The Chilean capital market is governed by a variety of laws and regulations, but the cornerstone is Law 18,045 (the Law).
The Law regulates the public offer of securities and the respective markets and intermediaries. This includes stock exchanges, stock brokers and securities agents, as well as publicly offered instruments, their issuers and secondary markets.
The Law also applies to corporations and companies limited by shares where (i) at least 10% of the subscribed capital belongs to a minimum of 100 shareholders (excluding those who hold that percentage individually), or (ii) there are 500 shareholders or more.
Pursuant to the Law, securities are understood to be any transferable instruments. They include:
- stock purchase and sale options;
- mutual fund quotas;
- savings plans;
- negotiable instruments; and
- generally, any credit or investment instrument.
The Law does not apply to securities issued or secured by the government, centralized or decentralized government institutions or the Central Bank of Chile.
The Law created the Securities Registry, which is maintained by the Superintendency of Securities and Insurance (SVS). The registry is public and all issuers of publicly offered securities must register themselves, their securities and the shares of publicly traded corporations. A public offer of securities can only be made when both the securities and their issuer are registered. Registration requires the issuer to disclose truthfully all essential information about itself, the securities offered and the offer.
As part of the reporting obligation of a registered issuer, the Law includes all actions that relate to takeovers. Accordingly, anyone who intends to take over a publicly traded corporation, whether directly or indirectly, and regardless of the form of acquisition of the shares, must first disclose the intention to the public. Disclosure is considered by the OPA (Public Tender Offer) bill, pending before Congress, which would determine:
- the content;
- the format and timeline for disclosure;
- sanctions for the breach thereof; and
- the obligation of the board of directors of the target corporation to decide on the convenience of the takeover.
The Law also requires persons who directly or indirectly hold 10% or more of the subscribed capital of a listed corporation (and the administrators thereof, regardless of the number of shares they hold) to inform the SVS and the stock exchanges of any purchase or sale of shares they make in the corporation within five days of the transaction. The OPA bill contemplates requiring majority shareholders to notify whether the acquisitions they make are due to an intention to take control of the company, or whether the investment is merely financial.
The Law prohibits securities transactions that are designed to stabilize, fix or artificially vary prices (except in accordance with general rules issued by the SVS in relation to the issue of new securities or the offer of previously issued securities).
The main legal aspects regarding derivative transactions between entities in Chile and foreign counterparties are described below.
Underlying assets in transactions may be:
- foreign interest rates;
- fixed income instruments;
- commercial loans;
- variable-income instruments; and
- share indexes traded in foreign stock exchanges.
Transactions may be performed in stock exchanges or over-the-counter, except for those described below.
Restrictions affecting Chilean parties
Public sector entities may not enter into transactions without prior authorization from the Ministry of Finance.
Regulated private sector entities (eg, banks, mutual funds, pension funds, insurance companies, investment funds, stock brokers and securities agents) may only enter into transactions if the purpose is to hedge risks associated with their investments, assets or liabilities. Furthermore, each type of regulated entity may only enter into certain kind of transactions that relate to specific underlying assets (as permitted by the laws which govern their activities).
Foreign exchange regulations
Foreign exchange issues that relate to transactions are contained in Chapter VI of Title I of the Compendium of Foreign Exchange Regulations of the Central Bank of Chile.
Chapter VI generally deals with the flow of foreign currency in and out of Chile, and regulates:
- credit derivatives; or
- any combination of the above.
Remittances of foreign currency outside, or flowing into, Chile must be conducted through a local commercial bank (ie, the formal foreign exchange market). The Chilean party is not obliged to return foreign currency proceeds resulting from transactions to Chile.
Under the rules of Chapter VI, Chilean entities will have the right to purchase the foreign currency needed to meet their payment obligations under transactions in the formal foreign exchange market. Exporters may use their export proceeds directly to settle obligations under transactions.
Transactions do not require prior authorization from the Central Bank, but Chilean parties must comply with the information requirements set forth in Chapter VI.
Foreign parties to transactions will not be deemed to be conducting business in Chile based solely on the execution of transactions. However, from a Chilean tax standpoint, two issues must be taken into account.
First, if the foreign party has no permanent establishment in Chile (within the meaning of the Income Tax Law), there is no exposure to tax liability due to entering into a master agreement to govern transactions or by reason of payments to Chilean parties thereunder.
Second, provided no permanent establishment has been created in Chile, the foreign party will only be subject to taxes in Chile on Chilean source income resulting from transactions. Pursuant to the Income Tax Law, Chilean source income is defined as income from assets located in Chile or activities conducted in the country, regardless of the taxpayer's domicile. Consequently, foreign parties should not generally be subject to income tax in Chile.
Recent changes in regulations
On May 11 2000, the Central Bank of Chile approved two amendments to the applicable foreign exchange regulations. Chilean parties have been authorized to enter into transactions where one of the underlying assets is the Chilean peso or the Unidad de Fomento (a Chilean inflation index). Banks have also been authorized to enter into transactions to cover the risk associated with (i) their fixed income investments, and (ii) commercial loans granted to local or foreign borrowers.
For further information on this topic please contact Jaime Martínez or José Antonio Silva at Carey y Cía by telephone (+56 2 365 7255 / +56 2 365 7201) or by fax (+56 2 633 1980) or by e-mail ([email protected] or [email protected]).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.