Consortium Legal - Nicaragua
  November 28, 2005 - Nicaragua

Integration of the Board of Directors in Corporations
  by Alfonso Sandino

The structure of Stock Companies consists of three organs: The General Meeting of Shareholders, as the supreme organ; the Board of Directors, as an administrative organ; and the Supervisor or Supervisors, as the supervision organ. The Board of Directors is a collegiate organ whose members are shareholders periodically elected by the General Meeting of Shareholders and which function is to perform all the acts of administration, representing the company before third parties. The Board of Directors shares with the General Meeting of Shareholders the characteristic of being a collegiate organ, since section 124 of the Commercial Code requires the plurality of persons to form the same. In this it differs from the Supervision organ which may be formed by an individual and, in the case of being formed by several persons, the Supervisors are not obliged to act all accordingly. Another common characteristic between the Board of Directors and the General Meeting of Shareholders is that both organs can only be composed by shareholders of the company, while the Supervisor can be an outsider of the company. In fact, section 244 of the Commercial Code establishes that “Directors” can only be elected among the same shareholders. Most of the foreign legislations allow that an outsider of the company integrates the administrative organ, since the requirement to confer the administration only to shareholders, introduces personal traits not adequate for a stock company. Additionally, such restriction affects the shareholders interests, since these ones not necessarily have the required skills and knowledge to carry on an efficient administration of the social businesses. For that reason, section 29 of the General Law on Banks, Non Banking Financial Institutions and Financial Groups eliminated, for these types of stock companies, the general requirement to be a shareholder in order to integrate the Board of Directors. The existence of the restriction above mentioned, has imposed within the Nicaraguan corporative practice, some mechanisms to make more flexible, through the statutes, the company's operation. The first mechanism is the establishment of substitute Directors whose, in the statute, are exempted from the requirement to be a shareholder. It is argued that the numeral 4 of section 124 of the Commercial Code establishes that the deed of constitution of the company must determine “the manner in which vacancies are provided” for the members of the Board of Directors, leaving to the shareholders the authority to freely establish such mechanism. Additionally, it is argued that the restriction of section 244 of the Commercial Code can only be referred to proprietary Directors, since substitute Directors are not contemplated in the Law. Those who supports the idea that even the substitute Directors must be shareholders, estimate that the general rule in our legal system is that all the persons appointed as substitute must comply with the same requirements that the person acting as proprietary. The second mechanism used is to agree, in the company's deed of constitution that shareholders being juridical persons can hold different positions in the Board of Directors appointing for such effects different special representatives. The persons alleging the illegality of this mechanism, in general support that the same violates the equality of shareholders since it is unsustainable the thesis that the juridical persons can be represented more than once, while natural persons can only hold a position independently of the number of shares owned by them. On the other hand it is argued that the mechanism in question contravenes the principle of indivisibility of the shares *since it allows that the same shareholder with the same shares can exercise several time the same rights. Unfortunately, it is still not possible to establish with certainty the legality or illegality of the mechanism referred before, since the same have not being submitted to the decision of the courts which are the ones called for the interpretation of the law.


Footnotes:
*The indivisibility principle of the shares established in section 231 of the Commercial Code determines that “when different persons owe a share or a security, the company is not obliged to register nor recognize the respective conveyance, while they do not select one to represent them before the company in the exercise of their rights and in compliance with their obligations.”

This norm is a logical consequence of the legal precept stating that all the shares have equal value and confer equal rights, since if the division of a share is permitted due to the co ownership of a share, it will result that the share will confer as many votes as co owners exist, in contravention with the principle of equality of the shares.




Read full article at: http://www.taboadalaw.com/Boletin/html/CCeng.htm