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BERDEJO ACTUAL FINAL(DO NOT DELETE) 12/2/2019 1:41 PM OLIGARCHS, FOREIGN POWERS, AND THE OPPRESSED MINORITY: REGULATING CORPORATE CONTROL IN LATIN AMERICA CARLOS BERDEJÓ* Corporate law and governance scholarship have traditionally focused on understanding the agency costs that result from unresolved conflicts of interest between shareholders and management. This agency problem becomes trivial when corporate ownership is concentrated, as is the case in many countries outside the United States. In this context, the more pressing agency problem results from conflicts of interest between minority shareholders and controlling shareholders seeking to divert resources at the expense of the former. When ownership is concentrated, legal rules must seek to protect minority shareholders from controlling shareholders, rather than shareholders from managers. In many countries, minority shareholders are afforded this protection via tag-along rights, i.e., the right to be bought out by any person that seeks to acquire a controlling stake in a company. The effectiveness of such a mandatory bid rule has been the subject of vigorous debate. This debate, however, has centered on comparing the approaches followed by the United States and the European Union in regulating sale of control transactions. Latin America offers an unexplored setting in which to address these long-standing issues. The Article starts with an examination of the shareholder structure of Latin American companies, which are characterized by high levels of ownership concentration. Families and foreign entities play a dominant role, a remarkable reflection of the region’s colonial past. Latin American countries have adopted unique approaches in sales of control that attempt to protect minority shareholders without deterring some of the efficient transactions that the traditional mandatory bid rule prevents. A preliminary comparison suggests these local rules outperform the U.S. market rule and the European mandatory bid rule. Copyright © 2019 Carlos Berdej * Professor of Law and J. Howard Ziemann Fellow, Loyola Law School, Los Angeles. 1 BERDEJO ACTUAL FINAL (DO NOT DELETE) 12/2/2019 1:41 PM 2 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 30:1 I. INTRODUCTION ................................................................................................ 2 II. CORPORATE OWNERSHIP AND CONTROL ................................................ 5 A. The Ownership of Publicly-Traded Companies ...................................... 5 1. Separating Ownership and Control .................................................. 5 2. Large Shareholders and Corporate Governance ............................... 8 B. Transferring Corporate Control ............................................................. 12 1. Tender Offer Regulation ................................................................ 12 2. Regulating Sales of Control ........................................................... 13 a. Market Rule ............................................................................. 14 b. Mandatory Bid Rule ................................................................. 15 c. Comparing the Market and Mandatory Bid Rules ................... 17 d. Assessing which Rule is Optimal............................................. 19 C. What Should We Expect in Latin America? .......................................... 21 III. CORPORATE CONTROL IN LATIN AMERICA ......................................... 24 A. Construction of Data ............................................................................. 25 1. Assembling a List of Firms ............................................................ 25 2. Gathering Ownership Information ................................................. 26 3. Assessing Ownership Structure ...................................................... 27 B. Who Owns Corporate Latin America? .................................................. 28 1. Brazil .............................................................................................. 30 2. Chile ............................................................................................... 31 3. Colombia ........................................................................................ 32 4. Mexico .............................................................................. 33 5. Peru ................................................................................... 33 IV. REGULATING THE MARKET FOR CORPORATE CONTROL ................ 34 A. Approaches to Sales of Control in Latin America ................................. 34 1. The “Traditional” MBR: Colombia and Mexico ............................ 36 2. A “Hybrid” Approach: Chile .......................................................... 37 3. One Modified “MBR” Approach: Brazil ....................................... 40 4. A Second Modified “MBR” Approach: Peru ................................. 42 B. Assessing the Modified Approaches to Sales of Control ....................... 44 V. CONCLUSION ................................................................................................. 51 VI. APPENDIX: LIST OF ISSUERS BY COUNTRY ......................................... 52 I. INTRODUCTION Shareholders invest their capital in publicly-traded companies seeking a financial return. Though they are putting their capital at risk in doing so, they neither seek nor wish to be involved in the management of a firm’s business. They often lack the necessary knowledge and expertise to manage the business, and most do not have enough money at stake to warrant such an investment of time and effort. Instead, shareholders rely on managers to oversee the business affairs and activities of the corporation. However, those BERDEJO ACTUAL FINAL(DO NOT DELETE) 12/2/2019 1:41 PM 2019] REGULATING CORPORATE CONTROL IN LATIN AMERICA 3 managers may not always take actions that benefit shareholders—they may shirk responsibility or creatively divert corporate resources for their own benefit. Due to the collective action problems associated with shareholders being dispersed, it is costly for shareholders to monitor and reign in these rogue managers. Much of U.S. corporate law and rules on corporate governance has been tailored to address this problem. Legal scholarship has followed suit, devoting countless articles to painstakingly explaining how legal rules and private ordering can help shareholders monitor and discipline managers. Outside the United States, this traditional agency problem does not characterize the most pressing corporate governance issues faced by investors in publicly traded companies. Ownership of public corporations in most countries is concentrated in one or a few shareholders who exert effective control over corporate affairs. Because of the size of these controlling shareholders, they have the incentive to monitor management and are often deeply involved in corporate decision-making. In this setting, the traditional agency problem between managers and shareholders becomes overshadowed by another kind of agency problem: the exploitation of minority shareholders by controlling shareholders. Controlling shareholders may use their power to cause the corporation to take actions that benefit the controller at the expense of the minority. Protecting minority shareholders and preventing the extraction of these private benefits of control thus becomes a priority for corporate law. Part II.A will address these two kinds of agency problems and the ways in which the law seeks to manage them. In countries where concentrated ownership is commonplace, the law can help minimize these agency problems by empowering shareholders to participate in and protect themselves from the corporate decision-making process. For example, minority shareholders can be given the right to elect members to the board of directors and to challenge certain actions by the board in court. The effectiveness and enforcement of this kind of minority shareholder protection varies across countries. An alternative mechanism to protect minority shareholders allows shareholders to “cash out” and exit at the time that a shareholder acquires a controlling stake in a corporation, limiting the extraction of private benefits of control. One way of providing this protection is to require a shareholder acquiring control of a corporation to make an offer to purchase all shares of stock, including those held by the minority, at the same price paid to the person who transferred control. Whether this type of rule is preferable to a more market-based approach that allows the acquisition of a controlling stake without an accompanying offer to minority shareholders has been the subject of vigorous scholarly debate, BERDEJO ACTUAL FINAL (DO NOT DELETE) 12/2/2019 1:41 PM 4 DUKE JOURNAL OF COMPARATIVE & INTERNATIONAL LAW [Vol 30:1 which is discussed in Part II.B. This debate, however, has centered on the frameworks adopted by the United States, which has a laissez-faire market rule, and the European Union, which has the traditional English mandatory benefit rule. These two approaches have been treated in the literature as two exclusive, opposing alternatives. It is not obvious why these two choices are the only options for import into other jurisdictions’ corporate governance laws. This Article expands and enriches this debate by considering additional approaches to the regulation of the market for corporate control that have been overlooked in the existing literature. Latin America offers a promising setting in

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