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Risk Factors
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We and our subsidiaries outside Chile are subject to various economic, political, social and competitive
conditions. Any of the following risks, if they materialize, could materially and adversely affect our business,
results of operations, prospects and financial condition.
- › Risks Related to our Company
We rely heavily on our relationship with The Coca-Cola Company which has substantial influence over our business and operations› Risks Relating to Chile
Approximately 88% of our net sales in 2006 were derived from the distribution of Coca-Cola soft drinks and 9% from the distribution of other beverages bearing trademarks owned by The Coca-Cola Company. We produce, market and distribute Coca-Cola products through standard bottler agreements between our bottler subsidiaries and, in each case, the local subsidiary of The Coca-Cola Company or, in the case of fruit juices and nectars, The Minute Maid Company, a subsidiary of The Coca-Cola Company. The Coca-Cola Company has the ability to exercise substantial influence over our business through its rights under the Bottler Agreements. See “20F - Item 7. Major Shareholders and Related Party Transactions—Bottler Agreements.” Under the Bottler Agreements, The Coca-Cola Company unilaterally sets the prices for Coca-Cola soft drink concentrates and Coca-Cola beverages (in the case of soft drinks pre-mixed by The Coca-Cola Company) sold to us. The Coca-Cola Company also monitors pricing changes we institute and has the right to review and approve our marketing, operational and advertising plans. These factors may impact our profit margins which could adversely affect our net income and results of operations. Our marketing campaigns for all Coca-Cola products are designed and controlled by The Coca-Cola Company. Pursuant to the Bottler Agreements, we are required to submit a business plan to The Coca-Cola Company for prior approval on a yearly basis. In accordance with the Bottler Agreements, The Coca-Cola Company may, among other things, require that we demonstrate financial ability to meet our business plan and if we are not able to demonstrate our financial capacity The Coca-Cola Company may terminate our rights to produce, market and distribute Coca-Cola soft drinks or other Coca-Cola beverages in territories where we have such approval. Under the Bottler Agreements, we are prohibited from producing, bottling, distributing or selling any products that could be substituted for, be confused with or be considered an imitation of, Coca-Cola soft drinks or other Coca-Cola beverages and products.
We depend on The Coca-Cola Company to renew the Bottler Agreements which are subject to termination by The Coca-Cola Company in the event we default or upon expiration of their respective terms. We cannot assure you that the Bottler Agreements will be renewed or extended upon their expiration, and even if they are renewed, we cannot be certain that renewal will be granted on the same terms as those currently in effect. Termination, non-extension or non-renewal of any of the Bottler Agreements would have a material adverse effect on our business, financial condition and results of operation.
In addition, any acquisition we make of bottlers of Coca-Cola products in other countries may require, among other things, the consent of The Coca-Cola Company under bottler agreements to which such other bottlers are subject. We cannot assure you that The Coca-Cola Company will consent to any future geographic expansion of our Coca-Cola beverage business. In addition, we cannot assure you that our relationship with The Coca-Cola Company will not undergo significant changes in the future. If such changes do occur, our operations, and financial results and condition could be materially affected.
Our business is highly competitive and subject to price competition which may impact our net profits and margins
The soft drink and non-alcoholic beverage businesses are highly competitive in each of our Company’s franchise territories. In our franchise territories we compete with bottlers of regional brands as well as with products from Pepsi bottlers. Although our management believes that we are well positioned to meet our objective of increasing sales volume at acceptable levels in each of the franchise territories, it is possible that competition will continue, and we cannot assure you that such competition will not intensify in the future which could materially and adversely affect our financial condition and results of operations. See “20F - Item 4. Information on the Company — Part B. Business Overview— Soft Drink Business—Competition.”
Raw material prices may be subject to U.S. dollar/local currency exchange risk which could increase our costs of operations
Numerous raw materials, including sugar and resin, are used in producing beverages and containers. We purchase raw materials from both domestic and international suppliers. See “20F - Item 4. Information on the Company—Part B. Business Overview—Soft Drink Business—Raw Materials and Supplies.” Because we are often required to purchase raw materials in the international markets using U.S. dollars, we are subject to local currency risk in each of our operations. If the Chilean peso, Brazilian real or Argentine peso were to depreciate significantly against the U.S. dollar, the cost of certain raw materials could rise significantly, which could have an adverse effect on our financial condition and results of operation. We cannot assure you that these currencies will not lose value against the U.S. dollar in the future.Instability in the supply of utility services may adversely impact our results of operations
Our operations depend on a stable supply of utilities and fuel in the countries where we operate. Given recent economic instability, particularly in Argentina, we cannot assure you that such instability will not impair our ability to procure required utility services or fuel in the future which could adversely impact our results or operations. Fluctuations in oil prices have affected the cost of energy and transportation in the three countries we operate and we expect that they will continue to do so in the future.
Perception of risk in emerging economies may impede our access to international capital markets, hinder our ability to finance our operations and adversely affect the market price of our common shares and American Depositary Shares or ADSs
As a general rule, international investors consider Brazil and Argentina, and to a lesser extent Chile, to be emerging market economies. Consequently, economic conditions and the market for securities of emerging market countries influence investors’ perceptions of Chile, Brazil and Argentina and their evaluation of companies’ securities located in these countries.
During periods of heightened investor concern regarding emerging market economies, Brazil and Argentina, in particular, have experienced significant outflows of U.S. dollars. In addition, Brazilian and Argentine companies have faced higher costs for raising funds, both domestically and abroad, as well as limited access to international capital markets, which have negatively affected the prices of Brazilian and Argentine securities. Although economic conditions are different in each country, investors’ reactions to developments in one country may affect the securities of issuers in other countries, including Chile. For example, adverse developments in other developing or emerging market countries may lead to decreased investor interest in investing in Chile or in the securities of Chilean companies, including securities of the Company.
It may be difficult to enforce civil liabilities against us or our directors, executive officers or controlling persons
We are a sociedad anónima, or stock corporation, organized under the laws of Chile. Some of our directors, executive officers and controlling persons reside in Chile or outside of the United States. In addition, all or a substantial portion of the assets of these persons and of our assets are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons, or to enforce against them in U.S. courts judgments predicated upon civil liability provisions of the federal securities laws of the United States or otherwise obtained in U.S. courts. Because our assets are located outside of the United States, any judgment obtained in the United States against us may not be fully collectible in the United States.Our growth and profitability depend on economic conditions in Chile› Risks Relating to Brazil
Approximately 45% of our assets and 40% of our net sales in 2006 were derived from our operations in Chile. Thus, our financial condition and results of operations depend significantly on economic conditions prevailing in Chile. According to data published by the Central Bank, the Chilean economy grew at a 2.1% in 2002, 3.8% in 2003, 6.0%, in 2004, 5.7% in 2005 and 4.0% during 2006. Our financial condition and results of operations could also be adversely affected by changes over which we have no control, including, without limitation:
• the economic or other policies of the Chilean government, which has a substantial influence over many aspects of the private sector;
• other political or economic developments in or affecting Chile;
• regulatory changes or administrative practices of Chilean authorities;
• inflation and governmental policies to combat inflation;
• currency exchange movements; and
• global and regional economic conditions.
Inflation in Chile may disrupt our business and have an adverse effect on our financial condition and results of operations
Although Chilean inflation has moderated in recent years, Chile has experienced high levels of inflation in the past. High levels of inflation in Chile could adversely affect the Chilean economy and have a material adverse effect on our financial condition and results of operations. The annual rates of inflation (as measured by changes in the consumer price index and as reported by the Chilean National Institute of Statistics) in 2004, 2005, and 2006 were 2.4%, 3.7% and 2.6%, respectively. We cannot assure you that Chilean inflation will not increase significantly. We cannot assure you that, under competitive pressure, we will be able to realize price increases, which could adversely impact our financial condition and results of operations.The Chilean peso is subject to depreciation and volatility which could adversely affect the value of an investment in our securities
The Chilean government’s economic policies and any future changes in the value of the peso against the U.S. dollar could adversely affect our operations and financial results and the dollar value of an investor’s return on an investment in our securities. The peso has been subject to large nominal devaluations in the past and may be subject to significant fluctuations in the future. Based on the Observed Exchange Rates for U.S. dollars in the period from December 31, 1997 to December 31, 2002 the value of the peso relative to the U.S. dollar decreased approximately 38.9% in nominal terms (without adjusting for inflation) and decreased 27.8% in real terms (adjusting for inflation), in the period from December 31, 2002 to December 31, 2006, the value of the peso relative to the U.S. dollar appreciated 35.0% in nominal terms (without adjusting for inflation) and appreciated 48.6% in real terms (adjusting for inflation). During 2006 the value of the peso relative to the U.S. dollar depreciated 3.7% in nominal terms (without adjusting for inflation) and depreciated 1.3% in real terms (adjusted for inflation). See “20F —Exchange Rates.”
Our Class A shares and Class B shares are traded in pesos on the Chilean Stock Exchanges. Cash distributions with respect to the shares will be received in pesos by the depositary, currently The Bank of New York or the depositary (as depositary for the Series A and Series B shares represented by the Series A and Series B ADSs), which will convert such pesos to U.S. dollars at the then prevailing exchange rate to make U.S. dollar payments in respect of the ADSs. If the value of the peso depreciates relative to the U.S. dollar, the value of the ADSs and any distributions to be received from the depositary would be adversely affected. In addition, the depositary will incur foreign currency conversion costs (to be ultimately borne by the holders of the ADSs) in connection with the foreign currency conversion and subsequent distribution of dividends or other payments with respect to our ADRs. See “20F —Exchange Rates.”
Exchange controls and withholding taxes in Chile may limit repatriation of your investment
Equity investments in Chile by persons who are not Chilean residents are generally subject to various exchange control regulations that govern the repatriation of the investments and earnings. The ADSs are governed by an Agreement among us, the depositary and the Central Bank (the “Foreign Investment Agreement”). The Foreign Investment Agreement grants the depositary and the holders of the ADRs access to Chile’s Formal Exchange Market, permits the depositary to remit dividends it receives from us to the holders of ADSs and permits the holders of ADSs to repatriate the proceeds of the sale of shares withdrawn from the ADR facility, thereby enabling them to acquire on more favorable terms currencies necessary to repatriate investments in the shares and earnings therefrom. See “20F —Exchange Rates.” Pursuant to current Chilean law, the Foreign Investment Agreement may not be amended unilaterally by the Central Bank, and there are judicial precedents (which are not binding with respect to future judicial decisions) indicating that the Foreign Investment Agreement may not be voided by future legislative changes.
Dividends received by holders of ADSs are paid net of foreign currency exchange fees and expenses of the depositary and are subject to Chilean withholding tax, currently imposed at a rate of 35%, subject to credits in certain cases as described under “Item 10. Additional Considerations —Tax Considerations Relating to Equity Securities”.
In order to facilitate capital movements from and into Chile and to encourage foreign investment, the Central Bank eliminated foreign exchange restrictions and adopted the Compendio de Normas de Cambios Internacionales (“Compendium of Foreign Exchange Regulations”) effective April 19, 2001.
We cannot assure you that additional Chilean restrictions applicable to the holders of ADRs, the disposition of the shares underlying the ADRs or the repatriation of the proceeds from such disposition or the payment of dividends will not be imposed in the future, nor can we advise as to the duration or impact of such restrictions if imposed. If for any reason, including changes in the Foreign Investment Agreement or Chilean law, the depositary was able to convert Chilean pesos to U.S. dollars, investors would receive dividends or other distributions, if any, in Chilean pesos.
The Brazilian government has exercised and continues to exercise influence over the Brazilian economy, which together with historically volatile Brazilian political and economic conditions, could adversely affect our financial condition and results of operations and the market price of our shares and ADSs› Risks Relating to Argentina
Approximately 37% of our assets and 40% of our consolidated net sales in 2006 were derived from our operations in Brazil. Because demand for soft drinks and beverage products is usually correlated to economic conditions prevailing in the relevant local market, which in turn is dependent on the macroeconomic condition of the country in which the market is located, our financial condition and results of operations to a considerable extent are dependent upon political and economic conditions prevailing in Brazil.
Historically, the Brazilian government has changed monetary, credit, tariff, and other policies to influence the course of Brazil’s economy. Such government actions have included wage and price controls as well as other measures such as freezing bank accounts, imposing exchange controls and imposing limits on imports and exports. Changes in policy and other political and economic developments could adversely affect the Brazilian economy and have a material adverse effect on our business, financial condition and results of operations. The Brazilian government has exercised and continues to exercise substantial influence over many aspects of the private sector. For example, the Brazilian government in the past has imposed domestic price controls on certain products, including price controls on soft drinks and beer. Actions of the Brazilian government in the future could have a significant effect on economic conditions in Brazil, which could adversely affect private sector companies such as Refrescos, and thus, could adversely affect us.
Brazil’s current President, Luiz Inácio Lula da Silva, was elected in October 2002 and took office on January 1, 2003. During 2006 he was reelected and will continue in office until the end of 2010. In the period leading up to and following President Lula’s election, there was substantial uncertainty regarding the policies the new government would pursue, including the potential implementation of macroeconomic policies that could have differed significantly from those of the prior administration. Although certain macroeconomic uncertainty remains, the level of confidence in the Brazilian economy improved recently resulting in an 8.1%, 11.8% and 8.7% appreciation in the value of the real against the U.S. dollar during 2004, 2005 and 2006 respectively. We cannot assure you that current economic conditions and policies intended to promote continued economic development will continue. We cannot predict what effect the policies of President Lula’s administration will have on Brazilian economic conditions or on our financial condition or results of operations.
Although inflation in Brazil has stabilized in recent years, increased inflation may adversely affect the operations of Refrescos which could adversely impact our financial condition and results of operations
Brazil has experienced high and generally unpredictable rates of inflation for many years in the past. Inflation itself, as well as the governmental policies to combat inflation, has had significant negative effects on the Brazilian economy in general. During the last two years Brazil has faced progressive lower inflation rates, in line with the country’s improvement of macroeconomic policies. As measured by the Brazilian Índice Nacional de Preços au Consumidor or INPC, inflation in Brazil was 6.1%, 5.1% and 2.8% in 2004, 2005 and 2006, respectively. We cannot assure you that levels of inflation in Brazil will not increase in future years and have a material adverse effect on our business, financial condition or results of operations. Inflationary pressures may lead to further government intervention in the economy, including the introduction of government policies that could adversely affect the results of operations of Refrescos and consequently our financial condition and results of operations and the market price of our shares and ADSs.
The Brazilian real is subject to depreciation and volatility which could adversely affect our financial condition and results of operations
Brazil’s rate of inflation and the government’s actions to combat inflation have also affected the exchange rate between the real and the U.S. Dollar. During 2005 and 2006, the real appreciated 11.8% and 8.7%, respectively against the U.S. dollar compared to the prior year period. Current conditions are different, there is a higher volume of dollar reserves and a favorable trade balance, but there can be no assurance that the real will not again be devalued relative to the U.S. dollar, or that the real will not fluctuate significantly relative to the U.S. dollar. In the event of a devaluation of the real, the financial condition and results of operations of our Brazilian subsidiary could be adversely affected.
Depreciation of the real relative to the U.S. dollar may increase the cost of servicing foreign currency-denominated debt that we may incur in the future, which could adversely affect our results of operations and financial condition. In addition, depreciation of the real creates additional inflationary pressures in Brazil that may negatively affect our results of operations. Depreciation generally curtails access to international capital markets and may prompt recessionary government intervention. It also reduces the U.S. dollar value of our revenues, distributions and dividends, and the U.S. dollar equivalent of the market price of our common shares. On the other hand, the appreciation of the real against the U.S. dollar may lead to the deterioration of Brazil’s public accounts and balance of payments, as well as to lower economic growth from exports.
The Brazilian government imposes certain restrictions on currency conversions and remittances abroad which could affect the timing and amount of any dividend or other payment we receive
Brazilian law guarantees foreign shareholders of Brazilian companies the right to repatriate their invested capital and to receive all dividends in foreign currency provided that their investment is registered with the Banco Central do Brazil, which we refer to as the Brazilian Central Bank. We registered our investment in Refrescos with the Brazilian Central Bank on October 19, 1995. Although dividend payments related to profits obtained subsequent to January 1, 1996 are not subject to income tax, after the sum of repatriated capital and invested capital exceeds the investment amount registered with the Brazilian Central Bank, repatriated capital is subject to a capital gains tax of 15%. Under current Chilean tax law, we will realize a tax credit in respect of all Brazilian taxes paid relating to Refrescos. There can be no assurance that the Brazilian government will not impose additional restrictions or modify existing regulations that would have an adverse effect on an investor’s ability to repatriate funds from Brazil nor can there be any assurance of the timing or duration of such restrictions, if imposed in the future.
Our business is dependent to some extent on economic conditions in Argentina› Risk Factors Relating to the ADSs and the Shares
Approximately 18% of our assets and 20% of our net sales in 2006 were derived from our operations in Argentina. Because demand for soft drinks and beverage products usually is correlated to economic conditions prevailing in the local market, which in turn is dependent on the macroeconomic condition of the country in which the market is located, the financial condition and results of operations of our franchise in Argentina are, to a considerable extent, dependent upon political and economic conditions prevailing in Argentina. In 2006, the Argentine economy continued recovering following the acute economic crisis that prevailed from 1998 through 2003. Recording a positive GDP growth, stability in its fiscal accounts, and a robust growth in exports. The Argentine crisis had a material adverse effect on our operations in Argentina. Notwithstanding the positive economic results recorded from 2003 until 2006, we cannot assure you that economic conditions will continue to improve or that our operations in Argentina will continue to experience improved results.
Political and economic instability may recur which could have a material adverse effect on our Argentine operations and on our financial condition and results of operations.
In the period from 1998 through 2003, Argentina experienced acute economic problems that culminated with the restructuring of substantially all of Argentina’s sovereign bond indebtedness. A succession of presidents were inaugurated during this crisis period and various states of emergency were declared that suspended civil liberties and instituted restrictions on transfers of funds abroad and foreign exchange controls, among other measures. During this period, Argentina’s GDP contracted by 10.9% during 2002. Beginning in 2003, Argentine GDP began to recover and in 2004 and 2005 recorded an average rate of growth of 9% and continued to record significant GDP growth during 2006 of 8.4%.
The macroeconomic condition in Argentina has been characterized by:
• increased inflation during 2006, which has been slightly controlled by price control;
• high nominal exchange rate;
• primary fiscal surplus and commercial surplus;
• negative real interest rates; and
• expansive monetary policy.
The Argentine economy had four years of recovery between 2003 and 2006, resulting in a cumulative 40% increase in GDP compared to 2002.
Real GDP growth was 8.4% for the year 2006. The exchange rate was stable during 2006, with variations of 1.0% and official inflation was 9.8% versus 12.3% in 2005, resulting from the price control policy carried out by the government. As of December 31, 2006, the exchange rate was AR$3.06 per U.S. dollar compared to AR$3.03 per U.S. dollar as of December 31, 2005. The employment situation improved slightly as the unemployment rate reached 9.8% during 2006, reflecting a decrease from the 10.1% achieved during 2005.
Despite the improvement of the Argentine economy from 2003 until 2006 compared to 2002, certain underlying structural problems which have repeatedly caused or contributed to the political crisis in the past, have not yet been resolved. A number of unpopular decisions may need to be made in order to address the continuing problems that Argentina is currently undergoing which may or may not impact popular support for current and future presidential administrations and political stability in Argentina. There can be no certainty Unstable economic conditions have had, and could have, a material adverse effect on our financial condition and results of operation.
During January of 2006, the Argentine government proceeded with an anticipated payment of the totality of the debt with the International Monetary Fund, paying almost US$9,600 million. After this payment, the balance of the Argentine public debt amounted to US$124,000 million, with the titles issued as a result of the exchange representing the most significant portion of the debt.
Despite the results of the restructuring, it is impossible to predict the effect that this will have on investor confidence or on the Argentine economy. The Argentine government may again be faced with the possibility of default on its issued bonds if economic recovery abates and a new economic crisis emerges which could again have a material adverse effect on our results of operation and prospects.
The Argentine government continues to face significant exposure to litigation from holders of its defaulted debt that did not participate in the Argentine government’s exchange offer. At present, there are legal proceedings against the Argentine government in the United States, Italy and Germany. Although it is impossible to determine what the outcome of these proceedings will be, a judgment against the Argentine government in such cases could result in a reduction in funding sources and investment capital, which could have a significant effect on the Argentine government’s capacity to implement reforms and reinstate sustainable economic growth, all of which could adversely affect our results of operations.
The Argentine government imposes certain restrictions on currency conversions and remittances abroad which could affect the timing and amount of any dividends or other payment we receive from our Argentine franchise
Until December 2001, the Argentine peso was pegged 1-to-1 to the U.S. dollar. From January 1st, 2002, the Argentine peso has been allowed to float freely against the U.S. dollar and other foreign currencies.
Since 2003 and following a series of restrictive measures in the money market and fund movements, the Argentine Central Bank removed several of the foreign exchange restrictions, including elimination of the requirement that the Argentine Central Bank approve the repayment of principal of financial indebtedness, extended the term for the repatriation of export proceeds, allowed earlier payments of imports, and as of April 2004, increased up to US$2 million, the monthly amount that Argentine-domiciled individuals or corporations are allowed to purchase and transfer abroad.
There can be no assurance that the Argentine Central Bank will not once again require its prior authorization for the transfer of funds abroad in the form of dividends or payment of inter-company or third party loans. Any such inability to transfer funds outside of Argentina, in the form of dividends or otherwise, could adversely affect the value of our Argentine operations and the market value of our ADSs.
Inflation in Argentina may adversely affect our operations which could adversely impact our financial condition and results of operations
Argentina has experienced high levels of inflation in recent decades, resulting in large devaluations of its currency. Argentina’s historically high rates of inflation resulted mainly from its lack of control over fiscal policy and the money supply. The annual rates of inflation (as measured by changes in the consumer price index) in 2001, 2002, 2003, 2004, 2005 and 2006 were -1.5%, 41.0%, 3.7%, 6.1%, 12.3%, and 9.8% respectively. High levels of inflation in Argentina could adversely affect the Argentine economy and have a material adverse effect on our financial condition and results of operations.
The Argentine peso is subject to depreciation and volatility which could adversely affect our financial condition and results of operations
The Argentine government’s economic policies and any future devaluation of the Argentine peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Argentine peso has been subject to large devaluations in the past and may be subject to significant fluctuations in the future.
The Public Emergency Law and Foreign Exchange Regime Reform Law of 2002 put an end to more than ten years of U.S. dollar-peso parity and authorized the Argentine government to set the exchange rate. Subsequent to the devaluation of the Argentine peso in early 2002 and since the beginning of the Argentine economic crisis, there have been significant fluctuations in the value of the Argentine peso causing repeated Argentine Central Bank interventions to stabilize the Argentine peso through purchases and sales of U.S. dollars. Since the devaluation of the Argentine peso, the Argentine peso has fluctuated significantly, which has had a negative impact on our results.
We cannot assure you that the policies to be implemented by the Argentine government in the future will stabilize the value of the Argentine peso against foreign currencies. Therefore, the Argentine peso may continue to be subject to significant fluctuations and further depreciations which might significantly and adversely affect our financial condition and the results of our operations.
Argentina continues to face political and economic uncertainty
Although general economic conditions have improved recently, the rapid and radical nature of the changes in the Argentine social, political, economic and legal environment over the past years and the absence of a clear political consensus in favor of any particular set of economic policies raises doubts about Argentina’s economic and political future. It is possible that, despite recent economic growth, Argentina could return to a deeper recession, higher inflation and unemployment and greater social unrest. We cannot assure you that laws and regulations implemented by the Argentine government to regulate the economy will not continue to change in the future or that any changes will not adversely affect our business, financial condition or results of operations.
Preemptive rights may be unavailable to holders of our ADSs
According to the Ley de Sociedades Anónimas No. 18.046 and the Reglamento de Sociedades Anónimas (collectively, the “Chilean Companies Law”), whenever we issue new shares for cash, we are required to grant preemptive rights to holders of our shares (including shares represented by ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. However, we may not be able to offer shares to United States holders of ADSs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless a registration statement under the U.S. Securities Act of 1933, as amended, is effective with respect to such rights and shares, or an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended, is available.
Under the procedure established by the Central Bank, the foreign investment agreement of a Chilean company with an existing ADR program will become subject to an amendment (which will also be deemed to incorporate all laws and regulations applicable to international offerings in effect as of the date of the amendment) that will extend the benefits of such contract to new shares issued pursuant to a preemptive rights offering to existing ADS owners and to other persons residing and domiciled outside of Chile that exercise preemptive rights, upon request to the Central Bank. We intend to evaluate at the time of any rights offering the costs and potential liabilities associated with any such registration statement as well as the indirect benefits to us of enabling United States holders of ADSs to exercise preemptive rights and any other factors that we consider appropriate at the time, and then make a decision as to whether to file such registration statement.
We cannot assure you that any registration statement would be filed. To the extent holders of ADSs are unable to exercise such rights because a registration statement has not been filed, the depositary will attempt to sell such holders’ preemptive rights and distribute the net proceeds thereof if a secondary market for such rights exists and a premium can be recognized over the cost of any such sale. If such rights cannot be sold, they will expire and holders of ADSs will not realize any value from the grant of such preemptive rights. In any such case, such holder’s equity interest in the Company would be diluted proportionately.Shareholders’ rights are less well defined in Chile than in other jurisdictions, including the United States
The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Bolsa de Comercio de Santiago (the “Santiago Stock Exchange”), which is Chile’s principal securities exchange, had a market capitalization of approximately US$175,047 million at December 31, 2006 and an average monthly trading volume of approximately US$2,419 million for 2006. The lack of liquidity owing, in part, to the relatively small size of the Chilean securities markets may have a material adverse effect on the trading prices of our shares. Because the market for our ADSs depends, in part, on investors’ perception of the value of our underlying shares, this lack of liquidity for our shares in Chile may have a significant effect on the trading prices of our ADSs.
Under the United States federal securities laws, as a foreign private issuer, we are exempt from certain rules that apply to domestic United States issuers with equity securities registered under the United States Securities Exchange Act of 1934, as amended, including the proxy solicitation rules, the rules requiring disclosure of share ownership by directors, officers and certain shareholders. We are also exempt from certain of the corporate governance requirements of the Sarbanes-Oxley Act of 2002 and the New York Stock Exchange, Inc., including the requirements concerning independent directors.
Our corporate affairs are governed by the laws of Chile and our estatutos or bylaws, which function not only as our bylaws but also as our articles of incorporation. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction.
Pursuant to Law No. 19,705, enacted in December 2000, the controlling shareholders of an open stock corporation can only sell their controlling shares via a tender offer issued to all shareholders in which the bidder would have to buy all the offered shares up to the percentage determined by it, when the price paid is substantially higher than the market price (that is, when the price paid was higher than the average market price of a period starting 90 days before the proposed transaction and ending 30 days before such proposed transaction, plus 10%).
The market for our shares may be volatile and illiquid
