Nuestro socio Juan Andrés Bretón, junto al director Roberto Carrillo escribieron el capítulo “Directors’, Senior Executives’ and Managers’ Fiduciary Duties in Chilean M&A Deals” para la Guía de Fusiones y Adquisiciones de la publicación inglesa Latin Lawyer. A continuación, compartimos el texto completo en su versión original en inglés, el que también puede ser consultado en su fuente original, en el siguiente vínculo.

Introduction

Due to the size of the Chilean market, it is common for directors, senior executives and managers of Chilean companies to hold similar positions in related companies, including clients and suppliers, as well as to have an interest or relationship in the transactions that their companies wish to carry out, whether as shareholders, partners, investors or stakeholders.

Directors, senior executives and managers must carry out specific actions to fulfil their fiduciary duties to the company and its shareholders. This is particularly true with respect to those evaluating an M&A transaction as they must address specific considerations.

The purpose of this chapter is to analyse some common issues surrounding all M&A transactions and business structuring in general in Chile. This chapter provides an overview of fiduciary duties and insider trading regulations in Chile and their application to the M&A stages, particularly with respect to due diligence and the exchange of information thereunder.

Additionally, the chapter offers an overview of the implications of the new law that systematises economic crimes and offences against the environment (the Economic Crimes Law (ECL)), which establishes a special legal status for crimes perpetrated in the business sphere and is expected to become a heightened area of diligence, as well as the management of post-closing exposure thereunder.

Trends and criteria from local regulators are presented, and practical recommendations are identified, to provide guidance for those wishing to invest in Chile, as well as for directors, senior executives and managers of Chilean companies who are involved in daily business decision processes.

Management’s fiduciary duties

Directors’ fiduciary duties

Company directors have certain fiduciary duties, such as the duty of care and diligence, the duty to be informed, the duty of confidentiality and the duty of loyalty, in addition to their general responsibilities in the administration of the company.

By virtue of the duty of care and diligence, in the exercise of their functions directors must employ the care and diligence that people ordinarily use in their own businesses, and they are jointly liable for any damage caused to the company or shareholders by their fraudulent or negligent actions.

The duty to be informed entails the right to be, and the duty of being, informed about the business, as well as the duty to inform the shareholders, authorities and public in general.

The duty of confidentiality implies that directors must maintain confidentiality about the company’s business and of the information to which they have access due to their position, as long as it has not been officially disclosed. Consequently, they may not disclose this information to third parties, particularly current or potential competitors of the company, even if they are shareholders of the company, by any means, including verbal, written or electronic means.

Finally, the duty of loyalty means that directors must always act in the best interests of the company, fulfilling their duties independently and loyally. As a result, even if they have been appointed by a group or class of shareholders, they have the same duties towards the company and other shareholders as all other directors.

Regarding the scope of application of these duties, in accordance with Chilean law, managers (or those acting in lieu thereof) and senior executives of a company are subject to the fiduciary duties of directors, to the extent compatible with the responsibilities of their position or function. Accordingly, when the fiduciary duties of directors are discussed, this also applies to senior executives and managers.

Compliance of fiduciary duties

The compliance of fiduciary duties in corporate practice presents several challenges for directors. In this context, the Financial Market Commission (CMF) has provided guidance on the specific behaviour that directors must adopt to strictly fulfil their fiduciary duties.

In this sense, directors must assume an active and leading role in the exercise of their fiduciary duties. For example, in the context of the duty of care and diligence, when a general manager becomes aware of situations that may expose the company, they must disclose this information to the board of directors so that the directors can adopt the corresponding measures, thus discharging their own fiduciary duties. This was the CMF’s conclusion in a case in which a general manager failed to inform the board of directors for months that irregular charges were being made to a trade union through a related company of the company he worked for.[2]

In complying with the duty to be informed, directors can request copies of documents they deem relevant to make decisions proposed by management, subject to the duty of confidentiality.[3] They can also specify that the agenda for each board of directors’ meeting must sufficiently specify the matters to be discussed, to properly exercise their right to be informed prior to the meeting.[4]

In observing the duty of loyalty, directors must ensure the correct approval of transactions between related parties (OPRs), strictly following the regulations established by Chilean law. In this regard, the CMF has stated that directors must disclose whether they have any personal interest in an OPR. Likewise, directors cannot exempt an OPR from legally required approvals based on a laxly drafted ‘regular operations policy’.[5]

Likewise, when contracting with a related party requires board approval, the analysis of several independent competing proposals is required, and it is insufficient to simply state that the related party has offered arm’s-length terms and conditions. Otherwise, directors would be in breach of the duties of care and diligence.[6]

The duty of confidentiality also stands as an essential fiduciary duty in corporate governance matters. Its fulfilment allows the protection – unless otherwise indicated by applicable law – of the confidentiality of the company’s information to which the board of directors has access as an administrative body in the performance of its duties.

Discretion and responsible judgement are crucial when management is requested to disclose certain corporate information. To illustrate the latter, in the case of a company that was requested by one of its shareholders to disclose certain legal opinions that were commissioned to analyse a capital increase, the CMF determined that the management of the disclosing company must carefully analyse whether the information should be disclosed to shareholders or the market. Therefore, because the management did not consider the information to be of interest or essential, it was determined that there was no obligation to disclose it.[7]

Following the same logic, if the minutes of board meetings are confidential, the shareholders’ meeting cannot lift that confidentiality, not even to read them in a meeting.[8]

The proper fulfilment of fiduciary duties, especially those of care and diligence, confidentiality and loyalty, allows for the preservation of the separation of the different corporate instances in which certain information is produced, worked on and disclosed. This avoids confusion where the same person has the role of director, general manager and shareholder representative in the same company.

Fiduciary duties in M&A processes: practical considerations for adequate compliance

During the due diligence stage, or in the determination of the transaction price, it is common for confidential information to be collected from the target company or business group. This information is typically disclosed to the potential buyer through a data room, which may also include third parties such as the potential buyer’s legal or financial advisers.

The CMF has advised that this situation requires careful analysis to avoid a breach of the duty of confidentiality. To safeguard corporate interest, it is imperative that a confidentiality or non-disclosure agreement (NDA) is entered into with the third party that will have access to the company’s information.[9] However, the existence of an NDA does not automatically exempt the disclosing company from liability to third parties with whom it has confidentiality obligations over the information disclosed in the due diligence process. In this case, it is necessary to review each contract and the terms under which confidentiality obligations were entered into. This may involve the company obtaining express authorisation from the third party before disclosing the confidential information.

As a component of diligence on compliance with fiduciary duties, buyers are advised to ask sellers for representations and warranties (R&W) in the acquisition agreement that the target companies have entered into, and only with the OPRs that have been disclosed during due diligence and have been approved in accordance with Chilean law.

Additionally, if the transaction involves a publicly traded company or a company subject to reporting essential information to the CMF, details surrounding the M&A transaction could be considered as essential information for all parties involved (the acquiring company, selling company or target company). In that case, all relevant boards of directors will be required to declare the existence of pending deal negotiations as confidential information. However, this confidentiality has a finite duration and must be lifted when the justifying reasons cease to exist.

Another element to consider relates to the scenario in which an investor acquires a company in Chile and decides to remove the previous management. In this context, any settlement negotiated with the directors should be limited to the contingencies known as at the date on which the settlement is signed or agreed upon. This approach prevents the buyer from assuming fines or sanctions resulting from breaches of directors’ fiduciary duties or applicable regulations that occurred in the past and of which they were unaware.

Directors and executives as insiders

Inside information rules

In Chile, not all company information is considered inside information; it must meet certain specific requirements. First, the information must pertain to specific matters, such as the issuers of securities, their businesses or the securities that they have issued. This information must not have been disclosed to the market and must have the potential to influence the trading of publicly offered securities.

To properly regulate the access, use and disclosure of inside information, clear duties and prohibitions are established. There is a special duty to maintain the confidentiality of this information, a prohibition on using it directly or indirectly for personal or third-party benefit and a prohibition on engaging in transactions with the affected securities or benefiting from operations related to the information. It is also prohibited to disclose this information to third parties and to recommend engaging in transactions with the relevant securities, either directly or indirectly. With the introduction of the ECL, these actions became economic crimes and apply to anyone who has access to this information due to their office, position, activity or relationship, without the need for a specific connection to the issuing company or other individuals with inside information. Furthermore, the prohibition on using this information is absolute, and includes the order to cancel or modify a security, in addition to the acquisition or transfer thereof.

The Chilean legislator has established presumptions regarding individuals in possession of inside information. These presumptions involve directors, managers, administrators and senior executives of the issuer, as well as those working for the issuer’s controlling persons or representatives engaged in the transfer of control.

These presumptions do not preclude the possibility of sanctioning other individuals who do not hold these positions or have specific relationships with the company under the rules and prohibitions described above.

In summary, the Chilean legislator sets precise requirements for considering information as privileged and imposes strict duties and prohibitions on those who have access to it. Additionally, presumptions of those in possession of inside information strengthen and ensure more effective application of these regulations.

Common compliance issues with insider trading regulations

As discussed above, the use of inside information in Chile is associated with a strict set of rules and prohibitions, and, as a consequence, several issues have naturally arisen in relation to its compliance, which the CMF has sought to address within its jurisdiction.

One of the most prominent issues – and corresponding rulings – is that the prohibition on using inside information is absolute. This means that it is not possible to defend oneself by alleging any personal connection or economic justification with the securities acquired while having access to inside information. The CMF has concluded this, most notably in the case of the director of a bank who acquired shares while in possession of inside information. At the time, the director argued that the shares were not acquired for speculative purposes but solely to increase his stake, which was confirmed as he did not sell the shares. However, this defence was rejected by the CMF.[10]

In a similar case, the defence was based on the long-standing family relationship between the individual investigated and the company for which the individual had inside information. This defence was also dismissed.[11]

Another recurring issue arises around whether the financial statements constitute per se inside information about the company they pertain to, or whether it depends on their potential to influence the trading of securities issued by that company. In this regard, on several occasions the CMF has held that, by their nature, financial statements constitute inside information per se, regardless of their content.[12]

An example of this is the dismissed defence of a director who received access to the company’s financial statements during a board meeting and, before their publication, traded company securities. Although he sold the securities because they were not useful to him, the CMF deemed that a company’s financial statements are always considered inside information, which implies an absolute prohibition to trade.[13]

For foreign investors interested in investing in Chile, it is crucial to note that the concept of inside information is broad and encompasses multiple scenarios, including the evaluation stage of an M&A transaction. In one particular case, certain individuals alleged that the M&A transaction was in its initial stages and, therefore, was only a potential transaction, which exempted them from meeting the inside information requirements. However, the CMF determined that the law does not require inside information to be related to ‘business that is certain’ but that ‘any information’ can constitute inside information. The CMF has also clarified that only the ‘potential’ to influence the securities’ trading price is necessary, without requiring it to actually materialise.[14]

In connection with the above, it is not required that the individual has detailed knowledge of the transaction in question; it is sufficient that they become aware of its essential elements, such as the parties involved, the purpose of the transaction and its price and intended effects.[15]

Proper handling of inside information in M&A transactions

In situations where it is detected that negotiations or the closing of a transaction could involve inside information about publicly offered securities, it is essential to consider from the outset how details of the negotiations or the completion of the transaction will be disclosed to local authorities, stock exchanges and the general public, as appropriate (whether in the letter of intent or the memorandum of understanding). This ensures compliance with the law and that when made public the information loses its privileged status.

This measure takes on significant importance in cases where there is a legitimate interest in maintaining the confidentiality of the transaction, in a context where not all expected effects have occurred. A common example is when, after an initial closing, the effects of the transaction are subject to specific conditions, such as obtaining approvals or authorisations.

In these circumstances, transparency and compliance with appropriate disclosure protocols are essential to ensure that sensitive information is handled correctly and to avoid any suspicion of improper use of inside information. This protects the reputation and credibility of the parties involved, and compliance with existing regulations governing the disclosure of market information is upheld.

In an increasingly demanding environment concerning transparency and regulatory compliance, adopting solid and proactive practices for information disclosure is essential for preserving the trust of investors and the market as a whole. Therefore, from the outset of any negotiation, the appropriate disclosure aspects must be considered.

ECL challenges

Overview

In August 2023, the long-awaited ECL came into force. This new legislation introduces the concept of economic crime associated with economic and business activities. It incorporates some new and some partly modified criminal offence classifications. For example, some of these crimes are found in the Corporation Law (LSA), the Securities Market Law (LMV), the Criminal Code, the General Banking Law, the Tax Code and the Law Regulating the Financial Market Commission, among others. Additionally, the ECL has introduced material amendments in matters concerning environmental offences.

One of the main characteristics of the Law is the organisation of economic crimes into four categories, with the purpose of establishing a special system for determining more severe penalties and sanctions for individuals involved in these crimes and a special system of substitute penalties. Additionally, special aggravating factors have been incorporated that are not contemplated in the Criminal Code; these apply a qualified or highly qualified aggravating factor to cases involving high or very high culpability, as appropriate. These aggravating factors will particularly affect individuals who hold significant leadership roles or are part of a company’s senior management.

Regarding penalties, all economic crimes will be punished with day fines in addition to disqualification from holding public or managerial positions (such as director or senior executive) and from contracting with the state. In the latter case, the disqualification will also affect the legal entities to which the individual belongs. The Law also provides for the confiscation of gains derived from crimes.

Regarding the criminal liability of legal entities, in broad terms the ECL:

• extends the list of base crimes and active subjects;
• establishes new grounds for criminal liability;
• expands the circle of individuals who can generate criminal liability for legal entities;
• generates a change in the definitions of compliance programmes; and
• establishes new sanctions.

Key aspects of LMV and LSA modifications

In relation to the main regulatory frameworks applicable in an M&A transaction and the operation of directors, senior executives and managers, it is relevant to highlight the modifications that have been made to the LMV and the LSA, as well as the creation of new crimes in the latter.

The catalogue of crimes established in the LMV has been reviewed, expanding certain scenarios to cover a wider range of behaviours. This means that now, not only directors, senior executives or managers of an issuing company can be criminally liable, but anyone who engages in certain behaviours, such as providing false information to the market, can also be considered criminally liable.

As for prohibitions related to insider trading, significant modifications have also been introduced. The absolute prohibition of using this information for one’s benefit or that of third parties, as well as of engaging in transactions that can generate benefits by taking advantage of the information, has been reinforced.

Moreover, the requirement that the insider must have a connection with the issuer of that information has been eliminated.

In terms of economic crimes concerning credit ratings, the crime of providing a rating that does not correspond to the risk of the rated securities now applies to the rating agency, and collusion with another person is no longer required for this to be classed as an offence. Similarly, the requirement that the alteration, concealment or destruction of information of a rated issuer must have the purpose of achieving a false assessment of a financial situation for the conduct to be considered a crime has been removed.

In the case of the LSA, new offences have been introduced that will have a direct impact on M&A transactions. These modifications include the creation of specific offences related to directors, senior executives or managers who, in the reports, financial statements or other documents intended for shareholders, third parties or company management, deliver or approve false information about the legal, economic or financial situation of the company.

Taking inspiration from Spanish legislation, directors who, taking advantage of their majority position, adopt an abusive agreement are criminally sanctioned. This includes any controlling persons who, taking advantage of their status, induce the board of directors to adopt or execute an abusive agreement. Although the ECL does not define or specify the concept of abusive agreement, it does establish that it must be carried out to obtain a benefit for oneself or an economic benefit for a third party, to the detriment of the other partners and shareholders and without producing a benefit for the company.

While these modifications send a clear message about the need to respect the rights of shareholders and interested third parties, some important observations arise.

First, unlike Spanish law, the new regulations refer only to agreements adopted in board meetings and not in shareholders’ meetings, which is striking because the LSA regulates shareholder decisions but not specifically board meeting decisions. Second, the new provision does not state that the abusive agreement must result in harm or loss to the company, but rather that it does not benefit it, so an agreement that has a neutral effect on the company could eventually be considered abusive. Third, as an abusive agreement is also considered to be one in which the controller of the company agrees or participates in its execution, it would not be necessary for it to be an agreement proposed by the directors appointed by the votes of the controllers of the company, it would be sufficient for them to have voted for it.

Finally, if a controlling person could induce an abusive board agreement, it would raise questions about the directors’ duty of loyalty, as established in the LSA. Under this duty, directors of a company must act at all times in the company’s interest and fulfil their duties independently and loyally, without failing in their duties to the company and the shareholders on the pretext of defending the interests of the shareholders who appointed them. In other words, in accordance with the duty of loyalty, directors should not be induced by the controller who appointed them to adopt a specific resolution. Moreover, the regulation does not address the situation of abuse that minority directors can generate in deadlocks or vetoes by unanimous quorums established in shareholder agreements prior to an acquisition.

These reforms seek to ensure a transparent and effective governance environment in the economic and business sphere. They have updated, elevated and adapted the country’s criminal legislation to meet modern business needs. However, it is necessary to carefully analyse how economic crimes and the modifications introduced by the ECL will be applied in practice, not only in terms of the case law that the courts will develop in corporate crime, but also concerning the understanding and criteria that will be developed by the system’s various actors, such as prosecutors during the procedural investigation and accusation stages, and plaintiffs and defendants in their respective roles within the criminal system. Examining these interactions and dynamics will help to determine whether adjustments to the legislation will be required to ensure its effectiveness.

Avoiding infringing ECL in M&A transactions

As illustrated above, the implementation of this new legislation could lead to several complexities, as it affects multiple aspects of the Chilean business environment. For this reason, the development and evolution of corporate practice in relation to the application of the ECL should be closely followed.

Furthermore, in the context of traditional document review, especially within due diligence processes, it is essential to analyse the minutes of board meetings held following the introduction of the ECL, particularly in terms of the new offence of abusive agreements. Companies will also need to adjust their corporate governance, compliance programmes, crime prevention models and internal policies to prevent their directors, controlling persons and employees from potentially perpetrating any of the offences or violations introduced by the ECL.

In this regard, crime prevention models can exempt companies from criminal liability as long as they meet certain requirements, such as identifying activities or processes that pose risks to the legal entity, implementing protocols and procedures to prevent and detect crimes, and disclosing these protocols to all employees and workers.

Regarding the negotiation of R&Ws, if the seller is a controlling person, either on its own or jointly with another entity or individual in a company or a joint-stock company, it is recommended to include a statement that ensures that the board of directors of the company has not been induced to adopt agreements that may be considered abusive. It is also important to assess, in diligence, whether the liability insurance policies contracted for these persons cover risks related to the ECL. This should also be taken into account when selecting the executives of the acquired company after the closing, as they will assume greater exposure and financial responsibility.

Finally, in the context of the negotiations of a purchase agreement in general, it is essential to consider the additional exposure that the aforementioned elements represent for the company and its management when determining the amount necessary to be placed in escrow or in negotiating the limits of sellers’ liability. These aspects must be handled with special care to protect the interests of all parties involved, while also ensuring that these elements do not impede the transaction or make it unfeasible.

Conclusion

In summary, M&A transactions in the Chilean market require the assessment of several local legal and regulatory obligations to which companies and their administrative bodies, senior executives and corporate boards are subject. Moreover, Chilean legislation increasingly raises the standard in terms of compliance with fiduciary duties (in relation to the company and its shareholders) on company directors, senior executives, administrators and managers. Violations of, and penalties for, these duties have been recently broadened by the ECL.

With the recent introduction of the ECL, companies and their senior executives face greater responsibility. Both investors looking to establish themselves in Chile and individuals occupying leadership positions in local companies must thoroughly understand the complexities of the new regulatory scenario introduced by the ECL. This will enable them to improve their business and plan how to structure certain transactions, even in a transaction’s preliminary stages.

In this context, it is crucial to consider the interpretation of regulators, particularly the CMF, because their guidelines play a decisive role in the practice of corporate law and in the promotion of investments in Chile. Therefore, to ensure a successful entry into the Chilean market, as well as strict compliance with current regulations, investors and senior executives must be aware of the implications of the ECL and align themselves with the guidelines issued by sector regulators in their strategies and in the structuring and implementation of their business transactions in the country.

Footnotes

[1] Juan Andrés Bretón is a partner and Roberto Carrillo is a director at FerradaNehme.

[2] Exempt Resolution No. 7,932 issued by the Financial Market Commission (CMF) on 23 December 2021.

[3] Ordinary Official Letter No. 35,388 issued by the CMF on 5 May 2022.

[4] Ordinary Official Letter No. 8,205 issued by the CMF on 23 April 2015.

[5] Política de operaciones habituales. Exempt Resolution No. 3,259 issued by the CMF on 6 July 2020.

[6] Exempt Resolution No. 640 issued by the CMF on 28 January 2021, and Exempt Resolution No. 3,207 issued by the CMF on 24 June 2021.

[7] Ordinary Official Letter No. 11,479 issued by the CMF on 15 April 2019.

[8] Ordinary Official Letter No. 12,540 issued by the CMF on 10 May 2017, and Ordinary Official Letter No. 22,766 issued by the CMF on 13 September 2016.

[9] Ordinary Official Letter No. 21,197 issued by the CMF on 29 August 2016. See the ‘Preliminary Legal Documents in Mexican M&A Transactions’ chapter in this guide.

[10] Exempt Resolutions Nos. 7,603 and 7,604, both issued by the CMF on 8 November 2019.

[11] Exempt Resolution No. 4,311 issued by the CMF on 11 July 2022.

[12] Exempt Resolution No. 7,603 issued by the CMF on 8 November 2019.

[13] Exempt Resolution No. 3,087 issued by the CMF on 12 June 2020.

[14] Exempt Resolution No. 4,311 issued by the CMF on 11 July 2022.

[15] Exempt Resolution No. 2,470 issued by the CMF on 6 April 2023.