People generally think of corruption in the context of public acts or State intervention. Common conceptions of corruption generally include acts such as bribery of public officials to gain advantage in public procurement contracts, unjustified increased costs in construction of major projects, embezzlement of public funds by any imaginable means, among many others. However, there are certain forms of private corruption that have become entrenched in many sectors of the economy. Private corruption may be defined as any act by which an officer, director or employee of a company carries out actions or omissions against the duties of her post, in order to attain a benefit for herself or a third party, and to the detriment of such company.
Examples of unjustified acts by officers or directors include extraction of corporate resources through different means, such as excessive compensation schemes, asset sales or personal loan guarantees. It is also common for a majority shareholder to benefit from its control by transactions that are advantageous to itself, and detrimental to minority shareholders or the company. This has been referred to as "tunneling".[1] In these cases, generally, the majority shareholder will be aided by the directors and officers of the company, which are under its control and will defend its interests for fear of being excluded.
A real life example may help to illustrate the point. At the height of the InterBolsa[2] scandal in Colombia, the authorities found that the wife Rodrigo Jaramillo, chairman of the board and majority shareholder, received a salary in excess of US$ 48,000 per year, with no visible job or function within the company. Interbolsa was a financial institution, listed on the Colombian stock exchange. Although the Interbolsa case is merely one anecdotal reference, empirical studies have concluded that boards of directors in closely held corporations serve to further the interests of majority shareholders instead of acting as supervisory or managerial organs.[3]
Notwithstanding the existence of private corruption, there are also private mechanisms to fight it. Currently, there is a possibility for the Colombian Congress to introduce one of the most effective means to harness abusive acts by officers and directors: the derivative action.
In several jurisdictions, including the United States the derivative action has served to defend the interests of shareholders, particularly minority, against abuse. The derivative action is a procedural mechanism which allows members of a company to bring suit, in the name of the company, against the officers and directors which have acted against its interests. Consequently, whenever there is harm done to the company, minority shareholders are not subject to a decision by the majority of the members to bring a judicial action; on the contrary, any investor willing to defend the interests of the company may act on its behalf in order to seek relief.
The widespread use of the derivative action in the U.S. gave way to a kind of “private attorney general” which appeared during the Twentieth Century. Notably, alongside the surveillance over corporate acts generally carried out by public bodies, the derivative action allowed for a welcome complement to enforcement of company laws. Consequently, individuals were now allowed to defend their interests in front of the courts of law. Even the Supreme Court of Justice of the United States declared in 1949 that the derivative action had long been the principal means to rein in corporate action.[4] Additionally, according to Professor John C. Coffee, the derivative action allowed the development of fiduciary duties in the corporate context.[5]
In Colombia, enforcement of corporate rules against abusive acts of controlling shareholders has been scarce, to say the least. In 2003, the current attorney general noted that minority shareholders in listed corporations where wholly unprotected, and commented on the absence of judicial rulings regarding liability of officers and directors.[6] More recently, in 2015, the former superintendent of companies brought attention to the lack of efficacy of the rules enforcement against directors and officers, as suits are easily blocked by majority shareholders.[7] Up until that date, there was no knowledge of a final ruling on the matter by the Supreme Court. In 2016, the specialized court of corporate law acknowledged the limitations of the law and described the problems for minority members in detail.[8]
The situation regarding protection of minority shareholders has improved since the overhaul of the specialized court of corporate law in 2012. However, there is not much the judiciary can do to protect investors with the current statutory framework. Currently, in order to bring suit against an officer or director against harm done to the company, the decision must be taken by the general shareholders assembly. In this situation, whenever such officer or director acts in coordination with the controlling member, minority shareholders will find the decision utterly blocked. At this point, it must be noted that capital in Colombia is highly concentrated, consequently the managers depend directly on the majority shareholders and very often act to defend their interests.
However, there is a final possibility that Congress might help to change this situation. Currently bill 2 of 2017 intends to modernize the corporate regime in Colombia with a primary objective of facilitating protection of minority shareholders. One of the most important modifications is contained in articles 18 to 22 of such bill, which introduce a derivative action, tailor-made to the needs of the Colombian market.
The bill has one final opportunity of becoming statute if Congress votes before summer of 2019. If this is carried out, investors will have a very effective protection mechanism to face acts of abuse or private corruption by officers and directors of a company. Consequently, Colombia could count with a complement to the useful task carried out by regulatory or enforcement entities such as the Office of the Attorney General, the Public Ministry or the Superintendence of Companies. Notably, as a complement to the public enforcement directed to rein-in disloyal acts, investors could act effectively as the "private attorney", which may bring action before the specialized corporate court in order to defend the interests of the company, against acts of private corruption.
[1] Johnson, Simon and La Porta, Rafael and Lopez de Silanes, Florencio and Shleifer, Andrei, Tunnelling. American Economic Review Papers & Proceedings, May 2000. Available at SSRN: https://ssrn.com/abstract=205468
[2] InterBolsa was the largest stock broker dealer in Colombia. In 2012 it was intervened by the local financial regulator. Public officials found evidence of money laundering and accounting fraud activities within the firm.
[3] Villalonga, B., Trujillo, M., Guzmán, A. and Cáceres, N. (2018), What are Boards for? Evidence from Closely Held Firms in Colombia. Financial Management. Accepted Author Manuscript. doi:10.1111/fima.12224. Available at SSRN: https://ssrn.com/abstract=2989359
[4] John C. Coffee Jr., Entrepreneurial Litigation, Harvard University Press, 2015.
[5] Ibid.
[6] Nestor Humberto Martínez Neira, Seis lustros de jurisprudencia mercantil, Universitas, Vol. 52 Núm. 105 (2003).
[7] Francisco Hernando Reyes Villamizar, Apuntes para una reforma al régimen de sociedades, in: Proyecto de reforma al régimen societario 2015, Superintendencia de Sociedades.
[8] Ruling number 800-52 dated June 9, 2016 issued by the Specialized Corporate Law Court. https://www.supersociedades.gov.co/delegatura_mercantiles/Normatividad/Jurisprudencia/S_Carlos_Hakim_09_06_2016.pdf