Why Don’t Shareholders Sue? Derivative Actions as a Test of Convergence in Chilean Corporate Law

Abstract

The existence of a shareholder derivative action seems to be indicative of a jurisdiction’s convergence towards what the academic literature has referred to as the standard shareholder oriented model of corporate law. In the course of an ongoing deliberate process of junction towards such model, during the year 2000, Chilean legislation provided for a derivative action expressly intended to promote minority shareholders' protection. Interestingly, however, since its enactment no single derivative suit has been filed, despite that in several litigated cases there were grounds to be found for a shareholders' claim for compensation of corporate damages. One of such cases resulted in the imposition of a historical fine by the regulatory agency of publicly held corporations and securities markets (Superintendencia de Valores y Seguros, SVS), to high officers of the major Chilean electricity company (commonly known as the 'Chispas' case). The factual configuration of the case was extremely appealing. Following the privatization of its formerly state held property, the control over Enersis was exercised by a group of key managers through a twofold mechanism: First, pursuant to a 29 percent stake in the stock of Enersis which was held by a close corporation named Chispas (hence the popular denomination of the case); and, second, by means of several proxies granted to the key managers by a number of minority shareholders in Enersis. In 1997, the key managers sold to Endesa Espana 51 percent of their shares in Chispas, which conferred control over this company but not over Enersis. Thus, the key managers also agreed to exercise the authorities attached to their capacities as directors and officers of Enersis according to the acquiring party's best interest, in exchange for a surcharge on the price for the remaining 49 percent stake in Chispas. In this context, where there seemed to be reasonable grounds for a derivative action, one is inclined to question why no such action was filed by the minority shareholders in Chispas. The object of our investigation is to claim that shareholder passivity in this and similar cases may be explained as a result of cost related considerations with respect to the procedural design of a derivative action. This, in turn, may work as a test case for the convergence thesis in Chilean corporate practice, and shed light over the more general issue of the conditions for an effective transplantation of derivate actions. Therefore, our normative claim is that since plaintiff shareholders may only benefit indirectly from a derivative suit according to their pro rata shareholding, Chilean law should improve their means to shift costs of litigation to defeated defendants or beneficiated companies. The positive claim is that, at least on the Chispas case, Chilean judicial practice regarding the statutory exception of 'plausible cause' has discouraged shareholder activism in the derivative litigation context.