squeeze-out provisions were authorised by law only recently, it goes without saying that this process seldom works in practice. Thus a majority shareholder who wishes to delist a company will have to buy out residual minority shares via open market transactions, a simplified tender offer procedure recognised for up to 5% acquisition among other requirements, or private purchases until the company is left with fewer than 500 shareholders for six months, at which point the company may be taken private. Shareholders that have not voted their shares or collected their dividends for more than ten years will not be counted for the purposes of these thresholds.

6.11 irrevocable commitments In a typical tender agreement, it is common to obtain irrevo-cable commitments to tender from principal shareholders of the target company who are privy to the agreement. We are not aware of any relevant tender offer or OPA that was launched in the absence of such a pre-existing agreement.

Negotiations will usually take place after the bidder has been able to obtain access to material non-public information of the target and, based thereon, made a binding offer that will usually contemplate a term sheet of the terms and conditions of the tender agreement or sometimes attach a draft thereof.

The nature of the undertakings that can be made part of the tender agreement or purchase and sale agreement are many and may vary substantially depending on the merits of the particular case. There is seldom a case that repeats itself in M&A, which is much more of an art than a science. These agreements may provide for an absolute lock-up of the shares, although exceptionally in some instances they could contemplate an out for the principal shareholder if a better offer is made. But the fact of the matter is that, when a ten-der agreement has locked up the majority of the shares and secured exclusive access to the material non-public informa-tion of the target, the likelihood of a rival offer is virtually nil.

7. Disclosure7.1 Making a Bid PublicIn a tender offer for the control of a public company, the deal is made public: (i) when the bidder decides to announce the deal; (ii) when the bidder launches its tender offer or OPA, if it wishes and is able to avoid its prior announcement; or (iii) earlier than either of the above if the SVS requires the target company or its shareholders to disclose the deal because the SVS in its discretion has found that the lack of disclosure may give rise to insider trading or other illicit activities.

In a combination by way of a merger that involves at least one listed or reporting company, the deal is made public when the controlling shareholders of the listed or reporting company discloses to the SVS and the market the execution of a memorandum of understanding (“MoU”), letter of in-tent, or other initial document providing for the terms and conditions of and the parties’ intention to pursue a merger of their companies. On the same date, the board has to in-form the SVS as a “hecho esencial” about the prospective transaction if the company has been privy to the relevant negotiations.

If the merger involves two or more private companies, there is no public notice until the advertisements to summon each of their respective EGMs are published.

7.2 types of Disclosure In a combination by way of a merger that involves at least one listed or reporting company, the issuance of shares is made public when the board of directors of the listed or re-porting company adopts a resolution to summon an EGM of its shareholders to consider and vote on a proposed merger with another company. On the same date, the board resolu-tion must inform the SVS that there is a “hecho esencial” and it must be made public. There is no legal basis for the board to ask the SVS to treat this information as confidential.

If the merger involves two or more private companies, there is no public notice until the advertisements to summon each of their respective EGMs are published.


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In anticipation of the EGM being summoned for the approv-al of the merger transaction by a two-thirds majority of all is-sued shares with voting rights, the board of directors of each merging company must provide its shareholders with: (i) a copy of the merger agreement providing for the terms and conditions of the merger including the exchange ratio; (ii) the audited financial statements of the relevant companies dated no longer than six months before the shareholders' meeting (90 days in the case of listed or reporting compa-nies); and (iii) the report of the independent expert appraiser containing the valuation of the relevant companies, the ex-change ratio and a pro forma balance sheet post-merger.

In the case of listed companies, the board of directors also has to provide the shareholders with: (i) detailed informa-tion on the objectives and expected benefits of the merger and its terms and conditions; and (ii) a certification by the auditors of the surviving entity of the financial statements of the merged entity at fair market values.

7.3 requirement for Financial StatementsIn a takeover by way of a tender offer (OPA), the prospectus of the tender offer must include summarised financial infor-mation for the two preceding fiscal years of both the bidder and its controller.

In a business combination by way of merger, the board of directors of each merging company must provide the share-holders with: (i) audited financial statements of the relevant companies, prepared in Chile's required form (eg IFRS in the case of listed or registered companies, or Chilean GAAP in the case of private companies) and dated no more than six months before the shareholders' meeting or 90 days in the case of listed or registered companies; and (ii) a pro forma balance sheet post-merger.

7.4 Disclosure of the transaction DocumentsIn a takeover by way of a tender offer (OPA), disclosure of the transaction documents (the MoU, if any, the bind-ing offer, the tender agreement, etc) in full is not required. However, the SVS has the authority to force the bidder to disclose such documents during the course of an offer. The prospectus of the OPA must describe all prior agreements of the bidder in connection with the OPA that may have been entered into with the target, its parent, subsidiaries or controllers, or majority shareholders of the target. Usually, this disclosure includes a brief summary of the main terms and conditions of the tender agreement or purchase and sale agreement.

In a business combination by way of merger, in anticipa-tion of the EGM being summoned for the approval of the merger transaction by a two-thirds majority of all issued shares with voting rights, the board of directors must pro-vide the shareholders with, among other things, a copy of the

merger agreement providing for the terms and conditions of the merger including the exchange ratio, and, in the case of listed companies, detailed information on the objectives and expected benefits of the merger and its terms and conditions.

8. Duties of Directors8.1 Principal Directors’ Duties The board of directors of a Chilean company is vested by law with full and exclusive power and authority to adminis-trate and manage the company except for such matters that the law and the by-laws reserve for the exclusive decision of the shareholders (see below), and the statutory authority bestowed upon its managers (officers) to act in the ordinary course of business and represent the company in court. The board of directors acts collectively, as a body, in legally con-vened board meetings. Individual board members as such do not have any executive powers or authority to bind or represent the company.

A director who is elected by a group of shareholders or a class of shareholders has the same duties to the company and all other shareholders as the other directors. Therefore, a director must always advance and look to the interests of the company and all its shareholders, rather than the interest of the shareholder that elected him or her. This is a paramount principle of Chilean corporate governance law. It means that directors, once elected, must discharge their office, func-tions and authority with a view to advance the interest of the company and all its shareholders with disregard to any competing or conflicting interest of a shareholder that voted to elect that director. This is especially relevant in the context of related party transactions where a decision by the board has to approve a matter or transaction between the company and one of its shareholders.

8.2 Special or ad Hoc committees It is uncommon for boards of directors in Chile to establish special or ad hoc committees in business combinations by way of a merger. Although the law requires that the board of directors of a large corporation must designate at least one independent director and a committee of directors, the ap-proval of a merger transaction is the exclusive prerogative of an EGM with a two-thirds special majority vote of all issued shares. The initiative to call for an EGM to consider, approve or refuse a proposed merger lies with the board of directors or shareholders representing no less than 10% of the issued shares asking for such an EGM to take place.

Accordingly, if the company or its shareholders wish to initi-ate a merger process for a business combination, the role of the board is to propose the merger and convene an EGM to consider and approve the proposed merger. In proposing the merger, the board must make the case for the merger as in the interest of the company and all its shareholders.



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If the proposed merger qualifies as a related party transac-tion and members of the board are conflicted because of their interest or involvement in the transaction, they must declare their interest and abstain from voting. If a majority of the directors are conflicted, then the unanimity of the uninterested directors has to approve the merger proposal. But in the ultimate analysis, the EGM will be sovereign in approving the transaction, not the board.

As an alternative to realising a business combination by way of a proper merger (with exchange of shares, etc), it is pos-sible under Chilean law to resort to what may be termed a “de jure” merger. This type of merger takes place when one of the entities of the combination, which will be the surviv-ing entity, acquires all of the shares of the other entity of the combination. Upon the consolidation of all the shares of the other entity in a single shareholder, by operation of the law, the other entity is then automatically dissolved and merged into the absorbing entity that succeeds in all of its assets and liabilities. If the acquisition by the absorbing entity of all the shares of the other entity should constitute a related party transaction, the acquisition has to be approved by a majority decision of the board of directors with the exclusion of the interested directors. If there is no such majority, the acquisi-tion has to be approved by the unanimity of the uninterested directors or, in failure thereof, the EGM with the favourable vote of a two-thirds majority of the issued shares, and on the basis of an independent appraisal report and the opinion of the directors as to the advisability of the proposed acquisi-tion to the interest of the company and its shareholders.

8.3 Business Judgement ruleThere is no sufficient precedent on these matters to affirm that courts in Chile will defer to the judgement of the board of directors in takeover situations. However, both the ap-plicable statutes and the market practice would indicate that the judges will not second-guess a board, let alone the share-holders when deciding the key statutory test in all board decisions, which is whether the corporate action in question does in fact advance and look towards the furtherance of the interests of the company and all its shareholders.

8.4 independent Outside advice Under Chilean law, there is no concept of or requirement for a fairness opinion. However, such opinions are usually sought by the boards of directors of public companies, most typically in the context of large transactions where US par-ties or investors are involved, in addition to any mandatory appraisals or directors’ opinions.

In a business combination by way of a merger, the Corpora-tions Law provides that the board of directors of the com-pany being merged shall designate an independent appraiser (“perito independiente”) to issue a valuation report of the companies being merged and the relevant share exchange ratio. The report also has to include a pro forma balance

sheet of the surviving entity or new entity to be formed upon the merger, showing the sum of the respective assets, liabilities and net worth line items of each of the companies being merged. The independent appraiser has full access to all corporate documentation and records of the companies participating in the merger that may be necessary to produce the report and verify any data or information supplied by these companies. The report must indicate the methodology used by the appraiser in the calculation and determination of the share exchange ratio. In any event, it is important to note that the EGM shall be sovereign in the final determination of the share exchange ratio.

8.5 conflicts of interest Conflicts of interest of directors, managers and sharehold-ers (but not advisers) have not been the subject of judicial review in Chile. However, these same conflicts have been the subject of extensive scrutiny by the SVS in many instances.

Perhaps the most salient case of a conflict of interest be-tween directors and shareholders involved a hotly disputed capital increase in Enersis, a large energy company in Chile, at the behest of its controlling shareholder, Endesa España. The capital increase was structured to allow for payment of the new shares of the capital increase in kind, that is, with assets that Endesa España wanted to contribute to its affili-ate Enersis in exchange for such shares. Endesa España had enough voting power to have the capital increase and is-suance of new shares approved by the EGM. The minority shareholders manifestly opposed the transaction on grounds that the valuation of the assets was not fair and would result in their undue dilution. Key to forcing a better valuation in the transaction was the opinion (liability) of the directors. However, the board took the legal position that their opinion was not required in this instance and the matter had to be referred to the sovereign decision of the EGM for approval or rejection. Active minority shareholders led by a pension fund vigorously protested and sought the intervention of the SVS, which finally made an aggressive (binding) interpreta-tion of the law, essentially concluding that the proposed capi-tal contribution and issuance of shares was a related party transaction between Enersis and its controlling shareholder. Since related party transactions do have an extensive body of rules dealing with conflicts of interest, Enersis and its entire board were forced to follow the strictures and processes for the approval of related party transactions which included the rendering of individual opinions by all the members of the board of directors, their declaration of interest, and their reasons to consider that the transaction was on market terms or fair value and in the interest of the company and all its shareholders, and so on. Not surprisingly, the transac-tion was completed but in significantly improved valuation terms.

There is another case which may be illustrative of conflict issues and their treatment under Chilean corporate laws.


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This case involved a merger of two entities, in which the entities and their controlling shareholders relied on the fact that, under Chilean law, a takeover by way of a merger does not give rise to a tender offer to the shareholders (it only affords to dissenting shareholders what is considered a mea-gre redress, “derecho a retiro,” a put based on trading prior to the announcement of the transaction, ie no premium). The merger was structured as a shares-for-shares exchange (at a given ratio) for approval of a two-thirds majority of issued shares of each entity. The problem here was that in addition to the exchange of shares involved in the merger, which was the only consideration offered to the sharehold-ers in this transaction that effectively ceded control to the surviving entity’s shareholders, the deal also contemplated a series of shareholder arrangements between the controlling shareholders of the merged entities. According to critics of the deal, such agreements embedded valuable consideration (board seats, perks, etc) flowing to the controlling share-holder of the merged entity, but no such contractual rights or the value thereof were offered or otherwise made available to the minority shareholders of the merged entity.

A minority shareholder, a US fund invested in the merged entity, brought a lawsuit in Chile. The case was dismissed. The board of the merged entity was not subject to any spe-cial duties to challenge the proposed transaction, let alone to seek a better alternative, and the shareholders were not entitled to have the court “appraise” or determine a higher consideration payable to them under Chilean law. So the minority shareholder brought a lawsuit in the US courts predicated on US securities laws. It remains to be seen if the court will exercise jurisdiction and, if it does, whether it will apply US securities laws to the Chilean merger deal.

9. Defensive Measures9.1 Hostile tender Offers Hostile tender offers are permitted but are uncommon in Chile. The reason is that the vast majority of Chilean pub-lic companies have a controlling shareholder that elects the majority of the board and, indirectly, the key management. Accordingly, the acquiescence or wishes of the controlling shareholder of the company is the key to the feasibility of any tender offer for the control of the company. Any poten-tial bidder will have to discuss directly with the controlling shareholder any potential transaction. If the potential trans-action is aimed at taking over the control of the company and the controlling shareholder agrees to pursue such a transac-tion, the controlling shareholder may request that the board of directors co-operate with the deal.

In the event that a sufficiently large number of the members of a board of directors are hostile to the change of control that is being pursued by the controlling shareholder (and probably most of the float as well), ultimately in practice

the controlling shareholder may resort to a renewal of the entire board and elect directors who are sympathetic to the change of control.

There have been at least three historic cases in which a com-pany did not have a controlling shareholder and its board of directors had a decisive role in seeking, negotiating and structuring a deal for the takeover of the company by a third party. In one of those cases, the bidder, a large strate-gic buyer, had negotiated a strategic alliance with the target that included the purchase of a controlling stake in it via a tender offer and the entering into of several contractual arrangements with the target’s management. Some active shareholders of the target were not happy with the terms of the proposed deal. But instead of forcing the board to take a more active role to improve such terms or turn the deal down, something for which there was not much legal base given the limited fiduciary duties of a Chilean board, the opposing shareholders themselves went on to attack the deal favoured by the management of the target by, among other things, asking the securities regulator to stop it on the grounds of alleged violations of securities laws posed by the proposed contractual arrangements between the target and the bidder and, also, by going out themselves to find and produce a rival offer. The strategy worked, a rival offer en-sued, and the purchase price gradually started to improve until both competing bidders called the bidding-up off and agreed to split the prize.

9.2 Directors' Use of Defensive MeasuresAs explained, the role of the directors in a tender offer is limited to issuing an individual opinion for delivery to and benefit of the shareholders as to the adequacy of the offer. All they can do against the offer is to say to the shareholders whether, based on their analysis of all the terms and condi-tions of the offer, the tendering of their shares is advisable or not. Apart from this, neither the board of directors nor the individual directors are supposed to take any active role in expanding the options to the shareholders, let alone interfere with the normal conduction of an offer. Also, the vast major-ity of Chilean companies have a controlling shareholder, and management has none or a very marginal stake in the com-pany. All of this explains why directors have no legal duty or incentive to “defend” the company from a potential buyer.

In the case of a combination by way of a merger, again, the laws of Chile require a two-thirds majority vote of all issued shares to approve a merger. Even if the board of directors is not in favour of a proposed combination by way of a merger, shareholders representing 10% of the issued shares may cir-cumvent the board of directors and call an EGM to approve a merger.

In summary, a board of directors has a paramount obliga-tion to pursue the best interest of the company and all its



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shareholders. It would be very hard to justify the adoption of defence strategies consistent with the goal of maximising shareholder value.

9.3 common Defensive MeasuresA board of directors of a Chilean company is not supposed to adopt measures that are not exclusively justified on the enhancement and advancement of a company and share-holder value. The company belongs to the shareholders, not to its board or board-designated management. Any defen-sive measures by the board have to be predicated on the basis of seeking the best interest of the company and all its shareholders.

In the face of a takeover transaction between the controlling shareholder of a target and a bidder, the members of a board could theoretically determine, under their personal liability, that such takeover is not necessarily a satisfactory transac-tion. Following those determinations, the board could then refuse to co-operate with the proposed transaction by refus-ing to give access to its non-public information to the bidder to conduct diligence, or it could give that access to the bidder but on a non-exclusive basis and thereby open the company to any potential interested party to look into its non-public information and put the company in play and challenge the bidder. The board may even decide to engage its own finan-cial adviser to advise the target company as to the suitability and fairness of the proposed transaction, evaluate alterna-tives and even seek bidders or alternative transactions. There is no precedent of this kind in Chilean market practice.

9.4 Directors' DutiesDirectors are subject to a duty of care in adopting corporate measures and they are personally liable for any loss or harm caused to the company by their negligent decisions. When enacting a defensive measure, as discussed in the preceding paragraph, they will have to ponder the adverse effect that such measures may have in a proposed transaction that the board decides to turn down, confront or challenge. If such measures result in loss of value or business opportunity to the company or its shareholders, including both majority and minority shareholders, directors approving such defen-sive measures could potentially face personal liability for those losses.

9.5 Directors' ability to "Just Say No"Directors may not “just say no” and prevent a business com-bination by way of merger from taking place. Individual di-rectors may give a negative opinion on the proposed com-bination. A majority of the board may even declare their opposition to a merger. But even in that case, 10% of the shareholders may request that an EGM is held to vote on the combination, and a two-thirds majority of the issued shares can approve the merger, regardless of any board opposition. If such an EGM is held and a two-thirds majority approves

the merger, dissenting minority shareholders will have the right to exercise their “derecho de retiro” or otherwise receive shares in the combined business at the share exchange ratio that is approved by the EGM.

“Derecho de retiro” is granted by law to shareholders that dis-sent (but not those that abstain) at an EGM called to approve a merger (or certain specified transactions), and those share-holders that were absent from such meeting; and they have the right, if they tender their shares to the company within 30 days after the EGM shareholder approval is received, to have their shares purchased by the company within 60 days after shareholder approval is received at a price per share based on (i) the book value in the case of private companies or listed or reporting companies whose shares do not have market presence, or (ii) the weighted average price of the company’s shares as reported on the Chilean stock exchanges where the company's stock is listed for the period that starts on the 90th trading day and ends on the 30th day prior to the date of the shareholder meeting (in the case of listed or re-porting companies whose shares do have market presence).

10. Litigation10.1 Frequency of LitigationLitigation has increased in connection with M&A deals in Chile. The Chilean Civil Procedure Code and the civil courts are unable to handle cases involving complex busi-ness transactions and securities law issues. For that reason, most M&A disputes are brought both before domestic and, in some cases, foreign arbitrators.

The enforcement of securities law violations is in practice restricted to the active supervision and sanctions, mostly fines, which the SVS imposes from time to time on offend-ers. As mentioned, the enforcement of contracts is largely referred to commercial arbitration. Chilean arbitrators are very capable and able to handle complex business matters in a timely and effective manner. Criminal prosecution can be very effective provided there is merit for a criminal case. Un-like the civil courts, the criminal courts and their procedures and infrastructure are very effective.

The lack of effectiveness in the civil court system, the judicial enforcement of contracts and the rendering of decisions in civil cases in connection with M&A transactions and se-curities issues is a perceptible shortcoming of the business environment in Chile. It makes it difficult for advisers, busi-nesses and practitioners to have certainty regarding where the law stands in a number of instances where the statutory language or the administrative interpretations of the SVS are missing or inconclusive.

What is worth mentioning is the utility that ordinary courts give to arbitration proceedings with respect to injunctions


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and interim measures. In spite of the arbitral jurisdiction, the ordinary courts are by law ready to assist future plaintiffs in aid of arbitration.

10.2 Stage of DealIf civil litigation can be of use in difficult M&A situations, it is in the initial stages of a process where injunctive relief can be a potent tool available to the parties. Civil courts are quite liberal in granting such relief in cases where there is a clear indication that the progression of the allegedly illicit conduct may lead to a result that damages may not render an adequate remedy, and where the party seeking the relief has persuaded the court that there is a case and that the action will be filed promptly.

In fact, in many cases, litigation starts by means of the in-junctive relief that one of the parties to the M&A seeks from the courts or the arbitrator.

11. activism11.1 Shareholder activism Shareholder activism is becoming an important factor in public M&A in Chile. The main drivers of this activity have been the pension funds or AFPs and some international in-stitutional investors. Their focus has been mainly directed at negotiating and pushing for a better premium from the bidders.

11.2 aims of activistsIn the context of a tender offer or OPA, activists generally do not seek to interfere with the completion of an announced transaction because there is only so much that the laws and regulations of Chile afford to minority shareholders when facing a poor or untimely offer. As explained, Chilean law does not contemplate Revlon-type duties that would have the board of directors take an active role in creating oppor-tunities for shareholder value maximisation. Nor are there appraisal rights that would allow shareholders to seek fair value and a court revision of an inadequate purchase price.

Hence, a tender offer or OPA tends to be very coercive or, at best, disappointing for minority shareholders if the majority or controlling shareholder negotiated less than a fair value.

In the context of other types of combination, such as a merger, there are marginally more possibilities available to shareholders. For instance, if a minority is overruled by a majority, there is a derecho de retiro or withdrawal right, which, as explained, is the right of dissenting shareholders to put their shares back to the company. But the problem is that the strike price is the book value in the case of private companies or a listed or reporting company whose shares do not have market presence or the average of the market price during 60 trading days that start on the 90th trading day and end on the 30th trading day prior to the date of the EGM when the transaction is approved, which usually tends to be a discounted price.

If there is a conflict of interest in the proposed combination, statutory law does provide for some ammunition to unhappy shareholders that wish to interfere with the completion of the announced transaction. Although the transaction may not be stayed or invalidated, interested directors face serious liability exposures if they fail to show their duty of care in proposing a transaction that is not in the best interest of the company and all its shareholders.

In summary, tender offers (OPAs) and mergers tend to be somewhat restrictive for minority shareholders; and in our civil law system, there is no expectation whatsoever that the courts will come to the fore and provide any type of redress to remedy these perceptible shortcomings of statutory law.

11.3 interference with completionActivists generally do not seek to interfere with the comple-tion of an announced transaction, whether a tender offer or other type of business combination. However, in a recent case, in which the whole transaction (reorganisation) was structured step by step as independent transactions (spin-off, mergers, tender offer), an AFP has played a relevant role in obtaining the result that the Chilean courts in part upheld a legal action filed against the SVS’s ruling that the restruc-turing did not constitute a related party transaction. As a consequence, the second step (mergers) must be approved following the rules applicable to related party transactions, something unwanted by the controller and that may materi-ally impact the shareholder approval process of the restruc-turing.

Morales & BesaAv. Isidora Goyenechea 3477 Piso 19 Las Condes Santiago de Chile Santiago Chile 7550106

Tel: +56 22 472 7000Fax: +56 2 472 7001Email: [email protected]: www.moralesybesa.cl/eng2

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