Volume 6, Number 8, Page 3

Implications of Reform in the Colombian Commercial Code

By Adrian Rodríguez Piedrahita

With Law No. 222, which reformed the Colombian Commercial Code, entering into effect, so have new rules related to the regulation of holding companies and subsidiaries. The principal aspects defined by these rules include (i) mechanisms of control for these types of situations and (ii) the legal obligations arising from the same.

In accordance with these rules, natural and juridical persons, foreign or domestic, affiliated through “situations of corporate or economic control,” will have to comply with basic legal obligations provided for in the new regulations for such cases.

What is understood by “corporate control,” subordination or affiliation?

In accordance with the official interpretation of the Superintendency of Corporations, these general principles include both affiliate relations and cases of business groups, whether these relations are via direct participation in the entity or through whatever other basis for determining material control within a corporate relationship. In other words, a situation of corporate control is understood not only in specific cases defined by the relevant rule, but also in all cases in which material control exists between two different entities. Such cases of corporate control may include situations as diverse as a sharing of assets, investments, contracts and other contractual relationships.

According to the official interpretation of the Superintendency of Corporations, the above definition of corporate control stems from the fact that the new rules do not expressly limit the allowed modes of association. In any case, the applicable rules establish as clearly identifiable relations of control the following situations:

a. When the decision-making power of a corporation is submitted to the will of another or other legal persons, i.e. directly or with the involvement of third parties.

b. When a given entity directly or indirectly possesses 50% or more of a corporation’s stock, i.e. effective control through majority of stock. This calculation does not included preferred stock without voting rights.

c. When an entity directly or indirectly maintains the decisive vote in shareholder and/or board meetings.

d. When the entity directly or indirectly possesses the required number of votes to elect a majority of the members of the corporation’s board of directors.

e. When directly or indirectly and as a consequence of any agreements entered into, the entity exercises dominant influence in the decisions of the corporations governing bodies.

What constitutes a business group?

In accordance with the official interpretation of the applicable rules, the Superintendency of Corporations has established that a business group is considered to exist when in addition to maintaining a relationship of control or subordination among the relevant parties, a unity of purpose and direction can be verified among the same.

A unity of purpose and direction is understood when the activities of one entity are directed towards an objective determined by another, controlling entity without limiting the individual development of the corporate purpose of the affiliated entities. It is important to emphasize without such control a business group cannot exist because such a group presupposes the existence of corporate control.

In order to establish the existence of a unity of purpose it is necessary to review the corporations’ policies or its policies as recorded in the minutes of board of directors meetings. Special attention should be given to the way associates carry out not only their mutual business activities but also those performed with third parties. The Superintendency of Corporations considers the above criteria as well as the following:

a. Whether the corporate purpose of the affiliates is similar in nature or even complimentary to that of the parent company.

b. Whether the shareholders of both corporations are the same.

c. If the administration of the corporation is entrusted to the a board of directors whose members also compose that of the affiliated

d. Is company’s legal representation is entrusted to the same persons.

What are the legal consequences?

To register a relation of corporate control, the applicable regulations establish the obligation of all parties (both the holding company and its affiliates) to provide a record to the mercantile registry. This record must contain a statement affirming that corporate control exists and how, why and when this relationship came into being. This record must be provided to the registry within 30 days of the establishment of corporate control.

As for business groups, the above obligation exists to provide information to the mercantile registry. Additionally, the business group shall have the following obligations:

a. The administrators of corporations under parent company control and their parent companies must both present information specified by the law to the individual boards of directors of their corporations.

b. Financial statements must be produced detailing the extent of the business group’s operations in Colombia.

c. Reciprocal participation by affiliates in their parent companies is forbidden.

d. The business group must submit certain records to the Superintendency of Corporations whenever the Superintendency requires the group to verify relations between the parent company and its affiliates.

e. Contingent secondary liability is imposed on the parent company in the case of reorganization.

In closing, it should be noted that the government entity responsible for ensuring compliance with the above requirements is the Superintendency of Corporations, which is also empowered to sanction corporations who violate the above regulations via the imposition of successive fines at the Superintendency’s discretion.

Adrian Rodriguez Piedrahita is a partner with Lewin & Wills, Abogados in Bogota, Colombia. Translated from the Spanish by the editor.