Practical Tips to 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 a companies grows, 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 an important role in how we protect the foreign shareholder and ensure the local entity is operating to the highest standard.
There has been plenty of examples over the years where companies did not have proper controls in place. The result is that we have seen General Managers who dismissed themselves with large severances, payments to “suppliers” where services were never actually provided, contracts that were entered into that carried unnecessary risk and would have never been approved by the parent company.
The fact is that foreign companies operating in Chile have very little oversight of their local staff. A level of trust is always needed but there are also practical steps that can be taken in order to put in place checks and balances that will reduce the likelihood of something happening.
We have provided a brief over of companies are structured in Chile and recommendations to think about when setting up your corporate structure –
Administrator or Board of Directors.
In Chile, the most common type of company is a “SpA”. It is a stock company that can have one shareholder and is quite flexible. A SpA requires either an Administrator or a Board of Directors (BOD). Some companies may have a strict policy that requires a BOD for all of their foreign entities or there may be more than one shareholder where a BOD is needed to represent the distinct shareholders. Alternatively, when there is only one shareholder, it can make more sense to have just an administrator which simplifies on-going corporate governance by avoiding the need for board meetings and changing out directors who may no longer be with the company.
We generally recommend having an administrator for simplicity purposes when possible but it depends on the circumstances of each situation.
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 by government institutions. It is our opinion that it is better to not elect to have an employee to act as the legal representative. The role requires broad powers and will effectively have control of your company.
In addition to a Legal Representative, some companies will choose to elect to also have a General Manager, who will also have powers to represent the company.
Our recommendation if you choose to have a General Manager is to place limitations on their powers or require double signatures where needed in order to allow for a check and balance. We would even go a step further by saying it’s not necessary to have them appointed as a General Manager in the corporate documents but rather provide them specific powers in selected areas where they will need them.
The Legal Representative is very important to the banking relationship. The bank will often only set up a bank account based on the relationship that the Legal Representative has with them. This is particularly true with foreign companies that have no history in Chile.
When it comes to banking, the Legal Representative can provide banking powers to select employees at the request of the parent company. We suggest ensuring those powers are not broad and that a check and balance system is implemented. Part of this check and balance is putting in certain limitations regarding banking powers and/or the need for dual signatures/approvals regarding transfers of monies over certain amounts, processing payments, etc.
This is particularly important for foreign companies who may not have the ability to provide strict oversight because of distances or time differences. The key is to provide enough powers to the local management team so that they 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 unchecked.
Day-to-day powers have to be provided to a person that is always readily available. It can be a General Manager, an administrator, human resources, etc. 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 companies 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.);
- Banking/Financial transactions;
- 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. The key is to ensure there are always check and balances in place.
- We recommend putting in place an Administrator over a Board of Directors for simplicity purposes. This is only because we prefer to keep things simple whenever possible. There are times, such as a joint venture or the internal polices of a company, when a Board of Directors is needed.
- We recommend putting in place a check and balance system. For most clients, our senior legal team will act as the legal representative and then we will appoint a General Manager who has limited powers to act in certain matters.
- Our goal is to always provide enough powers to the managers that allow them to complete day-to-day activities without slowing down the business but with certain limitations related to banking powers and commercial contractual matters in order to ensure there is a proper checks and balances.
- 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. Companies should review occasionally to ensure the powers are set up in a way that best matches the needs of the company.
Ax Legal 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. Ideally companies will review as they grow and make changes to reflect the new reality of the company as time passes.
Ax Legal is a legal and business advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects are clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at firstname.lastname@example.org