Chile Corporate Overview: Directors Liability
Foreign companies looking to operate in Latin America are drawn to Chile´s stable economy and its connections to the global economy through its many double taxation and free trade agreements.
Foreign companies who incorporate in Chile often designate directors who are domiciled outside the country. For these directors, it is especially relevant to understand their responsibilities and liabilities for acting in this role.
This blog is intended to present an overview of the Chilean rules governing Directors Liability who are board members of Limited Liability Stock Companies (Sociedad por Acciones) and Privately Held Corporations (Sociedad Anónima Cerrada).
Duties of the Board.
Before referring to liabilities, it is appropriate to speak of certain duties to which the Boards are subject to. The Corporations Law No. 18.046 (hereinafter the “Corp. Law”), states that Board Members directors must comply with, among others, the following duties:
1) Duty of Care.
For these purposes, the Corp. Law requires Directors to use the care and diligence that a person would be ordinarily expected to use in their own businesses.
This duty of care is meant to include, among others, the obligation and the right to inform the shareholders and be informed fully and with the proper documentation, by the General Manager or other sources, regarding everything related to the business enterprise. They also have the obligation to actively participate in the Board of Directors and to state opposition against illegal agreements or those that do not provide benefits to the company’s interest.
Then, in case of conflicts, the Director may exempt himself from liability by proving that he has behaved without negligence, since this is an Obligation of Means, that is, to act diligently regardless of the result.
2) Duty of Loyalty.
The duty of loyalty requires that the Board Members carry out their duties with loyalty to the company, therefore, without taking any advantage of the company to which they have a fiduciary duty. That is why the Board Members should avoid if possible, being involved in operations that represent a conflict of interest; performing acts that do not aim for the company’s best interest; misusing the company’s assets; not taking advantage of business opportunities the Board has been previously aware of by virtue of such position; not maintaining the duty of confidentiality regarding the company’s business and social information, etc.
3) Duty to Inform.
The law states that Directors have an obligation to inform the shareholders through sufficient, timely and a reliable means, concerning the legal, economic and financial situation of the company.
4) Duty of Confidentiality.
The Directors have the duty to keep confidentiality regarding the business of the company and the company’s information to which they have access by reason of their position and which has not been officially disclosed by the company, unless it harms the corporate best interest or constitutes an infringement to the bylaws of the company.
After reviewing the essential duties to which the Board is subject to, it is necessary to review the liability regimes of Directors.
1) Civil Liability.
First, it should be noted that regarding the responsibility of the Directors, Chilean regulations establishes liability for negligence or willful misconduct. Therefore, Directors may exempt themselves from liability by proving that its conduct and actions have been executed with no legal misconduct or negligence, regardless of the outcome.
Directors could be subject to damages by the affected shareholders in the event that a Director violates the regulations contained in the Corporation Law, the bylaws of the company, or the duties mentioned above. For this purpose, any losses suffered by the corporation due to the Directors actions, entitles a shareholder or group of shareholders representing at least 5% of the issued shares, to demand compensation for damages from the offending Director.
Now, there are certain cases where such negligence or misconduct is presumed, hence the Director must answer for the damages caused to the company, shareholders or third parties in the following cases:
- If the company does not keep corporate books or registries.
- If provisional dividends are distributed with accumulated losses;
- If the company hides its assets, it recognizes supposed debts or simulates sales;
- If the Directors unduly benefits, directly or through another natural person or legal entity, from a negotiation that also harms the company.
Nevertheless, it should be kept in mind that Limited Liability Stock Companies and Privately Held Corporations with foreign investors are usually owned by a single shareholder, so this risk is quite limited. Therefore, the true purpose of this regulation is to protect minority shareholders.
Chilean law allows companies to modify the liability regime of Board Members only with respect to Limited Liability Stock Companies, as long as said limitation is incorporated within the bylaws. However, a total limitation is not possible, so the Board of Directors would also be subject to the general rules on liability according to Chilean law.
In any case, there is always the possibility that the company or the Directors can take out D&O insurance (Directors & Officers) to protect themselves against third parties and/or shareholders, depending on the insurance policy that is subscribed. In any case, it should be considered that these policies cannot cover acts of the Board of Directors committed with intention of damaging or fraud.
2. Criminal Responsibility.
Finally, it is worth referring to the criminal liability that Directors may incur.
Recently it was issued Law No. 21,121, which entered into force in 2018 and amended the Criminal Code for the prevention, detection and prosecution of corruption.
Said law introduced the felony of “Incompatible Negotiation”, which can only be committed by the Director or Manager of a Corporation including Privately Held Corporations. Consequently. It cannot be committed by Directors of Limited Liability Stock companies.
Said regulation sanctions the Director who “directly or indirectly is interested in any negotiation, action, contract, operation or management that involves the company, in breach of the conditions established by law “.
Therefore, the felony requires an “interest”, and the crime may be incurred even when there is no result or damage.
This law does not state what is understood by “conditions established by law”, so it is necessary to resort to the procedure to carry out operations with related parties established within article 44 of the Corp. Law.
Consequently, said interest must refer to acts or contracts that involve relevant amounts. For this purpose, it will be understood that there is a relevant amount in acts or contracts that exceed 1% of the company’s equity, provided that said act or contract exceeds the equivalent of 2,000 UF (approximately USD $72,000) and in any case, when it exceeds 20,000 UF (approximately USD $719,455). Regarding amounts not classified as relevant, the crime is not applicable.
In this case, the Director can avoid criminal liability by previously informing of such interest to the Board; later the operation must be approved by the Board; and finally, the operation has to comply with similar conditions to those normally prevailing in the market. Obviously, the Director with interest must abstain from voting on the approval or rejection of the operation.
For this purpose, it is considered that there will be interest from a Director in any negotiation, act, contract or transaction in which is involved:
- Himself, his spouse or his relatives up to the second degree of consanguinity or affinity (grandparents, parents, brothers, children and grandchildren);
- Other companies in which it is Director or owner, directly or through other natural persons or legal entities, of 10% or more of their capital;}
- The companies in which any of the above persons is Director or owner, directly or indirectly, of 10% or more of its capital, and;
- The controller of the company or its related parties/persons, if otherwise the Director would not have been elected without the votes of that Controller or those parties/persons.
Given the severity of the crime described as “Incompatible negotiation“, we advise our clients and potential clients who hold the position of Director in a Privately Held Company to review in detail those operations in which they could have a potential interest and comply with the duties established within the Corp. Law above mentioned.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Mexico, Peru, Ecuador, Brazil, and Argentina. Over the last 20 years, our team of English speaking Lawyers 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