The Organization of American States’ Model Law on Simplified Corporations

On 20 June 2017, the General Assembly of the Organization of American States (‘OAS’) adopted a resolution (General Assembly Resolution 2906 (XLVII-0/17)) in which it requested the Inter-American Juridical Committee and its Technical Secretariat to give the broadest possible publicity to the OAS Model Law on Simplified Corporations (the ‘Model Law’). In the same resolution the General Assembly requested the General Secretariat to provide the OAS’ Member States with all the necessary cooperation and support in case they decided to adopt the Model Law or any parts thereof.

The Model Law is based on the Colombian legislation on Simplified Corporations (Law 1258 of 2008), and is aimed at reducing transaction costs in starting, carrying out and winding-up any given business venture. Despite the fact that the Simplified Corporation is particularly suitable for Micro, Small, and Medium Enterprises (‘MSMEs’), it can be used to structure businesses of any dimension. Even large enterprises can benefit from its state of the art provisions.

The main idea behind the adoption of the Model Law is that reducing transaction costs for business can foster economic growth and trade, and can be a vehicle to incentivize formal economic activity in emerging economies. It can be argued that reducing informality, by setting up an enabling legal environment for business, ultimately enhances economic development and provides welfare for the population. Certainly, national governments and municipalities alike may increase their fiscal base and improve the collection of taxes and other contributions. Access to formal jobs as well as the increase in social security contributions may also be attained through formalization.

The Model Law contains the basic rules for the adoption of a modern business-type entity in any given country. The instrument contains enabling default provisions (off-the-rack housekeeping rules), which, generally, can be opted out of by the investors. The default rules contained in this instrument are aimed at providing the parties with the most flexible corporate structure available for all kinds of undertakings. Such flexibility is intended to counteract many old-fashioned and rigid schemes prevailing under current company laws in most Latin American jurisdictions.

The proposed legislation broadly encompasses six components: (1) Full-fledged limited liability; (2) Simple incorporation requirements; (3) Contractual flexibility; (4) Straightforward organizational structure; (5) Simplified rules on capital; and (6) Effective dispute resolution mechanisms. Each of these components responds to a set of problems generally present in Company Law legislation throughout Latin American jurisdictions. Consequently, private ordering in the Model Law allows for a high level of shareholder protection through devices of a contractual nature.

As with any other harmonizing legal instrument, the provisions of the Model Law are intended to serve as a guide for legislators and policy-makers alike. Therefore, they can be adapted in order to make them compatible with domestic legislation. On an OAS newsletter, posted on 25 July 2017, it was noted that: ‘OAS member States have been invited to adopt, in accordance with their domestic laws and regulatory framework, those aspects of the Model Law which are in their interest, with collaborative support from the [OAS] Department [of International Law].’

The Model Law is altogether based on the Colombian Law 1258 of 2008 by means of which the Simplified Corporation (the ‘Colombian SAS’) was adopted. The Colombian SAS has proved to be both effective and beneficial, showing an unprecedented success and having an equally unrivalled impact on the business community. It is by far the preferred business entity for entrepreneurs and business activities of all sizes. This fact provides a compelling argument in favor of its transplantation to jurisdictions of similar economic characteristics and level of development, such as other Latin American countries.

The Colombian experience thus serves as a tested model, which has dramatically changed the Company Law landscape in that country. The empirical data (partially available here), demonstrates outstanding results: incorporation has been reduced to a simple filing which may be carried out electronically, costs have been streamlined and formalistic requirements have been carved out. The Colombian SAS has essentially displaced other traditional business forms as over 98% of new incorporations in Colombia now correspond to this type of entity. This has significantly altered the manner in which people do business in Colombia, bringing thousands of units previously operating in the informal sector into formality.

The current trend towards simplification and the adoption of new business entities has already permeated a few countries in the Latin American region. Aside from the case of Colombia, there have been similar experiments in Chile (Law 20.190 of June 5, 2007), Mexico (Law dated December 9, 2015 regarding Sociedades Anónimas Simplificadas (simplified corporations)), and Argentina (Law 27.349, designed to encourage entrepreneurship). In Brazil, there is also a bill on the so-called sociedade anónima simplificada still pending in the Federal Congress (Projeto de lei 4303 de 2012). Notwithstanding the adoption of these few similar laws in the recent past across the Latin American Region, it is true that the OAS Model Law contains the most comprehensive and flexible framework for business activities.

Finally, the OAS General Assembly’s decision represents a significant step towards the harmonization of Company Law in the Americas. It is, in fact, the first Inter-American instrument ever produced in this legal area. The OAS Model Law is intended to serve as a stepping-stone to fill a significant gap in Private International Law, and bring about harmonization of substantive Company Law and, hopefully, higher levels of formalization and economic development.

Francisco Reyes Villamizar is Superintendent of Companies in Colombia and Professor of Corporate Law at the University Javeriana. In 2016 he was the Chairman of the United Nations Commission on International Trade Law (‘UNCITRAL’).