Lessons from Ecuador’s Corporate Revolution

Latin American companies are commonly shaped by a concentrated ownership structure, where one or a few shareholders hold significant control. While this pattern may create strong incentives for oversight, it also opens the door to shareholder exploitation. Unlike managerial agency problems, where directors act against dispersed shareholders, in Latin America, it's often the controlling shareholders who use their power to benefit themselves, at the expense of minority shareholders. This context requires tailored regulatory strategies. Ecuador's recent corporate reforms offer important solutions to protect non-controlling shareholders and promote accountability in corporate governance.

Regulating Related-Party Transactions

Not all related-party transactions are harmful, but without regulation, they can enable unjustified self-dealing. Therefore, Ecuador has taken steps to ensure they are properly monitored. Now, any transaction involving a conflict of interest must only be approved by disinterested shareholders. The law also includes "indirect" related-party transactions involving relatives or companies in which controlling shareholders or directors have significant influence. And importantly, when there's a legal dispute, it’s the beneficiaries of the deal who must prove it was fair. That shift in the burden of proof is a game changer in the region.

Minority Voting Rights 

Ecuador has granted minority shareholders greater influence in critical corporate decisions. Key matters—such as mergers or the reinvestment of profits—now require supermajority approval. Also, changes to the rights of specific share classes must also be approved by all the holders of those shares, giving non-controlling shareholders a say in protecting their interests.

Appointment Rights for Non-Controlling Shareholders

Independent directors in Latin America are often closely aligned with controlling shareholders. To address this, Ecuador allows minority shareholders to appoint at least one independent director. Additionally, a dual voting system gives minority shareholders veto power over appointments made by controlling shareholders. This enhances genuine representation and strengthens oversight mechanisms.

Tools for Corporate Accountability: Derivative and Direct Actions

For corporate litigation to be meaningful, it must be accessible. Ecuador allows any shareholder—regardless of their ownership percentage—to bring a derivative claim against directors for breaches of the duty of care, and a direct action for breaches of the duty of loyalty. These rights have been extended to allow derivative actions against controlling shareholders in specific cases, such as abuse of voting rights or unlawful related-party transactions. And again, the burden of proof can shift to whoever holds the evidence to sustain or dismiss the claim, which levels the playing field in court.

Holding De Facto and Shadow Directors Accountable

In many Latin American companies, it's not the legally appointed directors who run the company’s operations. Often, decisions come from behind the curtain—from controlling shareholders or advisors who act as de facto or shadow directors. Ecuador now recognizes these figures under the law. If someone interferes in corporate management without being formally appointed, that person can be held liable as if he was a formally appointed director. That includes responsibility for damages and the possibility of being sued through a derivative action. 

Abusive Voting Practices Are Finally Regulated

The new legislation defines and penalizes abusive voting behaviors, distinguishing between majority abuse, minority abuse, and deadlock abuse. Whether it's diluting shares unfairly, blocking necessary resolutions without cause, or exploiting a voting deadlock, bad-faith voting can now result in annulled resolutions, damage payments, or other legal consequences.

Making Corporate Litigation Accessible—but Not Abusive

Previously, a 25% ownership threshold was required to challenge corporate resolutions in Ecuador. That requirement has been eliminated. Now, any shareholder can bring a claim within a year of a resolution being passed. This extended timeframe allows for adequate evidence gathering. Also, to avoid frivolous litigation, courts may penalize shareholders who file baseless claims. Provisional measures, such as injunctions, are subject to strict criteria to prevent undue disruption of business operations.

Remedies Against Shareholder Oppression

Oppression involves more than isolated acts; it refers to sustained patterns that marginalize minority shareholders. Ecuadorian law now provides remedies in such cases. Courts can annul oppressive decisions, require controlling shareholders to change their behavior, or force the company to buy out minority stakes at a fair value. These remedies are especially relevant in cases involving unfair capital increases or voting structure manipulations.

Regulating Litigation Costs and D&O Insurance

Running a company involves risk, but directors and controlling shareholders shouldn’t be personally liable for litigation costs if they act in good faith. Ecuador now allows companies to cover legal expenses or provide Directors & Officers (D&O) insurance, subject to strict conditions. For instance, coverage must be linked to official corporate duties, not personal disputes. These protections must be approved by disinterested shareholders after a financial assessment confirms the company can afford them. Importantly, reimbursement only applies if the court finds the defendant acted properly. This ensures protection for good-faith actors, without shielding wrongdoing.

A Model for the Region?

The recent Ecuadorian reforms, which will ensure greater transparency and accountability in corporate decision-making, are a reference for modernizing corporate governance across the region. Also, from a practical standpoint, implementing a combination of ex-ante and ex-post mechanisms would help mitigate the main agency problem that Latin American companies deal with during their existence. By adopting these measures, the region can move towards a more balanced corporate governance framework, which would, in the end, encourage investment and innovation in our companies. 

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By Paúl Noboa-Velasco (Universidad San Francisco de Quito and Ibero-American Institute for Law and Finance)

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