New law may affect transactions of corporation owned real estate
Do you have corporation owned real estate in Costa Rica? Now you need the approval of your board of directors to sell or get a mortgage on it.
On August 24th, 2016 a new law was issued and duly published at La Gaceta on October 4th, 2016.
This new law # 9392 is called Protection for the Minority Shareholder or “Protección al Inversionista Minoritario”.
It has the potential to be a “game-changer” for all real estate transactions in Costa Rica when the property is owned by a mercantile corporation.
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Transfer of real estate title
With law 9392, it appears, that at the closing, the attorney who transfers the title has to give public faith that the Board of Directors (BOD), or the equivalent administration board, agrees in full with the purchase or sale of a corporation owned real estate.
This applies to a Sociedad Anonima (S.A.) but what happens to Sociedad de Responsablidad Limitada (S.R.L.)? What kind of approval would the SRL need?
Law # 9392
This law regulates the obligations and responsibilities of the BOD or their Managers in corporations of any kind, such as S.A. or S.R.L.
The current Commerce Code already covers this in several articles. However, this law only covers the consequences of bad or negligent administration.
Also, it establishes the rights of minority shareholders to request the examination of contracts, acquisitions and financial information of the corporation. The law allows 10% of the shareholders to request an audit with all the legal consequences.
Approval by the Board of Directors
To be exact, Article 3 of law # 9392 includes a modification to Article 32 of the existing Commerce Code.
This modification obliges to the approval of any transactions that involve acquisition, sale, mortgage or pledge of assets of the company that represents a percentage equal to or greater than 10% of the total assets by the Board of Directors or equivalent administration.
Does it make sense?
You may think: “this makes no sense”, and you are probably right. This modification raises more questions than answers.
The big question is how the verification process should be handled by the lawyers in case of S.A.’s.
1. This law states that it is 100% of the BOD or equivalent (?) has to approve. What happens if you cannot find 100% of the BOD?
2. Or, we as lawyers could interpret that because the BOD is incomplete, the Shareholder Assembly can approve.
In the case of S.R.L., how should the verification process be handled?
1. There is no organization, so how can you hold a meeting?
2. Is a sworn declaration by the manager a possibility?
3. Or an Assembly of Shareholders or “quotistas”.
The approval could be given in a meeting of the BOD, a General Assembly of Shareholders or with a sworn declaration of the Manager. For sure, it’s kind of awkward for a Manager to approve his own decisions, don’t you think?
Other board members
A “Sociedad Anónima” is constituted by a President, Secretary, and a Treasurer by default. Therefore, the approval by the Board of Directors will have to be in a formal meeting in which 100% of the directors are present have to approve the acquisition or sale of corporate assets that represent more than the 10% of the current existing assets.
Where are they?
Often, employees of the constituting lawyer were the other board members of the S.A. Years later, you might not know where they live or work, they might not want to talk to you, or they might even be long dead. So how can they give you the necessary authorization to buy or sell corporation owned real estate?
In a rush?
Clearly, those who presented this law either approved it in a rush or they were sufficiently clear about the issue at hand.
In Costa Rica, the General Assembly of Shareholders in full quorum is the maximum authority of a corporation by default. The assembly has full powers to make any decision about the administration and future of the corporation.
When a corporation is formed, there is a Constitution Assembly in which a President is appointed. It is quite customary to grant the President with a full power of attorney without limitations.
Now law # 9392 establishes restrictions for the already appointed legal representatives to make decisions as to the acquisition or sale of assets that represent a percentage equal to or greater than ten percent. Unfortunately, this is contradictory.
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A conflict of interest
For the sanity of any corporate structure, it is understandable that the legal representative(s) should be authorized by the General Assembly of Shareholders in order to sell assets of the corporation if they are transferred to another corporation in which they are also the legal representative(s). Or if the assets are going to be transferred to them into their personal name. This could be a conflict of interest unless the legal representative is the sole shareholder.
The Public Registry has already enforced these written approvals for years by internal directives. Also, banks request the same approval in the case of mortgages or Guaranty Trusts of a corporation owned real estate.
However, this law, it seems, will be applicable to any acquisition or sale of properties, independently of who the seller or the buyer is. If you have a SA or SRL, you may need the approval of the Board of Directors, the Manager or an equivalent administration board, either to acquire or sell corporation owned real estate in Costa Rica.
As of today, although approved and enforced already, this law is not yet applicable at the Public Registry.
It is not yet clear if this approval is in the competence of the closing attorney or not.
Time will tell.
By Licenciado Francisco Molinero H. – LandCo Real Estate Legal Services. LandCo specializes in real estate law and can service you in the following areas: Real estate closing procedures, Escrow and Trusts, Residential & Commercial Condominium Structure, Residential & Commercial Project Structures (Lots, Segregations, Subdivisions, Right of Way and Water Easements, Access), Adverse possession Law, Concession property System, Maritime Zone Law, Special Real Estate Law, Title Guaranty policies (Title Insurance), Real Estate Contracts of all kind, Costa Rican & US Corporate Structures.