I OVERVIEW OF GOVERNANCE REGIME
Corporate governance in Bolivia is mainly regulated by Book 1 Title 3 of the Bolivian Commercial Code and by the articles of incorporation of each corporation. In addition, the Bolivian Comptroller of Corporations (AEMP), a regulator for enterprises in Bolivia, issued its Guidelines on Corporate Governance in 2011. Adopting and complying with these Guidelines is not mandatory for any corporation in Bolivia, and in practice they are not usually referenced or considered in corporate incorporation documents or by-laws.
There are two entities that are in charge of the enforcement of the corporate governance regime of corporations. On the one hand, the Registry of Commerce is in charge of issuing an annual certificate of good standing to the corporations that comply with the basic requirements and obligations imposed by the Commercial Code, such as having one annual shareholders’ meeting to appoint or ratify the directors, registering the balance sheets of the corporation each year, and so forth.
On the other hand, AEMP is the comptroller of corporations in matters related to corporate governance, antitrust, corporate restructuring and overseeing the functioning of the Registry of Commerce. While one of AEMP’s tasks is to issue the Guidelines on Corporate Governance, because adoption of the Guidelines is not mandatory, the enforcement powers of this entity with regard to corporate governance practices are minimal.
Besides the general rules applicable to all companies and industries, certain specific industries are under the supervision of specific regulatory entities that may determine and affect the corporate governance system of those companies. This is the case for financial institutions and banks under the supervision of the Bolivian Financial System Authority (ASFI), which monitors and enforces compliance with financial regulations, including regulations regarding the creation and composition of corporations engaged in financial services practices. ASFI issued its Rules on Corporate Governance in December 2012, which came into force a year later (and which were amended in September 2015), for all the entities under its authority. Compliance with the Rules is mandatory for all financial institutions in Bolivia, in contrast to the voluntary Guidelines on Corporate Governance issued by AEMP, applicable to all other industries and entities. Where appropriate, we will make specific reference to the ASFI Rules on Corporate Governance.
Notwithstanding the development of corporate governance rules and guides in the financial sector, the evolution of corporate governance legislation in the country has been slow. During the past few decades, the corporate governance regime in Bolivia has not been on the radar of legislators and the executive branch of the government. In 2002, Law No. 2427 established certain corporate governance requirements for directors of pension funds in Bolivia and, in addition, created an overseeing entity, then called the Superintendency of Businesses, charged with regulating and controlling the compliance of corporations in antitrust and corporate governance matters. Later, in 2009, its name was changed to the Authority of Fiscal and Social Control of Companies, which is now known as AEMP.
In recent years, AEMP has increased its level of engagement and become a more important player in the creation and management of corporations and their compliance with corporate regulations. The growing importance of this entity is most clearly noticed in the field of antitrust, but its importance is also expected to grow in the field of corporate governance.
The efforts of the region to unify and promote the regulation of corporate governance are also noteworthy. In 2005, CAF, the Development Bank of Latin America, created the Andean Code of Corporate Governance, with the help of representatives of stock markets in the Andean countries, including the Bolivian Stock Market. The aim is to provide corporations in the Andean region with a corporate governance regime that makes them more attractive to international investment and more competitive in the international arena.
One of the notable aspects of corporate governance in Bolivia is that the law does not specifically deal with regulations regarding fiduciary duties of directors and executive officers. A possible reason for this lack of interest on the part of legislators is the fact that the structure of most public corporations in Bolivia involves a major shareholder who owns a majority of the corporation’s stock (unlike in other countries, where dispersed ownership is common). For the purposes of this analysis, we will refer to the Bolivian corporation structure as a ‘concentrated ownership’ structure. In this structure, the dominant shareholder usually owns a sufficient amount of shares to allow him or her to appoint all directors of the board, or at least a majority of them. As a result, the possibilities for ‘entrenchment’ by directors who reject, for example, a friendly acquisition offer, are minimal, whereas in other countries the more active M&A markets have been the main drivers of jurisprudential and regulatory development regarding the duties of directors.
II CORPORATE LEADERSHIP
Boards of directors in Bolivia commonly have a one-tier structure; however, pursuant to the Bolivian Commercial Code, the board of directors may designate a special executive committee, composed of a smaller number of board members for the management of specific affairs. The organisation of such a committee does not diminish the obligations and responsibilities of the board of directors as a whole.
Traditionally, the representation and administration of the corporation – which lies with the board of directors – is delegated to executive officers with broad powers to act on behalf of the corporation. Although managers and executives may represent the corporation (by means of power of attorney) in the executive and administrative duties of the corporation, the delegation of power to them does not diminish the responsibilities and oversight duties of the board of directors.
i Composition of the board
Under the Commercial Code, boards of directors must be composed of no less than three and no more than 12 directors. The members of the board are appointed by decision of the shareholders during the shareholders’ ordinary meeting, which must be held at least once a year (a more thorough description of the characteristics and powers of an ‘ordinary’ meeting are described below). The shareholders can remove directors and can also re-elect directors for indefinite periods, unless the articles of incorporation of the particular corporation establish a maximum number of possible re-elections. In general terms, the Bolivian Commercial Code allows for many of the internal rules governing corporations to be simply decided by shareholders or specified in the by-laws of the corporation.
ii Company representation
The representation of the company is vested in the chairperson of the board of directors who, pursuant to Article 314 of the Commercial Code, is the official representative of the company, but the representation of the board may also be delegated to other directors and executive managers, if the by-laws of the corporation contemplate the possibility. As mentioned above, these faculties are commonly delegated to a general manager or CEO of the corporation, by means of a general power of attorney for administration purposes, granted by the totality of the board in representation of the corporation, which can enable the company to have a shared representation (by the board and by the CEO). In practice, the representation of the corporation is usually delegated to a CEO in medium-sized and large corporations, but it remains with the chairperson of the board of directors in the case of smaller businesses in which, frequently, the shareholders of the corporation also play the role of directors of the board.
There are exceptions to this general rule. Under Article 325 of the Commercial Code, the chairperson of the board may only represent the corporation in matters of urgency regarding the day-to-day management of the business of the corporation, but decisions of the chairperson are subject to ratification by the board of directors in its next meeting.
The chairperson of the board can also represent the company without the need of a board decision, but he or she is only allowed to represent the company in the daily management of the business of the company, not in any extraordinary actions, and even the daily management of the corporation is subject to the ratification of the entire board of directors.
Although the representation of the corporation is vested in the board of directors, there are certain decisions that cannot be taken by the board, but need to be taken by the shareholders in a duly convened shareholders’ meeting, as further explained below.
iii Delegation of board responsibilities
Legislation has not provided separate roles for the CEO and the chairperson of the board, but instead establishes that the administrative power of the board can be delegated to managers, meaning that both may have basically the same faculties regarding managerial functions. However, the overseeing functions remain only with the board and, ultimately, with the shareholders. Thus, there is no true delegation of the overseeing responsibilities of the board, only a delegation of its administrative powers.
iv Direct communication with shareholders
There are no provisions in the Commercial Code that prohibit direct communication between shareholders and the chairperson of the board or any other members of the board of directors. In practice, it is common for shareholders and directors to have a very fluent line of communication, at least in small and medium-sized corporations. One of the possible reasons for this is the concentrated ownership structure of corporations in Bolivia, because the pool of shareholders of a corporation is not as numerous as the pool of shareholders in jurisdictions with dispersed ownership.
v Remuneration of directors and senior management
Article 320 of the Bolivian Commercial Code states that the remuneration of the board needs to be contemplated in the by-laws of the corporation. This Article has two important implications: (1) remuneration not being mentioned in the by-laws implies that the service of the board is unremunerated – this provision is particularly designed bearing in mind the cases of small corporations where sometimes all the shareholders act as both shareholders and directors of the corporation; and (2) remuneration of directors is established by the shareholders in the by-laws and can thus only be modified by amending the by-laws.
In the case of medium-sized and large corporations, it would be unusual for directors not to be paid for their services. Normally, by-laws do not establish an exact amount but instead provide a mechanism that determines the remuneration of directors in relation to a measurable factor, such as the annual earnings of the corporation. In such cases, Article 320 of the Bolivian Commercial Code provides that the maximum amount of remuneration that the board of directors may receive is 20 per cent of the net profit of the corporation in any particular year. If the company suffers losses during the year, the shareholders’ meeting needs to expressly authorise the amount of remuneration that will be paid.
On the other hand, remuneration of senior management is mandatory under the Commercial Code, but there are no specific regulations determining limits or minimum amounts that may be paid for the services of the CEO. In the case of financial institutions, remuneration of directors and the management team cannot exceed 20 per cent of the administrative expenses of the entity, under the ASFI Rules on Corporate Governance.
Board committees are also not extensively regulated by the Bolivian Commercial Code, but they are, nevertheless, permitted and even recommended by the Guidelines on Corporate Governance. However, committees are not common in the Bolivian corporate governance regime. Article 330 of the Commercial Code allows the appointment of an executive committee (if the by-laws also provide for it) for the purpose of completing determined activities of the corporation. As with the Guidelines on Corporate Governance, the appointment of an executive committee or any other committee is not mandatory but merely recommended.
Although there are other regulations that do mandate appointment of committees, these are only applicable to specific industries. The boards of directors of financial institutions subject to ASFI regulations must have several committees to comply with the norms, such as a risk management committee. The specific regulations for financial entities vary depending on their level of complexity and their involvement in the market.
Notably, all financial institutions, with the exception of exchange houses, are subject to the regulations on corporate governance issued by ASFI in 2012 and amended in 2015, and these regulations mandate the creation of a specific committee on corporate governance within the board of directors of all these entities. The committee on corporate governance must be composed by at least one director of the corporation and the general manager, and this committee is in charge of preparing and filing an annual report on corporate governance with ASFI.
Because of the concentrated ownership structure of corporations in Bolivia (where a dominant shareholder owns more than half or, at least, a large percentage of the shares of the corporation), takeover attempts are very scarce in our jurisdiction. This is because control of the corporation cannot be effectively acquired unless the shares of the dominant shareholder are purchased, because even the purchase of all the shares of the remaining shareholders would not be sufficient to allow the new owner to take important decisions regarding the corporation. Defensive mechanisms against takeover attempts, such as ‘poison pills’, are not used in our jurisdiction.
Notwithstanding the power that a controlling shareholder has over the business of a corporation and the effect that this has on takeovers in Bolivia, there are cases where buyers have acquired significant amounts of shares of corporations to launch takeover attempts. In these scenarios, the controlling shareholders keep sufficient voting power to maintain a favourable board of directors and defend the corporation against the takeover attempt. However, pressure from the buyers may create disruption in the handling of the business. The goal of the buyers in doing so is not to take over the corporation as such, but to create discomfort and struggles inside the corporation, to create more leverage for negotiations with the controlling shareholder. In a way, this is comparable to the practice of ‘greenmailing’, with the difference that buyers are not interested in forcing the firm to buy back their shares at a premium, but instead are interested in forcing the controlling shareholder to sell the remaining shares to the acquirer.
There is little regulation in Bolivia regarding outside directors and, specifically, there is no requirement specifying a minimum percentage of outside directors on boards. Therefore, not all public corporations have outside directors serving on their boards. In practice, it is common for shareholders in small corporations to act as directors of the board, and it is also common to find the senior management personnel of the firm acting as directors, although this clearly defeats the controlling purpose of the board.
Even in the case of corporations that do have outside directors on their boards (usually banks, financial institutions and large corporations), these directors play only a moderate role in the corporate governance system. This is probably another consequence of the concentrated ownership structure of Bolivia; most corporations have a controlling shareholder who owns at least 51 per cent of the shares of the corporation and who has almost complete control over the appointment of the majority of the board members and management team, and hence there is no true incentive for the appointment of outside directors by the controlling shareholder.
However, corporations that have a minority of at least 20 per cent of the issued shares are entitled to designate up to one-third of the board of directors. As a result, in many cases where the minority shareholders themselves are not appointed to the board, they may appoint outside directors, typically prominent professionals such as financial advisers, partners of accounting firms and lawyers, based on their ability to provide the board with advice on how to better conduct business and review the coherence of managerial decisions.
Legal duties and best practice for inside and outside directors
Because of the lack of legislation regarding outside directors, both inside and outside directors are subject to the same standards and duties. Bolivian legislation sets out the responsibilities of the board of directors in a very broad way, stating that the board of directors is responsible for the administration of the company and its representation. On the other hand, boards of financial institutions are subject to the guidelines provided in the ASFI Rules on Corporate Governance, which include principles of independence and ethical conduct for directors.
Liability of directors
Directors may be held accountable and jointly liable for their actions if they break their duties of ‘diligence, prudence and loyalty’ towards the corporation. In some cases it is disputed whether the duty to the corporation also means a duty towards the shareholders of the corporation, in particular to the shareholder group that appointed the board members. However, the definition and scope of the obligations of diligence, prudence and loyalty have not been developed by specific regulation or by a clear jurisprudential line. Thus, it is generally hard to argue that there has been a breach of the duties of the directors, particularly if their diligence and prudence is being questioned. Breach of loyalty, on the other hand, is often linked to undisclosed conflicts of interest, and is thus easier to demonstrate in court.
The Bolivian Commercial Code does not establish requirements that must be met by potential directors to be eligible, but instead sets out in Article 310 a list of characteristics that impede the appointment of a person as director of a corporation, including:
- a the fact that a person is judicially banned from performing commercial acts as a result of bankruptcy proceeding;
- b persons that might face conflicts of interest;
- c persons related by blood or family; and
- d public officers who performed duties in fields related to the field of business of the corporation, for two years after having left office (e.g., a former minister of the Vice Ministry of Electricity and Alternative Energy cannot be part of a board of directors of a corporation involved in the business of providing electricity).
Conflicts of interest
The above-mentioned article of the Bolivian Commercial Code applies the criterion of ‘conflict of interest’ in a broad manner and there is no specific case law that discusses or analyses the actions or situations that may create conflicts of interest. The wording is very peculiar because it establishes that ‘conflicts of interest, judicial claims or debts with the corporation’ are elements that impede persons from serving as directors, meaning that a conflict of interest is not defined as having a judicial claim or a debt with the corporation, but instead that having a conflict of interest may encompass other things as well. However, it is not common, in practice, for appointments of directors to be challenged on any of these bases, and when they are, conflicts of interest are mostly linked to economic ties (creditor–debtor relationship) or family ties.
The Commercial Code establishes that faithful keeping of accounting books is one of the duties of corporations. Under Article 39 of the Code, accounting of the corporation must be kept by legally authorised accountants. Additionally, Article 64 expressly prohibits the practice of ‘double accounting’, levying criminal sanctions against persons who breach this rule.
As explained above, the concentrated ownership structure of corporations in Bolivia is a very important element that allows us to better understand the reasons behind some of the rules (or lack thereof) in the corporate governance regime. For example, regulations restricting one-on-one meetings of directors and shareholders do not exist in our jurisdiction, and in fact these kinds of meetings are fairly common. There are no restrictions that forbid these kinds of meetings, and there is usually a very strong line of communication between the board and, in particular, the dominant shareholder of the corporation.
iv CORPORATE RESPONSIBILITY
Bolivia is a very atypical country with respect to corporate social responsibility and stakeholders.
As a first consideration, it has to be taken into account that there is wide-ranging regulation that protects the rights and social benefits of employees in the country. Bolivian legislation is considered to be employee-friendly, because it prohibits, for example, the at-will termination of employment agreements without a cause. In addition, the freedom of employees to create syndicates to represent workers’ rights is strongly protected by labour laws.
Despite the fact that labour law in the country provides many advantages for employees over employers, there are no specific regulations protecting the interests of stakeholders inside the decision-taking bodies of corporations, or allowing, for example, the participation of syndicates in the decisions of the board of directors. Even though labour law and corporate governance rules do not complement each other, the importance of labour unions in Bolivian companies is unquestionable.
Although it is not very common and the law does not mandate it, some of the larger corporations in Bolivia have implemented projects to allow the participation of employees and stakeholders in decision-making processes, in an effort to reinforce the well-being of their employees and the community.
Pursuant to Article 231 of the Bolivian Commercial Code, each share of the corporation grants its owner the right to cast one vote. However, holders of preferred stock have limited voting rights. This means that holders of ordinary stock are empowered to cast their votes in both the ordinary and extraordinary shareholders’ meetings held by the corporation, while holders of preferred stock may only cast their votes on extraordinary meetings (although they are allowed to participate in ordinary meetings, but without voting powers).
i Powers of shareholders to influence the board
In practice, shareholders in Bolivia have undisputed power to influence the board of directors. There are two reasons for this. First, and most importantly, the influence of the shareholders (and in particular of dominant shareholders) is a result of the concentrated ownership structure of corporations in Bolivia. On the other hand, the lack of a developed M&A market highlights the fact that there are generally no disputes over the control of the corporation as a result of conflict between the power of the board and the power of the shareholders, because friendly mergers are the norm rather than the exception.
ii Decisions reserved to shareholders
The decisions taken by shareholders’ meetings are the most important governing actions in the functioning of corporations, as shareholders have the ultimate power to take decisions regarding key aspects of the corporate governance of corporations, such as electing directors and defining their responsibilities. Under Articles 285 and 286 of the Commercial Code, these corporate decisions are strictly reserved to the vote of shareholders and cannot be taken by the board of directors.
It is important to differentiate two kinds of meetings that may be held by the shareholders. The first is the ordinary meeting, commonly referred as the annual meeting, because it must be held at least once a year to comply with the requirements of the Registry of Commerce (but can be held more frequently). The ordinary meeting has exclusive competence to approve the balance sheet and accounting books of the corporation, the payment of dividends to the shareholders, and the appointment of directors.
The second kind of meeting that can be held by shareholders is an extraordinary meeting, which has exclusive competence to determine the amendment of the by-laws, the issuing of stock, bonds and debentures, or the dissolution of the corporation. Extraordinary meetings are not mandatory, and may take place as many times in a year as necessary.
iii Rights of dissenting shareholders
Dissenting shareholders who decide to object any measure taken by the shareholders’ meeting as a whole are excluded from potential liability that may arise as a result of the illegality or judicially declared nullity of the measure taken. Therefore, although dissenting shareholders are bound by the determinations of the other majority of the shareholders and do not acquire any particular right as a result of their dissent, they do acquire the right of immunity in the case of an overcoming nullity of the action taken by the other shareholders, pursuant to Article 304 of the Bolivian Commercial Code.
iv Facilities for long-term shareholders
Pursuant to Article 279 of the Bolivian Commercial Code, ‘founding’ shareholders are entitled to receive special bonds, which are not convertible to shares and do not empower the founding shareholders to participate in the administration of the corporation. The amounts to be paid by the corporation to the bond-holding ‘founders’ of the corporation depend on each specific corporation. In practice, it is uncommon for corporations to issue these kinds of bonds.
v Board decisions subject to shareholder approval
Certain board decisions require the approval of the shareholders. One example is approving the resignation of directors, which can be accepted by the board of directors of the corporation, but is subject to the later ratification of the shareholders. In addition, shareholders may impose other restrictions in the by-laws of the corporation on board decisions.
vi Controlling shareholders’ duties and liability
As mentioned above, it is very common to find that Bolivian corporations are controlled by a dominant shareholder who owns a large amount of the shares of the corporation. Although there are no specific obligations imposed on controlling shareholders (or a definition of what constitutes a controlling shareholder), there is a specific provision stating that minority shareholders who represent at least 20 per cent of the voting shares of the corporation may appoint one-third of the board of directors. Minority shareholders may also convene general meetings, even if the board of directors disapproves or objects.
vii Institutional investors’ duties and best practice
Institutional investors are subject to the ASFI Rules on Corporate Governance for the management of their internal corporate functioning, and their management bodies are thus subject to the obligations imposed on this norm.
viii Codes of best practice for shareholders
The AEMP Guidelines on Corporate Governance act as a code of best practice for shareholders, as they recommend certain measures that might be considered as intended to aid minority shareholders. One of the more relevant parts of these Guidelines is based on the importance of providing reliable information to all shareholders and the importance of establishing, in advance, the specific topics that are going to be discussed in the shareholders’ meetings.
ix Shareholder activism
The concentrated ownership structure of corporations in Bolivia makes shareholder activism an unusual topic for the Bolivian jurisdiction. Because the ultimate power of decision is vested in the shareholders, and it is common to find a controlling shareholder in the corporation, there is rarely conflict between directors and shareholders over the power to take decisions regarding the corporation (the power lies with the dominant shareholder).
There are also no specific provisions governing the use of derivative actions by shareholders, nor the use of proxy battles to take control of the corporation, as control normally lies with the dominant shareholder.
There are some particular requirements for calling a shareholders’ meeting under Article 288 of the Bolivian Commercial Code:
- a the meeting has to be advertised in a national newspaper;
- b notice has to be given of the topics that will be discussed during the meeting;
- c notice has to be given of the place and the time; and
- d the meeting has to be advertised for three non-consecutive periods, with the final advertisement being made at least five days before the meeting is held.
x Takeover defences
Another consequence of the concentrated ownership structure of corporations in Bolivia is that takeover attempts are extremely rare, and the use of takeover defences unnecessary. The reason for this is that successful takeovers require obtaining a majority of the shares of a corporation, to have effective control of the corporation and influence the board of directors in favour of the merger of the company with the acquirer. A controlling shareholder, however, disrupts the scheme, because it is not possible for the potential buyer to obtain more than 50 per cent of the shares of the corporation without acquiring some of those shares directly from the controlling shareholder. Hence, bidding parties are forced to negotiate with the board of directors of the corporation and through them, with the controlling shareholder itself.
As mentioned above, there are cases where buyers have acquired significant amounts of shares of corporations in an effort to force the controlling shareholder to sell the remaining shares to the acquirer. However, no clear takeover defences have been developed in Bolivia to counter this strategy.
The development of corporate governance in Bolivia is just beginning. It is expected that the AEMP will become a more active participant and enforcer of corporate governance regulation in the future (in the same way that it has become a more active participant in the field of antitrust law during the past five years). In addition, the Commercial Code of 1977 is expected to be modified in the next few years – a new Commercial Code is under review by the Bolivian National Assembly and many changes to the regulation of the creation of corporations and companies are anticipated. Also, a law on merger control is expected to be discussed by the Bolivian National Assembly in 2017. If this law is approved, it may have an impact on fiduciary duties and corporate obligations.
1 Jorge Inchauste is a partner and José Bernal is a senior associate at Guevara & Gutiérrez.