The main securities market in Chile is the Santiago Stock Exchange (Bolsa de Comercio – www.bolsadesantiago.com), incorporated in 1893 and concentrating 81.7 per cent of the trade volume in stock and 95.7 per cent in debt securities in 2005. The other two exchanges in Chile are the Electronic Stock Exchange (Bolsa Electrónica) and the Valparaíso Stock Exchange (Bolsa de Corredores). On 31 December 2006, there were 244 companies listed on the Santiago Stock Exchange. The equity trading in 2006 exceeded €22 billion and market capitalisation was approximately €131 billion. During the last decade, there were 20 IPOs in Chile (10 IPOs during the last three years).
The use of other types of traded securities (derivatives) is very limited but increasing. During 2006 the first agricultural commodity exchange (Bolsa de Productos de Chile – www.bolsadeproductos.cl) started operating in Chile.
The Securities Central Depository (Depósito Central de Valores or DCV – www.dcv.cl), provides to issuers and market participants a book-entry system for the transfer, clearance and settlement of securities and their custody. Payment clearances can be carried out through the clearance and settlement system run by the Santiago Stock Exchange or directly between the brokers participating in the transaction.
2. LEGISLATIVE AND REGULATORY STRUCTURE
Issuers, public offering of securities, publicly offered securities and the secondary markets of such securities, whether on the floor or OTC, stock exchanges, brokers, securities depositories and risk rating agencies are governed by the Securities Market Act (Ley de Mercado de Valores or LMV) and regulation issued thereunder by the securities authority (Superintendencia de Valores y Seguros or SVS – www.svs.cl). Additional regulation is imposed over insurance companies, banks and pension funds, each one of the last two having a special supervisory authority overseeing their activities.
The LMV defines securities as any transferable title, including shares, purchase and sale options of shares, bonds, debentures, mutual fund units, saving plans, commercial paper and, in general, any credit or investment title. Likewise, the Act defines public offering as that which is addressed to the public in general or to certain specific categories or groups thereof. Otherwise, the offer is understood to be a private offering not subject to securities regulation.
Because the definition of public offering is very broad, even if an offering is addressed to a small group of investors with all sorts of restrictions, it may be considered addressed to a certain specific category or group of the public and, consequently, in fact, still be reputed a public offering under the LMV. Although the number of offerees and the use or absence of any kind of marketing means or mass media may be important elements to determine whether the offering is public or not, neither the LMV nor any rule issued by the SVS establishes a threshold number or type of offerees in order to determine whether an offering could be deemed as private.
3. REGISTRATION OF THE ISSUER AND SECURITIES
For the public offering of domestic securities, both the issuer and the securities must be registered in the Securities Registry (Registro de Valores) kept by the SVS. Banks do not have to register in such registry, but their securities must be previously registered with, and approved by, the banks and financial institutions authority (Superintendencia de Bancos e Instituciones Financieras or SBIF -www.sbif.cl). The Treasury and the Central Bank of Chile are exempted from registration to publicly offer their securities.
For the public offering of foreign securities in Chile or certificates in representation thereof (certificados de depósito de valores or CDV, the equivalent to ADR), the LMV specifically provides that such offering may only be carried out when the securities or the CDV are registered in the Foreign Securities Registry (Registro de Valores Extranjeros) also kept by the SVS.
However, foreign securities or CDV may only be registered when the foreign issuer and its securities are listed with the supervisory entity or competent regulator in its country of origin or with the supervisory authority of another country where its securities are in fact traded and such supervisory authority and the SVS have signed an agreement or memorandum of understanding.
4. SUPERVISORY AUTHORITIES
The SVS is the main securities authority. It is the key institution to be able to offer publicly securities in Chile due to the registration process; it oversees the obligations of listed companies regarding financial information and accounting principles, the transparency of its shareholder structure and, in general, the supervision of secondary markets.
The stock exchanges and the securities depository issue, supervise and enforce their internal rules, which are of a contractual nature and binding for the market participants.
In addition, banks and their securities are subject to the supervision of the SBIF. Pension funds managers, the main institutional investors in Chile are also overseen by their own supervisory authority (Superintendencia de Administradoras de Fondos de Pensiones – www.safp.cl) essentially regarding the limits and type of securities in which pension funds may invest.
5. OFFERING DOCUMENTS
A public offering of securities requires the publication of a prospectus. This prospectus must be drawn up in conformity with the forms imposed by SVS General Rule 30 and 118 for stocks, SVS General Rule 30 for bonds and commercial papers, the SVS General Rules 58 and 94 for securitisations, SVS General Rule 82 for stocks of foreign issuers, SVS General Rule 88 for CDV and SVS General Rule 193 for bonds issued by foreign companies or governments.
Any prospectus and informational brochure used in connection with the offering of securities may not be disclosed if it has not been filed with the SVS (or the SBIF in the case of securities issued by banks). The SVS must ensure that it complies with the applicable regulations and contains the information that, depending on the characteristics and the nature of the offering, is required under general rules issued by the SVS.
The prospectus is traditionally drafted by the issuer, with the assistance of its financial advisor or broker acting as underwriter or investment bank, the Chilean counsel of the advisor, underwriter or bank and of the issuer, and the auditors.
There is no legal requirement to perform due diligence before a securities offering, but it is usual to do so because the prospectus must include a certificate signed by a majority of the board of directors and the CEO of the issuer stating that all the information provided to the SVS during the registration process is true and that the issuer is not in default.
Pursuant to the LMV the publicity, advertising and dissemination carried out by any means by issuers, stockbrokers, securities dealers, stock exchanges and any other persons or entities that participate in the issue or sale of securities, may not contain statements, references or representations that may lead to error, mistakes or confusion among the public about the nature, prices, profitability, redemption, liquidity, guarantees or any other characteristics of the publicly offered securities or their issuers.
Depending on the nature of the offering and the market on which securities will be listed, issuers are usually requested to provide risk ratings issued by two risk rating agencies registered with the SVS and audited financial statements (balance sheet, profit and loss and cash flow statement), both consolidated and not consolidated, for the last two financial years.
6. DISTRIBUTION SYSTEM/CONTROL OF DISTRIBUTOR
Securities offerings are traditionally distributed by stockbrokers acting as underwriters (either as stand-alone broker houses or banks’ subsidiaries). Depending on the size of the transaction, a large consortium of brokers may be involved (with lead managers, global coordinators, bookrunners, co-managers, selling agents, etc). Brokers’ fees are in line with international practice, and depend on the brokers’ commitments.
Distribution could be carried out using the facilities of the Santiago Stock Exchange (which has several trading systems designed for book building and auctioning) or outside the exchange, but stockbrokers must inform the Santiago Stock Exchange of their underwriting activity outside the exchange and trading over the counter.
7. LISTING
The Santiago Stock Exchange has no special listing requirements other than those imposed by the LMV or the SVS for registration of both the issuer and the securities in the Securities Registry.
Following the registration of securities in the Securities Registry, an application must be submitted to the Santiago Stock Exchange, including the same documents presented to the SVS plus a certificate issued by such authority evidencing that such securities are duly registered in the Securities Registry.
Issuers listed in the Santiago Stock Exchange must pay every six months a listing fee equal to 0.01 per cent of market capitalisation of the issuer with a cap of approximately €3,250 per payment.
8. CONTINUING REQUIREMENTS
Continuing requirements for both listed and unlisted companies are provided for by various sets of rules, such as the Chilean Companies Act, the LMV and the SVS General Rules identified in section 5 above, among others.
All companies registered with the SVS (both listed and unlisted) have a duty to file with the SVS and deliver a copy to the stock exchanges, within 60 days following 31 December of each year and in no event with less than 20 days before the date of the annual shareholders’ meeting, the annual financial statements, which have to be audited. These annual financial statements must be accompanied by the management and the auditors’ reports. In addition, listed companies are required to publish their annual financial statements in a newspaper.
The first and third quarter financial statements must be filed with the SVS and delivered to the stock exchange within 30 days following the last day of March and September of each year, respectively. The half-year financial statements, which have to be audited, should be filed and delivered within 45 days following the last day of June of each year.
The management report often contains information about the company’s strategy and business, a management’s discussion and analysis of financial condition and results of operations, risk factors, corporate governance disclosures such as directors’ and managers’ compensation, a list of material contracts the company entered into and contracts with related parties, the auditors’ report, etc. There is no special regulation as to forward looking information in the annual report.
The annual report must be published in the form of a printed document and must be delivered to all shareholders before the publication of the first notice to the annual shareholders’ meeting (issuers with a large base of shareholders may request the SVS to limit such delivery to shareholders with more than a certain number of shares).
8.3 Other disclosure and governance obligations
Aside from its obligation to provide periodic information, a company registered in the Securities Registry (both listed and unlisted) must immediately disclose any material event or information regarding the issuer, its businesses and securities. Such information must be disclosed through a ‘material event’ notice (hecho esencial) forwarded to the stock exchanges and electronically delivered to the SVS (which makes it public immediately through is web site) as soon as the event occurs or the issuers learns about such event or information.
Notwithstanding the above, with the approval of three quarters of the acting directors of the company’s board, certain facts or information related to pending negotiations that might damage the company’s interests if disclosed may be considered restricted information. Nonetheless, the qualification as restricted information, such event or information must be confidentially communicated in writing to the head of the SVS on the business day following the decision of the board.
In addition to the foregoing, companies registered in the Securities Registry must inform the SVS and the stock exchange about shareholders’ meetings, amendment to by-laws, identity of the shareholders on a quarterly basis, appointments of board members and managers and regarding any other documents delivered to shareholders or information published in the press by the issuer as to its securities or business.
9. CORPORATE GOVERNANCE
Corporate governance principles are laid down by the Chilean Companies Act, which has been drawn up according to the ‘one-tier board’ model. All stock companies (sociedades anónimas) must appoint a board of directors (directorio) which is responsible for the management of the company. The board of public companies must be comprised of a minimum of five directors or by a minimum of seven directors in those companies that must have an audit committee.
The board of directors is entrusted with all powers relating to the general management of the company and may proceed with any legal action on behalf of the company. The board of directors is accountable to the shareholders for the performance of their duties and may be dismissed by the latter at any time. The board of directors is chaired by a chairman (presidente).
Public companies for which market capitalisation exceeds €39 million must have a standing audit committee elected from among the members of the board. The audit committee is comprised of three directors, who are compensated. The majority of its members must be independent from the company’s controlling shareholder to assure an independent organ of control within the board. Directors are understood to be independent when they would have been elected anyway without the votes of the controlling shareholder or its related persons.
The authorities of the audit committee are (in addition to those indicated in the bylaws or entrusted by a general shareholders’ meeting or the board) to examine and opine on the reports of external auditors and the company’s financial statements before their presentation to the shareholders for approval; to propose the external auditors and private rating agencies, as applicable, that will be recommended to the shareholders meeting; to examine the information on transactions in which a director or persons related to the company have an interest and to prepare a report on those transactions; and to examine the manager and senior executive compensation plans and salary systems. Committee members are jointly and severally liable for their actions.
The board of directors must appoint one or more managers or executive officers and set their attributions and duties. The position of manager of a public company is incompatible with that of chairman or director of the board, auditor or accountant of the company. The board may replace managers at its discretion. Managers and senior executives of the company are subject to the same rules on liability that the law imposes upon directors, to the extent compatible with the functions and duties inherent to the position.
The chief executive officer represents the company judicially (mainly to be served lawsuits against the company). He has the right to speak at board and shareholders’ meetings and fulfils the duties as company secretary unless another person is especially appointed. He must report on the course of the company’s business to the board and to each director in particular (if requested). He keeps custody of the corporate books and records and must ensure that they are kept with the regularity required by the law and its supplemental rules.
Since 2003, a new bill has been discussed in Congress to reform the capital markets. This bill also introduces tax-related and institutional changes with a view to encouraging the venture capital industry. In 2005, such bill was divided into two separate bills. The new separate bill focused on improving the governance of corporations. The main changes in corporate governance being discussed in Congress are to strengthen the proxy system to ease the participation of shareholders in taking corporate decisions, the administration of conflicts of interest (including not only conflicts at the board level but also the level of controlling shareholders) and requiring shareholders’ approval to dispose of certain strategic assets (up to now such approval is required based on the value of the assets and not its strategic importance).
10. INSIDER TRADING
Pursuant to Chilean law, inside information (información privilegiada) is any information related to issuers, their securities or businesses (our legislation has adopted a very broad-ranging or extensive position in this matter) non-public (the information must not have been disclosed to the market yet) and capable, by its nature, of affecting the price of the relevant securities.
The ability of inside information to affect the price of securities will originate from the nature of the facts discussed thereby, and a cause-and-effect relationship is required between the information and the alteration in the pricing pattern of securities. Information would only be judged capable of influencing the price of publicly-offered securities when a reasonable investor could determine ex ante that the disclosure of the facts constituting that information could exert just such an influence. The law has adopted a subjective approach and the judges are therefore called upon to decide, on the basis of their experience and with the support of experts if necessary, on the materiality or lack thereof of the information in question.
Information disclosed by any issuer to the SVS on a confidential basis pursuant to article 10 of LMV shall also be considered as inside information. Also considered inside information is information about the purchase or sale operations to be carried out by an institutional investor (eg banks, finance companies, insurance companies and fund managers).
Any person with access to inside information because of his title, position, activity or relationship shall maintain strict reserve, and may not use such information to his own benefit nor to the benefit of another, nor purchase the securities he has inside information about for himself or for third parties, directly or indirectly. Such persons are also prohibited from using inside information to obtain profits or to avoid losses, by means of any type of operation with the securities referred to above or with instruments whose profitability is determined by those securities. Said parties shall also refrain from communicating such information to third parties or recommending the purchase or sale of the aforesaid securities, making sure this does not occur either through employees or trusted third parties.
The above prohibition is particularly broad and includes tipping and tuyautage practices that are excluded in some foreign jurisdictions. Moreover, Chilean laws do not demand a relationship of trust or fiduciary duty between the source of information and the person who engages in that conduct in order to classify the same as insider trading.
11. MUTUAL FUNDS
11.1 Regulatory framework
Mutual funds in Chile are ruled by the provisions contained mainly in the LMV and the Decree Law 1,328 about Mutual Funds Managers.
In addition to mutual funds, Chilean regulation also comprises investment funds, foreign investment funds and other special funds.
The management of mutual funds and the other type of funds corresponds to stock companies (administradoras generales de fondos) whose exclusive purpose should be the management of funds. The incorporation of the manager must be authorised by the SVS and their activity is under the supervision of such authority. Managers of funds must have, among other requirements, a paid in minimum capital of €260,000 and should maintain a guarantee in favour of each managed fund in an amount of at least one per cent of the net worth of the fund.
The contributions are expressed in units of the fund, all of them of the same value and characteristics. Units of mutual funds are considered as securities of easy liquidation for all legal purposes. The fund’s units are represented by nominative certificates or by the other documents authorised by the SVS.
The participants of mutual funds may, at any time, request to the manager the total or partial redemption of their units, and they must be paid within the following ten days or in the shorter time established in the internal regulations of the fund.
11.2 Investment powers
The internal regulation of each fund (which has to be approved by the SVS) determines the securities and instruments in which managers may invest and the limits of such investment power. However, depending on the type of funds, further restrictions may be applicable.
Mutual funds are entitled to invest in shares of public companies; in debentures, bonds and other credit or investment securities issued or guaranteed by the Treasury, the Central Bank of Chile or entities subject to the supervision of the SVS; in debentures, bonds, promissory notes or bills of exchange registered in the SVS Securities Registry; all without prejudice to the amounts maintained in cash, whether in a cashbox or in banks. Likewise, mutual funds are authorised to invest in securities issued or guaranteed by a foreign State or the Central Bank of a foreign country, by foreign or international banks or institutions listed on local or international markets; public offered debt securities and shares issued by foreign companies listed on stock exchanges; and in other public offered securities issued by foreign issuers authorised by the SVS.
The fund can enter into futures, options and other investment transactions which comply with the requirements established by the SVS.
Mutual funds cannot invest in mutual fund units or shares issued by mutual fund managers and there are investment limits and percentages of concentration per issuer, for example, no fund may be the controlling person of the issuer of the securities in which it is investing.
12. SECURITIES INSTITUTIONS
12.1 Regulatory framework
Brokers acting as members of a stock exchange are called stockbrokers (corredores de bolsa) and those operating on the OTC market are known as securities dealers (agentes de valores). Brokers and dealers must be registered in the SVS Registry of Stockbrokers and Securities Dealers before acting as such.
Any person applying for registration in the SVS Registry of Stockbrokers and Securities Dealers must prove and maintain a minimum capital of approximately €365,000 and other requirements of solvency, knowledge and character.
Brokers shall have as their sole corporate purpose the brokerage of securities. However, they may also carry out additional activities authorised by the SVS such as custody, portfolio management, advisory and specific commission for the purchase and sale of securities in foreign securities exchanges, advisory rendering or execution of determined research.
Banks may carry out brokerage activities for securities other than stocks, for which case they should act through a stockbroker. Banks are not obliged to register in the SVS Registry of Stockbrokers and Securities Dealers; however, they are subject to all the other provisions of the LMV as to brokerage activity.
12.2 Special arrangements for foreign entities
Foreign brokers and institutional investors may trade directly on the Santiago Stock Exchange as direct users (operadores directos) through the exchange electronic system of trading, but under the responsibility of a broker member of such stock exchange.
To be admitted as a direct user, the foreign broker or institutional investor must sign an agreement with a broker member of the Santiago Stock Exchange under which the latter take responsibility before the stock exchange for the activities of the former. Also the direct user must evidence to the stock exchange a net worth of at least €38 million and it may be required to grant further guarantees.
13. NOTIFICATION OBLIGATIONS
13.1 Notification of substantial shareholdings
Any person who, directly or through other individuals or entities, holds ten per cent or more of authorised capital in a listed company, or who attains said percentage as a result of a share purchase, and the directors, liquidators, senior officers, general manager and managers, as applicable, of said companies, regardless of how many shares they hold, are required to report to the SVS and to the stock exchanges, any direct or indirect purchase or sale of shares of said company, within two business days following the relevant transaction.
Moreover, shareholders who own more than ten per cent of the shares of voting stock at any company or who are able to appoint at least one director to its board, are required to report whether the acquisitions were conducted with the intent to take over control of the company or if it was just a financial investment.
13.2 Notification of substantial holdings in a credit institution
The Banking Act provides that no one may acquire, directly, through third parties or indirectly, shares at a bank which, by themselves or added to those previously held by the same person, amount to more than ten per cent of bank capital, other than with the prior consent of the SBIF.
The SBIF may only withhold this authorisation by means of a well-grounded resolution, if the petitioner does not meet the solvency and integrity requirements provided by Banking Law. The penalty for failing to request the SBIF’s consent will be that the shares so purchased will be deprived of voting rights for as long as the requisite consent is not obtained.
Also filing with the SVS will be necessary upon the acquisition of a ten per cent or greater share of the capital of an insurance company. The shareholder acquiring such interest must report to the SVS on the identity of its controlling partners.
14. PUBLIC TAKEOVERS
14.1 Supervision
The general rule in Chile is that any takeover of a listed company must be conducted through a tender offer (OPA), except when the law provides an exception. The OPA is a public offer to acquire shares, the procedures of which are regulated in detail in the LMV ensuring equal opportunity and fair dealing among all shareholders of the OPA target company. OPA are supervised by the SVS and its process is described in 14.2 below.
Takeovers structured through an increase of capital at the target company or through the sale of stock by the controlling shareholder, provided the price it receives is not substantially higher than market (usually not more than ten per cent above the market price of the shares) or through a merger, are exempted from the mandatory OPA.
In the takeovers exempted from the OPA mechanism, there is nevertheless the obligation to make public disclosure of the takeover before its consummation. Any person who directly or indirectly intends to take over a public company, regardless of how the shares are acquired, must previously disclose the takeover to the public delivering a written notice to:
Moreover, whoever intends to take over the target company must publish a prominent advertisement in two nationally circulated newspapers. The above notice and advertisement must be made at least ten business days before the intended date of consummation of the acts aimed at taking over the relevant company and, in any case, as soon as takeover negotiations have started, by delivering information and documentation on said company. The contents of the notice and advertisement mentioned above are determined by the SVS General Rule 104.
Once the takeover is consummated, the new controlling shareholder must, within two business days from closing the transaction, publish a notice disclosing said event in the same newspapers and send a written communication to the entities mentioned above.
14.2 The takeover process
When the takeover is carried out through an OPA, the bidder shall:
The tender offer must be open for no less than 20 days and no more than 30 days. Notwithstanding the foregoing, the bidder may extend the OPA once for a minimum of five and a maximum of 15 additional days.
Each board member of the target company shall prepare and issue a written report in which they express their opinion as to the convenience of the tender offer to the shareholders. Such report must indicate the relationship of each director with the controlling shareholder of the issuer and with the bidder and if each such director has an interest in the transaction.
Unless a shareholder consents to lose its conditions as such, no person shall be squeezed out as a consequence of an exchange of shares, merger, incorporation of a new entity, transformation or division of such company.
14.3 Financing obligations
Takeover bids may be either in cash, in securities or in a mix of cash and securities. In any case, the bidder wishing to launch an OPA must set forth in the prospectus how it will finance the payment of the share purchase price.
Tender offers and exchange offers are irrevocable, but the bidder may include in the offer (ie the notice of commencement and the prospectus) objective conditions to cancel the OPA. For example, that a certain minimum number of shares are tendered to the bidder or that certain provisions of the bylaws of the target company are amended.
14.4 Impact of 13th Directive
Inapplicable.
Unsolicited (hostile) transactions are extremely rare in Chile because almost all public companies have a controlling shareholder with a stake large enough to block any takeover attempt (either as a tender offer or a proxy campaign).
Although defensive tactics are not expressly banned, the tender offer regulation provides that during the offer the target company may not acquire its own shares, approve the creation of subsidiaries, dispose of assets representing more than five per cent of its total assets; and increase its indebtedness by more than ten per cent. The SVS, however, may authorise such transactions provided that they do not adversely affect the normal tender offer process.
15. FOREIGN INVESTMENT CONTROLS
Foreign investment in Chile and the repatriation of an investment and its profits must be carried out through two different legal frameworks: the Chapter XIV of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile (www.bcentral.cl) or the Foreign Investment Statute, Decree Law No 600.
Foreign exchange transactions may be freely carried out by any person. However, certain transactions have to be reported to the Central Bank of Chile, or have to be carried out in the formal foreign exchange market (which is the market comprised of commercial banks and other authorised entities) or both.
In general terms, a person that purchases or sells foreign currency is not required to report such transaction to the Central Bank of Chile. However, purchases and sales of currency in amounts equal or higher than US$10,000 (or €7,500) must be reported to the tax authorities by the entities of the exchange market.
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