WITH eight key changes for the corporate system, Reform of the Companies Act for Optimizing and encouraging business and promoting corporate governance, which was published on March 16 of this year in Addendum to the Official Gazette No. 267.

The law, among other things, deals with issues of establishment of companies, shareholders, mergers, spin-offs, corporate governance. The law, in general, requires to provide the Supervisory Board of companies with the most appropriate monitoring mechanisms, in order to, by offering greater and better service to companies, to its partners or shareholders and the general public, it is more in line with the guidelines of the modernization of the state.

According to the opening statements of the law, the changes experienced in the economic and social order by the globalization model, the internationalization of economies and the opening of the market, impose the obligation to propose a series of reforms to the Ecuadorian corporate regime, in order to establish a regulatory framework that recognizes an efficient business operating regime, seeking to ensure the appropriate course of operational activities of Ecuadorian economic subjects. The law seeks to make the job easier for entrepreneurs, and also favors formality.

Over the years, the regulations have undergone a number of reforms. Supreme Decree no. 142 of January 27, 1964. published in the Official Gazette no. 181 of February 15 of the same year, the Military Government Junta issued the first Law on Commercial Companies. In 1977, the first codification of the Companies Act was issued. In 1999, the Companies Act underwent a new reform.

Juan Esteban Espinosa, an expert in corporate law, explains that since the reform of the law made with the promulgation of the Organic Law for the Optimization of the Stock Exchange Sector (2014), significant and substantive changes are beginning to be observed, trying to adapt to the needs of entrepreneurs. The same trend is deepened by the 2020 reform, which has already introduced the figure of the SAS and also highlights, in the same sense, the promulgation of the Law on the Modernization of the Law on Commercial Companies.

For Espinosa, what has been sought over time is to try to get the law to remove bureaucratic obstacles and simplify corporate processes for the benefit of employers. Previously, companies were created in about a month and a half, and there has been progress, after the aforementioned reforms, and it was even possible to establish SAS electronically in one day, and other types of companies in a few weeks.

For Espinoza, the changes were in line with the modernization of the law and hand in hand with what other countries in the region have done. In some points, the Ecuadorian law can be considered avant-garde. The expert believes that the law that previously controls is not better because it can hinder processes.

But what are the main points of the new law that just came into force?

1) Establishment of companies

One of the first changes is that a company can be founded with one person. In this way, the paradigm of the social contract, which considered that there must always be two people in order for it to be a contract, is destroyed. If an individual wants to establish a company, in addition, he can do so simply by means of a public deed entered in the Commercial Register. Previously, there was the possibility of establishing independent entrepreneurs before a judge, but this mechanism was not accepted.

2) Liability of shareholders

The law clearly states that partners and shareholders will be responsible only “to the extent of their roles” including tax and labor obligations of the company. For Espinosa, this is important because in this way, an entrepreneur or investor is liable in case of bankruptcy, but only with what he invested, not with his personal assets.

3) Good corporate governance

Among the several provisions related to good corporate governance, it is established that minority shareholders can appeal the decisions of the majority. It also seeks to eradicate conflicts of interest. Espinosa explains that there are often companies where the shareholder is also the manager and they do not have to make decisions in the best interest of the company or its shareholders, but for their own benefit. An example could be purchasing a particular product from your third party or related company, without considering more practical alternatives. The standard indicates what should be the treatment for engaging suppliers where there may be a conflict of interest.

4) Conversion of legal entities

The law establishes that any legal entity can be transformed into a commercial company. This means that joint stock companies, consortia or civil and commercial companies can become companies. This is a positive reform that promotes transparency.

5) New mergers and separations

There is a new set of rules for business mergers and divisions. Espinosa explains that they are given based on the needs of the market, but are not described in the law.

For example, more than a merger of two or more companies or a merger; a wholly owned reverse merger and acquisition was created. A reverse merger is when the merged company is a shareholder of the merging company. In that case, the acquiring company would end up with its own shares. In the case of a wholly owned company, it absorbs another company in which it owns 100% of the shares. The law, therefore, tells us how to deal with these special cases.

As for division, a figure is created by which a business segment can be divided and transferred to another existing company. There is another way of spin-off where the business line is transferred to another company and shares are delivered thereby. The transferor company does not disappear, it is not liquidated.

6) Fact Manager and Hidden Manager

The new law recognizes and differentiates the figure of a de facto administrator, which is one who, without being legally appointed, acts as if he were in front of the company and in front of third parties. A typical example occurs in a family business where the head of the family decides everything, even if the son or another person is the manager or legally authorized representative. There are also hidden administrators (shadow director) that impose pressure and influence, but do not appear formally. By determining this figure, he can be determined as responsible for certain actions.

7) Control groups

New business groups are obliged to inform the Supervisory Board of Companies about the degree of influence that companies can have between them, either vertically or horizontally. The statement must be submitted within 30 days from the day the fact was established.

8) Spacing

The new law establishes accelerated and simplified liquidation.

The 120-page bill was discussed by the Assembly in the first debate in February last year, while it went to the second debate in December 2022. Previously, the Commission for Economic Development, chaired by Daniel Noboa, gathered for this debate at least ten initiatives that had unity of matter, which came from President Lenín Moreno and other members of the assembly.