Corporate Governance – Protecting your Chilean Entity

Most companies starting off in Chile, regardless of their size, often start with only a few staff. Given the distances with Chile, time differences, and the overall workload of the head office, there is generally very little day-to-day oversight of the local staff. The result is that a level of trust is always needed but it also leaves companies open to potential risks.

When companies initially incorporate a entity in Chile, corporate governance is not always a priority in the beginning stages of opening the business. The reality is that how we grant powers will play an important role in how efficiently the company will operate and whether the foreign shareholder is protected.

Good corporate governance practices will allow companies to delegate powers to their local teams while still protecting the business from bad situations. Ideally, this means giving the local teams enough powers to complete day-to-day activities without leaving them unchecked.

We have provided a brief overview of how companies can be structured to create this “check and balance” system.

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). This is established in the bylaws of the company when it is first incorporated.

Both options are perfectly fine but ultimately the circumstances of the company will determine how to move forward. For example, some companies may have a strict policy that requires a BOD for all foreign entities. In other cases, 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 leave the company at some point. When possible, we generally recommend having an administrator which simplifies governance of the entity for the foreign shareholder.

Legal Representative

This is often the most difficult to explain to foreign management teams since it is quite unique to Latin America. In Chile, government entities, public institutions, and banks impose the need for a Legal Representative who have residency in Chile. In simple terms, it has to be a person that lives in Chile, who can be readily available, and notified by government institutions.

The Legal Representation is unique because it has many legal and practical considerations for a company operating in Chile. In the simplest terms, the representative is the legal “face” of the company who is liable for the companies actions in Chile.

From a practical operating standpoint, the person acting in this role is quite important since they will often by the ultimate signature authority over all official acts the company might undertake in the country. This includes opening a bank account, contracting services, signing work contracts, etc.

We generally recommend that foreign companies do not appoint an employee to this role. The role requires broad powers that could potentially be abused. This is particularly sensitive for foreign companies who tend to not have complete oversight of all day-to-day activities that are taking place on the ground. Instead, the legal representative should be someone of complete trust that works directly with the board, administrator, and shareholder.

General Manager

In addition to a Legal Representative, most companies will also have a General Manager. A General Manager who is appointed in the corporate documents will automatically have full powers to represent the company.  

Our recommendation is to place limitations on their powers or require double signatures where needed in order to allow for a “check and balance” system. 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.

Banking

The Legal Representative is very important to the banking relationship. The bank will often only open 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 double signatures are implemented for certain tasks.

Banking powers are 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 ability to transfer large amounts of funds unchecked.

Day-to-Day Powers

As the company grows, there are other areas where powers may need to be provided to the local management team. There is no single formula for granting powers that will ensure the company is running optimally. The best structure for delegating powers will be the one that best fits the companies circumstances. The key is to ensure there are always check and balances in place.

In large companies, separate powers are generally granted for some of the following activities:

• Employment/Human Resources – Powers to sign work contract, represent the company before labor authorities, issue internal regulations, etc.
• Banking/Financial Transactions – Powers to make payments, request credit cards or loans, request guarantees, etc.
• Managerial – Powers to enter into contracts, contract services on behalf of the company, etc.
• Judicial or Delegate Powers – This can include 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.

Conclusion:

• While we may recommend using an Administrator for simplicity purposes, there are times, such as a joint venture or the internal polices of a company, when a Board of Directors is needed. There is no issue with either option.
• We recommend putting in place a check and balance system. For most clients, Ax Legal will act as the legal representative who reports directly to the shareholder. We then provide the General Manager with powers to act in certain matters.
• The goal is to always provide enough powers to the manager that will allow them to complete day-to-day activities without slowing down the business. We place certain limitations around critical areas such as banking matters to ensure there is a proper checks and balances in place.

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 set up the same way 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 an 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 our 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 cmm@ax.legal