The reasons for the enactment of the Minority Investor Protection Law
On August 4, 2016, the Costa Rican Congress approved the Minority Investor Protection Act, Law No. 9392 that came into force on October of that same year, filling an important legal vacuum within corporations in Costa Rica and that also places our country at the levels of best practice and standards of the Organization for Economic Cooperation and Development.
Regulatory authorities, worldwide, have made enormous efforts to improve the rules that govern the capital markets, this to make its operation efficient, credible and reliable. These efforts sought to increase the transparency of the markets as well as to safeguard the interests of investors, especially small investors, because of their disadvantaged position in the power relationship.
Responsibility to protect the rights of the small investors
It is up to each country to protect the rights of the investors through regulations that encourage the implementation of good practices of corporate transparency, which provide better access to information and ensure protection for minority investors against possible conflicts of interest. The World Bank, in its publication “Doing Business 2015: Beyond efficiency”, placed Costa Rica that year in the 181st position, almost at the bottom of the ranking in terms of investor protection. By 2017, our country jumped to position 119, which shows a great advance, effort and work by the authorities to protect these investors.
The Doing Business Index is a decision-making instrument for investors, mainly foreigners, when assessing the feasibility of conducting a business, based on ten indicators that cover the life cycle of a business. The Doing Business method defines the minority shareholder as one who has a percentage equal to or less than 10% of the share capital.
Under this scenario, in order to increase protection for investors, especially minority shareholders, it was necessary to carry out punctual reforms to the Code of Commerce, in its articles 26 and 189, as well as the Civil Procedure Code in its article 426; which allowed the country to be at the level of the best international practices in this matter
Achievements of the Minority Investor Protection Law
The Minority Investor Protection Law has helped to strengthen the small and medium-sized associated companies under the guise of consortiums for the benefit of better conditions that meet their needs, since there was not an adequate legal framework to protect them as minority investors.
The article 26 of the Commercial Code, in its first paragraph, is amended to incorporate a right of minority shareholders to examine those transactions that involve the disposal of assets of the company – or the constitution of guarantees through them – provided that such operations represent a value equal to or greater than 10% of the total assets of the respective company. In this regard, it is also important to notice that the Law also requires, through paragraph 32 ter of the same Law, that these transactions must always be approved by the Board of Directors.
It is important to point out that the Law decreases the percentage of corporate capital necessary to request a Court order to conduct an audit of the company, of 20% – as it was established – to 10%. In addition, the Law adds a new second paragraph to Article 189 of the Commercial Code to establish, explicitly, the duty of diligence and loyalty of corporate directors and other administrators, as well as their duty to act in the best interest of the company, taking into account that it counts the interests of shareholders, employees and the public.
Finally, the Law reforms article 426 of the Civil Procedure Code regarding the abbreviated process; a process through which the challenge of corporate resolutions taken at a meeting of shareholders, or at a board of directors is known. In this sense, the Law extends the power of the parties to request the Judge to present documents from the defendant company.