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An Overview of Directors' Liability in Uruguayan M&A Transactions

Eugenia Ciganda and Igal Guertein


  • Uruguayan corporate Law 16.060 outlines Directors' duties, emphasizing loyalty, prudence, adherence to the "good businessman" standard, and liability for breaches of duty or misuse of authority.
  • Article 391 provides exemptions for Directors' liability, such as opposing questionable transactions or being unaware due to non-negligence.
  • Article 392 outlines situations where shareholders may approve directors' actions to exempt them from liability.
An Overview of Directors' Liability in Uruguayan M&A Transactions
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In the intricate business realm, mergers and acquisitions (“M&A”) are pivotal in growing, expanding, and establishing companies within the market. In Uruguay, akin to numerous jurisdictions, the accountability of directors in these processes holds utmost significance. Decision-making, conducting thorough investigations, and adhering to are crucial elements that Uruguayan companies’ directors must consider at each phase of an M&A deal. This approach protects the company's interests, shareholders, and other stakeholders.

In Uruguayan companies, shareholders often hold directorial positions, especially in family-owned businesses. Here, the convergence of shareholder and director roles is customary. Usually, shareholders sell the entire parcel of shares, lessening the relevance of directors' roles per se as they become the interested party.

However, in other scenarios, directors' roles become much more relevant, mainly when shareholders take a step back and the actual business operation relies on these board members. In such instances, where directors' roles transcend mere shareholder interests, they play a crucial part in decision-making processes. They face intricate challenges arising from diverse shareholder motivations, which are sometimes divergent or conflicting in nature.

During the initial phases of an M&A deal, after formalizing confidentiality agreements and preliminary understandings between involved parties, selling shareholders usually inform the company's board of directors about the potential transaction. At this stage, directors and management assume fundamental roles, facilitating the transaction by providing essential information for due diligence. Simultaneously, they ensure the seamless continuity of regular business operations, cautioning not to disclose the potential transaction to the entire company. Balancing these dual responsibilities often creates a challenging scenario, demanding a delicate equilibrium between transactional demands and the imperative of sustaining day-to-day business functions.

It is crucial to comprehend the scope and contours of directors' responsibilities within Uruguayan companies as governed by Law 16.060. Sections IX and X delineate the obligations of directors, elucidating qualifications for directorial roles, conduct expectations, and duties towards the company, shareholders, and third parties.

Article 83 of Uruguayan corporate law mandates that directors act with loyalty and prudence akin to that of a competent businessperson (diligence of a good businessman). A failure to adhere to these standards renders directors potentially liable to face corporate claims filed by the company, shareholders, or creditors. This liability arises if directors contravene legal provisions, bylaws, and regulations or discharge their duties with an abuse of authority, fraudulent intent, or gross negligence, as stipulated under Article 391.

While lacking a precise legal definition, the conceptualization of the "good businessman" standard holds substantial relevance. Our doctrine asserts that this standard is an objective and abstract criterion, intending to establish the reasonable behavior expected from a diligent administrator placed in the same situation as the evaluated person. Additionally, the notion of the "good businessman" encompasses genuine professional responsibility, taking into account various factors such as the size and purpose of the company, generic and specific directorial functions, and the circumstances under which the director should have acted.

Moreover, directors bear an obligation of loyalty, demanding unwavering allegiance to the company's best interests. They are mandated to avoid conflicts of interest meticulously, refrain from using company information for personal gain, engage in direct or indirect business dealings with the company, or pursue ventures that might compete with the company.

Specific scenarios provide exemptions for directors from liability, as outlined in Article 391, such as expressly opposing a motion's vote or being unaware of a transaction made by other directors, provided this unawareness is not due to negligence.

Furthermore, as outlined in Article 392, our legislation extinguishes directors' liability in specific situations. To enact this exemption, shareholders must explicitly approve the directors' actions, which must be aligned with the law, company bylaws, and regulations. Typically, the Sale and Purchase Agreement (“SPA”) includes provisions regarding the director's appointment, and as a condition to closing, it's common to require the sellers’ approval of the director's appointment.

In conclusion, M&A processes present strategic opportunities and pose complex challenges for company directors. Prudent management, regulatory compliance, thorough due diligence, and transparency are crucial elements that directors must consider when fulfilling their duties and safeguarding the company’s and its shareholders’ interests in these processes. Seeking legal, financial, and specialized advice becomes critical to ensure success and integrity in M&A transactions in Uruguay.

A comprehensive understanding of directors' responsibilities in these transactions is imperative to ensure informed and ethical decision-making, thereby promoting companies’ long-term sustainability and growth in Uruguay's dynamic business landscape.