Corporate Governance in Chile
When companies initially set up in Chile, their operations are generally quite small with very little thought put into the organizational structure and the way the company will operate on a day-to-day level. As companies grow, sometimes these structures and powers are not adapted to the new circumstances of the company.
A Sociedad por Acciones (SpA) or Simplified Corporation is one of the most common corporate structures used by foreign companies in Chile. This type of entity is similar to an SA but can be incorporated with just one shareholder, including a trustee company and/or its unitholders (in their own right). The SpA was created in response to a need for a corporate vehicle that encouraged the establishment and growth of small and mid-sized businesses. It is flexible from a corporate governance perspective and has greater autonomy as to what their by-laws may provide as compared with the S.A.
Most companies both local and foreign, regardless of their size, decide to set up a SpA and, in this case, we generally recommend this as a good and practical option.
The SpA’s shareholders’ obligations are basically two: to appoint the administration body of the company, which may be an Administrator or a Board of Directors and to hold an ordinary shareholder meeting.
Here are a few recommendations to think about when setting up your corporate structure:
Administrator or Board of Directors.
A SpA requires either an Administrator or a board of directors to administrate the business. Some companies may have a strict policy that requires a Board of Directors. In other cases, there may be more than one shareholder and a Board of Directors will make sense. The advantage of a SpA is the flexibility, so there is no obligation to hold any Board meetings, as long as the bylaws indicate this. Alternatively, when there is only one shareholder, it can make more sense to have just an administrator. This can allow for faster decision making and avoid the need for board meetings.
Legal Representation and/or General Manager
In Chile, most government entities, public institutions, and banks impose the need for a Legal Representative with domicile in Chile and a national identity card. In other words, it has to be a person that lives in Chile, who can be readily available and notified of all the companies matters.
The company may have an Administrator, Legal Representative or General Manager. All can be different people, or they can be one in the same. Our recommendation would be to have at least 2 individuals with the powers to represent the company, in case of absence of the other, in addition to the fact that it allows a certain check and balance, especially regarding banking powers and commercial contractual matters.
As we mentioned above, it is always ideal to appoint 2 individuals that will have the representation of the company. This also applies for banking so that a check and balance can be implemented. Part of this check and balance is putting certain limitations regarding banking powers and/or the need for dual signatures regarding transfers of monies over certain amounts, etc.
This is particularly important for foreign companies who may not have the ability to provide strict oversight because of distance or the time zones. There are cases when companies want to provide full powers to a recently hired manager which we do not recommend. The key is to provide enough powers that managers can deal with day-to-day matters without putting the company at risk such as giving them the ability to transfer large amounts of funds.
These day-to-day powers have to be provided to a person that is always readily available, it can be the administrator or general manager, someone of your absolute confidence. There is no single formula for granting powers that ensure the company runs optimally. The best power structure will be the one that best fits the company’s activities and individual circumstances.
In large companies, separate powers are generally granted for the various activities that may arise:
- Employment/Human Resources (hire workers, represent the company before labor authorities, issue internal regulations, etc.)
- Managerial (entering into contracts, etc)
- Judicial or Delegate Powers (Representing the company before courts, entities, and government institutions, among others)
It is important to note that powers can be granted in many different forms, such as empowering a person individually, two people to act jointly, or empowering two people to act interchangeably. Furthermore, you can empower a person to act individually but when a specific operation exceeds “x” amount of dollars, you can force him/her to act jointly with another person, who will normally hold a position of higher authority.
- As mentioned, we recommend putting in place an Administrator and not a Board of Directors, unless absolutely required. This is only because we prefer to keep things simple when possible. Depending on the circumstances, it might not be possible.
- We recommend putting in place a check and balance system. For most clients, Harris Gomez Group will act as the legal representative.
- As the legal representative, we provide powers to the managers that allow them to complete day-to-day activities but with certain limitation related to banking powers and commercial contractual matters.
It is important to note that there is almost an endless amount of possibilities for structuring a company. Therefore, the power structure chosen must be adapted to the specific needs of the company, without sticking to a pre-established structure proven to work for other companies. What may work for them, may not work for you.
Harris Gomez Group is accustomed to assisting companies with organizing their power structures to minimize the risk of individual employees abusing their powers while ensuring the company can operate smoothly and efficiently.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Mexico, Peru, Brazil, and Argentina. Over the last 16 year,s we have been supporting foreign companies with their growth in Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
To better understand how we can support your management team in the Region, please contact Cody Mcfarlane at email@example.com