Companies Act 19,550 · Article 271 — Director's contracting with the company

When a director may contract with the company (Art. 271 LGS)

Article 271 of the General Companies Law governs contracts between a director and the company: the director may enter into them freely if they fall within the activity the company engages in and on market terms. All other contracts require prior approval by the board of directors or agreement of the supervisory board, and must be reported to the shareholders' meeting; if the meeting disapproves them, they are void.

Source: Act 19,550

What article 271

Article 271 sets out the regime governing a director's contracts with the company: those permitted without further formality, those requiring prior control, and the sanction of nullity.

Official text · Act 19,550, art. 271

The director may enter into contracts with the company that fall within the activity in which the company operates, provided they are agreed on market terms.

Contracts that do not meet the requirements of the preceding paragraph may only be entered into with the prior approval of the board of directors, or the agreement of the supervisory board if there is no quorum. The shareholders' meeting must be informed of these transactions.

If the shareholders' meeting disapproves the contracts entered into, the directors or, as the case may be, the supervisory board will be jointly and severally liable for the damages caused to the company.

Contracts entered into in violation of the provisions of the second paragraph and not ratified by the shareholders' meeting are void, without prejudice to the liability provided for in the third paragraph.

Source: Law 19,550, Art. 271 — InfoLEG (updated official text)

Commentary

The rule balances normal operations with the prevention of conflicts of interest. Ordinary contracts within the company's business and at market price are unrestricted; extraordinary contracts or those outside market terms require prior approval by the board of directors (or by the supervisory board if there is no quorum) and must be reported to the shareholders' meeting.

The regime has teeth: contracts entered into without that control and not ratified by the shareholders' meeting are void, and the directors or supervisory board members who improperly approved them are jointly and severally liable for the damages. It is complemented by Article 272 (duty to abstain in the event of a conflicting interest).

Distinctions often confused

Contract within the business at market price is not the same as Contract outside the business or market terms. The former may be entered into freely; the latter requires prior approval by the board of directors or the supervisory board and notice to the shareholders' meeting.

Art. 271 (contracting with the company) is not the same as Art. 272 (conflicting interest). Article 271 governs when the director may contract with the company; Article 272 requires him to abstain when his interest conflicts with that of the company.

Practical impact

Every transaction between a director and the company should be documented and, if it is not within the company's business at market price, approved in advance and reported to the shareholders' meeting. Failing to take this precaution may result in the nullity of the contract and liability.

Frequently asked questions

Can a director contract with his own company?

Yes, freely if the contract falls within the activity in which the company operates and on market terms. All others require prior approval by the board of directors or the supervisory board and must be reported to the shareholders' meeting.

What happens if the procedure is not followed?

A contract not ratified by the shareholders' meeting is void, and the directors or supervisory board members who improperly approved it are jointly and severally liable for the damages.

This page is informational and does not constitute legal advice nor replace professional consultation. It quotes the official text of the rule; for its application to a specific case, consult a licensed professional.

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