Ecuador

Overview of recent corporate governance reforms

The legal and regulatory framework for corporate governance in Ecuador is mainly set out in the Companies Law, in force since 1964 and most recently amended in November 1999.

All Ecuadorian companies are regulated by this law and are subject to the control of the Superintendency of Companies. The Stock Exchange Law additionally applies to listed companies, and other pieces of legislation also include regulations on corporate governance, such as the Commercial Code, the Civil Code, the Criminal Code and the Law on the Internal Tax Regime. No significant corporate governance reforms are pending.

Shareholders’ rights

Meetings

There are two kinds of shareholders’ meetings: ordinary and extraordinary. Both must be called by the company’s managers through the press, and by any other means stipulated in the company statutes, at least eight days prior to the date of the meeting. The notice must include the agenda for the meeting, as well as the place, date and time it will be held. Any resolutions on issues which are not mentioned in the notice are considered void.

Ordinary meetings must take place at least once a year, within three months of the end of the company’s fiscal year. At these meetings, resolutions are issued on:

• the accounts and books;

• the reports of the managers and directors on the company’s business;

• the distribution of dividends; and

• remuneration of the officers.

The ordinary shareholders’ meeting must also review the reports of the external auditors, where applicable.

Extraordinary meetings take place when called by the managers at times other than those established for ordinary meetings to discuss issues which are not addressed by the latter. Again, only items included on the notified agenda may be discussed.

If an ordinary meeting is not held within the term required by law, any shareholder may request that the managers convene the meeting. For extraordinary meetings, any shareholder or group of shareholders that together represent 25 per cent or more of the company’s share capital may request at any time that the managers convene a meeting to discuss specific issues indicated in their petition. In both cases, if the meeting does not take place within 15 days of the request, any shareholder may request that the Superintendency of Companies convene the meeting.

Quorum requirements

In order for a shareholders’ meeting to take place, a number of shareholders representing at least one-half of the share capital must be present. If this quorum is not met, the shareholders’ meeting may take place after a second call is made, with any shareholders as are present. The issues to be discussed at the meeting may not differ from the first call to the second.

The situation changes where a meeting is called in order to decide on any of the following matters:

• increases or reductions in share capital;

• transformation, merger, division or dissolution of the company;

• reactivation of a company undergoing liquidation; and

• ratification or modification of the company bylaws.

In such cases the quorum requirements are as follows:

• The attendance of shareholders representing at least one-half of the share capital is required. If there is no quorum, a second call is made.

• At the second call, the attendance of one-third of the share capital is required. If there is no quorum, a third call is made no more than 60 days after the date which was originally set for the first meeting. Again, the issues for discussion must remain unchanged.

• After the third call, the quorum requirement is met regardless of how many shareholders are present.

Voting rights and requirements

The shareholder is considered to be whomever is recorded as such in the shareholder register, which is kept by the manager of the company. Each shareholder has the right to vote in proportion to the value of his shares relative to the share capital of the company.

As a general rule, resolutions are adopted by simple majority of the share capital that is represented at the meeting. However, the bylaws may require that all decisions be adopted by an absolute majority (ie, one-half plus one share) of the share capital represented at the meeting.

Resolutions on the following matters require the unanimous vote of the entire share capital of the company:

• an increase in the nominal value of the shares through contributions in cash or in kind;

• a change in the company’s domicile; and

• extension of the company’s term of existence (since all Ecuadorian companies automatically dissolve after a set term, usually 50 or 100 years).

Resolutions on the following matters require the unanimous vote of all shareholders in attendance at the meeting:

• capital increases through the capitalisation of profits; and

• decisions not to pay dividends to shareholders.

In this regard, if even one shareholder opposes the resolution, the company must distribute at least 50 per cent of its dividends to the shareholders.

Ordinary and preferred stock

Stock may be ordinary or preferred. Ordinary stock affords the holder every fundamental political and economic right granted to shareholders under law (eg, voting rights and rights to dividends and liquidation proceeds). Preferred stock does not carry voting rights, but may grant special rights on the payment of dividends or liquidation proceeds. Preferred stock may not amount to more than 50 per cent of the company’s share capital. These types of stock are commonly used to limit the influence of such shareholders, who are viewed more as mere investors.

Appointment and removal of managers

Even where this is not included on the agenda, the shareholders’ meeting can decide on the appointment, suspension or removal of the managers or members of management bodies created by the company bylaws.

Pursuant to the Companies Law, the company may specify in its bylaws the manner in which shareholders may exercise their rights to vote on the appointment of managers. One option is to create several classes of shares, each of which has the right to elect a member of the board.

Deferment of meetings

Any shareholder who considers that he has not been sufficiently informed about the matters tabled for discussion can request that the meeting be deferred for three days. This request will be honoured if it is supported by one-quarter of the share capital in attendance at the meeting. However, the meeting will not be deferred if it has been summoned by the officers on an urgent basis.

Questioning of auditors

Any shareholder or group of shareholders representing at least 10 per cent of the company’s share capital may call upon the external auditors to clarify aspects of their report.

Right to inspect corporate documents

Shareholders have the right to request, at any time, certified copies of the balance sheet and income statement, management reports, minutes of shareholders’ meetings, reports on issues to be discussed at shareholders’ meetings and shareholder lists.

Right to appeal decisions

Any shareholder or group of shareholders representing at least 25 per cent of the company’s share capital has the right to appeal against resolutions adopted by the shareholders’ meeting or any other company bodies where these contravene the company bylaws or damage the interests of the shareholders. Such an appeal may only be brought if the dissenting shareholders voted against the resolution or did not attend the meeting at which it was adopted. The appeal is heard by a local court, and must be filed within 30 days of adoption of the resolution.

Similarly, any shareholder may request the annulment of any resolutions which contravene Ecuadorian law. This action is also heard by a local court.

Initiation of litigation

In appropriate circumstances the shareholders’ meeting may appoint an individual to bring a liability action against the managers, commissioners or directors.

Protection of minority shareholders

All clauses or agreements that eliminate or hinder the rights attributed by law to minority shareholders will be void.

Recourse to the Superintendency of Companies

If a shareholder or a group of shareholders representing at least 10 per cent of the company’s share capital feels affected or is in danger of being affected by a serious violation of law, regulations or the company bylaws, it may request the Superintendency of Companies to appoint a supervisor in order to correct the irregularities and thus prevent or remedy the damage.

Disclosure of shareholdings

Anyone who, directly or indirectly through third parties, owns 10 per cent or more of the share capital of a listed company, or who reaches this threshold as a result of a share purchase, must notify the Superintendency of Companies and the Stock Exchange of all subsequent share acquisitions and transfers within five working days of each transaction.

Anyone who, directly or indirectly, intends to assume control of a listed company must inform the company, the public and all relevant stock exchanges at least seven working days prior to the transaction.

Shares of listed companies may only be traded on the stock exchange through brokers, except for share transfers that result from mergers, demergers, inheritances, legacies, donations and liquidations of property held jointly by married or cohabiting couples.

The state as shareholder

The state, municipalities, provincial councils and other public sector entities can participate, together with the private sector, in the capital and management of ‘mixed economy’ companies. These companies are dedicated to the development of agriculture or certain industries critical to the national economy or to the satisfaction of collective needs, as well as to the provision of new public services or the improvement of existing services.

The boards of such companies will be chaired by a director representing the public sector, as long as the public sector’s participation in the company exceeds 50 per cent.

Private entities and individuals can buy out the state’s holding in mixed economy companies through cash payment of the value of this share, as determined by an evaluation procedure similar to that employed in case of merger.

For reasons of public interest, the state can expropriate the private sector’s stake in a mixed economy company at any time, although it must pay the full cash value of this stake as determined by the evaluation procedure.

Institutional investors as shareholders

The stock exchange in Ecuador is developing and institutional investors are playing an increasingly important role. In addition to private institutional investors, the Ecuadorian Social Security Institute is one of the more active investors in Ecuador regarding the issuance of bonds.

Despite the growing significance of these investors, there are no particular regulations establishing their duties or protecting their rights, which are exercised in the same way as those of other investors.

Management structure and the role of directors

Structure and division of functions

The shareholders’ meeting is the supreme body of the company, with the power to resolve on all issues relating to the company’s business.

Shareholders’ meetings are chaired by the person designated as such in the company bylaws or, where the bylaws do not specify such person, either by the president of the managing board or board of directors or by a person elected as chair by those attending the meeting. The position of company secretary is not obligatory in Ecuadorian companies. Usually, the general manager or the company’s legal representative acts as secretary at the shareholders’ meeting.

In principle, the shareholders delegate the day-to-day operation of the company to the management. The company bylaws specify its management structure and must identify the company’s representatives, both judicially and extra-judicially. In principle, the legal representation exercised by the management extends to all matters relating to the company’s commercial and civil activities, although the bylaws may limit this power. Any restriction of the representative powers of the administrators or managers stipulated in the bylaws will be ineffective against third parties. Moreover, the authorisation of the shareholders’ meeting is required for the transfer or mortgage of the company’s real property, except where this is part of the company’s usual activities or is expressly permitted in the bylaws.

The following principles regulate the management structure of listed companies:

• Where the management of the company is entrusted jointly to several people, they together constitute the board of directors.

• Private financial institutions are the only private companies required by law to have a board of directors. The board of directors must always have an uneven number of members, ranging from between five and 15.

• A company’s bankers, tenants, constructors or suppliers may not act as managers of the company. Neither may public functionaries, religious functionaries or persons that have not obtained rehabilitation from bankruptcy.

• The bylaws specify the term for which the management position will be held, which may not exceed five years. However, managers will be eligible for re-election.

• The shareholders’ meeting has the power to determine the remuneration of managers and other officers, except where the bylaws state otherwise.

The main duties of the management are as follows:

• to fulfil the obligations stipulated by law and the company bylaws, and to perform their duties with the diligence that an ordinary and prudent commercial administration requires;

• to retain a copy of all meeting minutes and reports on the company’s situation; and

• to convene shareholders’ meetings.

Management’s liability

In general, any provisions in the bylaws which limit the liability of the managers, or which waive it altogether, are void. The managers have no personal obligations towards the company.

However, in certain cases the managers will be jointly liable towards the company and third parties (ie, in relation to the subscribed capital and properties contributed by shareholders, the existence of the declared dividends, the existence and accuracy of the books and the execution of shareholders’ resolutions). Such liability applies only for the duration of the manager’s term of office.

The Companies Law allows for liability actions to be brought against the management where it has acted negligently or with the intention to cause harm, and has caused damage to the company. Liability actions on behalf of the company may be brought once approved by the shareholders’ meeting. The action may be stopped or a settlement reached as long as this is not opposed by 10 per cent or more of the company’s total share capital.

The law does not does not allow shareholders to bring an individual liability action against the managers. If the management’s negligence has caused damage to a particular shareholder, he must bring a regular civil or criminal action, as the case may be.

Disclosure

Apart from the periodic reporting of financial results, companies must make public the managers’ reports, a list of management officers and a list of legal representatives within the first four months of every year.

In addition, listed companies must fully and timely disclose all material information that might affect the company’s legal, economic or financial situation, or its market value.

Listed companies must register all relevant information with the Superintendency of Companies and update it every six months. Where an important event occurs, the company’s representative must notify the superintendency within five working days.

Material events or facts are those which could have a significant influence on the company and affect decisions to invest in the company. Such events need not necessarily occur as a result of a decision adopted by a company body or officer.

Under the Securities Market Law, certain events and situations involving pending negotiations may be designated confidential by vote of three-quarters of the board, where such information could damage market interests were it made known to the public. The Superintendency of Companies must be informed of this decision the following day. The directors and officers who agree to designate the information as confidential are personally and financially liable for their decision.

Managers who do not disclose required information in a full and timely manner will be guilty of an administrative offence punishable by financial penalties, suspension or removal from office. They may also be held civilly liable for damages caused to third parties as a result of this failure to disclose. In some cases criminal liability may also be triggered, such as where false information is provided (this is punishable by between three and six years’ imprisonment)

Accounts and audits

All listed companies must provide the Superintendency of Companies with copies of their balance sheet and income statement, as well as the reports of managers and officers, within the first four months of every year. In addition, all listed companies must be externally audited each year so they can issue a report on their financial situation, without prejudice to any investigations carried out by officers of the superintendency.

The shareholders’ meeting is responsible for appointing external auditors; this should take place at least 90 days before the end of the fiscal year. Only auditing companies which have been duly registered with the superintendency may be appointed as external auditors. Any auditing company found to have breached its obligations as auditor will be disqualified from performing this function.

The law further provides that companies which have some relation to the managers or the client company, and companies which are not domiciled in Ecuador, may not be appointed as auditors. Moreover, the same firm may not audit the company for more than five consecutive years, unless the partner responsible for the auditing changes.

The officers of the client company must furnish the auditors with all information necessary to perform their duties and prepare the audit report. This report must be sent to the shareholders at least eight days before the date of the shareholders’ meeting at which it is to be approved.

Where an auditing company does not prepare its report in accordance with accepted requirements, it is guilty of an administrative offence punishable by fine and by temporary or permanent suspension from serving as auditors. Similarly, the auditors may be criminally liable if they hide any irregularities or fraud detected in the course of the audit, an offence which is punishable by up to nine years’ imprisonment.

Enforcement

The enforcement of corporate governance regulations, and particularly those set out in the Companies Law, is generally thought to be effective. Shareholders can inform themselves about the company’s operations and challenge acts which may be illegal or against the company’s interests.

The Superintendency of Companies assists minority shareholders through administrative and financial controls and its supervision of legal formalities. However, serious disputes between the shareholders or between shareholders and management must be heard before the courts, which can delay their resolution; in addition, some judges do not have the technical expertise to resolve such issues efficiently. However, arbitration provisions may be included in the company bylaws and in shareholder agreements, and commercial arbitration is well developed in Ecuador.

Although generally considered effective, the current corporate governance framework nonetheless has some significant shortcomings. For example, there are no measures in place to reward or protect whistleblowers, although the condemnation of corporate irregularities is encouraged in principle.

Corporate social responsibility

Reporting obligations, corporate social responsibility, sustainability and ‘triple bottom line’ reporting have not been significantly affected by the move towards increased transparency in corporate governance around the world. While the concept of corporate social responsibility is not significantly developed in Ecuadorian legislation, the public and Ecuadorian authorities (notably the Office of the Public Defender) keep a watchful eye on the activities of companies that have a significant social or environmental impact (eg, oil, energy and pharmaceuticals companies).

Sarbanes-Oxley

The Sarbanes-Oxley legislation and regulations in the United States have had little or no impact on corporate governance regulations and practices in Ecuadorian companies.

Recent developments

One recent development which reflects the heightened awareness of Ecuadorian lawmakers in relation to corporate governance occurred in 2001. During that year, a new programme was launched for the restructuring of debts in excess of US$50,000 which companies owed to financial institutions, with the aim of stimulating the domestic economy, among other things. A new set of regulations was issued requiring companies whose debts were restructured to observe “a good standard of corporate governance”, including adequately protecting minority partners and shareholders.