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Legal capacity of autonomous entities to act as partners or shareholders - International Law Office

International Law Office

Company & Commercial - Colombia

Legal capacity of autonomous entities to act as partners or shareholders

February 01 2010


The Colombian supervisory agency for corporations has repeatedly argued that only those entities that are considered as persons by the legal system can conclude contracts through which a company is incorporated.

According to the agency, Article 98 of the Commercial Code states that an incorporation contract is a contract through which two or more persons bind themselves to make a contribution in money, labour or assets, with the aim of sharing the profits earned through commercial activity. Hence, the autonomous entity formed by means of commercial trust contracts has no legal power to act as a party in an incorporation contract, as it lacks legal personality.(1)

The agency also states that an autonomous entity lacks the legal capacity to act as a partner or shareholder of a corporation,(2) and only those entities recognized as persons by the legal system (natural persons and legal persons such as corporations or foundations) are entitled to rights and duties within the legal system.(3)

Following the established concept of patrimony as an exclusive characteristic of legal personality, the agency's position has caused problems for the practical development of trust contracts, within which autonomous entities can acquire shares and participate in corporations.

Furthermore, by stating that only 'persons' are capable of exercising rights and bearing liabilities, the agency has created uncertainty over the ability of an autonomous entity to acquire rights or liabilities with regard to third parties during the development of the trust contract, rendering both the independence of the assets transferred in trust and the trust contract itself ineffectual.(4)

Given the loophole created by this argument, the government issued Decree 1049/2006, stating that autonomous entities established through commercial trust contracts have all the rights and legal or contractual duties that arise from the actions carried out and contracts executed by the trustee under the contract of trust, regardless of their lack of legal personality.

A recent agency decision(5) stated that due to the lack of legal personality of the autonomous entity, the trustee could exercise the pre-emptive right to purchase a company's shares only if the settlor transferred the corporate rights of the shares transferred in trust to the trustee. Otherwise, the settlor had the right to exercise the pre-emptive purchase of the company's shares.(6)

The decision recognizes that shares in a company can be transferred to an autonomous entity pursuant to a commercial trust contract. However, the trustee would exercise the pre-emptive right not in representation of the autonomous entity as a holder of legal rights and duties, but in accordance with the settlor's instructions, as specified in the trust contract. Thus, the agency has again disregarded the independence of assets transferred in trust. Such independence is important in many trust contracts, such as guarantee trusts.

This decision(7) does not repeal Decree 1049 and a considerable number of judicial decisions that have recognized autonomous entities as holders of legal rights and duties.(8)

However, the agency could maintain its position, arguing that according to Article 98 of the Commercial Code, only "persons" are entitled to act as partners or shareholders of commercial corporations. The enforcement of Article 98 has been questioned due to the enactment of a series of laws suggesting that the act of incorporation is not a contract between two or more persons, such as Law 1258/2008, which recognizes that simplified stock companies do not a require plurality of members.

For further information on this topic please contact Sergio Rodriguez Azuero at Rodriguez-Azuero Abogados by telephone (+571 321 8910) or email (srodriguez@rodriguezazuero.com).

Endnotes

(1) Agency Decision 2003-01-117340.

(2) Agency Decision 220-53163 of August 20 2003.

(3) Agency Decision 004-01-002047 of January 13 2004.

(4) According to this principle, all rights and liabilities of the trusts should be borne by the contracting parties (trustee and settlor), which have legal personality.

(5) Decision 220-115276 of September 9 2009.

(6) Id.

(7) According to Article 84 of the Administrative Code, decisions issued by government agencies cannot disregard the legal norms on which they are based.

(8) Supreme Court Decisions 1909 of August 3 2005, 0293 of May 31 2006 and 3101 of July 8 2009.


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