Fiduciary Duties of Directors in Latin America

Tuesday, March 17, 2015 - 09:37

Introduction

The board of directors of a corporation is the principal body ultimately responsible for the corporation’s management. Compliance with fiduciary duties to the corporation and shareholders is a matter not to be taken lightly and can come as a source of stress, especially when executives of multinational companies are asked to serve on boards of foreign subsidiaries. This risk becomes more pronounced when such service comes in the context of companies that operate as joint ventures with local or other partners and/or have more than one shareholder.

The purpose of this article is to describe how two fiduciary duties owed by directors to a corporation and its shareholders are regulated in certain Latin American jurisdictions. These fiduciary duties are (i) the duty of care and (ii) the duty of loyalty. We note, however, that these are not the sole fiduciary duties that may apply to a corporate board. Like other jurisdictions, Latin American corporations have the flexibility to impose additional duties in their bylaws or other internal corporate documents (e.g. corporate policies). For example, directors of public or state-owned companies ordinarily owe other duties, as provided in the applicable stock exchange regulations, regulatory frameworks and enabling statutes.

Latin American corporate statutes have long recognized the importance of regulating the actions of corporate directors, expressly imposing the duty of care and the duty of loyalty. However, it may be maintained that in practice the enforcement of these principles and development of jurisprudence to aid in compliance and corporate management has not been extensively developed.

Duty of Care in Latin America

The duty of care requires a director to use good faith and to devote his/her time and effort for the benefit of the corporation and its shareholders. It requires a director to perform his/her duties with the care of a reasonable and prudent person in a similar position and under similar circumstances. Further, the duty of care can also be breached by omission. Indeed, the duty of care can be breached in the event that a director has failed to act when a careful and prudent person in the same or similar circumstances should have acted in that situation.

The aforementioned reasonable and prudent standard implies that the director must actively participate in board meetings, be permanently informed about the corporation’s business and operation, and supervise and oversee the actions of managers and employees.

The duty of care has been generally recognized across Latin American jurisdictions. Generally, we have found that in many Latin American jurisdictions the duty of care has been regulated broadly and with little to no formal legal precedent to help guide compliance. In most cases, the statutes and legal sources give little guidance regarding board duties when directors are faced with particularly murky circumstances. Examples of the general statutory requirement for the duty of care in certain jurisdictions are set forth below.

The Argentine Commercial Companies Law provides that the directors must act with the diligence of a good businessman (article 59). In Brazil, the Brazilian Corporation Law has established that a director must employ, when performing his/her duties, the care and diligence that every active and honest person normally employs in the administration of his/her own business (article 153). Similarly, the Chilean Corporation Law states that the directors shall employ, in the performance of their duties, the care and diligence that they ordinarily employ in their own businesses (article 41). Further, the Chilean Corporation Rules provide that the duty of care and diligence of the directors includes the duty to perform his/her duties with the effort and attention that the persons ordinarily employ in their own business, and the arrangements necessary and convenient to follow regularly and to opine with respect to management matters, gathering the required information (article 78). In that same vein, the Peruvian General Corporation Law sets forth that the directors shall perform with the diligence of an organized businessman (article 171).

The Mexican corporate legislation, on the other hand, regulates the duty of care and the duty of loyalty both broadly and specifically, depending on the nature of the corporate entities. The Mexican General Corporation Law adopts a generic definition, setting forth that the directors shall have the responsibilities inherent to their position and derived from the obligations imposed by law and the bylaws (article 157). However, the Mexican Stock Market Law has provided more specific regulations addressing the duties of care and loyalty of directors in corporations for the promotion of investments (S.A.P.I.), including specific instances where such duties will be breached (articles 30-37).

Duty of Loyalty in Latin America

The other core fiduciary duty imposed on the directors of corporations is the duty of loyalty, which requires each director to act in good faith for the benefit of the corporation and its shareholders, not for its own interest. Therefore, directors should always disclose a conflict of interest and should abstain from voting on matters in which such a conflict arises, but must seek and obtain the approval of the disinterested directors.

The duty of loyalty has also been incorporated in corporate statutes across Latin America, also in a broad and generic fashion. However, contrary to what is the case in the regulations addressing the duty of care, in this case the applicable statutes address the issues arising from self-dealing, conflicts of interest and competing businesses with more specificity.

For example, the Argentine Commercial Companies Law provides that (i) when a director has an interest contrary to that of the corporation, it must inform the board of directors and the administrators and shall not intervene in any deliberation (article 272) and (ii) a director may not participate on his/her own behalf or on behalf of third parties in activities that compete with the corporation (article 273). In Brazil, the Corporation Law establishes that the directors must serve with loyalty towards the company and keep in confidence the company’s business (article 155). Furthermore, the Chilean Corporation Law states that the directors may not use for their own benefit or that of related third parties, to the detriment of the corporation, the commercial opportunities they learn due to their position and that, in general, the directors may not perform illegal acts or acts contrary to the bylaws or the interests of the company, or use their position to obtain undue advantages for themselves or for related third parties, to the detriment of the corporation’s interest (article 42). In addition, the Chilean Corporation Rules set forth that a director must refrain from proposing, agreeing to or performing acts or contracts, or making decisions that do not have the corporate interest in mind, and must avoid conflicts of interest that may be harmful to the corporation, communicating the same to the corporation and refraining from voting in matters involving such conflicts (article 79). In Peru, the Peruvian General Corporation Law sets forth that: (i) the directors may not make decisions that do not protect the corporation’s interest but their own interest or that of related third parties; (ii) the directors may not use for their own benefit or the benefit of related third parties the commercial or business opportunities of which they have knowledge due to their position; (iii) the directors may not participate for their own behalf or on behalf of third parties in activities that compete with the corporation, without the corporation’s express consent and (iv) any director who has a conflict of interest must inform the corporation and refrain from the deliberation and resolution of such matter (article 180).

Enforcement of Core Duties

As we have suggested, provisions regulating the duties to act as a reasonable and prudent businessman and loyal representative in several Latin American jurisdictions are fairly abstract. Ideally, issues and problems arising from generic definitions are discussed and resolved through appropriate judicial decisions from seasoned and experienced justices (e.g. the courts of the State of Delaware). In these instances, case law has thoroughly discussed and developed the fiduciary obligations of corporate directors. Unfortunately, this is not the case in Latin America. In effect, most Latin American courts have not produced ample and strong case law that could supplement the generic statutory descriptions of the core fiduciary duties and provide some useful guidance when advising on the parameters and extension of corporate fiduciary duties. This also means that since courts have not produced significant case law with respect to these fiduciary duties, judges are not as specialized and sophisticated in addressing the issues arising from such duties, so the ultimate outcome of certain matters that may involve a breach of fiduciary duty may be uncertain.

One of the reasons behind the lack of ample case law rests in the difficulty of filing a shareholder derivative suit for breaches of the duties of care and loyalty, due to the high shareholder participation requirement in certain Latin American jurisdictions. Indeed, even though the Argentine Commercial Companies Law (article 275) and the Brazilian Corporation Law (article 159) require a minimum of 5 percent of the shareholders to initiate a derivative action, other jurisdictions such as Mexico require shareholders representing a quarter of the registered capital (Mexican General Corporation Law article 163), and Peru requires one-third of the shareholders (Peruvian General Corporation Law article 181), which is a relatively high requirement when compared with other jurisdictions.

Inevitably, the end result of having generic definitions in place, difficulty to prosecute derivative claims and lack of ample case law from specialized courts translates into having few actions for breaches of the duties of care and loyalty. Therefore, only actions involving fraud or gross negligence (flagrant violations of the duty of care) and gross breaches of the duty of loyalty may be successfully prosecuted, which in turn means that only extremely disloyal directors may be sanctioned.

Conclusions

Even though Latin American jurisdictions have statutorily recognized the concepts of the duty of care and the duty of loyalty, given that such duties have been defined in a generic fashion and that there is very limited case law supplementing the existing provisions, fully understanding the scope of such obligations becomes a challenge. Given these uncertainties with potential enforcement, the best approach for directors serving in Latin American-based subsidiaries of multinational companies would be to adopt standards of care and loyalty applicable in more developed jurisdictions, such as Delaware. This may also be advisable if broad D&O policies extending coverage to foreign subsidiaries have been obtained through international issuers and ultimately provide directors with insurance against potential claims. 

Juan-Pablo Crespo, a partner, and Rodrigo Morales, an associate, are members of King & Spalding’s Global Transactions and Latin America Practice Groups. They are resident in the firm’s Houston office.

Please email the authors at jcrespo@kslaw.com and rmorales@kslaw.com with questions about this article.