Boardroom webs in Chile: Disentangling the knots of interlocking directorates

Introduction

In recent years, several situations have brought into question certain practices of large companies. Interlocking directorates (interlocking) has been one of those practices, being a widespread phenomenon in many economies around the world, not being necessarily harmful to competition.

Interlocking has been broadly defined as a situation in which two or more companies have one or more members of their respective boards of directors, senior executives, or close relatives in common.¹

However, interlocking is not a conduct that is homogeneously regulated among jurisdictions. Many jurisdictions do not even have express regulations in this regard, and those that do have such regulations generally limit their application to specific sectors of the economy.

Therefore, there are only a few countries that sanction interlocking as a per se conduct, which include the United States², Colombia³, and Chile.⁴ Other countries like Japan, Indonesia, and Korea analyze interlocking if under the rule of reason, applying sanctions only if it produces anticompetitive effects.

 

Types of interlocking

There are different types of interlocking depending on the relationship between the companies in which the directors or executives are seated.

One classification, which will not be developed in detail in this article, is the distinction between horizontal (between competitors) and vertical interlocking (between suppliers and customers). Most jurisdictions that regulate interlocking prohibit only the former.

A second classification distinguishes between direct and indirect interlocking. Direct interlocking is when a person sits on the boards of directors of vertically or horizontally related companies. In contrast, indirect interlocking is when the two companies are linked through:

1. A common source that appoints the directors (known as deputization);
2. The same controller (known as parent-subsidiary), which in turn can have different forms; or
3. When two competing companies appoint directors in a third company (joint venture).

 

Regulation in Chile

In Chile, the concept of interlocking was incorporated through the amendment to Decree Law No.211 (Competition Act) in 2017. This amendment established interlocking as a conduct to be sanctioned “per se”:

Article 3. (…) Among others, the following deeds, acts or agreements will be deemed to impede, restrict or thwart competition, or deemed to tend to produce such effects:

d) The simultaneous participation of an individual as a relevant executive or director in two or more competing companies, provided that the annual income of the aforementioned firms’ respective business groups exceeds one hundred thousand unidades de fomento (…).

The wording “competing companies” seems to imply that the regulation refers specifically to cases of direct horizontal interlocking. Indeed, it could be more categorical in its prohibition of such interlocking than the Clayton Act in the United States, which does not apply to companies whose competitive overlap is de minimis⁵, while in Chile if sales of the companies’ business groups meet the thresholds, the percentage of the market covered by them is not relevant.

However, there is no record of discussions during the processing of the 2017 amendment regarding what should happen with cases of indirect interlocking that, due to their characteristics, operate materially as direct cases (given the access to sensitive information of competing firms).

Nonetheless, even if not regulated explicitly, indirect interlocking could be subsumed into the generic offense of the first paragraph of Article 3 of the Competition Act, which should be assessed under the rule of reason (as it was broadly understood among practitioners before 2022, when the only relevant claims to date were filed):

Article 3. Whosoever should execute or enter into, individually or collectively, any deed, act or agreement that impedes, restricts or thwarts competition, or tends to produce such effects, (…)

 

Recent cases in Chile and the FNE’s interpretation

There have been two relevant cases brought by the National Economic Prosecutor’s Office (FNE by its Spanish acronym) before the Competition Tribunal (TDLC by its Spanish acronym).⁶ Both cases arose from an ex officio investigation initiated by the FNE in September 2019 into the structural links existing in the financial and banking industry. They were filed before the TDLC at the end of 2021 and the beginning of 2022, respectively.

The first case stemmed from the simultaneous participation of the economist Hernán Büchi on the boards of Falabella S.A. (retail), Consorcio Financiero S.A. (investments), and Banco de Chile (banking). Although these companies themselves are active in different industries, they control subsidiaries that overlap in four different markets (ie, banking services, securities brokerage, insurance issuance, and insurance brokerage).

The FNE stated in its claim that:

“The control of the three companies in question over their respective subsidiaries allows them and their boards of directors to adopt business strategies with respect to the offering of banking products and services, securities brokerage and other services provided by stockbrokers, the issuance of life and accident insurance, and insurance brokerage, respectively; to have access to sensitive business information; to supervise the commercial performance of their subsidiaries; and to articulate or veto decisions adopted by them. These elements allow to qualify (separately) Banco de Chile, Consorcio and Falabella, together with the respective subsidiaries that participate in the provision of each of the products and services, as part of a single decision-making unit, thus forming a single company.”⁷

The FNE argued that this has been the understanding that the TDLC has invariably demonstrated in its rulings, when considering as part of the same economic unit several legal entities that together constitute a "single competitive force in the market" or, in other words, an independent decision-making centre, capable of competing with other independent decision-making centres. Even if the business decisions adopted by the entities are legally and formally different, they should be treated as a "mere distribution of functions within ‘the independent decision-making center."⁸

In November 2022, a settlement agreement was signed between the FNE, Hernán Büchi, and Falabella. Therefore, the case continues with regard to the other parties.

The second case stemmed from the simultaneous participation of Juan Hurtado Vicuña on the boards of two companies, whose subsidiaries compete in the provision of securities brokerage and other services offered by broker-dealers. Thus, the defendant was a director in the parent companies that do not directly compete with each other, and not in the competing subsidiaries.

The FNE stated in its claim that, “Regarding the concept of a company, it is important to note that for competition law it is not identified with that of a company or legal entity, but rather with functional considerations on how real competition takes place in the markets, being possible, therefore, that a company is made up of various entities, whether natural or legal persons, exercising a single competitive force in the market. In this sense, what is relevant is the establishment of an economic unit, an essentially functional definition that is not related to the legal form.”⁹

This case continues before the TDLC, and it is in the evidentiary stage.

From the claims presented by the FNE we can conclude that the antitrust authority is interpreting the concept of competing companies as the entire business groups insofar as they constitute an economic unit. This means that indirect interlocking (parent-subsidiary type) will be considered direct interlocking and thus would be a per se infraction.

The basis of that reasoning is that if a company is able to influence the competitive behaviour of its subsidiaries of other related companies, or directly determine such behaviour, it is part of the competitive decision-making process and should therefore be considered part of the same economic unit.

However, we still have a long way to go. This issue will not be settled until the Supreme Court decides it, which can take two or more years. The case law that the Court will issue in this type of matter will define the scope of the assessment (per se or rule of reason) of the different types of interlocking offenses under the Competition Act, as well as the definition of who the actual offenders in such conduct may be (the companies and/or people involved).

 

Conclusion

Given that the concept of “competing company” in Chilean interlocking regulation, from the FNE's point of view, includes all entities controlled by the same independent decision-making center, the FNE is considering indirect interlocking (parent-subsidiary type) to be subsumed under direct interlocking. Consequently, under this interpretation, parent-subsidiary interlocking may be sanctioned under a per se rule, without having the possibility of proving the pro-competitive effects. Thus, it will be necessary to rethink the corporate governance configuration of companies that operate in Chile, following the definitions of the FNE, at least until the Supreme Court has issued its ruling.