Latin Lawyer Reference

Private Equity 2016

Published on Wednesday, 24 August 2016

  1. 1.

    What are the most common types of private equity transactions in your jurisdiction?

    Various types of private equity transactions are usually implemented in Chile, such as corporate acquisitions, joint ventures, acquisition of minority investments, the issuance of convertible debt, LBOs, PIPEs, among others.

    >In this regard, the most common types of private equity transactions in Chile are the following:

    • acquisition of the entire capital stock or a controlling stake of a company by private equity or venture capital funds or by other private equity sponsors;
    • acquisition of minority investments, whereby the private equity sponsor invests by injecting new capital into the company to boost growth or by replacing certain existing shareholders of the company;
    • acquisition of selected assets (to be absorbed in the existing structure of the purchaser or to be contributed to a new special purpose vehicle);
    • management buyout or management buy-in transactions; and
    • going-private transactions, where a listed company is taken private by one or more private equity sponsors.
  2. 2.

    What types of investors are most active (and what jurisdictions are they most commonly from) in the private equity market of your jurisdiction?

    Among the most active investors in the private equity market we can single out Chilean private equity funds, generally formed as private investment funds. Such private investment funds are managed by special purpose vehicles registered before the Superintendencia de Valores y Seguros in a special registry of reporting entities. In many cases such private investment funds (PIFs) receive soft loans from the Corporación de Fomento de la Producción (CORFO), a governmental agency that fosters investments in growing businesses.

    We have also seen that foreign private equity funds and foreign pension funds have been quite active in Chile, making investments in a wide array of industries (ranging from tech companies to casinos, water and sewage companies, telecoms, among others).

  3. 3.

    What historically have been the main target industries and what trends were noticeable throughout 2015? What trends do you expect to see in the next 18 months?

    Private equity sponsors have historically invested in a wide array of industries and sectors, going from technological ventures, to utilities, servicing companies and mining ventures. Private equity funds have indeed showed appetite for very different types of assets. We expect that during the next 18 months private equity sponsors will put aside mining opportunities, as a consequence of low copper and commodity prices, and may increase its presence in technological sectors as a consequence of an improved environment in Chile for tech startups and mid-size companies.

  4. 4.

    Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of any such local funds? Have any begun to participate significantly in transactions out of their local jurisdiction?

    As previously mentioned, private equity funds are generally organised as PIFs according to sections 84 and seq of Act No. 20,712 (known in the market as the Single Funds Act). Such funds are non-regulated funds that may not make public offering of their quotas. As a consequence, they are far more flexible than regulated investment funds, which conversely are entitled to make public offering of their quotas (RIFs). One of the flexibilities PIFs have is that they may be managed by RIF managers (which need certain de minimis capital requirements to be registered as such), or by very simple closely held corporations registered as PIF managers before the Superintendency of Securities and Insurance (SVS).

    Investment funds, including PIFs, are tax-free entities (however, quotaholders are subject to tax from income derived from funds, as explained in further detail below). This feature alone makes the use of such structure very attractive to investors. Indeed, any capital gain made by an investment fund is tax free given that the Chilean Internal Revenue Service has considered that funds do not have legal personality on their own, thus may not be considered as taxpayers. However, in order to take advantage of this feature the funds must have, after one year of their organisation, at least four non-related investors owning at least 10 per cent of the funds’ quotas (unless there is an institutional investor among the funds’ investors, owning at least 50 per cent of the quotas). Also, after one year from the fund’s organisation, the fund’s manager may not have more than 20 per cent of the fund’s quotas.

    In accordance with the information published by the Chilean Association of Investments Funds Managers (ACAFI), 34 managers make up the RIF industry, which in total operate 223 RIFs. Up to March 2016, the assets managed by RIFs reached US$13.363 million. In that line, the assets managed by private equity funds up to March 2016, amounted to US$3.191 million, equivalent to 23.9 per cent of the total industry of investments funds.

    ACAFI classifies private equity funds in the following categories, which up to March 2016 manage assets for the following amounts: (i) venture capital, US$14 million; (ii) Development capital, US$120 million; (iii) buyout, US$917 million; (iv) mixed funds, US$11 million; (v) feeder funds, US$1.505 million; and (vi) other funds, US$624 million.

    According to ACAFI, in 2015 the funds size ranged approximately from US$15 million to US$50 million, being the average size of PE funds US$34 million.

  5. 5.

    Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?

    There are private equity funds listed in the Santiago Stock Exchange. Please note, however, that most listed private equity funds invest in real estate companies or in foreign assets. As a matter of fact, many of them act as feeder funds of offshore private equity funds.

    In order for a private equity fund to be listed it requires, firstly, to be created by a RIF manager, which are special purpose corporations that require the prior approval of the SVS to be incorporated. Such companies must include in their names the expression ‘general fund manager’, comply with certain de minimis capital requirements and after one year of their incorporation they must manage at least one fund (otherwise they must be dissolved). Their board members and main executive officers must also meet certain qualification requirements (not being convicted of crimes under the securities laws, not being declared in bankruptcy, etc).

    Managing companies must have a net equity at least equal to 10,000 Unidades de Fomento (approximately US$400,000). Also, RIF managers are required to post a guarantee (either in cash or through an insurance policy or bank bond) for an amount of 10,000 Unidades de Fomento for each new fund under their management, which is to be adjusted on a yearly basis in order to be always the higher of:

    • 10,000 Unidades de Fomento;
    • 1 per cent of the daily average equity of the fund during the calendar quarter before the date of measurement; and
    • such percentage of the fund’s daily average equity during the calendar quarter before the date of measurement, as determined by the SVS on the basis of the quality of the risk management of its manager.

    RIFs must have a surveillance committee comprising an odd number of quota holders’ representatives, who are elected at the annual quota holders’ meeting. Such committee, among other tasks, verifies that the managing company complies with the fund’s internal regulation and that the information provided to quota holders is sufficient, true and timely.

    After the issuance of the internal regulation and its deposit by the RIF manager before the SVS, the RIF manager may make public offer of the quotas, and have them listed on a Chilean stock exchange.

  6. 6.

    What are the main issues in connection with the liability of fund managers?

    Managers of regulated investment funds are subject to similar rules than those applicable to open or listed corporations, including their standard of liability and their fiduciary duties rules. Managers of private investment funds are typically bound by the same standard of liability and fiduciary duty rules, which must be spelled out in the internal regulation.

    In connection with this, while performing its duties a managing company and its board members have to comply with the standard of care ordinarily used by persons in their own businesses (ordinary negligence standard) in order to reach the objectives set forth in the internal regulation of the fund as to the profitability and safety of its investments.

    In addition, a fund manager cannot perform any operation with fund assets in order to obtain undue advantages, either direct or indirect.

    In particular, RIF managers, their board members and executive officers and their related parties may not purchase, sell or encumber, either directly or through other individuals or entities, any securities or assets of the managed funds, nor sell or rent assets they own to such funds. They are also forbidden from granting loans or security interests to the benefit of RIFs or vice versa.

    No agreement of the parties may modify the standard of liability for the regulated investment fund managers since such duties are imposed by law.

  7. 7.

    What are the main remuneration schemes and related features for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?

    The most typical remuneration scheme for local fund managers is twofold, as it comprises (i) a fix fee, calculated as a percentage of the assets under management, payable monthly or quarterly in arrears, and (ii) a carried interest in the form of a percentage fee on the net gain of the fund, payable at its termination.

    Please note that the law does not provide for any limitation on the amount of the compensation to be paid to managers. Also, there is no reform or bill of law under discussion in this connection.

  8. 8.

    Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.

    There are no special legal issues with executing leverage buyouts and similar strategies with regard to the extension of a subsequent bankruptcy, or with upstream guaranties, minimum capital requirements and leverage restrictions.

    Please note, however, that from a tax perspective, investors domiciled or resident in countries considered as tax havens by the OECD are prevented from taking advantage of certain tax benefits provided for by Chilean law.

    Before the tax reform of 2014, the interest payments of an LBO debt incurred by the purchaser were not accepted as a deductible expense by the Chilean IRS. Indeed, such authority only accepted financial expenses related to the generation of income subject to regular corporate tax, and the subsequent sale of the target shares was not subject to regular corporate tax, but to a unique tax regime. The tax reform of 2014 eliminated this interpretation of the Chilean IRS by expressly allowing interest payments on LBO debt to be deductible as an expense of the purchasing entity.

  9. 9.

    What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?

    As noted above, investment funds are organised either as RIFs or PIFs.

    In order to create an investment fund it suffices to issue a private deed containing the internal regulation of the fund. In the case of RIFs, such internal regulation needs to be deposited before the SVS. Also, in the case of RIFs certain de minimis provisions regarding investment, liquidity, indebtedness, diversification, voting and expenditures policies need to be included in its internal regulations. It is important to note that the Sole Funds Act made easier and simpler the organisational process for RIF, given that under the previous Act a full registration process of the internal regulation was required, and not their mere deposit before the SVS.

    Private equity sponsors that are not fund managers generally set up a corporation, a sociedad por acciones (which is a more flexible type of corporate entity), or a limited liability company in order to channel private equity investments. Given that sociedades por acciones only require one shareholder to be organised, they have become increasingly popular since 2007, the year in which they were enacted.

  10. 10.

    What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?

    Local companies that are subject to private equity investments are typically organised as corporations (and in some cases as sociedades por acciones).

    Corporations are managed by a board of directors having at least three members (in the case of closely held corporations) or five members (in the case of listed corporations). In listed corporations the board needs to hold meetings on a monthly basis at least. On the other hand, closely held corporations require to hold board meetings with the frequency determined in their by-laws.

    In addition to such nuances, the following differences from a corporate governance perspective between listed and closely held corporations can be outlined:

    • Related party transactions – with regard to privately owned corporations, the Chilean Corporations Act requires that transactions with related parties to be on similar terms to those customarily prevailing in the market. Board approval is required only in cases where a director has a direct or indirect interest in a transaction (who is excluded from such voting proceeding).

    In listed companies the general principle remains the same, but approval of related party transactions is definitely more cumbersome. As a matter of fact, article 147 of the Corporations Act requires (with certain exemptions) that all related-party transactions be approved by the board of directors. Also, the transaction must be approved by the majority of the directors of the board, excluding any interested directors (who nonetheless must make public their opinion regarding the transaction if requested by the board) or, if more than the absolute majority of the directors of the board are interested in the transaction, by all the non-interested directors, or otherwise, by two-thirds of the shares with the right to vote of the company. In cases where the transaction will be approved by the shareholders, the board must designate at least one independent appraisal to inform the shareholders about the terms of the transaction, its effects and its potential impact to the company.

    Unlike listed corporations, the by-laws of a privately held corporation may authorise entering into transactions with directors on a no arm’s-length basis.

    • Directors’ committee – in addition to the above, listed corporations having a market capitalisation over 1.5 million Unidades de Fomento and at least 12.5 per cent of their shares in the hands of shareholders holding individually 10 per cent or less of such shares must have a directors’ committee comprised of at least three board members meeting certain independence tests (or, if there are not three independent directors, the committee shall be comprised of all the existing independent directors plus other directors needed in order to have a three-member body). Among other tasks, the committee must look over the accounts and certain transactions of the company, as well as examine the compensation plans of executive officers and other employees of the company.
    • Audit – listed companies also need to have their accounts audited by external auditing companies registered with the SVS, while closely held corporations may only have their accounts reviewed by specially appointed inspectors or in such other manner they deem fit, or even not reviewed at all if their by-laws so state.
    • Tender offer rules – in order to obtain control of a listed company the acquiring party is generally required to launch a tender offer, to be directed to all the shareholders of the target, at the same price per share, for a specific period of time. 
  11. 11.

    Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?

    In general, quotaholders of a Chilean investment fund are not liable for the fund’s obligations. In this regard, quotaholders are only liable to pay the contribution they have committed to the fund. Theories such as the piercing of the corporate veil have not been developed at length by local scholars, and courts have not issued judgments recognising such theory.

    Nonetheless, it could be argued that quotaholders become liable for the obligations of a fund that is dissolved. As a matter of fact, the termination, dissolution and liquidation of a fund does not, under Chilean law, extinguish the fund’s obligations (as in the case of a dissolution of any other entity). Therefore, if a fund is dissolved before having paid for all its obligations, said obligations should be transferred to the fund’s quotaholders.

    As to any exemption on the limitation of liability on a bankruptcy scenario, please note that the Bankruptcy Act does not seem, at first, to allow the possibility of the bankruptcy of a fund (or any other entity without legal personality), which has caused some discussion among bankruptcy scholars. In any event, even if bankruptcy of a fund would be possible, quotaholders would not be deemed liable for the fund’s obligations (unless, of course, they would have granted a surety or personal guarantee in that regard).

    As it can be seen, for investors there is no particular uncertainty in this matter.

  12. 12.

    What are the most common minority protection rights, whether granted by operation of law or contractual agreement? Are there any special issues to be considered under the laws of your jurisdiction?

    Private equity sponsors acquiring minority investments will typically negotiate some investment protection rights with the majority shareholders. A substantial part of such clauses will refer to governance rules (explained in detail in question 15).

    It is important to note, however, that the Corporations Act grants protection to minority shareholders by requiring that certain matters be approved by two-thirds of the outstanding voting shares (such as the sale of 50 per cent or more of the company’s assets; the reduction of the company’s capital; its transformation, merger, divestiture; its early termination; the reduction of board members; the way in which dividends are distributed; the creation of guarantees or liens securing third parties’ obligations other than that of subsidiaries, exceeding 50 per cent of the assets). A minority investor acquiring less than one-third of the shares will look to have higher approval quorums for said matters in order to avoid them being approved without its consent. In addition, the approval of certain of the aforementioned matters entitles dissenting shareholders to tender their shares to the corporation and be bought-out of the corporation. If such appraisal right is exercised by a dissenting shareholder, the price to be paid to it shall be the weighted average of the sales price for such a corporation’s shares as reported in the relevant stock exchanges for the 60 business days going from the 30th and the 90th business day preceding the approval of the matter giving rise to the appraisal right; or in case of privately held companies, and if the SVS determines that the shares of public companies are not actively traded on a stock exchange, the price shall be the company’s book value.

    On the other hand, private equity sponsors require the other shareholders to agree upon certain provisions allowing the former to sell their shares in the company with preference to any other shareholder. Among the several exit-oriented clauses a private equity sponsor may request, the most typical are drag-along, first right to sell and tag-along. In addition, funds, as minority investors, customarily request the other shareholders to accept transfer restrictions clauses, either as first-refusal or first-offer clauses. Furthermore, funds may request registrations rights enabling them to force the company to list its shares in a stock exchange after a certain period of time has elapsed since the original investment. Also, funds may request put rights or mandatory redemption provisions to be exercised against the company or the other shareholders under certain triggering events. None of these rights are granted by operation of law, thus funds require to negotiate them on a case-by-case basis.

  13. 13.

    What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the availability, effectiveness or enforceability of exit arrangements that are commonly used in other jurisdictions? Have you seen a shift away from or towards certain exit strategies over the past year?

    In general, private equity sponsors holding minority equity interests seek to have clear exit strategies outlined from the outset, in order to avail themselves the best possible liquidity scenarios. To this end said sponsors may require to have (i) rights to force an IPO of the investment company after a reasonable period of time, (ii) preferred sale rights upon any third party offer to any other shareholder of the company, (iii) drag-along rights enabling the holder thereof to force all other shareholders to sell their share to a third party, and (iv) joint sales clauses providing for a controlling stake of the company (or even all the target’s shareholding) to be sold in an orderly fashion. Given the low number of IPOs seen in the past years in the local stock exchange, the most frequent alternatives have been those described in (ii) to (iv).

  14. 14.

    What are the key legal issues to be considered when appointing or replacing directors and officers?

    In general, board members are appointed by shareholders at the annual shareholders meeting (upon expiration of their term or in the event a board member has resigned or vacated his or her position). However, in the event a board member no longer holds his or her position before the annual shareholders’ meeting the law allows the board to appoint a replacement member until the next annual shareholders’ meeting.

    Pursuant to Section 41 of the Corporations Act board members, when acting in such capacity, shall employ the care and diligence that men ordinarily use while conducting their own businesses, and shall be jointly and severally liable for the damages caused to the corporation and its shareholders with negligence or fraud. This proviso may not be changed by agreement of the parties, and any proviso to the contrary or which purports to limit the directors’ liability is null and void.

  15. 15.

    Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.

    The most significant issues commonly considered in purchase agreements comprise the following:

    1. Pricing mechanics, eg, pre-closing price determination mechanics, and post-closing price adjustments mechanics;
    2. Representations and warranties of seller, their scope, duration and thresholds (if any) required to trigger the liability of the seller. In this connection, parties negotiate if purchaser has any obligations to warn seller about a breach of the representations within a certain time frame in order to be entitled to an indemnity. Also, parties negotiate a maximum cap on the liability of the seller, which may vary depending on the nature of the representation breached.
    3. Covenants imposed on seller, such as non-compete, non-solicitation clauses.
    4. Governing law. In this connection it is generally accepted that Chilean law is to be applicable since the assets sold are located in Chile (including shares of a corporation), and according to civil law provisions all assets located in Chile are subject to Chilean law.
    5. Dispute resolution mechanics. In Chile disputes are typically submitted to either local (such as the Santiago Chamber fo Commerce) or foreign arbitration centres (eg, ICC, AAA, etc).
    6. Escrow arrangements. In this connection parties tend to accept escrow for a portion of the purchase price during a limited time frame ranging from six to 24 months. Local banks are acquainted with the structure, which has typically worked well for both buyers and sellers.
    7. Please note that share purchase agreements are not subject to cumbersome formalities as they only need to be executed before two witnesses. Indeed, no notarial authorisation is required (however, parties often do authorise the transfers by a notary public anyway) and no stamp tax is applicable on the transfer. On the contrary, asset purchase agreements may be subject to some formalities depending on the nature of the assets purchased (eg, acquisition of real estate requires to be executed through a notarial deed and then registered before the competent Property Registrar).

    The most significant issues commonly considered in shareholders’ agreements comprise the following:

    1. Limitation on sale of shares without the consent or notice to the other parties. In this regard first offer and/or first refusal clauses are fairly common. Please note, however, that pursuant to Chilean law it is not possible to completely forbid the transfer of shares since as a matter of public policy shares of a corporation are transferable in essence. Therefore, any restrictions imposed on the parties may not be so cumbersome as to make the transfer impossible.
    2. Governance rules, where the private equity investor investing in a minority stake would normally require some veto rights on major decisions of the company. Such decisions may include:
    • acts implying the disposal, encumbrance, transfer, sale or transfer of all or part of certain strategic assets;
    • the sale of assets of the target company over a certain amount;
    • the approval of any contract involving a payment or an obligation for the company in excess of a certain amount;
    • the approval of the annual budgets;
    • the compensation of the company CEO to the extent it exceeds normal market conditions;
    • the organisation of or incorporation into companies already organised;
    • the performance of any act or entering into any agreement with shareholders’ related parties;
    • the appointment of the company auditors;
    • the granting of loans or credits in favour of third parties;
    • the policy of compensation, benefits and loans to executives, managers and directors of the company, to the extent it exceeds normal market conditions;
    • the approval of stock option plans and other mechanisms of incentives for the employees of the company;
    • the resolution to submit an insolvency reorganisation plan or to request the bankruptcy of the company, as the case may be;
    • the indebtedness of the company in excess of a certain amount;
    • the granting, creation or modification of personal guarantees or of real guarantees constituted over assets or properties of the company to secure obligations of third parties;
    • the amendment of the company by-laws and in particular: (i) the increase or decrease of the corporate capital; (ii) the reorganisation or split up or merger with or into other company; (iii) the modification of the duration of the company, the modification of the corporate purpose and its early dissolution; (iv) the change of corporate domicile as well as the modification of the corporate purpose or objective; (v) the approval of contributions and estimate of properties consisting in money or credits; (vi) the decrease or increase in the number of members of the board of directors; (vii) the manner of distribution of dividends and other corporate benefits; (h) the creation, modification, extension or suppression of preferences; and (viii) the modification, directly or indirectly, of the quorums established in the corporate by-laws;  
    • the transfer of 50 per cent or more of the assets of an affiliate of the company provided the affiliate represents at least 20 per cent of the assets of the company as well as any transfer of its shares that implies that the parent company loses the character of controller; and
    • the manner of distribution of the corporate benefits.
  16. 16.

    Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?

    As previously noted, the most common dispute resolution mechanism between buyers and sellers is arbitration. On other hand, the arbitration between shareholders or partners of the same entity is mandatory in most types of companies, according to section 227 No. 4 of Organic Code of Court. Notwithstanding, the Corporations Act has a special rule where conflicts between shareholders or between shareholders and managers, can be solved through arbitration, but the claimant has also the option to submit his claim to the ordinary courts (section 4 No. 10 and 125 of the Corporations Act).

    If both parties are local to an arbitration, they will choose local arbitration (such as the Arbitration and Mediation Center of the Santiago Chamber of Commerce). On the contrary, if one party is local and the other is foreign, they might choose either local or foreign arbitration (such as ICC, AAA, etc). It is worth noting that Chile is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In addition, the International Arbitration Law of Chile is in essence a translation of UNCITRAL Model Law of 1985, with no special restrictions for the enforcement of foreign judgments. Therefore, there has not been a problem for foreign parties to submit the disputes to foreign arbitral courts and have the awards enforced thereafter in Chile.

    In local arbitration the rules for arbitral proceeding tend to be fairly flexible as to allow the parties to determine the steps of the proceeding. Normally, a claimant submits the claim and respondent has 15 to 20 days to respond. Precautionary measures are always available through ordinary courts if required before arbitration commencement, and can always be requested to the arbitrator(s) if the arbitration has already commenced.

    The selection of arbitrators can be made by mutual appointment of the parties. However, if the parties do not reach an agreement, the arbitration center will appoint the arbitrators from a listing of names. The appointment will be made by the centre depending on the complexity of the dispute, its amount, the relevant area of law, etc.

  17. 17.

    What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?

    Private equity funds typically fund their acquisitions through the calling of quotas. Indeed, such funds enter into quota subscription agreements with their quotaholders, which set forth the latter’s obligation to pay the value of quotas upon discretional calls by the manager thereof. Given that calls are mandatory for quotaholders, substantial penalties may apply to the breaching quotaholders in the event they do not meet the calls.

    Other private equity buyers may fund their acquisition through capital increases, inter-company funding (short-term or long-term financing), or through traditional bank lending, which remains the most frequent manner to finance private equity acquisitions. In some cases, it is possible to see convertible notes issued by the purchaser before closing.

    Whenever a third-party finances the acquisition, security interests need to be put in place in order to secure payment. If the financing party is a foreign entity, withholding taxes are applicable to interest payments at a rate of (i) 4 per cent if paid to a foreign or international bank or financial institution (considered as such by the Chilean tax authorities for purposes of article 59 No. 1 of Decree Law 824 of 1974, the Chilean Income Tax Act) and duly reported to the Chilean Internal Revenue Service and (ii) 35 per cent if paid to any other person domiciled or resident outside of Chile. However, the same interest that qualifies for the 4 per cent withholding tax rate will be subject to withholding tax at a rate of 35 per cent when paid to “related entities”, on the part of the indebtedness of the borrower deemed to be “excessive” pursuant to the terms of the Chilean Income Tax Act. Please also note that any other payment made under any financing documents (other than on account of principal) may be subject to withholding tax at a rate of up to 35 per cent.

  18. 18.

    Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?

    There is no formal domestic financing market for private equity deals. However, it is worth noting that many PIF fund managers have taken advantage of soft financing by CORFO, which has several programs designed to finance venture capital and private equity investments. Such soft loans are very advantageous in several respects, as they have low interest rates, and are exempt from stamp tax. 

  19. 19.

    What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?

    Nowadays, and after a staggered implantation process, IFRS is fully applicable in the Chilean economy.

    As to intangible and goodwill it is important to state that in the event a company acquires 100 per cent of the shares or equity interest of another entity (thereby absorbing it), and the purchase for such shares or equity interests is higher than the tax value of the absorbed assets, the difference shall be distributed among all non-monetary assets acquired as result of the merger whose value is below market. Hence, the distribution of such goodwill will be made among the referred assets up to their market value. Any goodwill excess not distributed shall be kept in a special goodwill account which can be amortised only upon dissolution of the absorbing entity.

  20. 20.

    Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?

    As regulated and public vehicles, RIFs are subject to high standards of disclosure, similar to the standard applicable to listed corporations. Therefore, they have to provide information to the regulator and the public about their financials and investments. In any event, there is no need to obtain the authorisation of the regulator for a RIF to make a private equity investment (except in cases of specific assets which require prior approval of the regulator by any type of purchaser, eg, banks).

    As provided by the Sole Funds Act, PIFs have limited information standards. As a matter of fact, the managers thereof are required to file before the SVS (on a quarterly basis) only the following information: (i) identity of the fund and its quotaholders, (ii) amount of the contributions made quotaholders, and (iii) valuation of the fund’s assets. Before the enactment of the Sole Funds Act, there was no disclosure or registration requirement applicable to PIFs. On the other side, and as in the case of RIFs, PIFs do not need to seek authorisation from regulators in order to make an investment, with the same exception noted above.

  21. 21.

    Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.

    In general, and given that Chile is a very open economy, there are no restrictions applicable to foreign investors in connection with private equity investments. However, there are certain areas in which foreign investment is restricted (see question 22).

    In any event, please note that all foreign investors (including those making a private equity investment) shall submit to the Central Bank of Chile certain information about themselves and the investment made whenever the investment exceeds US$10,000. It is worth noting that there are no limits on the amounts that a foreign investor may bring into Chile.

    In January 2016 a new act was passed in lieu of former DL 600 (which contained the Statute on Foreign Investment). The new act (No. 20,848), which grants far less benefits than DL 600, still recognises the right of any foreign investor making an investment higher than US$5 million to repatriate the principal amount of its investment and any profits thereof after payment of all applicable tax obligations. To this end the foreign investor has the right to purchase foreign currency at the formal exchange market (mainly composed by banks operating in the local market). In addition, foreign investors are exempted from VAT on the import of capital goods. Finally, foreign investors are to be treated the same as local investors, thus, they may not be discriminated directly or indirectly

  22. 22.

    Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?

    Chilean law grants freedom to all persons, national and foreign, to enter into any contract or engage in any business activity provided it is not contrary to morals, fair practices and the public order.

    Accordingly, foreign individuals and corporations are in general free to acquire all of the shares or assets of local companies. Nevertheless, restrictions apply in connection with certain businesses.

    In the case of concessions over television broadcasting services, such concessions may only be granted to companies that are organised and domiciled in Chile and whose officials, including their chairman and directors, are Chilean nationals.

    Other laws prevent the nationals of bordering countries and their companies from owning real estate located near the country’s borders.

    Moreover, there are a number of laws that impose certain restrictions whether on the nationality of the owners of specific assetsor on the members of the board of directors and the executives of certain Chilean companies, or both.

    The Chilean Navigation Act, for instance, provides that for registering a merchant vessel in Chile the owner thereof must be Chilean, even if a company. This same requirement is imposed by the Chilean Fishing Act on fishing vessels to allow them to obtain a fishing licence and carry out industrial fishing activities in Chilean waters. The Chilean Aviation Act also establishes the requirement of Chilean ownership for the registration of aircraft in Chile; however, the aviation authority may allow the registration of aircraft owned by foreign individuals or entities, provided such foreign owners carry out activities in Chile on a permanent basis. This same authorisation can be given to foreign aircraft under operation of a Chilean airline.

  23. 23.

    Please describe any antitrust approvals or other competition law requirements that may apply connection with private equity investments into your jurisdiction?

    Currently Decree Law 211 of 1973 (the Antitrust Act) does not consider a specific authorisation proceeding regarding concentration operations (such as mergers and acquisitions, and private equity transactions).

    However, within the framework of a wide consultancy power granted to the Antitrust Court, such court may review, upon request from the Fiscalía Nacional Económica (the Competition Watchdog) or from any party having a legitimate interest, on a non-controversial basis, any act or contract that may breach the Antitrust Act. Under these review powers the Antitrust Court may determine the conditions that said acts or contracts must comply with according to the Antitrust Act.

    It is within such consultancy powers that the Antitrust Court has generally reviewed mergers and acquisitions, either by approving or rejecting them, or by imposing mitigation conditions to be met by the purchaser or the target. Indeed, parties to a merger or acquisition likely to impact the market choose to seek prior approval from the Antitrust Court on the proposed merger or acquisition rather than carrying out the transaction and be subject to a subsequent investigation and application of fines (or even having to unwind the transaction if so determined by the court). 

    The Antitrust Court has estimated that the consultancy process takes approximately 237 days in average to be concluded.

    Notwithstanding the above, there is currently a bill of law at Congress that will change the landscape in this connection. Indeed, the new Act will establish a two-phase process in order to carry out a concentration operation, to be carried out before the Competition Watchdog, which will be triggered if certain thresholds are met (such thresholds to be determined by the Competition Watchdog).

  24. 24.

    Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle?

    Act No. 19,913 created the Financial Analysis Unit (UAF), whose purpose is to prevent the use of the Chilean financial system and other sectors of the economic activity for money laundering. In this regard, certain entities (such as banks, financial institutions, factoring, leasing and securitisation companies, and RIF managers, among others) shall report to the UAF any suspicious activity they come across in their business. For these purposes, "suspicious activity" is any act, operation or transaction that is unusual or lacking of economic or legal justification in accordance with the practice of the relevant activity or that could involve the financing of terrorist activities.

    Therefore, at any private equity transaction (as in any other transaction), banks and other financial institution involved must report to the UAF the suspicious activities they identify.

    On the other hand, banks shall comply with Chapters 1–14 of the Updated Compilation of Rules issued by the Superintendency of Banks and Financial Institutions, which provides for exhaustive "know your customer" due diligence to be carried out by all Chilean banks when opening bank accounts and dealing with new customers. In this regards banks have to identify the client’s background, its type of activity, amount and origin of funds transferred, country of origin of the funds (and whether such country complies with the minimum standard on money laundering policies), the client’s relations with other companies, and other risk factors (eg, whether the client, its managers, of final beneficiaries are politically exposed persons).

    In light of the above, the opening of bank accounts for new entities or clients could take some time (one to three weeks), which needs to be considered in the transaction timeline.

    As to extraterritorial regulations such as the Dodd-Frank Act and the Foreign Corrupt Practices Act, they have not posed particular difficulties in order to close private equity transactions. Nonetheless, parties bound by such rules do strictly comply with such laws and make sure all documentation requested under them is duly provided for in time.

  25. 25.

    Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?

    Currently, there is a free and open exchange market in Chile. Indeed, since 1989 any person may freely engage in foreign exchange transactions and, therefore, sell and purchase foreign currency, either on a regular or an occasional basis, at such rates as the relevant parties determine in their discretion. There are no official exchanges rates in Chile.

    However, the Central Bank Act grants to the Central Bank of Chile broad powers to reinstate exchange controls at any time it deems it appropriate. In the past, The Central Bank of Chile has exercised its regulatory powers by requiring that inflows of foreign currency due to foreign investments brought into Chile, as well as foreign loans and other external indebtedness contracted abroad, be notified to the Central Bank at the time the proceeds are brought into Chile through the formal foreign exchange market or, otherwise, used and disposed abroad. Since April 2001 proceeds of such foreign investments, loans or other external indebtedness brought into Chile are no longer required to be converted into Chilean currency. However, if such conversion is made it needs to be effected in the formal foreign exchange market (composed by banks authorised to operate in Chile).

    Nowadays, notice to the Central Bank of Chile of such foreign investments, loans or other debt transactions giving rise to foreign currency payments is required. If such notice is given, foreign investors, debtors, creditors or lenders, as the case may be, gain access to the formal exchange market to purchase and remit abroad the required foreign currency. Giving notice to the Central Bank is a very simple process, which in the case of loans require also filling out some forms provided for by the Central Bank itself.

  26. 26.

    What are the basic tax issues affecting private equity investments in your jurisdiction?

    Through Law No. 20,780 and Law No 20.899 (the acts containing the Tax Reform Laws), articles 81, 82 and 86 of the Single Funds Act were amended regarding the tax treatment of investment funds. In this regard, the following changes can be addressed:


    Tax treatment of the distribution of profits from the RIFs:

    • Foreign taxpayers are subject to a substitute tax of 10 per cent (however, they are exempted from tax in the case of funds having at least 80 per cent of their assets located abroad).
    • Chilean taxpayers are subject to the first category tax or the complementary global tax.

    Tax treatment of transfer or redemption of quotas without liquidation:

    • Foreign taxpayers are subject to a substitute tax of 10 per cent (however, they are exempted from tax in the case of funds having at least 80 per cent of their assets located abroad).
    • Chilean contributors are subject to the general regime applicable to the sale of shares in corporations (first category tax plus the complementary global tax). Sellers who do not declare their income through an accounting balance are only subject to the complementary global tax.


    Tax treatment of the distribution of profits from the PIFs:

    •  Foreign taxpayers are subject to the additional tax of 35 per cent (however, they are exempted from tax in case of funds having at least 80 per cent of their assets located abroad).
    • Chilean taxpayers are subject to the first category tax or the complementary global tax.

    Tax treatment of transfer or redemption of quotas without liquidation:

    • Foreign taxpayers are subject to the additional tax of 35 per cent.
    • Chilean taxpayers are subject to the general regime applicable to the sale of shares in corporations (first category tax plus the complementary global tax). For sellers who do not declare their income through an accounting balance, they are only subject to the complementary global tax.

    Dividends paid by Chilean corporations to foreign investors are subject to a withholding tax of 35 per cent, against which the corporate tax paid by such Chilean corporation can be used as a credit. In the event the paying entity is subject to the ‘attributed income’ tax system, the credit is equal to 100 per cent of the corporate tax paid. On the contrary, if the paying entity is subject to the ‘partially integrated’ tax system, the credit will be equal to 65 per cent of the corporate tax paid if the recipient of dividends is not domiciled in a country that has entered into a double taxation treaty with Chile.

    In connection with thin capitalisation rules please note that interests, commissions, fees for services and any other charge paid by a company resident in Chile to a related entity abroad, in connection with loans, debt instruments or credit facilities, which are considered as an ‘excess of indebtedness’, such payments shall be taxed at rate of 35 per cent. There is excess of indebtedness whenever the total annual indebtedness of the taxpayer is higher than three times its equity at the end of applicable year.

    As to capital gains in case of sale of equity participations by a foreign investor, the same shall be subject to a 35 per cent withholding tax. The foreign taxpayer may elect the timing for meeting its tax obligation in connection therewith, either by paying the tax on a perceived or accrued basis. Therefore, if the perceived basis is chosen, and, for instance, the purchase price is paid within two years, the foreign taxpayer may delay the payment of taxes until it receives the purchase price.

  27. 27.

    What impact are recent and projected changes in macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?

    Chile has recently undergone a very substantial tax reshuffle by virtue of which taxes have been raised and a new income tax system has been put in place. In 2014, during the discussion of such tax reform, the economy was damaged as a consequence of incertitude over the final outcome of the reform. Once the reform was finally approved and its content made clear to the market, economic players started to prepare for this new taxing era. Unfortunately, the government has pursued an agenda of other reforms (such as the labour and constitutional reforms) that have not given the legal stability that companies have been looking for. In addition to the foregoing, copper prices have been substantially lower than in recent years, which has had a direct impact on the main export of Chile. As a result, economic growth was 1.9 per cent in 2014, and 2.1 per cent in 2015, very low in comparison with previous years.

  28. 28.

    Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.

  29. 29.

    Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.

    As previously mentioned, during 2014 the government of President Bachelet approved a tax reform aimed at funding an educational reform currently under legislative discussion. As a consequence, corporate tax rates (as well as capital gain tax rates) will increase from 20 to 27 per cent (gradually from 2015 until 2018). Also, the tax reform considers amending the tax credit system by which 100 per cent of the corporate taxes paid by corporations and other legal entities are used as credit for taxes applicable to individuals or foreign investors. This increase in taxes has initiated a new selling trend in the Chilean market. Indeed, many Chilean investors and company owners see the gradual increase in taxes as an opportunity to cash out before taxes rates reach their peak in 2018. This trend not only applies to private equity transactions but to public company transactions as well, and affects all markets and industries. We have recently seen many cash-out transactions by Chilean owners, and we expect this trend to continue during 2016.

  30. 30.

    Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.

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