On October 20, 2009 Law No. 20.382 was published, amending the Commercial Code, the Corporations Act and the Securities Act, perfecting the corporate governance regulations. The Law will take effect beginning January 1st, 2010 and it is a very important part of the commitments of our country for its admission to the OECD.

In essence, the new law is aimed at improving levels of transparency and information that companies must provide to their shareholders, to the Securities Commission and to the market in general, so as to allow better and greater control and to protect minority shareholders interest.
 
The main contributions of this new legislation are highlighted in the following:

1- Information and Transparency:

It is set upon the board of the company, the obligation to define the procedures, accountability mechanisms and responsibilities to ensure the market a quick and opportune information, so as to reduce any information asymmetry.

Shareholders, as far as they control 10% or more of the company, as well as chief executives, are obliged to inform the Securities Commission and the stock market, not only of the transactions of their stocks, but also operations on contracts or other securities whose price or outcome is dependent or conditioned upon its stock price.

The law also incorporates a special section for transactions of public offering securities, which allows the imposition of restrictions, absolute or temporary, to the acquisition or disposal of such securities, an issue that must be regulated by the Board and informed to the Securities Commission.

In a similar vein, stockbrokers and security dealers must define and communicate their own monitoring procedures  for the proper handling of information to which they have access and which might affect supply or demand of securities transactions in which they participate.

The chief executives are also incorporated in the list of related parties and are required to report their position in securities of entities of the corporate group to which they belong.

2- Inside Information:

Directly related to promoting transparency and symmetry of information available to the market, the new law includes an explicit ban on selling securities while in possession of inside information, making an explicit distinction between the presumption of possession of information (applicable to those who are part of the administration) and the presumption of access to information (applicable to outsiders).

Provision is also an aggravating offense to Article 61 of the Securities Act, in terms of increased punishment for the crime of disseminating false or misleading information, even if advantages or benefits are not pursued, when the perpetrator of the crime might possess or have access to inside information, in which case the penalty of inability to serve as director, manager, liquidator or administrator of companies under the control of the Securities Commission also applies.

3- Public Offer of Stocks (OPA):

The mechanism of public offer of stocks is perfected, incorporating the obligation of the controller, who because of a takeover bid has acquired over 95% of the stocks of the company, to acquire the shares of the remaining 5%, if they so require, by exercising their right of withdrawal.

In contrast, the figure of the squeeze – out, of wide application in more developed financial markets, is now incorporated and the Controller who, product of a takeover bid acquires over 95% of the stocks of the company, may force the remaining 5% to sell their shares, provided that this provision was laid out in the bylaws.

4- Supervision and Control of the Administration:

(a) Creation the figure of the Independent Director, mandatory for any corporation that trades their shares and complies with the requirements to have a Directors Committee (UF 1.5 million of market capitalization and over 12.5% of its shares held by minority shareholders). In order to define the concept of the independent director, the factors that make them lose such quality and disable a person for this position are detailed.

(b) Restate the role of the Directors Committee, which shall consist of a majority of independent directors and increase their powers of supervision and control within the company.

(c) Raise the requirements, restrictions and incompatibilities for the Auditing Companies and higher technical standards imposed on their reports, so that they are obligated to attend shareholders’ meetings to explain the content of their opinions. Particular emphasis is placed on the need for auditing firms, their partners and teams to have full independence from the audited entity, establishing also a lack of independence assumptions that make them unsuitable to perform their duties.

5- Shareholders’ meeting:

Finally, the law provides a set of rules that empowers shareholders, improving their levels of information and facilitating the exercise of voting rights, even allowing, with the permission of the Securities Commission, electronic devices to remote voting.

There are, however, certain restrictions imposed on the exercise of voting rights to security dealers or brokers that hold securities in custody, in terms that they can only vote if they have been specifically authorized by the stock owner and they can only do so through their representatives or lawyers, but without the possibility of delegating to third parties.

The new law incorporates the possibility of establishing a formal stock options or compensation plans for employees of closed corporations for up to 10% of the amount of capital increases that are agreed upon and establishes the requirement to obtain board approval for transactions with persons related to or in an apparent conflict of interest.

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The new law clearly represents an important step forward in the line of revealing relations between issuers and the general public, seeking to avoid the recurrence of certain situations seen in recent times, so as to avoid adverse affects in the trust in the market within the system.

Alvaro Rosenblut

Partner AlbagliZaliasnik Attonrneys