Law Protecting Minority Investors in Costa Rica
Costa Rica approves a law protecting minority investors. Costa Rica has consistently ranked poorly in the World Bank Doing Business report for protecting minority investors (in the 160’s out of 190). In an effort to improve their rankings in this particular category the Costa Rican legislature passed the Law to Protect Minority Investors (Ley de Protección al Inversionista Minoritario – Ley 9392). The Ministry of Economy, Industry and Commerce (MEIC) spearheaded the approval of this law in the legislature.
The World Bank Rankings
When the World Bank conducts its review for rankings it generally does so with a standard set of assumptions. The standard assumptions and fact pattern are then sent to the country representative’s for a response.
Regarding the protection of minority investors the question that was posed by the World Bank was based on the following assumptions:
“ Assumptions about the business The business (Buyer):
- Is a publicly traded corporation listed on the economy’s most important stock exchange. If the number of publicly traded companies listed on that exchange is less than 10, or if there is no stock exchange in the economy, it is assumed that Buyer is a large private company with multiple shareholders. (Emphasis is added)
- Has a board of directors and a chief executive officer (CEO) who may legally act on behalf of Buyer where permitted, even if this is not specifically required by law………………….
How did Costa Rica deal with it ?
When Costa Rica passed the Protection of Minority Investors Law it did so without any limitations to “publicly traded companies” or “large private company with multiple shareholders”. Instead, it did so by modifying the existing Commercial Code and Code of Civil Procedure. By doing it this way the law now encompasses ALL entities regulated by the Commercial Code. Article 32 ter of the law indicates that:
Article 32 ter. The entities, corporations or any other entity that is regulated by this code must adopt corporate governance policies approved by the Board of Directors or equivalent governing body which must include ………
The effect on small holding companies
One of the clauses in the new law that is causing some confusion is section b) of Article 32 ter. This section imposes a new requirement on any entity regulated by the Commercial Code. The law now requires the approval of all shareholders that own more than 10% of the company in order to sell, mortgage or lien of any corporate asset of the company.
Many real estate purchasers in Costa Rica use a local entity as a holding company for their property. As such this new legal requirement could be burdensome under certain circumstances.
An example of the impact on small entities
For example, assume we have a limited liability company (SRL) which is a family owned holding company for real estate. The LLC does not do any commercial business activity whatsoever. Further assume that the stock of that LLC is divided as follows: 40% of the shares belong to the husband, 40% of the shares belong to his spouse and 20% belongs to their son. The sole asset of the LLC is the residential home of the couple.
The LLC has 3 managers, which are the husband, spouse and their son. Assume all 3 have unlimited Power of Attorney over the corporation acting independently of each other.
Assume the husband who owns 40% of the stock of the company dies. Now the surviving spouse who has an unlimited power of attorney as Manager of the corporation needs to sell the property. Traditionally any corporate officer or Manager that has full power of attorney to do so could sell the property without any further requirement.
Under the new law, specifically Article 32 ter b), it would appear that the surviving spouse would not be able to sell the property because she would need the approval of all shareholders that own 10% of the company (her husband owned 40% and son owns 20%). Her only solution would be to probate the shares that her deceased husband owned in the company. This process is both time consuming and expensive.
This may not have been a result the legislators wanted but it is the effect of the wording of the law. As I indicated in the beginning the assumptions used by the World Bank are based upon a “publicly traded corporation listed on the economy’s most important stock Exchange” , or if there is no stock exchange in the economy, it is assumed that Buyer is a large private company with multiple shareholders. “ (emphasis is added)
I don’t believe it was intended to affect small holding companies which are widely used in Costa Rica to hold real estate and other assets.
The resolution of conflict in the Costa Rican judicial system is notoriously slow and inefficient. In my view the country would be better served if it revamped its judicial system before it continues to pass additional laws that clutter the court system and slow the judicial process even further. If the country wants to protect investors it needs to do so by implementing access to a judicial system that provides a prompt and efficient resolution to shareholder disputes.