Legal guide for company directors and CEOs in Chile

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Pursuant to the Chilean Law on Corporations No. 18,046 (the “Law on Corporations”), directors must employ in the exercise of their functions the care and diligence that people ordinarily employ in their own businesses and shall be jointly and severally liable for the damage caused to the company and to the shareholders by their malicious or negligent actions. Consequently, the board of directors must always watch out for the company itself, the shareholders’ interests and the effects that any crisis – such as the COVID-19 crisis – might cause them.

During the crisis, considering the difficult situation that many companies are facing, directors should specially pay attention to:

Employment redundancy: Directors should address employment matters taking into consideration the measures and provisions issued by the corresponding authorities and the impact of the COVID-19 crisis on the company’s business. In this regard, the board should take into account sanitary or internal security measures for the control of COVID-19. Accordingly, the Employment Protection Act No. 21,227 (“Ley de Proteccion al Empleo) allows employers to suspend employment contracts if sanitary security measures put in place by the authorities lead to a cessation of activities in the country or in a certain territory that totally prohibits employees from rendering services, and also agree with employees a reduction of the working day under certain conditions and circumstances (see more here).

Insolvency: Directors of companies facing insolvency will need to give increased attention to certain duties. For example, the board of directors of a company that has ceased to meet one or more of its obligations or in respect of which bankruptcy proceedings have been declared (“procedimiento concursal de liquidación) must convene a shareholders’ meeting to be held within 30 days following these events in order to provide the shareholders with ample information on the legal, economic and financial situation of the company. Furthermore, during insolvency directors must take care to maintain the company’s liquidity; hence, no dividend distributions may be approved for shareholders if the company has accumulated losses. Accordingly, directors must have updated information about the company’s liabilities available and how the crisis will affect its obligations towards third parties.

Sanitary risk of management decisions: Directors must adopt the necessary measures in order to ensure employees’ compliance with the international and local lockdown rules and social distancing.

2. What government relief measures have been made available to directors?

Bearing in mind the issues noted above, directors need to be aware of the measures that have been announced by government authorities to assist companies through the crisis, and determine which ones are relevant to the company.

In Chile, the most relevant measures for companies include:

  • Tax relief measures (i.e. deferment of VAT tax payments, temporary reduction of stamp duty tax to 0% rate for all loans granted between April 2020 and September 2020)
  • Employment Protection Act No. 21,227 (“Ley de Proteccion al Empleo)
  • Resolutions issued by the Financial Market Commission (the “Commission”, “Comisión para el Mercado Financiero) announcing measures for:

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

As a consequence of the COVID-19 crisis, the Commission has issued General Rule No. 435, which regulates participation and remote voting mechanisms for shareholder meetings, and the corresponding Circular Letter No. 1,141, which provides guidance on the use of technological means and allows the possibility of citing the Commission reasons of force majeure preventing the holding of meetings or assemblies.

The Commission has also implemented additional directors’ duties with respect to verifying that shareholders’ meetings are properly carried out. In this regard, the board of directors has the following duties: (a) the duty to implement systems or procedures necessary to prove the identity of the persons participating in shareholders’ meeting remotely, (b) the duty to implement systems or procedures necessary to accredit that the persons participating remotely have the corresponding powers to act on behalf of the shareholder, and (c) the duty to implement systems or procedures necessary for casting votes remotely.

Directors duties and responsibilities

1. What form does the board of directors take?

In Chile, companies are managed by a board of directors appointed by the shareholders’ meeting. Directors are not allowed to delegate their office to other persons and they can only act and represent the company collectively as a board in a legally constituted meeting, provided that the required legal quorums are met.

2. What is the role of non-executive or supervisory directors?

In Chile, the law does not distinguish between executive and non-executive directors. Pursuant to the Law on Corporations, the board of directors has comprehensive powers to represent the company.

However, listed companies must have a steering committee (“Comité de Directores). The steering committee’s functions and duties are the following: (a) to examine the company reports provided by the external auditors, the balance sheet and other financial statements submitted by the management or the company’s liquidators to the shareholders, and to give its opinion on them prior to their submission for the shareholders’ approval; (b) to propose to the board of directors names for external auditors and private risk classifiers, if any, to be suggested to the respective shareholders’ meeting; (c) to examine the background of operations with related entities and prepare a report on those operations; (d) to examine the remuneration systems and the managers’, executives’ and workers’ compensation plans; (e) to prepare an annual report of its management, including its main recommendations to the shareholders; (f) to inform the board of directors about the advisability of hiring or not hiring the external audit company to provide services that are not part of the external audit, in view of whether the nature of such services may generate a risk of loss of independence; (g) any other matters set forth in the company’s by-laws or entrusted to it by a shareholders’ meeting or the board of directors, as the case may be.

3. Who can be appointed as a director?

In accordance with the Law on Corporations, there are a few restrictions on who can become a director.

In particular, the following persons may not be members of the board of directors of a closely held company: 1) underage individuals; 2) persons affected by the revocation caused by the company’s balance sheet rejection in accordance with article 77 of the Law on Corporations; 3) persons who have been (i) convicted of certain crimes or permanently disqualified from holding public office or performing public functions, and (ii) those who have the status of a debtor in a bankruptcy proceeding, personally or as administrators or legal representatives, or who have been convicted of bankruptcy crimes in accordance with the Criminal Code; 4) public officials, semi-public officials, and individuals working for government enterprises or agencies and autonomously administered companies in which the government makes contributions or has representatives in senior management, in relation to entities in which such officials exercise, directly and in accordance with the law, functions of supervision or control.

4. How is a director appointed?

Directors are appointed by the shareholders acting in a shareholders’ meeting.

The Law on Corporations states that the directors of a company are appointed by the shareholders’ meeting in a single vote. Appointment of directors is subject to the following rules:

  • The company’s by-laws shall establish a fixed number of board members
  • The shareholders may accumulate their votes in favour of a single person, or distribute them in the manner they deem appropriate. The candidate who in the same and only vote obtains the highest number of votes will be appointed a director, until the number of positions to be appointed is filled.
  • In companies that have alternate directors, the incumbent and alternate must be jointly nominated and the election of the incumbent will imply the election of the respective alternate.

5. How is a director removed from office?

Directors are removed by the shareholders acting in a shareholders’ meeting. Under Chilean law, the shareholders’ meeting may only remove the board of directors as a whole; therefore, individual removal of one or more of its members is not allowed. However, if a vacancy occurs in the office of a director and its respective alternate, the board may appoint a director to replace him/her in the meantime and the board must be completely elected at the next ordinary shareholders’ meeting.

In addition, as a matter of law, the shareholders’ meeting must appoint a new board of directors at the end of its respective term, which may not exceed 3 years. In any case, board members may be re-elected indefinitely in their functions unless it is expressly prohibited by the by-laws.

The removal of a board will also occur automatically if the shareholders twice reject the company’s balance sheet. If that is the case, the shareholders must appoint a new board without being able to reappoint the removed directors.

Notwithstanding the foregoing, a director may resign his/her office at any time by notice to the chairman of the board or the company’s CEO.

6. What authority does a director have to represent the company?

As mentioned, the board of directors has comprehensive powers to represent the company, with the only limit being the matters reserved to the shareholders’ meeting in accordance with law and its by-laws. Therefore, the board can legally represent a company in all matters and is not required to prove its comprehensive powers to third parties. The board – not the director – may partially delegate its powers to the company’s managers, assistant managers or lawyers, to a member of the board or a commission of board members and, for specific purposes, to other persons.

7. How does the board operate in practice?

The function of a director is exercised collectively in a legally constituted way by all the directors required for reaching a quorum in accordance with the company’s by-laws and the applicable law.

Meetings of the board of directors must be constituted with an absolute majority of the number of directors set forth in the by-laws and resolutions are adopted by an absolute majority of the assistant directors with voting rights. In the event of a tie, unless the by-laws provide otherwise the casting vote lies with the chairman of the board.

Board meetings are either ordinary or extraordinary meetings. Ordinary meetings are held on the dates and at the times predetermined by the board and do not require any special notification. Extraordinary meetings are held when specially summoned by the chairman, by himself/herself, or at the request of one or more directors, subject to prior agreement by the chairman of the need for the meeting, unless this is requested by the absolute majority of the directors, in which case the meeting must necessarily be held without previous agreement. In listed companies, the board of directors will hold ordinary meetings at least once a month; in other companies, the board of directors will meet as determined by the by-laws.

Board meetings must be held at the company’s registered office, unless the directors unanimously agree to hold a certain meeting outside the registered office, or directors unanimously participate in it. Notwithstanding the above, directors are allowed to hold virtual meetings using the technological means authorised by the Commission.

The articles of association often allow shareholders to appoint alternate directors – i.e. a person who can act as a director in the incumbent’s absence. The alternate is regarded as a fully-fledged director (and, for example, is subject to the same requirements as a director and while acting as alternate has the same duties as an incumbent director).

8. What contractual relationship does the director have with the company?

Appointment as a director does not constitute a contractual relationship with the company. The articles of association will generally entitle a director to remuneration on terms agreed by the ordinary shareholders’ meeting and to reimbursement of expenses. However, as mentioned below, directors are subject to statutory duties and limitations.

9. What rules apply in respect of conflicts of interest?

The Law on Corporations imposes on directors the obligation to abstain from casting their vote and participating in a decision where they have an interest. 

The Law on Corporations further states that closely held companies may only enter into acts or contracts involving significant amounts in which one or more directors have an interest by themselves or as representatives of another person when such transactions (i) are known and approved in advance by the board of directors (with the abstention of the conflicted director) and (ii) conform to conditions of equity similar to those normally prevailing in the market (arm’s-length basis), unless the by-laws authorise otherwise.

In such regard:

  • It is deemed that a director has an interest in any negotiation, act, contract or operation in which he/she intervenes in any of the following situations: (i) himself/herself, his/her spouse or his/her relatives up to the second degree of consanguinity or affinity; (ii) companies or enterprises in which he/she is a director or owner, directly or through another individual or corporation, of 10% or more of the equity; (iii) corporations or enterprises in which any of the aforementioned persons is a director or owner, directly or indirectly, of 10% or more of the equity; and (iv) the company’s controller or its related persons, if the director would not have been elected without their votes. 
  • Any act or contract is deemed to involve a significant amount when (i) it exceeds both 1% of the company’s assets and the equivalent of 2,000 Unidades de Fomento (approx. USD 70,000) or (ii) exceeds 20,000 Unidades de Fomento (approx. USD 700,000). 
  • Breach of the aforementioned rules will not affect the validity of the operation but will allow the shareholders and the third parties concerned in the operation to request compensation for any damages incurred and it will be up to the defendant to prove that the act or contract was performed under market conditions (arm’s-length basis) or that the agreed conditions brought benefits to the company that justify its performance. 

Notwithstanding the foregoing, these provisions will not be applicable if the operation is approved or ratified by two thirds of the shareholders with voting rights.

Special rules and provisions apply to conflicts of interests in listed companies.

10. What other general duties does a director have?

In addition to the duties of directors in regard to conflicts of interest, the Law on Corporations imposes a number of other general duties on directors: fiduciary duties to the company and all the shareholders; to exercise reasonable care, skill and diligence; information duties; confidentiality; prohibition on using inside information.

11. To whom does the director owe duties?

The director’s duties are owed to the company itself and to its shareholders as a whole. Accordingly, the Law on Corporations clearly states that directors appointed by a group or class of shareholders have the same duties to the company and other shareholders. Therefore, directors have a fiduciary duty to the company and all the shareholders as a whole.

12. How do the director’s duties change if the company is in financial difficulties?

Where a company is threatened with insolvency, the directors will need to give increased attention to certain duties as follows:

  • The board of directors of a company that has ceased to meet one or more of its obligations or in respect of which bankruptcy proceedings have been declared (“procedimiento concursal de liquidación”) must call a shareholders’ meeting to be held within 30 days following these events, in order to provide the shareholders with ample information on the legal, economic and financial situation of the company.
  • During insolvency, directors must take care to maintain the company’s equity position, hence, no dividend distributions may be approved to the shareholders if the company has aggregate losses.
  • Directors must ensure that the company does not enter into any agreement which may be detrimental to the creditors.

13. What potential liabilities can a director incur?

As already mentioned, directors owe their duties to the company and its shareholders and are therefore potentially liable to the company itself, the shareholders and third parties in respect of any breach of those duties, as follows:

  • Directors must employ in the exercise of their functions the care and diligence that people ordinarily employ in their own businesses and shall be jointly and severally liable for the damage caused to the company and the shareholders by their fraud or gross negligence.
  • Directors who breach the Law on Corporations and the corresponding regulations, the company’s by-laws and/or the rules issued by the Commission, thereby causing damage to another entity (the company, shareholders and/or third parties), are liable for compensation for damages and are jointly and severally liable with the company for all indemnifications and other civil or pecuniary penalties arising from the relevant violation. The foregoing is without prejudice to any other civil, criminal or administrative sanctions that may apply.

The directors of a company which is threatened with insolvency must take the interests of creditors into account when carrying out their duties. The key areas of liability of the directors of an insolvent company include:

  • Pursuant to the Chilean Criminal Code, directors are guilty of bankruptcy crimes if they carry on the business of the company with the intention of defrauding creditors prior to and during the reorganisation and liquidation process.
  • Directors are liable if they aggravate the company’s business situation in a way that is detrimental to the creditors’ rights.
  • Directors approving a dividend distribution when the company has aggregate losses are jointly and severally liable for the damage caused to the company, shareholders and/or third parties.

14. How can a director limit his/her liability?

  • A director who wants to prevent himself/herself from being liable for an act or resolution of the board must record his/her opposition in the board minutes and this situation must be made known to the shareholders at the next ordinary shareholders’ meeting.
  • A company is permitted to purchase directors’ and officers’ liability insurance on behalf of its directors, and it is usual for such insurance to be put in place.
JAZ
Jorge Allende Z.
Partner
Santiago
Jorge Allende Destuet
Jorge Allende D., LL.M.
Partner
Santiago
Sebas Barro
Sebastián Barros, LL.M.
Senior Associate
Santiago
Adolfo Romero abogado CMS Carey & Allende Chile
Adolfo Romero
Associate
Santiago