Introducing American Fiduciary Duties of Officers and Directors in Colombian Corporate Law

In the American legal system, the direct action could be defined as the “claim brought by the shareholder in his or her own name, which cause of action belongs to the shareholder in his or her individual capacity, and that arises from an injury directly to the shareholder.” (1)

On the contrary, in the U.S. legal system the derivative action general definition is “the lawsuit brought by one or more minority shareholders in order to ‘enforce a corporate cause of action against officers, directors, and third parties….’” (2) Thus, the real plaintiff in this kind of action is the corporation, which acts and brings the lawsuit through the shareholders, and the real defendant is the board of birectors for breaching of their fiduciary duties.

EXISTING FIDUCIARY LITIGATION CLAIMS IN COLOMBIA

Currently, the corporate law regime in Colombia allows two types of claims for fiduciary litigation against officers and directors who have harmed the corporation with their acts or omissions. These are: (i) individual action; and (ii) social action.

The individual action is established in article 200 of the Act 222 of 1995 and consists of the capacity granted to the corporation, its shareholders and third parties, to make the directors liable for the damages caused by their negligence or willful misconduct.

This action contains a presumption of negligence against the directors who have the burden to prove their innocence if any breach or abuse of their fiduciary duties, to the company’s bylaws or the law, is committed.

With respect to the social action, the provision established to regulate it (3), although ambiguous and unclear, states that the action belongs exclusively to the corporation and must be approved by the voting of the majority (50 percent plus one vote) of the shareholders (whether interested or disinterested). This lack of clarity means that in cases of conflicts of interest involving directors who were also shareholders with a controlling or dominant position, the latest could block and veto the minority initiative, since they are not required to abstain voting the action`s approval, thus making the social action useless in practice for minority shareholders in closely-held corporations.

BILL PROJECT NO. 70 OF 2015 FIDUCIARY LITIGATION CLAIMS

The Bill Project introduces three types of actions to pursue the liability of the officers and directors. The claims proposed by the Colombian government are: (i) individual action (ii) social action; and, (iii) derivative action.

The individual action (4) is entitled to any shareholder or third party of the company, acting in their individual capacity, considering that the director’s actions has affected them directly, therefore causing damages during the performance of their duties to personal interests of the formers (5). Unlike the current applicable individual action, the interests of the corporation are excluded by means of this new version of the direct action. Also, it is excluded from the scope of this action, any attempt of trying to seek damages that must be pursued through the derivative action.

The social action (6) is granted exclusively to the shareholders, not third parties, who want to bear the directors liable, according to article 16 of the Bill Project, for their actions if they were detrimental or caused harm to the company (7). Considering that the social action belongs to the shareholders, its authorization needs to be approved by the majority of the shareholders of the corporation in the form of a general assembly decision. Whenever no special majority is established in the company’s bylaws, the default rule for this kind of corporate decisions is 50 percent plus one vote.

Besides the attempt to fix the numerous practical problems of the current social and individual actions, the innovative proposal of the Bill Project is the importation to the different existing alternatives from the U.S. legal system, of the well-known derivative action (8). This is incorporated as a residual option (the social action could have not been initiated) to protect those minority shareholders that cannot obtain the majority approval required to activate the social action, but still considering that the directors have damaged the corporation, thus, filing the lawsuit on its behalf.

The derivative action could only be filed by a person who was a shareholder of the corporation at the time the acts or omissions where executed by the alleged liable director (9), or by a person who acquired that capacity according to the exceptions authorized by law (10). Likewise, the derivative action has a special feature not contemplated in the other two actions, which is that the claim can be used by an individual shareholder, on behalf of the corporation, to prevent the detrimental conduct of the director with the purpose of avoid the “occurrence of an imminent damage to the company.” (11)

Notwithstanding, in order to restrain the minority shareholders’ misconduct, reckless or wrong use of this new legal instrument, they will be held liable for the director’s legal fees, litigations costs and any other damages caused to the them or the corporation if their derivative suit is frivolous, they use it to holdup the company or for any other detrimental purposes. (12)

Finally, the Colombian government withdrew the Bill Project No. 70 of 2015 so that it could be amended and adjusted. However, we are expecting that the new text maintains intact the scope of the actions we have discussed.

Published in The Primerus Paradigm, Spring 2017, pp. 52-53.

NOTES

1. Prof. Brian Broughman, Corporations Class, Maurer School of Law, Indiana University Fall 2015.
2. Dennis J. Block, Nancy E. Barton and Stephen A. Radin, The Business Judgment Rule: Fiduciary Duties of Corporate Directors, FIFTH. ED. VOLUME II, 1380 (1998) (quoting Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991), and Hawes v. City of Oakland, 104 U.S. 450, 453 (1881)).
3. ACT 222 OF 1995. ARTICLE 25. SOCIAL LIABILITY ACTION.
4. Also known in comparative legal systems as direct action.
5. BILL PROJECT NO. 70 OF 2015. ARTICLE 32. INDIVIDUAL LIABILITY ACTION. In those cases in which it is aimed to correct the damages directly suffered by an shareholders, partner or a third party by reason of the manager’s actions, the affected persons may demand their personal liability pursuant to article 16 of this law, through an individual action, provided that said damages do not correspond to those that can be requested through the derived action.
6. Also referred to as social or corporate action.
7. BILL PROJECT NO. 70 OF 2015. ARTICLE 26. COLLECTIVE ACTION. In case of correcting the harm suffered by the company as a consequence of the managers’ actions, the company may demand, through a collective action, their responsibility pursuant to the provisions of article 16 of this law. In order to initiate the collective action of responsibility, the authorization of the general assembly of shareholders or partners shall be obtained.
8. BILL PROJECT NO. 70 OF 2015. ARTICLE 27. DERIVATIVE ACTION. Provided that the collective action of responsibility has not been initiated, any associate may petition for the derived action in order to correct the damages suffered by the company as a consequence of the managers’ actions. In these cases, the action will be filed by the plaintiff in the name of the company.
9. BILL PROJECT NO. 70 OF 2015. ARTICLE 28. LEGITIMACY FOR FILING THE DERIVATIVE ACTION. The plaintiff must have had the capacity as associate when the facts or omissions that give rise to the liability occurred or must have acquired said capacity subsequently, by operation of the law, (…).
10. An example of these exemptions are: divorces, bequests, inheritances, devise, legacy, among others.
11. BILL PROJECT NO. 70 OF 2015. ARTICLE 27. DERIVATIVE ACTION. (…) The associates may file the same action in case of avoiding the occurrence of an imminent damage to the company.
12. BILL PROJECT NO. 70 OF 2015. ARTICLE 30. LITIGATION COSTS IN DERIVATIVE ACTIONS.