Minority shareholder rights in M&A transactions in Latin America
June 2017 | SPECIAL REPORT: MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2017 Issue
In the last few years, minority shareholders have become more active in using their legal rights in the context of mergers and acquisitions (M&A) transactions in Colombia and in other countries in Latin America. Most of the lawsuits or claims are for breaches of the duty of loyalty of managers and directors of the companies involved, resulting in minority shareholders suffering a loss in the value of their investments or other damages.
Although most of the renowned cases in Latin America regarding this topic took place in public companies, the common model in Latin America is that these companies still have a controlling shareholder and just a minority float. Therefore, in most cases, the officers and directors of the companies have been designated by a majority shareholder that is exerting its controlling power, vis-à-vis management of the company, to obtain a personal benefit.
The flourishing shareholder claims challenging M&A transactions can be seen in cases such as the lawsuit filed by an ex-minority shareholder of Latam Airlines, the lawsuit filed by a minority shareholder of CorpBanca, the Enersis/Endesa case, the Grupo Oi SA/Portugal Telecom case, the dispute initiated by minority shareholders of Grupo Éxito in Colombia and the claim issued by minority shareholders of Avianca Airlines.
The legal grounds on which minority shareholders base these kinds of claims in jurisdictions such as Brazil, Chile and Colombia can be categorised as: (i) breach of fiduciary duties by directors and officers; (ii) oversight and information rights that the shareholders have; (iii) appraisal rights when certain transactions take place; and (iv) abuse of voting rights by the majority shareholder.
In most Latin American jurisdictions, officers and directors have duties of care and duties of loyalty in respect of the company for which they act as directors. Additionally, in most of these jurisdictions, directors have an obligation to report conflicts of interests and to abstain from participating in deliberations regarding such topics. These regulations help prevent managers and directors from abusing from their posts either for their own benefit or for the benefit of a third party who might be the controlling shareholder who appointed them.
If the directors breach any of their duties and cause damage to the company, as well as indirect damage to shareholders, the general shareholder assembly may decide to file a lawsuit against those directors in the name of the company. Therefore, in theory, if directors breach their duties by means of representing a personal interest of a controlling shareholder, minority shareholders could use these kinds of actions to make them liable for damage caused to the company. Additionally, the possibility of filing these actions could work as an incentive to prevent managers from acting in the interest of the controlling shareholder. Nevertheless, in Colombia and Brazil, although these kinds of actions are contemplated in the existing legislations, in practice they are not effective protection mechanisms for minority shareholders as the decisionmaking quorums to adopt them are too high. However, in Brazil, if the general shareholder assembly does not approve the filling of such lawsuit, a group of minority shareholders representing at least 5 percent of the subscribed capital may still go on with the lawsuit individually. In Chile although this legal action does not exist, any number of shareholders who represent at least 5 percent of the company’s issued shares have the right to sue (on behalf of the company) any person who caused damage to the company in violation of Law 18.046 of 1981.
Another important right that minority shareholders have as a protection against abuse is the right to be informed about the company’s financial and economic status. When the company is a public company, the right to information can be even stricter in order to protect investors. In Brazil, for example, officers of listed companies must disclose any material event that may affect the stock market price. Such events include changes of control in the company and transfers of shares of more than 5 percent. The Colombian law is similar, in the sense that listed companies should inform any relevant information that would have been taken into account by an expert to sell or buy shares in such company.
In jurisdictions such as Brazil, Colombia and Chile, dissenting shareholders have the right to withdraw from the company and be paid for their shares (either by the company or remaining shareholders) if the general shareholder assembly decides to merge, transform or spin-off. Although in some cases the right to withdraw may work as a protection for minority shareholders, in other cases it may not be the best option for such shareholders if the market share value is not in a good place.
In addition to the previous protections, in Colombia and Brazil shareholders have the right to sue other shareholders who have abused their voting rights to obtain a personal benefit, which goes against the interests of the company or causes damage to the minority shareholders or to the company.
Most of the legal actions filed by minority shareholders in the scope of M&A transactions are based on the breach of legal duties that directors of targeted companies have made. In the Enersis case, for example, a controlling group of shareholders of Enersis – an energy group in Chile – that were also the managers of the company, made a special deal to sell their shares in Enersis to Endesa España at a better price than the shares of other shareholders, and with special personal benefits. Once the situation was known, some of the minority shareholders started to oppose the transaction. As a consequence, the Securities Superintendence sanctioned such managers with fines on the grounds of acting in conflict of interest and for breaching their director duties. Although the transaction still went ahead, the conditions by which the controlling shareholders would be favoured were eliminated.
In the Oi SA case, a group of minority shareholders of Oi SA – a Brazilian telecommunications company – tried to block the merger of the company with Portugal Telecom, claiming that the minority shareholders would be diluted. As the transaction was planned, Portugal Telecom was going to capitalise the company and pay the debt of the controlling shareholder of the company. The minority shareholders tried to block the controlling shareholders from participating in the general shareholder assembly to vote on the capitalisation by making a claim before the securities regulator in Brazil. Nevertheless, the securities regulator authorised the controlling shareholders to vote in the meeting, stating that there was no impediment for them to do so.
The Itaú Chile/Corpbanca and Avianca cases, although involving shareholders and companies from Latin America, involve lawsuits that were filed in the US. With Itaú Chile/Corpbanca, the minority shareholders filed a lawsuit against Corpbanca, its majority shareholder and some of its directors, claiming that the controlling shareholder of Corpbanca, together with the other defendants, used fraudulent means to obtain special benefits for part of the shares in the company and failed to disclose important information. This claim was later dismissed by the court on technical grounds. In the Avianca case, minority shareholders filed a lawsuit arguing that the strategic alliance between Avianca Airlines and United Airlines would only benefit the majority shareholder of Avianca. This case has not yet been resolved.
The most recent lawsuits filed in Latin America are the Éxito and Latam cases. The Latam lawsuit was filed by Jorge Said Yorur on the grounds that he was forced to sell his shares in Latam and therefore harmed economically because Latam’s stock price dropped substantially. This, he claims, was due to bad management and a breach of duty by the officers and directors of the company after the merger of Lan Airlines and Tam Airlines.
The dispute initiated by minority shareholders of a supermarket chain called Grupo Éxito was based on the claim that its stock price fell because the chain purchased a company owned by a controlling shareholder. In this claim, the minority shareholders stated that the transaction was carried out in conflict of interest and that the purchase of such company was for the benefit of the controlling shareholder.
Neither the Éxito nor the Latam case has yet been resolved. Nevertheless, both of them involve actions carried out by directors. The courts will probably look at the decisions adopted by the directors and decide whether the directors complied with their duties and responsibilities in the adoption of such decisions. The question is how far into those decisions the court will look.
In Colombia, the court of the Superintendence of Companies, which has the faculty to decide on matters related to company law, has recently used the business judgment rule to decide on matters related to challenging decisions made by directors and managers. The court of the Superintendence of Companies has set forth that it will not analyse business decisions made by managers in detail, unless it has proof that they acted in a conflict of interest or that the decisions made by them were abusive or fraudulent. Therefore, the analysis that the court will make of the business decision in the Grupo Éxito case will depend on the plaintiff’s ability to prove that the decision was adopted in an abusive manner or was a conflict of interest. We will have to wait and see if the Chilean judges also use this criterion to decide the case.
Minority shareholders across Latin America have a variety of legal mechanisms that they can use to protect their rights. Although there is still a long way to go to consolidate minority shareholder rights in Latin America, courts are now more aware of the existence and implementation of such rights and are starting to become more sophisticated in resolving these cases. As a result of this activism, minority shareholders are exerting pressure on company management and this helps companies and their directors to become more diligent and careful in the performance of their duties. However, it is important to bear in mind that, although minority shareholders have rights to protect them from abuse, such rights are not absolute. In the end, managers or controlling shareholders can make decisions that do not always result in maximising share value. Nevertheless, this does not automatically mean that such decisions abused voting rights or breached director duties.
Jaime Robledo is a partner and Natalia Velasco is a junior associate at Gómez-Pinzón Zuleta Abogados S.A.S. Mr Robledo can be contacted on +57 1 319 2900 or by email: firstname.lastname@example.org. Ms Velasco can be contacted on +57 1 319 2900 or by email: email@example.com.
© Financier Worldwide
Jaime Robledo and Natalia Velasco
Gómez-Pinzón Zuleta Abogados S.A.S.