On the way to Bolivia's corporate restructuring
Alonso Indacochea Pardo de Zela
Indacochea & Asociados
Santa Cruz
Bolivia´s Commerce Code has existed since 1976. Since then it has not suffered any substantial modifications, other than small updates through executive decrees and resolutions. In a young country with so much economic potential, where two thousand new companies are created every month, the existence of a new statue that incorporates the legal scheme of a split off process is fundamental in order to avoid an economic pull-back that would slow down commercial development for companies and the country as a whole. However, this corporate restructuring is currently not regulated by the Commerce Code. Nevertheless, certain tax and financial related executive decrees and resolutions opened up the possibility of split offs in Bolivia, but the regulations were not clear in that aspect. In fact, the first approved split off process by the Commerce Registry was in 2008 and since then only 13 cases have been submitted.
Contradictions
Even with this background, in 2009, Indacochea & Asociados, was denied the registration of a split off process for one of its clients, when days before another client of the Firm had obtained its approval. Specifically, there seemed to be a contradiction between the responses of two of the regional offices of the Commerce Registry. The negative answer of one of the regional offices is repeated below:
"A corporate reorganisation for the incorporation of a new or various companies with part of its social capital, is not regulated by the Commerce Code. In Bolivia, the split off process is not an applicable legal scheme, nor does the Commerce Registry proceedings handbook, approved by the regulatory entity for businesses, foresee the requirements for this type of corporate restructuring".
This severe ruling gave birth to a year and half of proceedings, processes and presentation of legal arguments that would allow the approval of our client company´s split off. Indacochea & Asociados designed a strategy based on similar cases nationwide and sent an appeal to the Commerce Registry in La Paz (where most of the approved society restructurings took place in our country). The presented arguments were convincing and due to the contradictions it was suggested that a new statue could be passed in order to regulate split offs. As the months went by and more evidence came to light highlighting the need for an urgent resolution to the conflict, the Ministry of Productive Development and Plural Economy passed a ministerial resolution authorising the Commerce Registry not only to register split offs, but to implement norms stating requirements and proceedings to regulate society restructures from that moment on.
The benefits of a split off procedure
In a country that wants to reach competitive development levels, it is of vital importance that businesses that generate employment, productivity and economic development can count on flexible laws that would allow them, like in this case, to split off to new businesses and entrepreneurships, to reorganise them or transform. Not only that, a split off process is a type of corporate reorganisation that has important advantages such as:
(i) avoidance of liquidation and bankruptcy of companies, subsisting the business unit that is profitable and dissolving the one that is driving the company to a possible bankruptcy;
(ii) providing the company with an opportunity to dispose of a subsidiary in a tax-free manner, and even to relieve itself of an unwanted shareholder; and
(iii) a variety of other motivations including management reasons, capital market factors, risks, tax benefits, marketing factors, and regulatory/legal reasons, etc.
For over a decade the Bolivian congress has been debating whether to approve a new Commerce Code which includes split offs and spin offs. Nevertheless, the case presented by our Law Firm once again evidenced the lack of current legal procedures in the Bolivian commercial system. This was the starting point for the Ministry of Productive Development and Plural Economy through Executive Resolution No. 265/2009 to approve and authorise the administrative proceeding of the 'Registration of a Company Split Off' in Bolivia.
Moreover, the resolution in its clauses states that "the split off is a company reorganisation technique that has been introduced in most compared legislations, with the objective of fulfilling legal vacancies that have been appearing along with the Commercial - Industrial activity, allowing in a few years for the split off to be constituted as a daily practice to transform, create and develop new business entrepreneurships".
Conclusion
Bolivia was the only country in Latin America that lacked regulation over split off proceedings. Let us hope that the approval for a new Code of Commerce takes place in the near future, otherwise we will find ourselves in a situation where we will have to continue promoting Executive Resolutions to cover up legal gaps that will keep on showing up in the daily practice of law.