Chile: A new corporate culture

Author: | Published: 1 Sep 2010
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After winning the presidential election in January 2010, President Sebastian Piñera took office on March 11. This meant a centre-right coalition, after 20 years of centre-left and socialist governments. A severe earthquake marked Piñera's inauguration and a destructive tsunami followed it on February 27. A large portion of Chile's densely populated Central Region was destroyed, including highways and roads, hospitals, schools, houses and other infrastructure assets. The cost of the damage was estimated at $30 billion. This act of nature imposed changes on the new government's agenda; a reconstruction package is being discussed in Congress that is intended to enhance investment and productive activities.

In accordance with certain commitments related to Chile having been accepted in 2009 as a member of the Organisation for Economic Co-operation and Development (OECD), several developments have taken place within the business community during 2009 and 2010. These include deep amendments to corporate governance rules and regulations, the enactment of a Criminal Liability of Corporations Act and the establishment of a new environmental institution.

Corporate governance

In order to comply with the international standards of corporate governance recommended by the OECD, Chile amended several internal laws including corporate governance rules set forth in the Securities Market Act and in the Corporations Act. The new rules served their purpose of updating some corporate governance issues, but cast confusion on the interpretation of certain rules. The main aspects of the new rules are as follows.

Transactions with related entities

The new law established a set of separate rules for listed corporations, regarding transactions with related entities. Previously the same rules applied to both closely held and listed corporations. According to the new regulations, transactions between a listed corporation and its related entities (including affiliates, directors, officers and other entities in which directors and officers have a proprietary interest, among others) may only be conducted if several requirements are met.

In accordance with the regulations, the purpose of the transaction must contribute to the benefit of the company (under the previous rules, a transaction not prejudicial to the corporation i.e. a neutral transaction would have sufficed). The price, terms and conditions of the transaction must be similar to those prevailing on the market when the transaction was approved and the directors committee (discussed below) must revise the operation. The committee must prepare a report to be read in the board meeting summoned to approve the transaction. Although this rule already existed in the Corporations Act, the composition of the committee has changed. The requirement for the operation to be approved by the board of directors already existed under the amended Corporations Act; a new rule states that directors must disclose any interest in the transaction and refrain from participating in the voting of its approval. It should be noted that, before the Act was passed, it was common for directors to provide this information and abstain from voting voluntarily.

In the event that the majority of the board is required to abstain from the decision making process, an independent evaluator must be appointed and the transaction may only be conducted if approved by the unanimity of the remaining members of the board or by two thirds of the shareholders' meeting.

The resolutions of the board (as was required before the passing of the Act) must be disclosed in the following shareholders' meeting.

The Act allows the boards of listed corporations to determine that certain operations be exempted from the foregoing requirements in transactions involving low amounts; habitual transactions in accordance with the purpose of the company; and transactions entered into with fully owned (95% or more) subsidiaries.

Independent directors

Prior to the amendments, the Corporations Act stated that certain listed corporations were required to have a directors committee with a majority of independent directors. Independent directors were defined as those elected without the votes of the controlling shareholder. There was however, no requirement for corporations to have independent directors; the directors committee could therefore be formed exclusively from directors appointed by the controlling shareholder. In Chile, most listed corporations have a shareholder with controlling capabilities. The directors committee has a number of audit duties including the revision of related entities transactions. The new rules state that listed corporations that meet certain patrimony and property dispersion thresholds must have at least one independent director who must also be a member of the directors committee.

The new law redefined the figure of the independent director by applying certain objective restrictions on their eligibility for election. These requirements aim to preserve the lack of economic, personal or professional subordination to, or connection between, the independent director and the company and/or the controlling shareholders of the company in which board they will sit. Despite their intended effect, the amendments have introduced great uncertainty regarding the role and requirements to be elected independent director.

When these requirements are met, the director will be considered independent even if elected with the votes of the controlling shareholder alone. The fact that the independent director can be re-elected in that capacity with the votes of the controlling shareholder, has led the legal community (second guessing the real independence that some directors will really have) to widely criticise the new rule.

It is important to make clear that although the contrary is widely believed, independent directors do not represent the minority shareholders since they remain bound by a rule stating that directors elected by one group or class of shareholders have the same duties towards the company as the other shareholders. This provision confirms that the idea of the independent director has always existed and that all directors have the same duties, regardless of who elected them, i.e. acting in the best interest of both the company and its shareholders. Clarification is important regarding the fact that it cannot be expected that independent directors elected by the minority shareholders will be subordinated to them, or to the company or the other shareholders. Furthermore, if they were, they would openly breach their fiduciary duties to the company and its shareholders as a whole. Therefore, the enactment of the new law regarding independent directors cannot be interpreted as creating two classes of directors – those who are independent and those who are not and where the latter is liberated of duties to the minority shareholders and the first to the majority shareholders – all should act independently and in the best interests of both the company and their shareholders.

In sum, these new rules (together with other amendments that impose new obligations and liabilities on corporations, their board members and officers) anticipate a new advanced corporate culture in Chile, where close monitoring of compliance with these obligations will be the standard practice.

Criminal liability of corporations

In Chile, criminal liability was traditionally reserved for individuals. In accordance with the societas delinquire non potest principle, only individuals can commit crimes. There are however several cases in which collective legal rights are affected by the action of corporations acting as criminal agents and producing a deep social concern. These actions are commonly committed by high ranked officers of corporations.

The international trend in the world today is towards corporate criminal liability for the commission of certain crimes. Chile has ratified several international conventions in this regard. These include, in particular, the OECD Anti-bribery Convention, the signatories of which are obliged to enforce rules and take action against the bribery of foreign public officers.

This constitutes the direct antecedent for the enactment of law Nr. 20,393 (the Criminal Liability of Corporations Act) which establishes the criminal liability of corporations in money laundering related crimes (hiding or disguising the illicit origin of certain assets and acquisition, possession or use of said assets with knowledge of their illicit origin); financing of terrorism (solicitation, collection, or finance of terrorism related activities); and both domestic and international bribery (offering, committing, or giving an economic benefit to a local or international public officer).

The Criminal Liability of Corporations Act applies to private corporations (corporations, companies, foundations) and government owned corporations or companies when the described conduct is committed for the entity's direct benefit; and by its owners, controllers, responsible officers, representatives or those involved in its management or supervision when the wrongdoing breaches their supervising and management duties. Basically, the wrongdoing consists in not fulfilling the managerial or supervisory duties that would have prevented the corporation from committing the said crime.

The Criminal Liability of Corporations Act establishes a voluntary Crime Preemptive Model (CPM). Once implemented by a corporation, it will be assumed that the managerial and supervisory duties have been fulfilled. The above does not operate as a blanket waiver since the assumption is of a legal nature and is subject to being proven false by the public prosecution agency. The CPM must contain, at least, the appointment of a responsible officer in charge of prevention, the scope of duties, the applicable procedure, etc.

On the implementation of the CPM, corporations are entitled to obtain a certification by external audit companies, risk assessment companies or other entities duly registered with the Superintendence of Securities and Insurance. This certification will provide the corporation with a strong proof that is very useful, although it does not exonerate the corporation of its legal responsibility.

Another interesting aspect of the Criminal Liability of Corporations Act is the transmission of criminal responsibility. In the event of a voluntary merger, transformation, absorption, division, or winding up of a corporation, the legal responsibility of the corporation extends to crimes committed before the said voluntary merger, transformation, absorption, division, or winding up. Legal responsibility will then pass on to the resulting or surviving entity or entities. Hence due diligence in this regard would be advisable before executing any of the above corporate actions.

Penalties established in the Criminal Liability of Corporations Act range from the dissolution and cancellation of the legal identity of the corporation to fines. Dissolution and cancellation only apply in certain very delicate cases where a corporation has been sentenced for the same crime within the previous five years. Among the ancillary penalties is the publication of an excerpt of the ruling in the Official Gazette or a national newspaper.

The part of the Criminal Liability of Corporations Act that refers to bribery is especially relevant to multi-national corporations that may be liable in Chile for bribery of foreign public officers committed abroad.

New environmental institution

Another important amendment features our environmental law and regulations; new concepts were included, certain timeframes were changed and a new environmental institution was created. Some of the amendments require more detailed regulations to be put in place; a new law that creates a special environmental court must also be enacted.

Among the most relevant amendments is the new law eliminating the Environmental Commission (CONAMA) and creating a new Environmental Ministry (which will generate and develop environmental public policy), an Environmental Assessment Agency (which will manage the environmental impact assessment system) and a new Environmental Superintendence (which will supervise approved projects). Other relevant amendments include increasing social participation in the approval process of projects.

Author biography
Roberto Guerrero V.
Guerrero, Olivos, Novoa y Errazuriz


Roberto Guerrero V. was admitted to practice in Chile in 1991. He is a graduate of Pontificia Universidad Católica de Chile School of Law, Santiago, Chile. He has a Masters of Comparative Jurisprusdence (MCJ) from New York University, School of Law, New York, US. (1994). He is an Inter-American Development Bank Scholar (1993-1994); Fellow of the Eisenhower Fellowships Multi National Exchange Program (2007) and foreign associate at Simpson Thacher & Bartlett, New York, US (1994).

He was Professor of Economic Law and Civil Law at Pontificia Universidad Católica de Chile School of Law (1995-1997) and has been Professor of Commercial law at Pontificia Universidad Católica de Chile School of Law since 1998. He was Director of the Masters in Corporate Law Program, Pontificia Universidad Católica de Chile School of Law (1997-2000) and has been Vice Dean of Pontificia Universidad Católica de Chile School of Law since 2003. He is a member of the Council for Transparency (2008-2010).

He is a member of the Chilean Bar Association and the International Bar Association (IBA). He is an arbitrator and mediator of the Arbitration and Mediation Center of the Santiago Chamber of Commerce and arbitrator of the National Center of Arbitration.

Publications: Summary of the Legal Aspects of the ADRs Placement in the International Markets (Revista Chilena de Derecho, 1995); The Study of Law in Chile: A Critical View (Revista Chilena de Derecho, 1997); The Public Offer of Foreign Securities in Chile (Revista del Abogado, 2000); Legal Aspects of Internet: Cyberspace and the Law (Informativo Jurídico, Editorial Jurídica de Chile, 2000); The private Issuance of Bonds: a Mistaken Administrative Interpretation (Revista Chilena de Derecho, 2002). Global Financial Services Regulators, The Americas, 2004, Issue 1, Chilean chapter, with Sebastián Yunge (Richmond Law & Tax, England, 2004) Is it Possible to Manage a Law Firm? (Revista del Abogado, 2006).

Languages: English, Spanish.

Author biography

Sebastián Yunge
Guerrero, Olivos, Novoa y Errazuriz

Sebastián Yunge was admitted to practice in Chile in 1996. He is a graduate of Universidad Gabriela Mistral School of Law, Santiago, Chile. He has a Masters of Law (LLM) from Duke University Law School, Durham, North Carolina (2000). He was a Foreign Associate at Morrison & Foerster, San Francisco, USA (2000 – 2001) and worked with Bórquez & Quinzio Abogados (1995 – 1997). Publications: Global Financial Services Regulators, The Americas, 2004, Issue 1, Chilean chapter, with Roberto Guerrero (Richmond Law & Tax, England, 2004); Doing Business in 2006 “Creating Jobs” (World Bank/Oxford University Press, 2006).

Languages : English, Spanish.

Roberto Guerrero V and Sebastián Yunge are members of Guerrero, Olivos, Novoa y Errázuriz Corporate Group. Their practice focuses on general corporate law, mergers & acquisitions and banking & finance, project finance and capital markets.