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

2. 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

3. Business organizations …

4. 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

5. 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

6. What is “corporate governance”? Prof. Joe McCahery

7. Corporate governance Forms of self-dealing Executive com / perks Transfer pricing Taking corporate opportunities Personal loans Outright theft Minority Shs Control Shs Corporation Board Affiliate 100% 80%20%

8. Corporate governance Forms of self-dealing Executive com / perks Transfer pricing Taking corporate opportunities Personal loans Outright theft Minority Shs Control Shs Corporation Board Affiliate K 100% 80%20%

9. 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.14.421.00 France.08.68.50 Argentina.50.39.00 Bolivia.00.16.25 Brazil.22.36.50 Chile.50.751.00 Colombia.83.32.00 Mexico.19.16.50 Venezuela.08.09.00

10. The results, please …

11. 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 States142.12%20% Germany54.711%48% France89.51%34% Argentina58.112%53% Bolivia15.6--54% Brazil38.449%57% Chile89.715%45% Colombia14.315%63% Mexico21.947%64% Venezuela5.528%51%

12. Francisco Reyes, Corporate Governance in Latin America (2006)

13. Can legal transplantation work?

14. Legal transplants 1.Cost-saving transplant 2.Externally-dictated transplant 3.Inserted transplant 4.Legitimacy-generating transplant Jonathan Miller (Southwest Law School)

15. Model for borrowing Gain perspective Discover truths Impose / power Value of knowing other legal systems Lat Am joins the world …

16. Consider corporate formation … (in Argentina)

17. Promoters Notary Comptroller Public Registry Members Bank Company (manager / director) Board Supervisory Council FORMATIONSTRUCTURE Single act Public subscription

18. 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?

19. 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

20. Shareholders Holding Company Lat Am Multinational Corporation US Colombia Argentina Holding Mexico OperatingExport Europe

21. Shareholders Holding Company Lat Am Multinational Corporation US Colombia Argentina Holding Mexico OperatingExport Europe

22. Shareholders Holding Company Lat Am Multinational Corporation US Colombia Argentina Holding Mexico OperatingExport Europe

23. Shareholders Holding Company Lat Am Multinational Corporation US Colombia Argentina Holding Mexico OperatingExport Europe

24. Shareholders Holding Company Lat Am Multinational Corporation US Colombia Argentina Holding Mexico OperatingExport Europe

25. Shareholders Holding Company Lat Am Multinational Corporation US Colombia Argentina Holding Mexico OperatingExport Europe

26. Reform proposals …

27. “White Paper on Corporate Governance in Latin America”

28. 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 ????

29. Pyramid Corporation (profit center) Public Shs Public Shs Public Shs Holding C Holding B Holding A 40%60% 40% What is A’s investment compared to public shareholders? A

30. End