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Reforming Corporate Governance - International Law Office

International Law Office

Company & Commercial - El Salvador

Reforming Corporate Governance

January 14 2008

Corporate Requirements


A number of mergers and acquisitions in recent years have resulted in more multinational companies conducting business in El Salvador through the companies they have acquired. As a result, the commercial sector has come under pressure to internationalize the corporate governance regulations that apply to local subsidiaries of foreign companies.

The Code of Commerce's requirements on corporate entities include the following:

  • In order to be incorporated, a company must have at least two shareholders.
  • For every director nominated to the board of a corporation, an alternative or substitute director must be appointed.
  • A quorum of board members must be present in person for board meetings.
  • The minutes of board meetings must be recorded in authorized registers.
  • Directors may not be represented at board meetings.

These and other regulatory provisions, which apply especially to capital stock corporations - the most common Salvadoran corporations - must be made flexible enough to meet international standards and to facilitate corporate governance activities, particularly for foreign investors.

The code was enacted in 1970. Since then, several reforms have been passed in relation to different topics, including an increase in the minimum foundation capital. However, no changes have been made in relation to corporate governance and up-to-date provisions are ever more necessary for the day-to-day operations of local subsidiaries of multinational corporations.

Corporate Requirements

The corporate governance stakeholders in a Salvadoran corporation are the administrative bodies, the managers and the shareholders.

Administrative bodies
The direction of a corporation may be entrusted to one or more directors, who may or may not be shareholders and who are appointed by the shareholders’ meeting.

Where this responsibility is entrusted to one person, he or she acts as the sole administrator; where it is entrusted to more than one person, a board of directors is formed. A substitute must be appointed for each director, irrespective of whether he or she is a sole administrator or a board member.

The title of director is held by an individual and a director's functions cannot be carried out through a representative. In the event of a temporary or permanent vacancy among the directors, the corporation's bylaws will dictate how this must be filled.

If a board of directors is appointed, a majority of its members must be present in order for its meetings to be quorate.

A corporation's managers are appointed by the board of directors or, if the bylaws so allow, by the shareholders. As in the case of directors, a manager's functions are vested in the individual and cannot be carried out through a representative.

The shareholders, once duly summoned to a meeting, constitute a corporation’s supreme organizational body.

There are two types of shareholders’ meeting: ordinary and extraordinary. Ordinary meetings must be convened at least once a year, within five months of the end of the fiscal year. They must discuss at least:

  • the board of directors’ memorandum;
  • the general balance sheets; and
  • the profit and loss statement and the auditor’s report.

These items must be approved or rejected and the appropriate measures must be taken.

In addition, ordinary meetings must deal with:

  • the appointment and removal of directors and auditors;
  • directors’ and auditors' fees; and
  • the distribution of the corporation's profits.

Extraordinary meetings can be held whenever required in order to resolve issues including:

  • amendments to the bylaws;
  • the dissolution and liquidation of the company; and
  • capital increases or reductions.

A meeting may address both ordinary and extraordinary issues; for each agenda, the relevant majorities for quorum and approval apply.

The requirement to summon a shareholders' meeting can be waived if 100% of the company’s shares are duly represented and the shareholders or their duly authorized representatives agree to hold a meeting. If a meeting must be summoned, a notice must be published 15 days in advance (not including the publication date and the date of the meeting).


Legal reforms must be implemented in order to adapt El Salvador’s corporate governance regulations to the needs of the business sector. By making the regulatory regime attractive to foreign investment and responsive to modern demands, it will become easier for local companies to fulfil corporate requirements, particularly those companies which are subsidiaries of multinational corporations with operations and/or investments in El Salvador.

For further information on this topic please contact Roberta Gallardo at Arias & Muñoz by telephone (+503 2257 0900) or by fax (+503 2257 0901) or by email (rgallardo@ariaslaw.com).

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