Cintac S.A., offering of shares and securities

The Chilean steel specialist company, Cintac, listed on the Santiago Stock Exchange (Nuam), has decided to delist and exit the public markets.

Let us recall that corporations (S.A.) must list their shares, becoming publicly traded, only if they have more than 2,000 shareholders. In addition, the Financial Market Commission (CMF) can increase this number, provided that public trust is not compromised by doing so, taking into consideration the type of shareholder, the nature of the company, or similar circumstances. That is, the CMF can allow certain corporations, specifically and concretely, as implied by Art. 2 of the Corporations Law (LSA), not to list their shares and remain as closed or special corporations.

However, the above is completely true, but only upon the issuance of all the CMF rules (NCG) to implement the amendments to the Securities Market Law (LMV) introduced by the Fintec Law. Indeed, the first transitional article of the Fintec Law allows its Art. 32 (LMV amendments) to enter into force only when the CMF issues and enforces the regulations “in accordance with the provisions of such […] articles”. For example, when the NCG on automatic registration (future Art. 8 ter LMV) is issued.

This is because the rule regarding the number of a corporation's shareholders that mandates its enrollment in the Securities Registry (Art. 2, paragraph 2, LSA), despite already being in force because the Fintec Law—which also introduced this rule on the number of shareholders—did not establish a vacancy period, coexists with the rule in Art. 5 of the LMV, which has not yet been modified to be in complete harmony with the LSA.

Simply put, today two rules coexist to determine which corporations must enroll, compulsorily becoming public corporations. The one from the LSA (Art. 2), which mandates enrolling any entity with 2,000 shareholders unless the CMF establishes an exception; and the one from Art. 5 of the LMV which, because its amendment making it consistent with the current Art. 2 of the LSA is not yet in force, mandates enrolling the shares of corporations that have 500 or more shareholders or, at the very least, 10% of whose subscribed capital belongs to a minimum of 100 shareholders, excluding those who individually or through other natural or legal persons exceed said percentage.

Nevertheless, it should be kept in mind that Cintac S.A. has fewer than 200 shareholders, so we are dealing with a corporation that voluntarily had its shares listed (prior registration in the Securities Registry), which makes this discussion an anecdote in this case.

It is only worth adding that, despite being voluntarily listed, it must still secure a 2/3 quorum to transition to a closed corporation regime in an Extraordinary Shareholders' Meeting.

Next is one of the most relevant issues, namely, the right of withdrawal for those who become dissidents of the decision to transition to the closed corporation regime.

Let us consider that the market value of the share to be paid (the mechanism indicated by law to calculate the price the company must pay the absent or dissident shareholder) to shareholders exercising their right of withdrawal in public corporations is subject to the following rules:

A distinction is made between shares with or without stock market presence (market presence exists according to CMF qualification via NCG).

When dealing with shares that have market presence, the share value will be the weighted average of the stock market transactions of the share during the period of 60 trading days comprised between the thirtieth and the ninetieth trading day prior to the date of the Meeting that prompts the withdrawal.

And, if the shares do not have market presence, their market price is equal to their book value.

Cintac has market presence.

But here is what is interesting in this case. The controlling shareholder, CAP S.A., provided two alternatives to the exercise of the right of withdrawal. That is, instead of going through with the withdrawal, CAP set out to pay, by other means, for the shares of the dissidents or absentees.

We interpret this specific fact as an act with the following characteristics:

It would entail an attempt to bid—by the controlling shareholder—for the act of abstaining from exercising the right of withdrawal for those who hold that right.

This is hinted at by the offer of the second mechanism agreement (options), which sets non-exercise of the right of withdrawal as a deadline (it is not a condition, since there is a timeframe to exercise the right of withdrawal, at least for one of the parties).

The above, even considering that the first alternative mechanism (Buyer Power) allows the participation of those who did exercise their right of withdrawal.

The controlling shareholder seeks alternatives to "exercising the right," wishing to leave those who have already exercised the right out of its offer. But we want to make two caveats.

Whoever exercised the right could still transfer their share because, once the right of withdrawal is exercised, since there is a timeframe in favor of the company to pay, and as long as the share is not paid for it does not belong to the company (according to the LSA Regulations, registration in the company's name in the Shareholders' Registry is carried out only once the price is paid), it is possible for the person who exercised the right to transfer the share, just as it is for the person who did not exercise such right of withdrawal. In this case, enrollment in the Shareholders' Registry marks the mode of acquisition (tradition, for some), making it possible to sell to third parties in the meantime.

The other caveat is that, precisely because of the above, as long as the price is not paid, it is logical to conclude that the person who exercised the right can retract their withdrawal. And this retraction can also be made by the assignee of the share, an assignment that includes the right to repent from the right of withdrawal exercised by the assignor. Specifically, CAP could repent of the right of withdrawal exercised by the assignor of its share as long as Cintac does not pay the price. When a share is sold, it includes every right, such as the right to repent from the exercise of the right of withdrawal.

Because of both caveats, we ultimately see no problems with those who exercised the right of withdrawal participating in the first mechanism.

It should be kept in mind that, in the first mechanism, since both those who exercised and those who did not exercise the right of withdrawal can participate, the following consideration becomes important. The first mechanism is the most favorable (Buyer Power), but it only applies to 50% of the shares not owned by the controlling shareholder, so the universe of those who can consider this mechanism becomes significant for the purpose of covering all offers. Because it is a mechanism for everyone (those who did not exercise and those who did), there is a lower probability of participating compared to the second mechanism (options), which is only for those who did not exercise.

Now, the first alternative mechanism is the Buyer Power, which consists of the controlling shareholder ordering a brokerage firm to buy shares equivalent to 50% of the total Cintac shares not owned by the controller, through a firm purchase offer. Due to the premium it grants and the timeframe of the second mechanism, this is the safest and most convenient (unless Cintac, in the meantime between this mechanism and the exercise of the second mechanism, yields better results than current ones).

The second mechanism is even more interesting. It consists of signing an untransferable put option contract, considering that, at the same time, the controlling shareholder acquires a call option, both corresponding to the obligations towards the other. This mechanism, which matches the respective selling-buying shares, aims for the call to be exercisable within a period starting 18 months after the Meeting that triggered the right of withdrawal and ending 15 days after the expiration of the deadline to exercise the put. It should be noted that the strike price of the call is $80 CLP, a higher price than any other. Furthermore, this mechanism can also be used for the remainder by those who participated in the first alternative mechanism. Whether they participated in the first mechanism or not, it must always be for the entirety of their shares.

Here is what is interesting about this second mechanism (options). It is on the condition that this alternative is not classified as a public offering of securities.

From the outset, we know that call and put options are securities, because the law itself states so in Art. 3 of the LMV. It is not up for debate. The point is that, in this case, the so-called option contract is (i) untransferable, (ii) will belong to a closed corporation (Cintac should, as a condition, be outside the Securities Registry), and (iii) meets the definition of a financial instrument under the Fintec Law. There are more arguments, but we will stop at these.

Regarding its untransferable nature, we know that the essence of a security is its ability to be transferred. It could be partially untransferable, but it could never be in its essence an untransferable contract. The option offered by CAP, as clearly inferred from the entire agreement, is by essence untransferable. Furthermore, it must be noted that transferring the contract becomes impossible because the parties fix the shares individually, as a specific species or definite body, making it impossible to circulate the contract properly as a security.

In fact, if we are guided by the proper concept of an option contract, in an intimately financial sense, it could hardly meet its requirements on this occasion due to the symmetry between put - call which turn into dependent operations. It would fulfill the concept in a strictly legal sense, of accruing an obligation for one of the parties, merely potestative, without the need to grant another subsequent contract.

Then, it could be argued that we would be, at the time the option is granted, dealing with a closed corporation. This argument is somewhat weak, as it is debatable whether Art. 3 refers exclusively to shares of public corporations. But the definition of a financial instrument in the Fintec Law restores its importance, as it precisely includes "unregistered securities," including derivatives. And, since the Fintec Law itself distinguishes between registered and unregistered securities, it could be considered that options on unregistered securities are governed by the Fintec rules, which differ from securities rules.