Corporate Governance in Chile
When companies initially incorporate a company in Chile, their operations are generally quite small with very little thought put into the organizational structure and how the company will operate from a day-to-day perspective. As companies grow, sometimes these structures and powers are not adapted to the new circumstances of the company.
It is not always exciting to think about but how we grant powers and structure companies from a corporate governance perspective but it plays a large part in protecting the foreign shareholder. We have seen General Managers that were able to dismiss themselves with large severances, Managers that entered into risky contracts, and outright banking fraud.
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. 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. Alternatively, when there is only one shareholder, it can make more sense to have just an administrator. This can avoid the need for board meetings and changing out directors who may no longer be with the company. We generally recommend having only an administrator when possible. This can be changed even for existing companies that were initially set up with a Board of Directors.
Legal Representative 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.
The company may have an Administrator, Legal Representative and/or a General Manager. All can be different people, or they can all be the same. Our recommendation would be to have at least 2 individuals with the powers to represent the company. This allows for a certain check and balance, especially regarding banking powers and commercial contractual matters which we go into more detail below.
We never recommending having just an employee, regardless of whether they are the General Manager, to fill all of the roles as they will effectively have control of your company.
As we mentioned above, it is always ideal to appoint 2 individuals that will have the authority to represent 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. 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 by giving them the sole 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 but someone of your absolute confidence. There is no single formula for granting powers that ensure the company runs optimally. The best structure for delegating powers 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); and
- 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 over a Board of Directors, unless absolutely required. This is only because we prefer to keep things simple whenever possible. There are times, such as a joint venture, when a Board of Directors is needed.
- We recommend putting in place a check and balance system. For most clients, Harris Gomez Group will act as the legal representative and then a General Manager with limited powers.
- We then provide enough powers to the managers that allow them to complete day-to-day activities but with certain limitations related to banking powers and commercial contractual matters.
It is important to note that there is almost an endless amount of possibilities for governing a company. Therefore, the way powers are granted must be adapted to the specific needs of the company. A company with two employees will not be the same as a company with 20 employees. As the company grows, the powers granted will need to be adapted to the circumstances of the company.
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