CHILE Law and Practice Contributed by: Macarena Ravinet and Federico Espinosa, Cuatrecasas
• periodically updating security agreements or reg- istering supplemental agreements to capture new assets as the borrower’s asset base evolves. 5.3 Downstream, Upstream and Cross- Stream Guarantees Permissibility of Guarantees Chilean law permits companies to grant guarantees in favour of third-party obligations, including down- stream (parent to subsidiary), upstream (subsidiary to parent), and cross-stream (between sister com- panies) guarantees. This flexibility is widely used in both domestic and cross-border financing structures, particularly in syndicated loans, project finance, and acquisition finance transactions. Corporate Benefit and Corporate Purpose The main legal limitation on granting such guarantees is the requirement that the transaction must fall within the corporate purpose ( objeto social ) of the guaran- tor and must not be contrary to its corporate interest ( interés social ). Chilean courts and doctrine have gen- erally interpreted the corporate purpose requirement strictly, especially for upstream and cross-stream guarantees, as these may not provide an obvious direct benefit to the guarantor. If a guarantee is grant- ed outside the corporate purpose, it may be declared null and void. Standard market practices to mitigate this risk have been outlined below. • Expressly include the granting of guarantees for group companies or affiliates within the corporate purpose clause of the company’s bylaws ( estatutos sociales ). • Obtain specific shareholder or board approval for the granting of the guarantee, particularly where the benefit to the guarantor is indirect or less evi- dent. Typically, the granting of guarantees requires approval from the board of directors, and in some cases, shareholder approval may be advisable to mitigate potential challenges. In addition, compa- nies must comply with related-party transaction rules when providing guarantees in favour of affili- ates.
• Document the rationale and expected benefit to the guarantor, such as access to group financing, improved terms, or preservation of group value. • Obtaining legal opinions confirming that the guarantee is within the corporate purpose and has been duly authorised. • Including representations and warranties in the finance documentation regarding due authorisation and compliance with corporate purpose. 5.4 Restrictions on the Target General Legal Framework Chilean law does not contain a statutory prohibition on a company (the target) granting guarantees, security, or other forms of financial assistance for the acquisi- tion of its own shares or those of its parent company. This is a notable distinction from many European jurisdictions, such as Spain or the UK, where strict financial assistance rules apply. In Chile, the concept of “financial assistance” as a legal restriction is not expressly regulated. Corporate Purpose and Corporate Benefit Despite the absence of a specific statutory prohibi- tion, the granting of guarantees or security by the target in connection with the acquisition of its own shares is subject to general corporate law principles, with the most relevant limitations as follows. • Corporate purpose ( objeto social ) – he transaction must fall within the company’s stated corporate purpose as set out in its bylaws. If the provision of financial assistance is not expressly or implicitly included in the corporate purpose, the transaction may be challenged and declared void. • Corporate benefit ( interés social ) – directors must act in the best interests of the company. If the financial assistance does not provide a clear benefit to the target, directors may be exposed to liability for breach of their fiduciary duties. Shareholder and Board Approvals To mitigate risks, it is standard market practice to: • obtain express board approval, with directors documenting the rationale and expected benefit to the company;
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