15-06-2023
1. The Problem of Legal Representatives in Chile
This concentrates a lot of power in to very few hands in companies in Chile. The abuse of their position by a legal representatives is a very serious problem in Chile, especially when foreigners may be partners or owners in the company, and fail to appreciate the full scope of the powers they have given to the legal representative. When a legal representative is appointed or elected, the powers are typically given by a formally notarized document. This is binding on the parties, and third-parties are legally protected if they act on that document. The will and intent of the signers is considered settled at the time that document is signed before a notary public.
We have encountered many cases where legal representatives have decided to do things like sell assets in the company; or, simply seize total control of the company. In the more extreme cases, there was very little legally the owners of the company could do after the fact because they had given their full consent to wield unrestricted power to the legal representative of the company. Thus, foreigners, with possibly limited language skills and even more limited understanding of Chilean law, should be very careful when choosing whom will be the legal representative of their company in Chile, what powers they will be allowed to exercise, and under what conditions.
2. Legal Liability of Legal Representatives
The responsibility of a corporate legal representative also cuts the other way. A legal representative assumes certain personal legal liabilities. For example, if a company fails to pay taxes in Chile, the Chilean Internal Revenue Service (Servicio de Impuestos Internos de Chile) may bring criminal or civil penalties against a legal representative directly. In a civil law suit brought against a company, it is the legal representative that is served to appear in court. Thus, for all concerned, it is not a duty to be taken lightly.
3. Practical Suggestions to Lower Risks
The most important things is that in drafting the articles of incorporation in Chile, and any related contracts regarding the powers of the legal representative, that the powers given to the legal representative must be properly restricted. For example, in the articles of incorporation, a legal representative could be required to obtain the signature authorizing the sale of any real estate assets from the partners or shareholders. They could also be restricted in the amount of money they can transfer without authorization. For example, they would need to request authorization for transfers of over $10,000 US.
It is important however that these restrictions not be so strict that the legal representative can not function. The legal representative still needs sufficient authority to act in a timely manner to conduct day to day business on behalf of the company. Thus, careful planning at the time of incorporation regarding the structure and authority of the legal representative, and should take in to consideration what powers are essential for the company to function efficiently in regards to the mandate given to the legal representative.
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