In Ecuadorian corporations, the relationship between the managers and the shareholders is executed through a mandate agreement or letter of appointment, in which the manager is entrusted, besides from the legal, judicial and extrajudicial representation, with detailed duties and obligations. Nevertheless, the shareholders may decide about the dismissal and terminate this agreement when they consider opportune, since it is a relation of strict confidence and trust. This case does not apply to limited liability companies in which it is necessary to justify the dismissal of a legal representative, even when such situation is not contemplated in the order of the day.1
This way, the General Shareholders Meeting, in order to justify this termination, in most of the cases, indicates the failure of the manager to submit and file on time the balances, which is a cause for removal provided by the Ecuadorian laws.
But, what does the failure to timely deliver the balances mean?
Companies incorporated in Ecuador have the obligation to know and approve, in an annual ordinary shareholders meeting, the financial statements of the tax year that ends on each December 31, meeting that shall be held during the first quarter of each new tax year. Nevertheless, this meeting may only be held after the manager has submitted the final balances after the end of each tax year, together with the annual report of activities2.
It is common, but not within the terms provided by the law, especially in transnational corporations, that the annual balances are closed after the finalization of the first quarter of each year, for several reasons such as because the final reports may be subject to the approval of the main office, strict internal audit processes, the report of the external audit ordered by the law, among others. This corporations, at most, have the financial information at the end of the first four months of the year, in order to fulfill their obligations to report to control entities, which puts the manager in default of submitting the information for the approval of the shareholders.
Therefore, in the aforementioned case: Is the manager absolutely responsible for not submitting the financial information during the first trimester?
The answer goes hand in hand with the provisions of the Ecuadorian Companies Law, which states that the managers shall execute their duties with the diligence of an ordinary and prudent commercial administration3. In a dispute regarding the dismissal of a manager, this diligence will be the main argument of both parties , because the corporation shall argument that the diligence was not met because of the untimely submission of the reports; and the manager shall sustain the fulfilment of his/her duties with proper diligence, arguing that because of regional orders and provisions of his superiors, some processes of financial revision of information that breach the legal terms to provide the reports have been established, and that this go beyond his/her powers.
The decision about the most relevant argument finally relies in an authority, reason why it would be more appropriate that the shareholders of the corporation decide about the dismissal of a manager for the simple deterioration of the relationship of trust, a key element of the mandate agreement.
The termination of the mandate agreement does not require an introduction of the disputable facts, such as the breach to timely file and submit the balances, because the corporation may be forced to compensate the manager that has been dismissed. Therefore, the advisable course of action is to previously execute a mandate agreement, which provides, in mutual agreement, the reasons to compensate or not the manager, whose dismissal has been decided by the General Shareholders Meeting.
1 Art. 270.- The dismissal of the managers may be agreed at any moment by the shareholders meeting., Companies Law, Ecuador.
2 Art. 124 Ibid.
3 Art. 262 Ibid.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.