Amendments to the law on companies

Boletín societario de CorralRosales - Foto edificio con cristalera
In the supplement to the Official Gazette No. 269 of March 15, 2023, the amendments to the Law on Companies for the Optimization and Promotion of Business and for the Promotion of Corporate Governance were published, the most relevant aspects are as follows:

a) Sole shareholder/member:  Corporations and the limited liability companies may be incorporated by unilateral act by a single shareholder/member. 

b) Transfer of units: Units issued by limited liability companies are freely transferable, provided the transfer is between members of the company, and may be carried out by means of a private document. 

c) Pledge over units: Units issued by limited liability companies may be pledged with the unanimous consent of the members.  

d) Suspension of dividend distribution: Foreign members/shareholders who do not disclose their chain of ownership until the corresponding beneficial owner is identified, in addition to the prohibition to attend, intervene and vote in the ordinary shareholders’ meetings, may not receive the corresponding dividends declared by the company until such information is provided.

e) Right of accretion: The bylaws of a corporation may recognize the right of accretion, i.e., a shareholder will have the possibility of subscribing the shares resulting from a capital increase that are not assumed by another shareholder, with priority to third parties. If there are several shareholders interested in assuming the shares offered, these will be allotted in proportion to the participation of each one of them in the capital of the company. In the event of silence in the bylaws, the general shareholders’ meeting, at the time of establishing the basis for the capital increase, may grant the shareholders the aforementioned right of accretion.
f) Enforceability of shareholders’ agreements vis-à-vis third parties: As a general rule, shareholders’ agreements concerning any lawful matter shall be binding among the shareholders, but not enforceable against third parties. However, the agreement will become enforceable against a third party when it is proven that such third party knew of its existence and provisions. The breach of a shareholders’ agreement will give rise to the aggrieved counterparty’s right to request, at its discretion, the performance or termination of the agreement, and in both cases, compensation for damages.

g) Financial solvency report for capital reduction processes: When the general shareholders’ meeting resolves to reduce capital, it must simultaneously approve a solvency report of the company, prepared, and signed by its legal representative. This report must demonstrate, based on the company’s projected financial indicators, that after the capital reduction the company will continue to be able to meet its obligations and finance its operational activities. The legal representative who prepares a solvency report that is unfounded or does not accurately reflect the company’s financial situation shall be jointly and severally liable for the company’s obligations.

h) Suspension of the effects of the resolutions adopted by the general shareholders’ meeting: If upon a request of any shareholder, the Superintendence of Companies, Securities and Insurance establishes that: (i) the general shareholders’ meeting or any other body of the company approved one or more resolutions in contravention of the Law on Companies, its implementing regulations or the bylaws of the company; or that (ii)  in their approval, the shareholders or managers incurred in abuse of their majority, minority or parity voting rights, the Superintendent shall issue a reasoned resolution in which he/she shall order the suspension of all the effects of the respective resolution. The suspension does not proceed if the resolution has been implemented when the petition was received. 

i) Addition of items to the agenda: Shareholders who individually hold at least 5% of the capital stock are entitled to have an additional item included on the agenda of a duly called shareholders’ meeting. However, no more than five additional items may be included in addition to those included in the call to the meeting. If there are several requests, they will be dealt with in the order of their submission. 

j) Shareholders’ non-compete obligation: The bylaws of a corporation may prohibit its shareholders from participating in acts or operations that imply competition with the company, or from taking business opportunities that correspond to the company, unless expressly authorized by the shareholders’ meeting. This non-compete obligation may also be included in a shareholder’s agreement. 

k) Limits on the provision of services by external auditors: The external auditor may not provide any other service or collaboration to the audited company, through individuals or entities, directly or indirectly related, as long as it continues to be hired as external auditor. An individual or entity who has rendered services other than external auditing services to the audited company in the immediately preceding year may not be an external auditor of a company. Likewise, the external auditor may not, within the year following the termination of its agreement, render any other service to the audited company. No person or auditing firm may perform external audits for more than five consecutive years for the same company. 

l) Effects of the merger and subrogation of operating permits: In cases of merger, the absorbing company shall automatically subrogate the contractual and non-contractual rights and obligations of the absorbed companies in the exercise of their business activity. It will also be subrogated over any operating licenses, permits, property titles, or other authorizations that may have been granted to the absorbed company in the exercise of its operational activity, provided that the absorbing company has all the necessary powers or capacity to exercise rights with respect to such operating licenses, permits, property titles, authorizations, etc.

m) Effects of the change of domicile of a foreign company to Ecuador with respect to its branch: If a foreign company decides to transfer its corporate domicile to Ecuador and it already has a branch in the country, the Superintendence of Companies, Securities and Insurance will provide, at the time of approving the change of domicile, the revocation of the operating permit granted to the foreign company, without liquidation, and the cancellation of the documents related to the branch in the country. The company domiciled in Ecuador will be responsible for the obligations previously acquired by its branch.

n) Corporate acts by private instrument: Limited liability companies and corporations may be incorporated either by public deed or by means of a private document, which shall not be subject to any notarial process. Likewise, any corporate act subsequent to the incorporation of the aforementioned companies may be executed in a private document, without being subject to any notarial process. The public deed or the private document must be registered in the corresponding registries. When the assets contributed include assets whose transfer requires a public deed, the incorporation of the aforementioned companies and the amendments to the by-laws must observe said formality. The companies that carry out activities related to financial, stock market and insurance operations must be incorporated and their bylaws must be amended by public deed.

o) Elimination of grounds for dissolution due to losses: The grounds for dissolution due to losses are eliminated as well as the grounds for revocation of the operating permit of branches of foreign companies due to losses.

p) Term for the issuance of the taxpayer number: The Internal Revenue Service, upon request of a party, shall issue the taxpayer number (RUC) within a non-extendable term of 24 hours from the registration of a simplified stock corporation in the Superintendence of Company’s Company Registry, and of any other type of company in the Commercial Registry.

q) Joint and several liability of the legal representative: The company’s legal representatives will not be liable for labor obligations or of any other nature incurred by the company. However, Article 36 of the Labor Code establishes that the employer and its representatives will be jointly and severally liable in their relations with the employee.

r) Sole shareholders and wholly-owned companies: In corporations in which a an individual or an entity is the sole shareholder, it will not be mandatory to hold shareholders’ meetings. In these cases, the shareholder will record the resolutions approved in minutes signed by him. 

In the case of a merger, if the absorbing company is the holder of all the shares or equity interests issued by the absorbed company or companies, or when the absorbed and absorbing companies are owned, directly or indirectly, by the same partner or shareholder, the operation may be carried out by a resolution adopted by the legal representatives or by the boards of directors of the absorbing company and without the approval of the merger by the shareholders’ meeting of the absorbed company or companies.

Foto cuadrada de Milton Carrera, socio junior de CorralRosales

Specialist in Corporate
Milton Carrera, junior partner at CorralRosales
+593 2 2544144

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NOTE: The above text has been prepared for informational purposes. CorralRosales is not liable for any loss or damage incurred as a result of acting or failing to act on the basis of the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm in Quito / Guayaquil, Ecuador.


Regulations for the prevention of money laundering, financing of terrorism and other crimes

Regulations for the prevention of money laundering, financing of terrorism and other crimes - CorralRosales - Lawyer Ecuador
The following is a summary of the main obligations of the parties obliged to report to the Financial and Economic Analysis Unit (UAFE) according to article 5 of the Organic Law for the Prevention, Detection and Eradication of Money Laundering and Financing of Crimes, published in the Second Supplement to the Official Registry 411 of March 16, 2021.

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DISCLAIMER: The previous text has been prepared for informational purposes. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm.


Amendments to the law of companies

On December 10, 2020, the Law of Modernization to the Law of Companies was published in the third supplement of Official Gazette 347, of which the most relevant aspects are the following:

a) Permitted activities outside the corporate purpose: Companies are allowed to occasionally or in an isolated manner enter into acts or contracts for investment, research or experimentation purposes, or as reasonable contributions of a civic or social nature.

b) Elimination of the opposition process: The process of opposition by third parties to the reduction of capital, change of name, early dissolution and change of domicile is hereby eliminated.

c) Single shareholder: The stock company and the limited liability company may subsist with a single shareholder. For its incorporation, at least two contracting parties must participate. Consequently, the cause for dissolution is hereby eliminated if a second shareholder is not incorporated within six months.

d) Corporate acts that do not require approval:  The voluntary and anticipated dissolution does not require previous authorization of the Superintendence of Companies, Securities and Insurance. Therefore, the direct inscription of the corporate act in the Mercantile Registry is allowed for the beginning of the liquidation, which will be supervised by the control entity.

Neither does the change of name, change of domicile and modification of the corporate term require prior authorization.

e) Indefinite term: Stock and limited liability companies can be set up for an indefinite term.

f) President of the board of directors and legal representative: In the companies in which the bylaws provide for the existence of a board of directors, the legal representative of the company may not be the president or representative of that body.

g) Share premium: When non-shareholders participate in a capital increase, it may be decided the new shares to be issued with a value greater than the nominal value (share premium) to be paid by the new shareholders. The issue premium will be part of the voluntary reserves and will be freely agreed upon by the investor and the company.

h) Voluntary control: Stock companies may or may not have commissaries as a control body.

i) Loss absorbency: When a company registers operational losses and has reserves, these will be automatically called to be wiped out.

j) Cause of dissolution for losses: A company will incur in a cause of dissolution for losses when these represent 60% or more of the assets and this situation is maintained for more than 5 continuous years.

k) Transfer of the registered office abroad: The transfer of the registered office of an Ecuadorian company abroad is allowed if the receiving country allows the maintenance of the legal status of the company.

l) Global assignment of assets and liabilities to liquidate a company: A company may transfer in block all its assets to third parties, shareholders or other parties in exchange for a consideration. The global transfer of assets and liabilities must be approved unanimously by the general meeting of shareholders, granted by public deed and will not require the approval of the Superintendence of Companies, Securities and Insurance.  The global assignment of assets and liabilities will have the effects of the transfer of companies as economic units as provided in the Code of Commerce.  The assigning company will cancel its registration in the Commercial Registry without any additional procedure once the total value received from the global assignment of assets and liabilities has been distributed among its shareholders.  The joint and several obligations that under the Commercial Code are attributable to the person transferring the company will be assumed by the shareholders of the extinct company in proportion to their participation in the share capital.

m) Association or Joint Purse Agreements: The regulations regarding this figure, with some modifications, are excluded from the Law of Companies and are incorporated as reforms to the Code of Commerce.

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DISCLAIMER: The preceding text has been prepared for general information purposes only. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any given situation requires the specific opinion and view of the firm in Quito / Guayaquil, Ecuador.


Compliance as a business culture


Strict compliance with legal and ethical standards is a requirement for all companies today. To that end, each company must develop a culture of prevention through a regulatory compliance program, known as “compliance”. Compliance applies to all actions, relationships and procedures of the company and, therefore, all actions of managers and employees must be subject to this culture.

Keep in mind that not complying with legal obligations, not only could bring economic sanctions to those who act in this way, but could even cause criminal charges not only for the people who committed such acts but also for the companies themselves that are active subjects of the crime as stated in the Comprehensive Organic Penal Code that came into force in 2015.

The adoption of a compliance program is not simple, since it implies changing the culture of a company, not only by its partners, shareholders, managers and workers, but also by customers and suppliers.

Here are some of the key steps to adopt an effective compliance program:

  1. Start at the head of the institution: any change in the culture of a company starts at the top; therefore, the first step is for managers to have precise knowledge of what compliance entails, such as corporate culture and the willingness to adopt it. Therefore, it is up to them to transmit the adoption of the program to all levels, which implies the necessary commitment of everyone to strictly comply with it.
  2. Prevention and analysis: it is necessary to carry out a diagnosis regarding the approach that the program will have, this approach must be adapted to the individual characteristics of each company. For example, an organization that performs public procurement must implement a different compliance plan, compared to a company that mostly sells to the private sector. Once the areas of greatest risk have been identified, the necessary resources will be assigned to make the changes.
  3. Education: education is essential to achieve culture change. It is essential that all or at least the absolute majority of workers understand the scope of compliance. This ensures that any non-compliance that could harm the company is reported on time. Education programs must be continuous (at least every 6 months), personalized for each role, and must provide information on the legal framework for compliance.
  4. Communication: Internal regulations of companies contained in a code of conduct must be clear, affordable, and permanently communicated to their workers. It should include topics such as: corruption, blackmail, bribery, conflicts of interest, tax evasion, money laundering, among others. In addition, it must establish who is responsible for the compliance program and the mechanism through which employees can report or consult a case where a breach could happen.
  5. Relevance: the importance of the program must be determined, and the personnel and resources required for its implementation must be assigned to it. Otherwise it could become “dead letter” without any significance for the company that adopts it.

The additional costs that implementing a compliance program may eventually demand are fully justified if, with its deployment, the company achieves an unblemished reputation for strict compliance with the law and ethics in its business relationships with shareholders, customers and suppliers. This behavior will translate into better positioning in the market and the consequent increase in sales.

María Isabel Torres
Associate at CorralRosales