Chilean Squeeze-Out Regulations: The Case for Reform

Chilean Squeeze-Out Regulations: The Case for Reform

Squeeze-outs or freeze-outs in public corporations allow controlling shareholders to force the sale of minority stakes, enabling full ownership and taking the corporation private, thereby simplifying management and reducing compliance costs. However, they raise concerns regarding fair compensation for minority shareholders, which may not reflect the value of their stakes. Most jurisdictions therefore impose safeguards to balance these interests.

In this context, Chile’s squeeze-out framework, introduced by Law No 20,382 (2009), imposes stricter conditions than many international counterparts, while still offering insufficient minority shareholder protection in some instances. This blogpost evaluates Chile’s squeeze-out regulations and offers some suggestions for reform. 

Chilean Squeeze-Out Framework: Key Restrictions

The Chilean Corporations Act generally prohibits the forced exclusion of shareholders in public corporations, providing that no shareholder may lose their status without consent due to mergers, divisions or other reorganizations. However, the law exceptionally permits squeeze-outs following a tender offer, subject to strict conditions.

1. Ownership Threshold and Shareholder Acceptance 

First, the controller must own at least 95% of all shares following a tender offer for all of the corporation’s shares, in which at least 15% of the shares are acquired from non-related shareholders.

This is a higher threshold than the US, where freeze-outs can typically be done with 50% of shares, but it is comparable to many European jurisdictions, including squeeze-outs under the EU Takeover Directive. 

2. Bylaws Provision 

Unlike other jurisdictions, the Chilean framework requires an explicit bylaw provision authorizing the squeeze-out, applying only to shares acquired after its adoption. This requirement was introduced to prevent squeeze-outs from being deemed unconstitutional expropriations. Under the Corporations Act, acquiring shares implies acceptance of the company’s bylaws; shareholders therefore assume the risk of a squeeze-out upon acquiring shares subject to such a provision.

However, this condition significantly restricts the availability of squeeze-outs. Although a controller holding 95% of shares may easily amend the bylaws to include the squeeze-out (by two-thirds majority), the amendment applies solely to future share acquisitions, meaning that minority shareholders who acquired their shares before the amendment cannot be squeezed-out. Moreover, as the framework dates from 2009, older corporations face structural limitations in adopting such provisions. 

Additionally, this requirement adds procedural complexity and uncertainty, as determining eligible shares requires verification of acquisition dates in shareholders’ registries that are often outdated, and whose administration—formally the board of directors’ responsibility—is frequently delegated to the Central Securities Depositary (DCV), complicating coordination.

This issue becomes more complex in corporate restructurings. In Quiñenco v. Financial Market Commission (‘CMF’) (2017), the Court of Appeal of Santiago annulled a squeeze-out in Tech Pack SA, a company created from Madeco SA’s division, as it affected shares acquired before the adoption of the provision. Although Tech Pack SA’s bylaws included a squeeze-out clause, it could not apply to shareholders who had previously held Madeco shares and received Tech Pack shares in exchange because of the division, as their acquisition predated the provision. The case demonstrated that eligibility required tracing acquisition dates back to predecessor companies.

3. Controller Status 

According to the interpretations of the CMF (Letters No 593/2010 and 4456/2015), a squeeze-out is allowed only if the acquirer was a controlling shareholder prior to launching the tender offer, excluding non-controller squeeze-outs.

This restriction further limits squeeze-outs and appears misaligned with minority shareholder protection, as controller-led tender offers pose greater conflicts of interest than those initiated by non-controllers. Controllers may secure a lower squeeze-out price if the target company’s board is under their influence. Moreover, the controller’s prior presence eliminates the possibility of competing bids, casting doubts on offer price fairness (Vos, 2018). To address this, most jurisdictions impose stricter safeguards when a controller is involved. For example, in Delaware, controller freeze-outs are subject to entire fairness review, unless approved by both a majority of minority shareholders and a special committee of independent directors, while freeze-outs that follow a tender offer by a non-controller accepted by a majority of disinterested shareholders are subject to the business judgment rule. 

Chile’s approach is unusual, allowing only controller-led squeeze-outs without equivalent procedural protections. 

4. Price Determination

The squeeze-out price must match the tender offer price, adjusted for inflation and accrued interest. The tender offer price may be in cash or securities, with no general restrictions—except in specific cases, such as when shareholders may claim the difference if the bidder acquires shares at a higher price within 90 days before or 120 days after the tender offer. 

Using the preceding transaction price is common in other jurisdictions, but fairness typically depends on approval by a substantial majority of disinterested shareholders. In Delaware, such approval relaxes the standard of review to the business judgment rule, provided that the transaction is also approved by a special committee of independent directors in case of a controller freeze-out. In the EU, squeeze-outs following a voluntary takeover bid are presumed fair if accepted by at least 90% of securities; otherwise, courts, financial supervisors or independent experts typically assess price adequacy. 

Chile, by contrast, sets a significantly lower fairness threshold, requiring only that 15% of the shares included in the tender offer be acquired from unrelated shareholders. This safeguard seeks to reflect market value (History of Law No 20,382) but may not ensure broad minority shareholder agreement. Additionally, judicial or expert review of the squeeze-out price is not required.

Final Remarks

The stringent conditions for a squeeze-out in Chile have limited its practical utility, often forcing controlling shareholders into complex negotiations with minority shareholders. This dynamic gives rise to the holdout problem (Vos, 2018), where minority shareholders strategically retain their shares to demand higher compensation. Outdated shareholder registries and procedural inefficiencies further hinder full ownership. 

However, the Chilean approach is arguably not the most effective strategy for minority shareholder protection. While it prevents minority expropriation when squeeze-out conditions are not met, it provides limited safeguards when a squeeze-out occurs.  The sole protection—requiring 15% of shares be acquired from non-related shareholders in the tender offer—may be insufficient to ensure a fair price. Thus, Chilean legislation is stringent in restricting squeeze-outs but lacks safeguards where they matter most, rendering the framework both over- and under-protective.

International experience provides valuable insights. Instead of discouraging squeeze-outs, regulations should enable them at reasonable thresholds, while implementing safeguards for minority shareholders when  they occur (as argued by Vos, 2018). Mechanisms such as independent review by courts, financial supervisors or independent experts, or majority-of-minority approval, as used in other countries, could better balance the benefits of full ownership with a fair exit price for minority shareholders.

María Soledad Valenzuela Cisternas is a Corporate & M&A Senior Associate at Claro & Cía, Chile.  

Tom Vos is an Assistant Professor at Maastricht University, a Visiting Professor at the University of Antwerp, and a Research Fellow at KU Leuven.