Monday, January 17, 2011

Comparative Analysis of Suitable Vehicles for Foreign Investment in Chile

As we mentioned in the previous article “Foreign Investment in Chile”, the Chilean legislation includes several types of legal entities suitable to carry on business. The most relevant for the purpose of foreign investment are the branches of foreign corporations (“agency”), the limited liability companies (“LLC”), the stock corporations and the corporations by shares. In this section we will make a brief comparison between these legal entities with emphasis on matters relevant to foreign investment.

1.     Legal status.

The LLCs, corporations and corporations by shares are considered to be legal entities independent from their parent companies (foreign investor) as is the case for the Chinese limited liability company and the Chinese joint stock limited company. The most relevant consequence is that the parent companies will only be responsible with the foreign investment vehicle (“FIE”) for the capital contribution that they have agreed to pay. In other words, the parent companies will not be liable in any part for the obligations that the FIE undertakes in the course of its business.

On the other hand, an agency –as is the case for a Chinese representative office- does not have independent legal status and is considered to be a representative or agent of the parent company, sharing the same legal personality. As a consequence, the parent company with all its assets will be held liable for the obligations of the agency in case the assets of the agency are not enough to satisfy its liabilities.

2.     Supervision by the Securities and Insurance Commission [Superintendencia de Valores y Seguros or SVS].

According to the Chilean Corporations Act corporations can either be “closed” corporations (closely-held) or “open” corporations (publicly-held). Open corporations are those registered in the Securities Registry, either voluntarily or according to the law. Corporations which according to the law must be registered in the Securities Registry -and therefore will be “open” corporations- are those whose shares or other issued securities are publicly traded, or have more than 500 shareholders, or at least 10% or more of the subscribed capital belongs to 100 or more shareholders, excluding those who individually or through other natural or legal persons exceed such percentage.

Closed corporations are those that do not fall within the previous definition.

As a general rule open corporations will be supervised by the SVS and closed corporations will not. “Special” corporations like banks and insurance companies will be also supervised by the SVS.

3.     Incorporation.

3.1.  Agency.

In order to incorporate an agency, the agent or its representative will need to register at a public notary in Chile several documents related to the parent corporation, that is, incorporation documents and certificate of good standing, copy of the bylaws and a general power of attorney which must contain certain compulsory faculties. A translation must be included for any of documents that are in a language other Spanish. On the same date and before the same public notary, besides stating the name, purpose, capital (including payment modalities) and domicile of the agency, the agent must declare in a public deed on behalf of the parent corporation that the parent corporation is familiar with the relevant legislation in Chile, that the corporation's assets in Chile will be subject to Chilean law (notably for ensuring responsibility in contracted obligations) and that the corporation will maintain enough assets in Chile to fulfill its obligations.

An excerpt of the notarized copy and statement described above shall be registered in the Commerce Registry and published in the Official Gazette within 60 days following the execution.

3.2.  LLC and Corporation.

LLCs and corporations must have at least two shareholders. This means that a foreign investor who wants to incorporate a LLC or a corporation will need to have at least a second shareholder in the company. However, since the law does not specify any minimal capital contribution, the second shareholder can be left with a nominal participation (“nominee shareholder”). This role is often fulfilled by a subsidiary company of the investor.

Both LLCs and corporations are incorporated by public deed. An excerpt of such deed must be registered in the corresponding Commerce Registry and published in the Official Gazette within 60 days following the execution of the public deed.

The statutes of the company contained in the deed of incorporation shall include, among others, the individual details of the shareholders, the name and domicile of the company, the scope of business, the projected duration of the company, the capital and the contributions of each shareholder –as well as the number of shares in the case of the corporations-, the management procedures, etc.

3.3   Corporation by Shares

The corporation by shares is allowed to have only one shareholder. It can also have more than one. Therefore, the foreign investor will not need to appoint a nominee shareholder in case only one investor wants to own the entire company.

The incorporation is substantially similar to that of the LLCs and regular corporations, but more flexible. The public deed can be replaced by a private document signed by the parties with the signatures authentified by a public notary and recorded into the notary registry. For the corporation by shares the excerpt of the public deed or private instrument must be registered and published within 30 days counted from the execution.

4.     Amendments.

Regarding the Agency, in case of any modification of the content of any of the incorporation documents, the agent must repeat the same legal formalities as for the constitution, that is, registration of documents before public notary, public deed statement, Commerce Registry registration and publication.

The same principle applies to the LLCs, corporations and corporation by shares. The statutes of the company may be amended following the same formalities of incorporation, i.e. public deed, registration and publication.

With respect to a corporation, the decision to amend –which will be recorded in a public deed- will be adopted by the shareholders meeting in accordance with the quorum required by the law or the statutes. The same rule is applicable to the corporation by shares as a general rule.

However, and this is a very important difference between the LLC and the corporations, in order to amend any part of the statutes of an LLC, all of the partners must agree and jointly execute the public deed of amendment.

No prior approval of governmental agencies is required to modify any of these legal vehicles, except for capital reduction which shall approved by the Internal Revenue Service.

5.     Capital.

Unlike some other countries, including China, the Chilean law does not require as a general rule any minimum capital in order to constitute an Agency, an LLC or a corporation. Only certain industries, like banking, require a minimum capital to operate.

The capital of a corporation or a corporation by shares will be divided in shares, allowing the formation of different series of shares. The capital of an LLC will be divided in rights normally expressed in percentages.

As a general rule the capital may be paid in cash or in kind, as agreed at the articles of association/statutes.

The capital of a corporation must be fully paid within three years except when a shorter period is provided in the statutes. As per the corporation by shares, the capital must be fully paid within five years from the incorporation, or within a different period established in the statutes.

6.    Administration.

6.1  Agency.

The agency will be managed by the agent who must be granted with broad faculties.

6.2  LLC.

The rules for the administration of a LLC in Chile differ from other countries. In China, the administration of a limited liability company has to be carried out by a board of directors. Replacing the board of directors with a single executive director is only possible in the case of a company that is relatively small or has relatively few shareholders.

The general rule in Chile is that a board of director is not necessary. Instead, all of the partners may manage the company and are empowered to carry on a wide number of acts and contracts on behalf of the company within its scope of business. That being said, the partners can agree on a different way of administration, such as appointing one or more partner or third parties as company administrators, or establishing a board of directors.

6.3  Corporations.

A corporation must be managed by a board of directors elected by the shareholders meeting. The board must be composed of at least three directors in the case of closed corporations and of at least five in the case of open corporations. Some major corporations require at least seven directors on the board. The statutes may establish the existence of alternate directors.

There are no legal restrictions on the nationality of the directors.

The board must be renewed within the period provided in the statutes, with a minimum of once every three years, and the directors can be reelected indefinitely.

The quorum required to hold a board meeting is the majority of directors of the company and the decisions must be adopted by the majority of the directors attending to the meeting, except if the statutes provide for a higher quorum. There are some important matters established by law that require higher approval quorums.

As a general rule the board meetings must be held in the company’s domicile. However, the directors may agree otherwise and hold the board meetings in a different place within or outside Chile. It should be pointed out that the directors can attend the meetings without being physically present, e.g. via conference call or videoconference, which is extremely useful for FIE directors who are not in Chile.

The corporation must have one or more managers in to whom the board may delegate some of its management powers.

6.4  Corporations by shares.

The statutes can establish any method of administration agreed by the shareholders. In case of silence of the statutes, the rules established for the closed corporations will apply.

7.     Distribution and remittance of profits.

Generally speaking profits can be remitted to the foreign parent company or shareholder with no limitations, pursuant to the foreign exchange regulations and after having paid the applicable taxes.

The agency’s profits may be remitted to the parent corporation at any time. The partners of a LLC may agree in the bylaws or afterwards the time and conditions of the profits distribution.

Corporations must distribute dividends once a year. Open corporations must distribute each year as a dividend at least 30% of the net profits, or the higher percentage indicated in the statutes, unless all of the shareholders agree otherwise. The statutes of closed corporations can establish a lower minimum percentage. The board of directors can also distribute interim dividends, with the directors being personally liable for reimbursing to the company any distributed sums not covered by the year's net profit. Preferred series of shares may have the right to preferred dividends.

Rules laid down for corporations will be applicable to corporations by shares, unless otherwise provided in the statutes. The statutes may also provide a fixed dividend for a preferred share series or dividends connected with a particular activity within the scope of business of the corporation.

8.     Transfer of shares or interest.

The transfer of shares or interest works very different in corporations and LLCs and it will be one of the most relevant aspects to consider when deciding which company to incorporate.

The shares of a corporation or corporations by shares may be freely transferred between the shareholders or to third parties. The parties may agree on limitations to the transferability of the shares by means of a shareholder agreement. The statutes of Closed corporations and corporations by shares may also contain certain limitations.

On the other hand, in order to transfer interest in a Chilean LLC, all partners must agree to the transfer and the bylaws must be modified by means of a public deed accordingly. This differs substantially from the Chinese case in which the shareholders of a limited liability company can freely transfer their shares between shareholders, and where in case of transfer to third parties the other shareholders only have a preemptive right that can be exercised by more than half of the other shareholders.