alvaro clarke chairman securities and insurance regulator

ALVARO CLARKEALVARO CLARKE

ChairmanChairman

SECURITIES AND INSURANCE REGULATORSECURITIES AND INSURANCE REGULATOR

March 29, 2001

SVSSUPERINTENDENCIA DE VALORES Y SEGUROS

CHILE

“The Chilean Tender Offer Law:

Major Corporate Events- Public Tender Offers -

Changes in Corporate Control

Buenos Aires Argentina

MAJOR CORPORATE MAJOR CORPORATE EVENTS: THE GOLDEN EVENTS: THE GOLDEN

PRINCIPLEPRINCIPLE

All shareholders must receive the same All shareholders must receive the same

price in equal terms when the company price in equal terms when the company

changes ownership.changes ownership. A fair division of profits must reach every A fair division of profits must reach every

shareholdershareholder..

SVSSVSSUPERINTENDENCIA DE VALORES Y SEGUROS SUPERINTENDENCIA DE VALORES Y SEGUROS

CHILECHILE

THE CONTROL VALUETHE CONTROL VALUE

EfficiencyEfficiency: if an acquirer realizes that : if an acquirer realizes that under his control the company can under his control the company can have a higher value, he will be willing have a higher value, he will be willing to takeover.to takeover.

Appropriation of inflows or assetsAppropriation of inflows or assets: if : if an acquirer realizes that under his an acquirer realizes that under his control he can extract value of the control he can extract value of the company, through deviation of company, through deviation of business opportunities or selling at business opportunities or selling at different market prices, he would be different market prices, he would be willing to takeover.willing to takeover. SVSSVS

SUPERINTENDENCIA DE VALORES Y SEGUROS SUPERINTENDENCIA DE VALORES Y SEGUROS CHILECHILE

CHANGES IN CORPORATE CHANGES IN CORPORATE CONTROLCONTROL

A transfer will be done when the A transfer will be done when the acquirer’s control value is higher than acquirer’s control value is higher than the current control person value.the current control person value.

Two reasons could explain the higher Two reasons could explain the higher value:value: the acquirer is more efficient the acquirer is more efficient

the acquirer can extract a higher the acquirer can extract a higher

value from minority shareholdersvalue from minority shareholders SVSSVS

SUPERINTENDENCIA DE VALORES Y SEGUROS SUPERINTENDENCIA DE VALORES Y SEGUROS CHILECHILE

RULES OF CHANGES IN RULES OF CHANGES IN CORPORATE CONTROLCORPORATE CONTROL

There are two rules of transfer in There are two rules of transfer in corporate control:corporate control: The market rule that allows selling The market rule that allows selling

a controlling interest, determining a controlling interest, determining the price in a private deal.the price in a private deal.

The equal condition rule requires a The equal condition rule requires a tender offer each time a controlling tender offer each time a controlling interest is sold.interest is sold.


CHILECHILE

RULES FEATURESRULES FEATURES

The market ruleThe market rule

The acquirer and the control person The acquirer and the control person

negotiate without taking into negotiate without taking into

account minority shareholders. A account minority shareholders. A

transfer in the control will occur if it transfer in the control will occur if it

is privately convenient, even if is privately convenient, even if

minority shareholders are hurt. minority shareholders are hurt.


CHILECHILE

WHEN A CHANGE IN WHEN A CHANGE IN CORPORATE CONTROL IS CORPORATE CONTROL IS

DONE?DONE?

E V E V+ +

ACQUIRER CONTROL PERSON

E= EfficientV= Extraction of Value


CHILECHILE

THE MARKET RULE :THE MARKET RULE :THREE CASESTHREE CASES

If both, acquirer and control person, are equally skillful If both, acquirer and control person, are equally skillful in extracting value, the transaction will be made only if in extracting value, the transaction will be made only if the acquirer is more efficient. In this case minority the acquirer is more efficient. In this case minority shareholders will be better off.shareholders will be better off.

If the control person is more skillful than the acquirer If the control person is more skillful than the acquirer in extracting value, the transaction will be made only if in extracting value, the transaction will be made only if the acquirer is highly efficient. In this case minority the acquirer is highly efficient. In this case minority shareholders will receive a double benefit.shareholders will receive a double benefit.

If the acquirer is more skillful than the control person If the acquirer is more skillful than the control person in extracting value, the transaction will be made and in extracting value, the transaction will be made and the minority shareholder will be hurt.the minority shareholder will be hurt.


CHILECHILE

MARKET RULE MARKET RULE TRANSACTION TRANSACTION

EFFICIENCY EXTRACTION OF VALUE TRANSACTIONSHAREHOLDER

RESULT

1 > = YES +

2 > > YES ?

3 < > YES ---

4 > < ? +


CHILECHILE

EQUAL CONDITIONS RULEEQUAL CONDITIONS RULE

Under the equal conditions rule Under the equal conditions rule and if the control person is against and if the control person is against changing the corporate control, changing the corporate control, the acquirer will only take over if the acquirer will only take over if he is significant more efficient he is significant more efficient than the control person.than the control person.


CHILECHILE

SUMMARYSUMMARY The market rule permits inefficient transactions The market rule permits inefficient transactions

to be done.to be done. The equal condition rule hinders inefficient The equal condition rule hinders inefficient

transactions. However some efficient transactions. However some efficient transactions are not done as well.transactions are not done as well.

Even though the equal condition rule hinders Even though the equal condition rule hinders inefficient transaction, per se it does not inefficient transaction, per se it does not prevent the extraction of value from minority prevent the extraction of value from minority shareholders.shareholders.

Corporate Governance is a key issue to Corporate Governance is a key issue to complement these Rules. complement these Rules.


CHILECHILE

THE CHILEAN TENDER THE CHILEAN TENDER OFFER LAWOFFER LAW

The following slides will The following slides will present the above present the above theoretical background theoretical background applied to the Chilean applied to the Chilean legislation on Tender legislation on Tender OffersOffers

SVSSVSCHILEAN SECURITIES AND INSURANCE CHILEAN SECURITIES AND INSURANCE

COMMISIONCOMMISION

CHILEAN TENDER OFFERS CHILEAN TENDER OFFERS LAWLAW

KEY POINTSKEY POINTS

TRANSPARENCY TRANSPARENCY AND AND

DISCLOSUREDISCLOSURE

MANDATORY MANDATORY TENDER OFFERTENDER OFFER

CHAIN PRINCIPALCHAIN PRINCIPAL


COMMISIONCOMMISION

TENDER OFFERSTENDER OFFERSKEY POINTSKEY POINTS

THE CONTROLLING PREMIUM THE CONTROLLING PREMIUM

MUST BE DISTRIBUITED AMONG MUST BE DISTRIBUITED AMONG

SHAREHOLDERSSHAREHOLDERS

ANY CHANGE OF CONTROLLING ANY CHANGE OF CONTROLLING

INTEREST MUST BE EXECUTED INTEREST MUST BE EXECUTED

THROUGH A TENDER OFFER THROUGH A TENDER OFFER

MANDATORYMANDATORYTENDER OFFERTENDER OFFER


COMMISIONCOMMISION


EXCEPTIONS:EXCEPTIONS: When the following conditions exist When the following conditions exist

simultaneously:simultaneously: Transaction must be at market price (Transaction must be at market price ( average average

price of last 60 days must be below 10%) price of last 60 days must be below 10%) Payment is in cash Payment is in cash Stock has minimum liquidityStock has minimum liquidity

Primary distribution of the corporationPrimary distribution of the corporation MergersMergers

EXCEPTIONSEXCEPTIONS


COMMISIONCOMMISION


WHEN TAKING CONTROL OF A PARENT WHEN TAKING CONTROL OF A PARENT

COMPANY, BUT ITS SUBSIDIARY COMPANY, BUT ITS SUBSIDIARY

REPRESENT 75% OF THE CONSOLIDATE REPRESENT 75% OF THE CONSOLIDATE

ASSETS, FIRST A TENDER OFFER MUST ASSETS, FIRST A TENDER OFFER MUST

BE EXECUTED FOR THAT SUBSIDIARY BE EXECUTED FOR THAT SUBSIDIARY

CHAIN PRINCIPALCHAIN PRINCIPAL


COMMISIONCOMMISION


TRANSPARENCY AND DISCLOSURETRANSPARENCY AND DISCLOSURE Advance public notice of 10 business days shall Advance public notice of 10 business days shall

be required prior to any tender offerbe required prior to any tender offer Any "insider" information shall be made publicly Any "insider" information shall be made publicly

availableavailable Shareholders with more than a 10% interest in Shareholders with more than a 10% interest in

the company must disclose additional stock the company must disclose additional stock purchases and must declare if they are an purchases and must declare if they are an active or passive investoractive or passive investor

TRANSPARENCY TRANSPARENCY AND AND

DISCLOSUREDISCLOSURE


COMMISIONCOMMISION

CONCLUSIONCONCLUSION

The Chilean Tender Offer LawThe Chilean Tender Offer Law Combines the market rule and the equal Combines the market rule and the equal

conditions rule.conditions rule. The market rule operates when the price The market rule operates when the price

paid is at market level.paid is at market level. Protection of minority rights is the key Protection of minority rights is the key

point to solve the takeover problem when a point to solve the takeover problem when a major corporate event happens. Countries major corporate event happens. Countries with good corporate governance standards with good corporate governance standards have lower extraction of value when have lower extraction of value when corporate control changes.corporate control changes.


COMMISIONCOMMISION

ALVARO CLARKEALVARO CLARKE

ChairmanChairman

SECURITIES AND INSURANCE REGULATORSECURITIES AND INSURANCE REGULATOR

March 29, 2001

SVSSUPERINTENDENCIA DE VALORES Y SEGUROS

CHILE

“The Chilean Tender Offer Law:

Major Corporate Events- Public Tender Offers -

Changes in Corporate Control

Buenos Aires Argentina

alvaro clarke chairman securities and insurance regulator

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