Author: Mark Mulligan Chile’s parliament is close to passing a law that started life as a proposal to protect minority shareholders but now covers everything from stock options and share buy-backs to control of the country’s banking sector.
After three years of draft and debate, the so-called OPA law (from the Spanish for public share offer), cleared the upper house of congress on July 18, though it now needs a second approval from the lower chamber because of amendments.
Although the bill is multifaceted, its main thrust is to give minority shareholders the right to the same premium as controlling investors in the case of a takeover or merger. It is an obvious reform that brings Chile into line with the rest of the modern world, but it has upset the powerful families that dominate business life.
To ensure the legislation’s passage through parliament, proponents had to concede ground to right-wing supporters of the families by including an amendment allowing majority shareholders a three-year period to tender their equity to a suitor without involving the minorities.
Parliamentarians concede that the legislation could still become bogged down on this and several other points, but the investment community has already welcomed it as step in the right direction.
Apart from the obvious reform, the OPA legislation also seeks to introduce stock options and share buy-backs into Chilean corporate life and loosens up the straitjacket of investment restrictions worn by pension funds and insurance companies. These will now, for example, be allowed to invest in domestic mutual funds.
According to Geoffrey Dennis, head of Latin American equity research at Salomon Smith Barney, the Chilean reforms fit neatly with a regional trend toward addressing issues of corporate governance. “When it does get passed, it won’t lead to a sudden influx of foreign capital into the markets,” he said. “[But] in the long run, this is good news for the capital markets in Chile.”
Meanwhile, Banco Santander Central Hispano – which controls 27% of the loans market – is also counting on a gradual, rather than brusque, integration of the reforms into business life.
A banking law tacked onto the legislation in response to last year’s merger of the two Spanish institutions, which brought Chile’s two biggest banks under common ownership, has been sufficiently watered down to give sector supervisors discretionary powers on acceptable limits of concentration.
According to the latest draft, regulators will be left to establish each year an acceptable level of market share for a single bank, likely in the future to hover around 20%.
Banking sources say BSCH is likely to escape relatively unscathed this time, and probably will not have to reduce its loans portfolio by much, although it has offered to do so. At the same time, parliamentarians opposed to the continued Spanish dominance of “La Banca” may stall the OPA bill until the issue is resolved.
BSCH controls Banco Santiago, the country’s leading bank with a 15.5 per cent share of the loan market at the end of June, and Banco Santander-Chile, with 11.6 per cent.
According to banking analyst Armen Kouyoumdjin, both banks have restricted portfolio growth pending the bill’s final approval. “[Santiago] has maintained its leading position as a lender, though it has reduced its growth in view of the ‘Sword of Damocles’ of concentration limits hanging over its future,” he wrote in his half-yearly report. The bank’s loan portfolio grew by just 0.9% in the first half-year, reaching $7.6 billion. Total loans at Santander-Chile, meanwhile, shrank 1.7% in the six months to the end of June, to $5.67 billion.
Despite what many consider to be overcrowding in the banking market, newcomers are surveying the terrain ahead of the legislative reforms, which also propose some relaxation of the rigid risk-classification criteria.
Deutsche Bank has been authorized to open a branch and Dresdner-BNP is keen to raise its profile in the market through an acquisition. Analysts have mentioned Banco de A Edwards as a candidate, given that its owners, the Luksic family, have been steadily building a stake in Banco de Chile.
Industrial groupings such as the Luksics and other powerful families such as the Mattes and Angelinis, which have been able to command premiums in past takeovers and mergers at the expense of smaller investors, have the least to gain from the broader OPA law.
If passed in its current form, the bill would force any shareholder controlling more than two-thirds of the equity of a single company to make a public offer for all the outstanding shares at the one price. This puts an end to the cosy sweetheart deals between the large holding groups which have often left minorities with savagely depreciated shares.
“Some of the reaction from the big industrial groups has been somewhat negative,” said Guillermo Tagle, country head of markets at Santander Investment in Santiago and one of the architects of the bill. “To a certain degree they have a point: for a market to work freely it’s often better to have fewer written laws and more unwritten laws.”
“The problem in Chile is that it is the letter of the law which rules rather than the spirit of the law – so everything must be spelled out.”
