Dissatisfied Chilean buyers once pursued civil litigation for contract rescission or damages; now they file criminal complaints arguing sellers’ provision of false information constitutes inexcusable fraud. Similarly, sellers alleging buyers misrepresented financial capacity turn to criminal courts rather than contractual remedies. Francisca Franzani of DLA Piper details how this cultural shift demands heightened standards in negotiation and contract drafting, with share-purchase agreements requiring enhanced representations covering regulatory compliance and robust indemnity mechanisms designed to mitigate criminal liability exposure.
Historically, disputes arising from mergers and acquisitions (M&A) transactions in Chile have been resolved through commercial or civil proceedings. Common issues include breach of representations and warranties, indemnification claims and contractual liability. Criminal law has traditionally been regarded as a last resort and usually irrelevant to private transactions.
This landscape is changing. The enactment of the Economic and Environmental Crimes Act has created a new dynamic, with an increasing number of criminal complaints, such as fraud or willful mismanagement, being filed in connection with M&A transactions. Allegations often focus on sellers intentionally providing false or incomplete information during negotiations or due diligence. Although the number of cases remains limited, their reputational impact has set a precedent, altering the way in which share purchase agreements are negotiated and executed in Chile.
The implications are significant: Criminal proceedings expose the parties to substantial fines in cases of corporate criminal liability, and even custodial sentences for the executives involved. This reality compels companies and their officers to raise standards in M&A processes, both in due diligence and in contract drafting.
Criminal complaints in M&A transactions
Traditionally, dissatisfied buyers in a transaction resorted to civil litigation, seeking rescission of the contract, damages or the enforcement of indemnity mechanisms.
Recently, however, buyers have pursued criminal proceedings, arguing that a seller’s intentional provision of false, incomplete or inaccurate information amounted to inexcusable fraud. They contend that such conduct constituted criminal fraud, having suffered economic harm as a result of the deception.
Similarly, sellers who did not receive full payment have also turned to criminal courts, alleging that buyers fraudulently misrepresented their financial capacity. What once constituted a mere contractual breach may now trigger criminal charges, with economic, reputational and even personal consequences. This calls for heightened diligence in preparing, reviewing and substantiating the information exchanged by the parties.
In this new environment, due diligence is no longer merely a preventive commercial practice but a critical tool to mitigate criminal risks and protect the liability of those involved in these transactions.
Impact of the Economic Crimes Act and the expansion of corporate criminal liability
The Economic and Environmental Crimes Act, effective from 2024, has intensified the risk. The significant expansion of the catalog of offenses applicable to companies, including fraud and related offenses, has been a decisive factor in disputes arising from M&A.
Today, not only could executives or directors face criminal complaints but also the selling or purchasing company itself. This exposes legal entities to complex investigations and sanctions, such as significant fines, debarment from contracting with the state, or even dissolution.
Crime prevention, in line with Law No. 20,393 on corporate criminal liability, is thus crucial in any due diligence process. A robust compliance program has become a critical factor both for structuring the transaction and for mitigating future contingencies.
Parties have opted for criminal proceedings primarily for three reasons:
- Negotiation leverage: A criminal complaint exerts significant pressure due to the reputational cost of a public accusation but also because the threat of criminal penalties creates urgency to resolve disputes amicably.
- Expedited proceedings: Criminal processes often progress more quickly than civil ones and allow for precautionary measures like asset freezes, which are harder to obtain in civil courts.
- Public interest: Framing a contractual breach as fraud undermines confidence in the market, beyond mere private disagreement, making reputational damage itself the true — and often irreparable — sanction.
Although success in criminal courts is uncertain, the mere initiation of an investigation generates significant reputational and economic impact, incentivizing the injured party to pursue criminal claims even if they do not prevail on strictly criminal grounds.
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Read moreDetailsEvolving due diligence processes and contract drafting practices
In this context, due diligence must evolve into a comprehensive review that goes beyond traditional financial and tax aspects. It is essential to include accounting analyses, regulatory and compliance reviews and assessments of corporate governance, with particular attention to organizational culture, internal controls and decision-making traceability. This approach should reflect a genuine commitment to transparency, diligence and responsible management of legal and reputational risks, starting from senior management and cascading throughout the company.
Share-purchase agreements must also incorporate enhanced representations and warranties, covering not only financial integrity but also regulatory compliance in key areas, such as anti-corruption, antitrust, data protection and tax compliance. These provisions should be complemented with robust indemnity and termination mechanisms, designed to mitigate exposure to criminal liability and protect the parties against potential post-closing contingencies.
Conclusions and practical recommendations
The emergence of criminal law in M&A disputes marks a cultural shift in the Chilean transactional market. What was once a private legal controversy may now evolve into a criminal investigation, with economic and custodial sanctions in addition to reputational harm.
If this trend continues, the response of the public prosecutor’s office and the courts will be critical. What is clear today is that parties must raise their diligence standards in negotiating, drafting and executing their transactions. Although this phenomenon is currently visible in Chile, it is likely to expand to other jurisdictions in the region.
Accordingly, to conduct an M&A process transparently and successfully, the following is recommended:
- For sellers: Provide complete and accurate information, duly supported by documentation. Engage legal and compliance teams from the outset and, when necessary, obtain external validation of sensitive information (e.g., audits or certifications).
- For buyers: Invest in expanded due diligence processes, including regulatory and compliance aspects, and negotiate contractual clauses that mitigate risks.
- For both parties: Prioritize transparency and good faith in documentation and negotiations. These elements are the strongest defense against potential criminal accusations.
