Legal guide for company directors and CEOs in Chile

Although there is no specific legislation regarding ESG considerations in Chile, there are several rules that address ESG factors which apply to listed companies and other entities supervised by the Financial Market Commission (Comisión para el Mercado Financiero, the “Commission”), such as:

• Article 46 of the Chilean Law on Corporations No. 18,046 (the “Law on Corporations”) – establishes the duty of the board of directors to provide the shareholders and the public with sufficient, timely and real information on the legal, economic and financial situation of the company, in accordance with the law or instructions of the Commission
• General Standard Rule No. 30, which was modified by General Standard Rule No. 386 – establishes the information that issuers of securities must present to the Commission, i.e.: (i) diversity of the board of directors, members of management and employees of the company; (ii) number of directors, members of management and employees by gender; (iii) number of directors, members of management and employees by nationality; (iv) number of directors, members of management and employees by age range
• General Standard Rule No. 385 – provides that listed companies shall provide the public with current practices related to corporate governance, social responsibility and sustainable growth, and register them with the Commission in accordance with the established form and criteria. In accordance with these regulations, good practices are considered adopted when the company has approved said policies, and the procedures, mechanisms and systems are fully implemented and in operation for all the elements described in the respective practice.

There is no legal obligation for the board of directors to implement ESG considerations, notwithstanding that Chilean law and the General Standards issued by the Commission establish reporting obligations to the board of directors that may be related to ESG standards (please refer to question 4 below). In addition, the Commission, as well as some GOs and NGOs, has recommended some practices in this matter that can be adopted by companies in order to pursue a better governance practice, taking into consideration social and environmental practices.

There have been no recent changes regarding directors’ responsibility regarding ESG considerations. Nonetheless, a bill is being discussed in Congress that creates new legal entities, the Companies of Collective Benefit and Interest (Sociedades de Beneficio e Interés Colectivo), with the established purpose of taking into consideration public interest as well as investors’ interests. These hybrid organisations seek positive impacts on people and the environment, not for directors only to maximise the profit of companies and their shareholders.

General Standard Rules No. 385 and 386 establish that, in order to provide investors and the public with sufficient information about the company to make good investment decisions, listed companies must make known corporate governance practices to the general public. For this purpose, listed companies must submit to the Commission information on their corporate governance, social responsibility and sustainable development practices. To comply with the foregoing, the Commission has made available to listed companies, and to those that wish to do so voluntarily, a form containing ESG criteria which must be submitted to the Commission together with the Company’s annual report. This form contains topics such as:

• Procedures or mechanism for the induction of new directors that consider: (i) facilitating the processing of knowledge and understanding of the company’s behaviour; (ii) corporate governance practices adopted by other entities; (iii) the steps that other entities have taken regarding inclusion, diversity and sustainability reports; (iv) main tools for risk management, including sustainability
• Meetings with external audit companies in order to analyse differences with accounting practices, administrative systems and internal audit
• Meetings with the entity’s risk management unit to detect new risks and their impact on the company
• Meetings with social responsibility and sustainable development units in order to analyse the effectiveness of the standards adopted in the company and their benefits
• Implementation of a formal procedure for continuous improvement of the organisation and operation of the company
• Implementation of a formal procedure so that shareholders: (i) can be informed of the experiences, visions and conditions of the new directors to be elected; (ii) can participate and exercise their right to vote through electronic systems and know in real time what happens during meetings
• Information provided to the general public on the new standards implemented in the company in matters of social responsibility and sustainable development and relevant risks in these matters
• Communication channels between the board of directors, shareholders and the general public in order to answer questions about the company, its business, risks and financial, economic or legal situation
• Implementation of procedures to detect organisational, social or cultural barriers that may inhibit the diversity of capacities, conditions, experiences and visions.

The board of directors of listed companies must present how they have adopted each practice, or explain the reasons why the board of directors has estimated that the adoption of a certain practice was not appropriate in the best interest of the company, in order to comply with General Standard Rule No. 385.

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.

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 directors' committee (“Comité de Directores”). The directors' 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.

In accordance with the amendments introduced to the Law on Corporations by Law No. 21,314 on April 13, 2021 (“Law No. 21,314”), the directors' committee must provide its opinion with respect to the general policies for customary operations (política de operaciones habituales) determined by the board of directors, or their modification. In this regard, the Law No. 21,314 expressly establishes that the policy for customary operations must contain the minimum mentions established by the Commission. Likewise, the referred policy may not authorize the subscription of acts or contracts that compromise more than 10% of the company's assets. In addition, directors' committee shall propose to the board of directors a general policy for managing conflicts of interest (política general de manejo de conflictos de interés).

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.

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.

In addition, Law. No. 21,314 has introduced a new requirement for the boards of directors of parent listed corporations of companies supervised by the Commission, which must establish and make known a general policy for the election of directors in their subsidiaries (política general de elección de directores en sus sociedades filiales) containing the minimum information established by the Commission.

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.

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.

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).

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.

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.

Pursuant to Law No. 21,314, legal presumptions of directors' liability were modified, expressly incorporating the presumption of fault of those directors who concur in the approval of transactions with related parties in contravention of the rules established by Law on Corporations for closely held or openly held corporations, as applicable, being jointly and severally liable for damages caused to the company, shareholders or third parties.

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

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.

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.

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.

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.

• 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.

Pursuant to 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.

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 Commission announcing measures for:
  • Using remote mechanisms at shareholder, bondholder and financial backer meetings
  • The extension of timeframes for submission of annual financial statements
  • Easing of Basel III implementation deadlines
  • Easing treatment of provisions required from banks when rescheduling loan instalments
  • Instructions for banking entities regarding COVID-19 loans from the Guarantee Fund for Small and Medium-Sized Entrepreneurs (“FOGAPE”).

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.