The board of directors of a company is a body of major importance for the proper functioning of the legal entity, since it can be considered as the communication bridge between the company and its shareholders, whose main function is to manage the company.
Today we will talk about how it works, its importance and give recommendations on its conformation.
What is a company’s board of directors?
The board of directors of a company, according to the Superintendencia Financiera de Colombia, has overall responsibility for the entire company. The collegiate nature of this administrative body implies that it must be considered objectively, that is to say, independently of the persons that comprise it, thus ensuring that its actions are based on decisions of the administrative body and not on the independent conduct of any of its members.
According to Articles 434 to 438 of the Code of Commerce, in accordance with Articles 198 and 199 of the Code of Commerce, which recognize them as administrators, this cannot be understood as the extension of the powers of the body to each of its members individually considered, thus undermining and nullifying the characteristic collegiality and collectivity of the administrative body (…)”.
It is common for those companies where the business and activities have increased considerably to have a board of directors, in these cases, the most advisable is that it is integrated by some partners, and also designate third party experts in industrial, technical and economic business issues. Its obligations and responsibilities shall be specified in the bylaws.
How is a company’s board of directors formed?
As a general rule, the composition of the board of directors of a company must have a minimum of three members, each with an alternate; its composition may be specified in the bylaws, but always indicating the maximum number of members (Code of Commerce, Article 434).
It is a body of voluntary creation for limited liability companies, partnerships and joint stock companies by means of their bylaws; on the other hand, its creation is mandatory for corporations.
We mention that the general rule is a minimum of 3 members, the exception to this rule are the SAS, in this case the Law 1258 of 2008 in the paragraph of Article 25 stipulates that this is integrated with one or more members, which may or may not have alternates.
How is a company’s board of directors convened?
The board of directors of a company convened by itself, by the legal representative, by the statutory auditor or by two of its members acting as principals (article 437, paragraph 3°, Code of Commerce).
The Board of Directors of a company is the administrative body of the company and, as such, the rules regarding impediments, prohibitions and responsibilities shall apply to its members.
Article 435 of the Commercial Code states that: “The board of directors of a company may not include a majority of persons related to each other by marriage, or by kinship within the third degree of consanguinity, second degree of consanguinity, or first civil relationship, except in companies recognized as “family” (collective, limited partnership, limited partnership, limited, anonymous). If a board is elected contrary to this provision, it may not act and the previous board shall continue to exercise its functions.
Decisions adopted by a board under this impediment shall be deemed ineffective, i.e., they shall have no effect whatsoever.
The following is a non-exhaustive list of the main duties of directors:
- To make efforts conducive to the proper development of the corporate purpose: the directors must do everything in their power to ensure that the economic activities foreseen in the company’s purpose are carried out. The obligation of such administrators is one of means and not of result.
- Ensure strict compliance with the law and the bylaws: managers must comply with and ensure compliance with commercial, accounting, tax, labor, competition, environmental, copyright, etc. regulations. Likewise, they must ensure compliance with the company’s bylaws, as these are the rules of the game of the company.
- Ensure that the functions entrusted to the statutory auditors are properly performed: the directors must provide the statutory auditors in a timely manner with the necessary, adequate, complete and supported information required for the proper performance of their duties, as well as allow the statutory auditors to enter the offices and facilities of the company.
- Keeping and protecting the company’s commercial and industrial secrets: the administrators must keep and protect the company’s business secrets, which are divided into commercial and industrial secrets (Article 23 of Law 222 of 1995 stipulates this and the aforementioned).
- Duty to abstain from participating in acts that imply a conflict of interest or competition with the company (External Circular 006 of 2008. Item 3.9.).
- Keeping and protecting the company’s commercial and industrial secrets: the directors must keep and protect the company’s business secrets, which are divided into commercial and industrial secrets. (Decision 486 of 2000 of the Andean Community, Article 260)
As it is an administrative body, as mentioned above, the rules relating to its liability is the regulation of the administrators, first of all, what does it mean to be an administrator.
The administrator is the person who manages the corporate business. For this purpose, it not only represents the company, but also looks after and administers the proper use of the company’s assets, all in accordance with the provisions of the company’s bylaws.
Thus, when a director violates legal or statutory rules, he may do so by means of omission or action in his behavior. That is to say, the unexpected action on the part of the administrator occurs when he acts contrary to the legal order and the action by omission is generated when the administrator abstains from executing the conduct that he is obliged to perform. In any case, the fault of the administrators shall be presumed as indicated in the third and fourth paragraphs of Article 24 of Law 222 of 1995.
In other words, they are jointly, personally and unlimitedly liable for the damages caused to the company, the shareholders or third parties, due to fraud or negligence. In addition, Colombian commercial law presumes fault when they have acted: (i) in breach of or in excess of its duties, and (ii) in violation of the law or the bylaws.
Social Responsibility Action
Its purpose is that the company obtains compensation for the damages generated by the action of an administrator who violated the duties of the administrators.
This action has its origin in Article 25 of Law 222 of 1995, which stipulates that when this decision is adopted by the shareholders’ meeting or Board of Directors, and the social action of liability is not initiated within the following three months, it may be exercised by any administrator, the statutory auditor or by any of the partners in the interest of the company.
In this case, creditors representing at least fifty percent of the company’s external liabilities may exercise the corporate action as long as the company’s assets are not sufficient to satisfy their claims.
The provisions of this article shall be without prejudice to the individual rights of the members and third parties.
Such provision indicates the legal requirements that are necessary to make use of such action by the company, establishing in this case that the active subject is the company and the passive subject is the administrator or administrators who have caused the damage.
The action may only be brought once it has been approved by the highest corporate body, with the majority indicated in the law. In any case, the vote of one of the members representing the majority of the quotas represented at the meeting shall be sufficient to initiate the social action for liability.
As mentioned above, the respective meeting may be convened exceptionally by the partners representing 20% of the capital, and once the determination is adopted, the administrator must be removed and the respective lawsuit must be filed before the ordinary jurisdiction through the summary verbal procedure, in accordance with Article 233 of Law 222 of 1995.
Some of the conduct of the administrators may be extremely serious and may be typified in the Penal Code. In this case, the administrator will be criminally liable, but for this it is necessary that his conduct was culpable or fraudulent.
Based on this, the most representative sanction will be imprisonment. It is of great importance to emphasize that criminal liability in the area of legal persons is not regulated in the national regulations, therefore, the company will not be obliged to respond in these cases, since this will only be applicable to those persons who direct or administer it.
Events for which the administrators do not respond:
- Where force majeure or fortuitous event occurred.
- Those in which the administrators had no knowledge of the action or omission that gave rise to the damages.
- Those in which the administrators have voted against the decision that originated the damages, provided that they have not executed said decision.
- The damage generated against the company, the partners or third parties, was not caused by negligence, action or omission, but by precise instructions given by the highest corporate body and, in addition, does not involve unlawful conduct.
For the correct creation of your company and its board of directors (if required) it is necessary to have the correct advice from a lawyer specialized in corporate law.