Corporate governance Last updated 27&29 Nov 07 Latin American Law.

Corporate governance

Last updated 27&29 Nov 07

Latin American Law

Today’s topics

• Separation of ownership and control in LatAm – “Tunneling” of corporate assets– Protection of minority shareholders

• Oversight mechanisms– Ex-ante internal corporate processes– Ex-post external judicial review– Ex-post criminal sanctions– Alternatives: non-judicial review

• External pressure– Local financial markets – International financial markets – IMF liberalization– Academic literature

Business organizations …

Latin American (Spanish)• sociedad anónima (SA)• sociedad cerrada• sociedad colectiva • sociedad en comandita

(sociedad comanditaria)• sociedad de empresas

(en participación)• sociedad de inversiones • sociedad de responsabilidad

limitada (SRL)• sociedad filial• sociedad matriz• sociedad por acciones• sociedad pública (corporación)• sociedad unipersonal

United States

__ corporation

_ closed corporation

_ general partnership

_ government agency

_ limited partnership

_ joint venture

_ individual corporation

_ investment company

_ limited liability company

_ parent company

_ subsidiary company

Latin American (Spanish)• sociedad anónima (SA)• sociedad cerrada• sociedad colectiva• sociedad en comandita

(sociedad comanditaria)• sociedad de empresas

(en participación)• sociedad de inversiones • sociedad de responsabilidad

limitada (SRL)• sociedad filial• sociedad matriz• sociedad por acciones• sociedad pública (corporación)• sociedad unipersonal

United States

AJ corporation

B closed corporation

C general partnership

K government agency

D limited partnership

E joint venture

L individual corporation

F investment company

G limited liability company

I parent company

H subsidiary company

What is “corporate governance”?

Prof. Joe McCahery


Forms of self-dealing• Executive com / perks• Transfer pricing • Taking corporate opportunities• Personal loans• Outright theft

MinorityShs

ControlShs

Corporation

Board

Affiliate

100%

80%20%


Forms of self-dealing• Executive com / perks• Transfer pricing • Taking corporate opportunities• Personal loans• Outright theft

MinorityShs

ControlShs

Corporation

Board

AffiliateK

100%

80%20%

Lex Mundi (2005)Law and Economics of Self-Dealing

Ex-ante control(SH approval / pre tx

disclosure / inde review)

Ex-post control(public disclosure /

standing / evidence / ease of proof)

Public enforce(fines / prison terms /

control person / approvers)

United States .33 .97 .00

Germany .14 .42 1.00

France .08 .68 .50

Argentina .50 .39 .00

Bolivia .00 .16 .25

Brazil .22 .36 .50

Chile .50 .75 1.00

Colombia .83 .32 .00

Mexico .19 .16 .50

Venezuela .08 .09 .00

The results, please …

Lex Mundi (2005)Law and Economics of Self-Dealing

Stock market(market cap / GDP)

Block premium(control vs

non-control shares)

Concentration (percentage owned by

insiders / affiliates)

United States 142.1 2% 20%

Germany 54.7 11% 48%

France 89.5 1% 34%

Argentina 58.1 12% 53%

Bolivia 15.6 -- 54%

Brazil 38.4 49% 57%

Chile 89.7 15% 45%

Colombia 14.3 15% 63%

Mexico 21.9 47% 64%

Venezuela 5.5 28% 51%

Francisco Reyes, Corporate Governance in Latin America (2006)

Can legal transplantation work?

Legal transplants

1. Cost-saving transplant2. Externally-dictated transplant3. Inserted transplant4. Legitimacy-generating

transplant

Jonathan Miller(Southwest Law School)

• Model for borrowing

• Gain perspective

• Discover truths

• Impose / power

Value of knowing other legal systems

Lat Am joins the world …

Consider corporate formation …

(in Argentina)

Promoters

Notary

Comptroller

Public Registry

Members

Bank

Company(manager / director)

Board

SupervisoryCouncil

FORMATION STRUCTURE

Single act

Public subscription

Argentina Business Organizations Act

Article 59: The managers of the organization shall act loyally and exercise the level of care of a good businessman. If they neglect their obligations they are responsible unlimitedly and jointly for any harm that may result from their acts or omissions.

How do you run the business?Who might sue you?

IESE Business School in Spain: Argentine life is “characterized by making the least possible effort, ignoring the law and seeking individual advantage over any other interest.”

Jen Beatty

Shareholders

Holding Company

Lat Am

Multinational Corporation

US

ColombiaArgentinaHolding

Mexico

Operating Export

Europe

Reform proposals …

“White Paper on Corporate Governance in Latin America”

Recommendations• One-share / one-vote (no

non-voting shares) • Shareholder access to

nomination• ADR holder voting rights• Withdrawal rights (on

delisting)• Financial reporting (including

ownership structure)• Minority board representation

(cumulative voting)• Enforcement ????

Pyramid

Corporation(profit center)

Public Shs

Public Shs

Public Shs

Holding C

Holding B

Holding A

40% 60%

60%

60%

40%

40%

What is A’s investment compared to public shareholders?

A

Corporate governance Last updated 27&29 Nov 07 Latin American Law.

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