Legal guide for company directors and CEOs in Colombia

In Colombia, directors of companies do not have any specific obligations to strengthen ESG practices. In general terms, legal provisions only provide for directors’ fiduciary duties toward the company. However, note that directors of BIC companies (as defined further below) have the duty not only to act in the company’s interest but also for the collective interest.

Colombian law 1 Law 1901 of 2018 (“Law 1901/2018”) provides for certain economic and tax benefits for companies that are oriented to collective and environmental goals. Companies wishing to obtain such benefits must include in their corporate purpose, by way of a statutory reform, their ESG goals and register with the Colombian Chamber of Commerce their status as a Commercial Corporation of Collective Interest and Benefit (Sociedad Comercial de Beneficio e Interés Colectivo or BIC, “BIC company”). 

Nevertheless, given that directors must ensure that the companies they manage comply with Colombian law, companies (BIC and non-BIC) are subject to environmental and employee welfare obligations. For instance, companies developing industrial activities must hold environmental permits, and companies involved in extractive activities must hold environmental licences. Regarding employee welfare obligations, companies must, among other duties: (i) affiliate and pay pension, health and occupational hazard systems contributions; (ii) guarantee a good work environment; (iii) protect special populations.

BIC companies must have a balanced wage policy for their employees, subsidies for employee formation and education, employee equity participation, health and benefits plans for employees, flexible working hours and policies relating to hiring structurally unemployed communities, among others. They also must have gender, racial, cultural, religious and sexual diversity on boards of directors and other administrative positions.

Colombian labour law requires all employers (BIC and non-BIC companies) to guarantee adequate health and safety standards. Depending on the size of the company, its economic sector and its number of employees, certain occupational, health and safety obligations would be applicable. Also, pursuant to constitutional and international obligations, directors must guarantee the existence of internal policies regulating and promoting equality and protecting against discrimination for gender, race, nationality, sexual preferences, cultural or political beliefs.

The introduction of Law 1901/2018 is meant to increase directors’ responsibilities towards ESG considerations, but they are only applicable to companies adopting the BIC denomination. The full repercussions of the adoption of this denomination are yet to be determined, since only 300 companies have been granted BIC status. To promote the adoption of BIC status, the government has been offering new economic and tax incentives (e.g. special lines of credit and tax benefits when reporting revenue to shareholders via dividends).

BIC companies must prepare and disclose an annual report including the performance of their ESG obligations, including employee, environmental and corporate governance yearly performance indicators and overall policies. This report must be submitted to the highest corporate body and must be uploaded to the BIC company’s website, or be available at its registered office in case it does not have a website.

Even though directors of non-BIC companies do not have general ESG reporting obligations, the elaboration of sustainability reports is considered to be governance good practice.

In Colombia, companies have a single board of directors. It is made up of at least 3 main members and their respective alternates, who are also considered directors of the company. However, it is not mandatory to have a board of directors in every type of company, it is only mandatory for public limited companies (Sociedad Anónima). For instance, simplified stock companies (Sociedad por Acciones Simplificada) do not need to have a board of directors unless the company’s by-laws provide for one. Furthermore, a limited liability company (Sociedad de Responsabilidad Limitada) does not have to have a board of directors either.

Under Colombian law, the governance, management and direction of a company is mainly divided into two roles: the legal representative and the board of directors (if any). Both are considered directors of the company, and as such they have management powers.

The specific functions of these two bodies must will be included in the company’s by-laws. However, the legal representative is usually the person in charge of acting on behalf of the company and has the decision-making power on a day-to-day basis, while the board of directors is typically in charge of the general direction of the company. The board is also in charge of scrutinizing the legal representative’s actions, and also has the power to authorize the legal representative to enter into certain agreements on behalf of the company for which it has limited powers (as provided in the by-laws).

In Colombia, any individual or company may be appointed as director of a company. As a general rule, there are  no nationality or residency requirements; therefore, directors can be foreign individuals and have a different domicile from the company in which they serve as directors (certain restrictions apply to companies providing public utility services, in which case directors must be Colombian citizens). Shareholders can also be appointed as directors, either as legal representatives or members of the board.

However, to be a member of the board of directors, there are two restrictions:

• the majority of the board of directors cannot be formed by married couples, or relatives up to the third degree of consanguinity or second degree of affinity, unless it is a family company
• the members of the board of directors cannot be appointed to more than 5 boards of different companies simultaneously.

The members of the board of directors are appointed by the shareholders’ general meeting. For public limited companies (Sociedad Anónima), article 197 of the Colombian Commercial Code provides a system to appoint the directors called the quotient method (Cociente Electoral). Under this method, the quotient is determined by dividing the total number of votes validly cast by the number of persons to be appointed. The counting of votes begins with the list which has won the highest number of votes, continuing in descending order. From each list, as many names are elected as the number of times the quotient fits in the number of votes cast for it. If there are still vacant places, these must be filled according to the highest left-over votes, counted in the same descending order.

Under the quotient method, the members of the board of directors may not be replaced in partial elections without proceeding to a new election of the complete board of directors, unless vacancies are filled unanimously.

For simplified stock companies that have a board of directors, the quotient method is not mandatory for appointing the directors. Therefore, members of the board can be appointed as set forth in their by-laws, which can include any method for appointing directors.

Legal representatives are normally appointed by the board of directors. In companies with no board of directors (such as the simplified stock company), appointment of the legal representative must be made by the shareholders’ general meeting. There is no special system provided by law to appoint this type of director.

A director may resign at any time. However, for the resignation to be effective, a replacement must be registered with the Chamber of Commerce of the company’s domicile. Otherwise, the director could still be held liable for its duties as a director.

Directors can also be removed from office by the shareholders’ general meeting under two circumstances:

• at any time, if the majority rules of the shareholders’ general meeting are observed;
• when their term of office set out in the by-laws expires (however, they can be re-elected indefinitely, if there are no restrictions in the by-laws in this regard).

The general rule is that members of the board of directors do not have authority to represent or bind the company.

On the other hand, legal representatives are entitled to act on behalf the company. The shareholders may establish their powers and limits in the by-laws. Therefore, if nothing to the contrary is stated in the by-laws, the legal representatives are authorized to execute any agreement or act related to the company’s corporate purpose or its operation, and the company will be bound by those acts towards third parties.

However, when the legal representative’s powers and limits are defined in the by-laws, any agreement or act exceeding those powers would not be enforceable against the company unless ratified by the shareholders’ general meeting or the board of directors (as set forth in the by-laws).

The board of directors is a collective body, made up of no fewer than 3 main members and their respective alternates.

In order to carry out the decision-making process, the board must hold meetings and the decisions made at those meetings must be recorded in minutes and documented in the company’s corporate book. If nothing to the contrary is stated in the by-laws, meetings can be held at the company’s domicile, but they may also take place electronically such as by telephone or video link, or by written consent provided to the legal representative.

Although it is not particularly common practice in Colombia, large companies may establish committees in charge of different matters, to advise the board on certain matters. For regulated financial entities, the law established that the board of directors should have at a minimum an audit committee and a remuneration committee.

Usually, the legal representative is an employee of the company. On the other hand, it is common practice in Colombia to hire the members of the board of directors through a service agreement. Under Colombian labour law, service agreements may be considered an employment relationship by a judge if the following elements are demonstrated: (i) personal rendering of services; (ii) subordination and dependence; and (iii) the receipt of periodical payment for the rendered services.

If those elements are proven, directors could be subject to labour protection, and the company would be considered as their employer. As such, it would be need to pay social security contributions and all other payments resulting from that relationship. However, this risk is very low considering the type of responsibilities that members of the board have and because they are not normally involved in the day-to-day running of the company.

According to the Superintendence of Companies, there is a conflict of interest when a director’s and the company’s interests cannot be satisfied at the same time. For instance, when the director holds office in the management of 2 companies that contract with each other, or when the director has a “sufficiently significant” economic interest in a particular transaction.

In cases where directors have a conflict of interest or engage in transactions with the company’s competitors, it is their legal duty to refrain from participating in that matter’s decision-making process. Nevertheless, the director may discharge this conflict before the shareholders’ general meeting, which may authorize such transactions. If the director is a shareholder, that vote may  not be counted for the decision. In any case, the shareholders’ general meeting can only authorize the execution of that act or agreement if it does not harm the company’s interests.

According to article 23 of Law 222/95, directors must act in good faith, with loyalty and with the diligence of a “good businessperson” in every act related to the company. Also, it is their duty to act in the company’s interest, considering the shareholders’ interests as well.

In addition to duties set forth in the by-laws, directors must perform the following duties by law:

• do everything in their power to develop the corporate purpose of the company
• ensure compliance with all legal provisions and the by-laws
• ensure proper performance of the tax auditor’s functions
• save and protect the company’s commercial and legal reserves
• abstain from misusing privileged information
• grant equal treatment to every shareholder and respect their right of inspection
• abstain from participating in activities involving a conflict of interest or in acts involving competitors, unless expressly authorized to do so by the shareholders’ general meeting.

Directors owe their duties to the company as a whole, and to the general meeting rather than to the shareholders individually. Therefore, the company and the shareholders’ general meeting are entitled to demand the directors’ compliance with their obligations.

From a general standpoint, the legal representative is the person who is directly familiar with the day-to-day economic situation of the company. Once the legal representative has noted that the decisions needed to solve difficult economic situations must be taken by the board of directors (if any), the board should hold a meeting immediately.

If after the meeting of the board is held, it concludes that the decision to overcome the company’s financial difficulties cannot be made without the general meeting’s authorization, it must convene a shareholders’ general meeting. If the directors decide to act directly in the matter without the express consent of the shareholders, and as a result damage is caused, the directors (the legal representative and the board of directors) may be held liable for the damage caused to the company, its shareholders or third parties.

It is important to bear in mind that under article 22 of Law 222/95, when a company is undergoing a dissolution event and liquidation, the appointed liquidator will be considered a director of the company as well. Therefore, liquidators could be held liable if they do not comply with the general duties mentioned in question 10 above during the liquidation process.

Directors can be personally liable to the company for breach of their duties. Pursuant to article 25 of Law 222/95, the company may initiate legal action against directors in the event a company’s equity is harmed because of detrimental management.

Directors can also be held liable for damage caused intentionally or with negligence to the company, its shareholders or third parties. Even though the general rule under Colombian law is that negligence has to be proven in order to trigger liability, there is a presumption of negligence under two circumstances:

• when directors breach their duties, the by-laws or a legal provision, or
• when directors propose a wrong distribution of dividends in breach of article 151 of the Commercial Code; in such a case, directors are jointly and severally liable for the dividends paid in excess, or for those left unpaid.

If directors act beyond the limit of their powers under the by-laws, they will also be personally bound by that act, which may not be enforceable against the company unless ratified by the shareholders’ general meeting or the board of directors (as set forth in the by-laws).

Under Colombian law, it is not possible for directors to limit their liability. Particularly because article 24 of Law 222/95 – which sets out directors’ liability – is a mandatory norm and compliance is obligatory. Therefore, any by- law provision which limits the directors’ liability may be held void.

However, companies may purchase insurance policies for their directors which may cover directors against claims made by third parties or the company.

The government enacted a series of special measures, such as the extension of deadlines and the use of virtual communication technologies to perform corporate obligations. For example, the following deadlines were extended during the COVID-19 crisis in 2020; however, some of them have been modified and reestablished as mentioned below:

• filing of the financial statements with the Superintendence of Companies: at the beginning of the Covid crisis the deadline was extended from 13 May to 10 June 2020. However, in 2021, it was reverted back to April-May 2021.
• the shareholders’ ordinary meeting could be suspended until the next month after the end of the sanitary emergency. However, in 2021 this deadline was not extended, meaning that companies must hold their ordinary meetings no later than March 31.
• renewal of the commercial registry before the Chamber of Commerce was extended to 3 July 2020, instead of March 31. However, in 2021 this deadline was not extended, meaning that companies must renew their commercial registry no later than March 31.
• renewal of the Bidders’ Registry (“RUP”) was extended until the fifth working day of July 2020.  However, in 2021 it was reverted back to the fifth working day of April.

Notwithstanding the above measures, companies were and are still able to hold their shareholders’ ordinary meetings online. If held virtually, in order to carry out the right of inspection (information right) before the shareholders’ meeting, and to avoid travel, the Superintendence authorized virtual means to exercise this right, with the condition that the information is duly secured.

Moreover, several Chambers of Commerce around the country are still using virtual means to register different documentation (such as registration of minutes) and to communicate with their users.

To avoid the spread of COVID-19 and to relieve its negative effects on the economy, the government took many measures to favor companies from a commercial and financial standpoint. Please find below a summary of the most important measures taken so far which directors should be aware of:

• Guarantees granted by the National Guarantee Fund, so that small and medium-sized enterprises (SMEs) have access to different credit options provided by the financial sector.
• The Bank of Foreign Trade of Colombia (“Bancoldex”) launched an initiative called “Colombia Responde” (Colombia Responds), consisting of a special line of credit for the tourism, aviation, and entertainment sectors – and their supply chains – in addition to those related to the public entertainment industry. These loans may be granted to the partners or shareholders of the above- mentioned legal entities to capitalize the company.
• Financial entities have created special payroll lines of credit to support small, medium-sized, and large companies. They have also stopped collecting creditors’ interest and loan instalments for up to 6 months.
• Maintenance of the flow of credit resources, especially for small, medium-sized, and large agricultural producers.

The relief measures are covered in more detail in other CMS publications (see our COVID-19 page).

When a company is in an insolvency situation, it would normally be subject to the insolvency regime set forth in Law 1116 of 2006. However, during the COVID-19 crisis the government issued Legislative Decree 560 of 2020 which temporarily modified such regime, establishing new measures to reduce the impact of the crisis on the companies affected by it. Please find below a summary of the most important highlights directors should bear in mind for their management during the crisis:

• payment of liabilities that represent less than 5% of the external liability will not require the prior approval of a judge, as long as he/she is informed about it within the next 5 days after such a payment is completed
• possibility to request emergency negotiation of reorganisation agreements
• possibility to initiate company recovery proceeding before the Chambers of Commerce
• some tax benefits are contemplated in this new law
• reorganisation agreements may include different methods to ease the payment terms, such as: (i) capitalisation of debts, (ii) sustainable debt agreements or (iii) discharging of liabilities
• for agreements already being executed, payment fees will be frozen until July 2020.

Please note that it is a director’s duty to resolve any financial complications affecting a company, including those resulting from its incapacity to meet payment obligations.