Alberto Pulido and Fernanda Peters of Philippi Prietocarrizosa & Uría in Santiago look at the management structures in stock corporations
Without any doubt, cases that have arisen in the Chilean corporate scene, such as the one involving Sociedad Química y Minera de Chile (“SQM”), have awoken the discussion regarding the importance of defining the relationship between the general manager (CEO) and the board of directors of a stock corporation.
According to article 31 of the Chilean Law of Stock Corporations (the “Law”), the board of directors is the structure in charge of the high level management of a corporation. The board, pursuant to article 40 of the Law, has the judicial and extrajudicial representation of the company. Likewise, article 49 of the Law provides that the stock corporations shall have one or more managers appointed by the board of directors, which shall set their faculties and duties.
For proper corporate governance, it is important to have a hierarchical structure, in which the organs located in the upper side of this pyramid, supervise and control the ones located below. In the case of the stock corporations, the board of directors is the managing structure located at the top, only limited by the shareholders acting in formal meetings in particular cases provided by the Law. The CEO is located below the board of directors and should follow the board guidelines and decisions.
The importance of the hierarchy described is recognised in several provisions of the Law, for example, article 39 of the Law provides that each director has the right to be fully informed at any time by the CEO of every matter related to the running of the company; and, paragraph three of article 49 of the Law provides that the position of CEO is not compatible with the position of auditor or accountant of the company, and that in cases of publicly traded corporations (as SQM) neither with the position of board member.
In connection to the above, let’s analyse the SQM case. This year, SQM, in an investigation carried out by the Chilean Public Prosecutor, recognised that there are $11 million in expenses in the accounting records of SQM, between the years 2009-2014, during which Mr Contesse was the CEO, that do not comply with the Chilean tax legislation, as there is not sufficient documentation to support them. Due to this lack of the documentation SQM had to pay $7 million to the Chilean IRS as unpaid taxes and interest. The former CEO, Mr Patricio Contesse, had a close relationship with the chairman, majority shareholder and controller of the company, Mr Julio Ponce Lerou. Under this scenario, and despite of the hierarchical structure described, there are certain regulations in the Law, as the second paragraph of said article 49, which may affect the application of the board supervision explained above. The mentioned provision indicates that the CEO has the right to attend the board of directors meetings and has the right to speak. Consequently, Mr Contesse has the right to attend board meetings as CEO of the company, so it was certainly difficult for the rest of the board members, several of which were appointed by the controller, to question and properly audit the acts of the CEO with complete independency considering the latter had the full support of the chairman and controller of the company.
Even though the referred provision does not indicate any exception to such right to attend to board meetings by the CEO, we consider that such a rule should be read with certain limits, understanding that this faculty could only be exercised when it does not affect the independence of the board in the performance of its duties. Therefore, if the board holds a meeting to discuss matters that need to be kept confidential until its final decision (e.g. evaluation of the performance of the CEO or to define the remuneration of the latter) we understand that those board meetings, should be held without the attendance of the CEO.
Moreover, pursuant article 50 of the Law, all provisions regarding liabilities and inabilities applicable to board members are also applicable to the CEO. Hence, among others, article 48, provides that the director who wants to clarify their responsibility for any act or decision agreed in the board of directors should leave on record their opposition. Also article 44, regarding transactions with related parties, provides that the board shall decide with the abstention of the director who has interest in the relevant matter. We consider the foregoing provisions should be applied to the CEO, therefore in case of transactions in which he has interest or is involved he has to exclude himself from participating in the relevant board meeting.
Finally, considering there are some regulations that make it at least arguable that the faculty of the board of directors could hold board meetings, without the attendance of the CEO, we consider it would be advisable that the supervisory authority provides guidelines and interpretations in this matter.
Philippi Prietocarrizosa & Uría
About the author
Alberto Pulido is one of the partners in charge of one of the corporate and M&A groups of Philippi Prietocarrizosa & Uría in Chile. He has a Master in Law (LLM) from New York University and a degree in Law from Pontificia Universidad Católica de Chile.
With over 20 years of experience, his main areas of practice are corporate law, M&A and financing. Alberto is mainly engaged in corporate matters, the drafting and review of documents and contracts and ongoing advice to clients, both domestic and foreign. He has also participated in numerous transactions advising foreign clients in acquisitions and financing for the respective projects as well as in the drafting of shareholder agreements deemed relevant.
Philippi Prietocarrizosa & Uría
About the author
Maria Fernanda received her degree in law in 2010 at Pontificia Universidad Católica de Chile. She advises national and foreign clients on corporate and civil matters, M&A and corporate restructuring transactions, among other matters. She also has experience in capital markets and labour matters.