acuÑa gonzÁlez, mariana, current and prospective colombian company law under the legal transplant...

8/12/2019 ACUA GONZLEZ, Mariana, Current and Prospective Colombian Company Law Under the Legal Transplant Theor

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CURRENT AND PROSPECTIVE

COLOMBIAN COMPANY LAW UNDERTHE LEGAL TRANSPLANT THEORY

S.AS. Case Study

MARIANA ACUA GONZALEZ*

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TILBURG UNIVERSITYJune, 2010

*Beneficiaria Colfuturo 2009 -2010


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CURRENT AND PROSPECTIVE COLOMBIAN COMPANY LAW UNDER THE LEGAL TRANSPLANT THEORYSociedad por Acciones Simplificadas (S.A.S.) Case

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ABSTRACT

The Legal Transplant Theory proposed by A. Watson, K. Pistor and D. Berkowitz is defined as

movement of a rule or a system of lawfrom one country to another. Under this theory, the

mentioned authors conclude that a legal change does not perform in an equal manner in the

transplanting country as in the origin country. They argue that the adoption of it in the latter is the

result of a comprehensive study of the socio-economic circumstances of the nation, while

transplanting countries import the legal entity without having similar circumstances. Furthermore,

under this theory, the successfulness of a legal transplant is determined by an adaptation process

that the legislator, the governmental institutions and the society of the transplanting country shall

undertake to prepare the scenario for the introduction. In consequence, transplanted legal

changes are called to fail due to uninformed or erroneous decision made by the law-makers. Pistor

and Berkowitz analyzed company regulation in various countries, among them Colombia, to

support their theories. Regarding the Colombian case, they referred to the Codes of Commerce of

1853 and 1887, concluding that they were unsuccessful legal transplants from Spain and Chile,

respectively. This paper analyzes the abovementioned theory pretending to determine if the legal

transplant theory was correctly applied to the Colombian case. Particular attention deserves the

Sociedad por Acciones Simplificadas (S.A.S), which is a new hybrid business form adopted inColombia as a transplant from the United States Limited Liability Company. In the light of this

case, the document will determine whether this is called to be an unsuccessful legal transplant (as

predicted by the Legal Transplant Theory). If the answer is negative, the document will determine

if the S.A.S. is merely an exception of the theory or if it demonstrates the failure of such

assumption.

Keywords: Company Law, Dogmas of Company Law, Legal Transplant Theory, Limited Liability

Company (LLC), Socit par actions simplifies (SAS), Sociedad por Acciones Simplificada (S.A.S.).
http://en.wikipedia.org/wiki/System_of_lawhttp://en.wikipedia.org/wiki/System_of_law


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TABLE OF CONTENTS

I. INTRODUCTION 4

II. CORPORATE LAW, TOWARDS A FLEXIBLE STRUCTURE 7

1. BACKGROUND OF HYBRID BUSINESS FORMS 7

1.1. United States Business Law 8

1.2. French Business Law 10

1.3. Colombian Business Law 122. BUSINESS LAW DOGMAS 14

2.1. Plurality of shareholders: 14

2.2. Minimum Capital Requirement: 16

2.3. Maximum Duration Term of the Company: 17

2.4. Specific Corporate Purpose: 18

3. IMPORTANCE OF HYBRID FORMS 19

III. LEGAL TRANSPLANT THEORY 22

1. OVERVIEW OF LEGAL TRANSPLANT 22

2. EFFECTS OF THE LEGAL TRANSPLATS 26

3. LEGAL TRANSPLANT THEORY. THE KEYSTONE FOR LEGAL CHANGES? 28

3.1. Analysis of the Legal Transplant Theory 28

3.2. Analysis Undertook by Pistor and Berkowitz Regarding Colombia 32

IV. INTRODUCTION OF HYBRID BUSINESS FORMS 35

1. LIMITED LIABILITY COMPANY (LLC): THE US BUSINESS FORM 35

1.1. Characteristics of the Limited Liability Company 372. SOCIT PAR ACTIONS SIMPLIFIES (S.A.S): THE FRENCH BUSINESS FORM 39

2.1. Characteristics of the Socit par Actions Simplifies (S.A.S) 39

3. SOCIEDAD POR ACCIONES SIMPLIFICADA (S.A.S.): THE COLOMBIAN BUSINESS FORM 40

3.1. Economical Circumstances in Colombia Before the S.A.S 40


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3.2. Colombian Company Law before the Introduction of the S.A.S. 43

3.3. Characteristics of the Sociedad por Acciones Simplificada (S.A.S.) 44

3.4. Analysis of the Sociedades por Acciones Simplificadas (S.A.S.) 46

3.4.1. S.A.S.S Incorporation: A Conscious and Informed Choice 46

3.4.2. Flexibility Introduced by the S.A.S. 48

3.4.3. Exponential Number of Start-Up Companies Using the S.A.S. 50

3.4.4. Nationwide Adoption of the Sociedad Por Acciones Simplificada (S.A.S.) 53

3.4.5. Colombian Improvements in Numbers 54

V. CONCLUSION 55

VI. REFERENCES 58

TABLES AND FIGURES

FIGURES

FIGURE 1. US Company Law Structure 10

FIGURE 2. French Company Law Structure 12

FIGURE 3. Colombian Company Law Structure 14

FIGURE 4. Chronological Line: Colombian Company Law History 24

FIGURE 5. Limited Partnership Vs Limited Liability Company 36

FIGURE 6. Foreign Investment in Colombia 41

FIGURE 7. Start-up Companies Created in Colombia 50

FIGURE 8. Start-up Companies in Colombia 51

FIGURE 9. S.A.S Creation. January 2009April 2010 52

FIGURE 10. S.A.S. in Colombia Geographical Distribution (January 2009April 2010) 53

TABLES

TABLE 1. Characteristics of the Traditional Colombian Company Structures 13TABLE 2. Unemployment Rate in Colombia 42

TABLE 3. Colombian Business Environment Ranking 54


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CURRENT AND PROSPECTIVE COLOMBIAN COMPANY LAW UNDER THE LEGAL TRANSPLANT

THEORY

S.AS. Case Study

I. INTRODUCTION

The recent past has witnesses the continuous interest of law-makers in new business forms

which mitigate the rigidness of preexisting company forms, characterized by requirements such as

the minimum capital requirement or the plurality of shareholders. Indeed, a globalized world

claims for a reduction in the transaction costs, and the flexibilization of the corporate

requirements, in order to facilitate the cross border negotiations. This contrast with the traditional

corporate forms that countries as the United States, France and Colombia have offered to their

entrepreneurs i.e. Partnership or Corporations in the US, Socit responsabilit limite or Socit

Anonyme in France, and Sociedad Limitada or Sociedad Annima in Colombia. Those types of

business forms were criticized for their liability regime or their taxation regime, disadvantages that

discouraged the foreign investment and made difficult the start-up of companies. Such corporate

schemes demanded further requirements, such as plurality of shareholders, minimum capital

requirement, maximum duration term or specific corporate purpose. Nevertheless, rather than

been instruments for promoting the entrepreneurship, such requisites are considered negative

factors inhibiting the organization of new companies. For instance, if an entrepreneur did not have

the minimum capital required for setting-up a company, he would be discouraged from its

venture. In consequence, smaller investors did not have any opportunity to make their own

business. Such disadvantages limit the amount of companies that are incorporated in a country

per year, which in turn has an unconstructive influence in the economy. For these reasons, the

legislators focus their attention in the business forms as a cornerstone of the country

development, creating new company forms which take advantage from the positive characteristics

of existing regimes, even combining their features with the beneficial characteristics of others. As

a result, there is the perfect scenario to the origin of hybrid business forms.


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Nevertheless, in some countries the legislator rather than adopting original business forms to

incentivize the growth of the socio-economic environment of its own country, imitates successful

legal entities from other countries expecting to achieve similar positive results. This movement of

a rule or asystem of lawfrom one country to another is recognized as legal transplant, concept

created by Alan Watson, under which the origin country is the one who initially adopted the rule

or legal system, and the transplant countries are those who import their law from another country

or countries rather than developing it domestically. Furthermore, this concept was studied by K.

Pistor and D. Berkowitz under the analysis of the behavior of legal changes transplanted in some

countries in comparison with their origin countries. The conclusion of the mentioned work was

that a legal transplant has high probabilities of fail because most of the legal changes introduced inthe transplanting countries are the consequence of an erroneous decision, without analyzing the

conditions of the country and lacking an adaptation process. These authors sustain that the

successfulness of a legal transplant is only the result of a comprehensive law-makers analysis

about the necessity of the legal change and the level of preparation of the society and the

governmental institutions to receive the new legal figure. Along with the latter elements, it is

essential the presence of the social demand of the legal changes, since the legal change shall

correspond with such a demand. According to this theory, the absence of the abovementioned

elements determines the failure of the transplant; the so-called transplant effect.

Although the Pistors and Berkowitzs analysis of legal transplant is based in United Kingdom,

United States, France and Germany as origin countries, and Colombia, Spain, Chile, Malaysia, Israel

and Japan as transplanting countries, the scope of this paper is limited to United States and

France as origin countries and Colombia as a transplanted country, bear in mind that the

groundwork of this paper is the S.A.S. case study, which is the Colombian new hybrid business

form structured according to the US Limited Liability Company and adopted under the French

name Socit par actions simplifies(SAS). It is important to establish that even though the United

States was a transplanting country during its period as a British colony, nowadays it is considered a

origin country.
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Pistor and Berkowitz analyzed the Colombian case as a transplant country, studying the Codes

of Commerce of 1853 and 1887, which were transplanted from Spain and Chile, respectively. The

Code of 1853 was the first code of commerce adopted in Colombia after having achieved its

independence from Spain. On the other hand, the Code of 1887 was issued after the transition of

Colombia as a federal republic to a unitary republic, which requires from the central government

the adoption of harmonized regulation applicable to all the country. Pistor and Berkowitz reduced

their studied to those two Codes without observing the development of other Colombian

institutions, taking into account that Colombia is a country with great variety of transplanted legal

entities. As a result, Pistor and Berkowitz concluded that these codes were adopted by the

Colombian legislator under the basis of an erroneous decision, according to Pistor, or anuninformed decision, proposed by Berkowitz. In consequence, they were unsuccessful legal

changes since these transplants had no significant effects on the countryseconomy.

The present paper analyzes the abovementioned theory pretending to determine if the legal

transplant theory was correctly applied to the Colombian case and if it is the explanation not only

of the failures of the Codes of Commerce of 1853 and 1887, but also of the unsuccessful of other

legal changes translated by Colombia from countries as France and the US. For the achievement of

this purpose, it is important to determine that Colombian legal system was transplanted fromSpain, whose system was in turn imported from the French civil law. Additionally, in the last years,

Colombia had transplanted legal entities from the US, as the Sociedad por Acciones Simplificadas

(S.A.S), which is the reproduction of the US Limited Liability Company (LLC).For this reason, the

S.A.S. will be evaluated in the light of the legal transplant theory, studying the characteristics of

this new company form and the results that the S.A.S. has brought to Colombia. In the light of this

case, the document will determine whether this is called to be an unsuccessful legal transplant (as

predicted by the Legal Transplant Theory). If the answer is negative, the document will determine

if the S.A.S. is merely an exception of the theory or if it demonstrates the failure of such

assumption.

In order to address this analysis, the Section II of this paper illustrates the development of

Company Law in the last years, in United States, France and Colombia. This section exhibits the


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traditional businesses forms in each country, their principal characteristics and the requirements

to their conformation. Therefore, particular reference is made to the business law dogmas,

revealing how their disadvantages have opened the door to the creation of the hybrid business

forms. On the other hand, in Section III the Legal Transplant Theory proposed by A. Watson, K.

Pistor and D. Berkowitz is exposed. Firstly, the legal transplant concept and its general

characteristics are explained. Secondly, the legal transplant effect and its consequences are

described. Lastly, a critical analysis of the legal transplant theory is provided, with particular regard

to its implications to the Colombian case. Finally, Section III describes the principal hybrid business

forms issued in United States, France and Colombia, presenting their characteristics and their

achievements, with the purpose to draw a comparison. Furthermore, the section presents acomprehensive description of the socio-economic environment of Colombia before, during and

after the introduction of the S.AS. Thereafter, it is established the influence that the S.A.S has in

the Colombian economy, nowadays, in order to apply the legal transplant theory and determine

its impact in this new company form.

II. CORPORATE LAW, TOWARDS A FLEXIBLE STRUCTURE

1. BACKGROUND OF HYBRID BUSINESS FORMSIn recent years, the business law has shown a continuing development, aiming at creating new

business forms that allow the start-up companies to be part of the globalized world. The latter is a

response of the inflexibility of the corporate forms, which involves a barrier to entrepreneurship,

i.e. reflected in minimum amounts of capital. However, this innovative tendency is not only

favorable to start-up companies, but also to consolidate companies which are willing to expand.

This is the case of a multinational holding investing in a new country in terms of equity. If its

purpose is to create a new entity, the plurality requirement is the first obstacle, since it is

necessary to find a partner just to create the intended company. Clearly, this is a risky decision,

since it involves moral hazard and adverse selection problems.


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The abovementioned barriers are imposed by traditional corporate forms, such as the

Corporation or the Partnership in the United States. As will be discussed, they establish strict

requirements, based in traditional corporate law dogmas. Nevertheless, these dogmas are called

into question by modern doctrine, since their basis and purposes are ineffective. As a result, by

removing them, corporate forms are able to be more flexible and consequently more accurate to

the requirements of investors.

In this set of circumstances, the response to the traditional corporate forms is found in new

entities known as hybrid business forms. They can be considered as a combination of partnership

law and corporate law. Examples of them are the limited liability partnership (hereinafter LLP)

and limited liability company (hereinafter LLC) in the US, as well as their Japanese counterparts,

the J-LLP and J-LLC.

The hybrid business form adopted in Colombia is found in the Sociedades por Acciones

Simplificadas(S.A.S.). Since this business form is inspired in the American and French model, the

company law of these countries will be addressed, parallel to Colombian. In doing so, the first step

will be to discuss the traditional corporate forms in each country. Then, it will be revealed how the

traditional dogmas are embraced by the conventional company forms, highlighting the barriers

that they create. This allows us to demonstrate the importance of the hybrid business forms, in

the final stage of this section.

1.1. United States Business LawCompany Law is not a matter of federal regulation in the United States, and consequently, the

regulation on this issue is adopted by each State. As a result, the applicable business law in the

United States is determined by the entrepreneur, at the moment of setting up the company.

However, the most important company law regulation in the United States is found in Delaware.

For this reason, this section is focused on the referred regulation. In this respect, the principal

business forms we are addressing are the General Partnership, the Corporation, the LLC and the

LLP.


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The partnership was the dominant business entity from Roman times until the end of the

nineteenth century. It is characterized by the unlimited personal liability of its owners, since each

partner can manage the partnership. Moreover, depending of the jurisdiction and partnership

structure, this entity could have a favorable taxation regime, since in most of the cases partnership

does not incur a tax on profits before it is distributed to the partners.

Afterwards, with the emergence of the business corporation, the partnership lost prominence.

Particularly, the lack of limited liability made the latter less attractive than the corporations.

Indeed, the Corporations are separated legal entities, which count with legal personality. In

consequence, the member of it had limited liability, which means that the obligations of these

companies were bonded only by the assets held in the name of the firm itself.1This implies that

companies are considered as separate tax contributors, and as a result, pass through taxation is

impossible under it. Consequently, shareholders are not able to offset losses from the company

under their own creditworthy.

In spite of its advantages, the latter business form generates skepticism, because the lack of

personal liability and the weakness of the bankruptcy procedure made it difficult to guarantee the

creditworthy of the firm in front creditors and it was complicated to avoid opportunistic acts.

Consequently, it was established the limited partnership, whose main feature is the establishment

of limited liability for investors who do not have any management function in the entity.

Although, the abovementioned changes of the business law, it was necessary the creation of

hybrid forms that bring together the qualities of both type of firms (partnership and corporation),

and that eliminated the old dogmas of the company law with the objective of remove the rigid

requirements in the conformation and development of the explained business forms. For this

reason, in the United States was established the LLC, which is going to be studied in the third

chapter of the present paper.

1H. Hansmann et. al., The New Business Entities in Evolutionary Perspective. February 2005.


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FIGURE 1. US Company Law Structure

1.2. French Business LawThere are numerous types of company structures which are provided by French Law, such as

Socit anonyme (SA), Socit responsabilit limite (SARL), Socit en nom collectif (SNC),

Socit en commandite simple (SCS), and Socit en commandite par actions (SCA). However

today the great majority of trading entities in France have taken the form either of a Socit

Anonyme(S.A.) or a Socit Responsabilit Limite (S.A.R.L.).

Under a theoretic approach, the French tradition draws differences between companies of

capital and so-called companies of persons2. The latter is built under the Latin concept of intuitu

person, which implies that the company is created regarding the qualities of the counterparties.

Although highly criticized, this classification is useful to understand some key issues in each

corporate form. The prototypical company of persons is the Socit en nom collectif (SNC), since

all the partners are able to act on behalf of the company, and consequently, they are personally

liable for the obligations of the company. This implies confidence among partners, since the acts of

any of them can compromise the interest of the others and their liability. As a result, the

2Socit de capitaux and socit de personnes

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participation is not freely transferable, because the rest of the partners are not willing to be

responsible for the acts of an unknown third party.

Contrastingly, instead of parts of interest, the companies of capital are capitalized by shares.

This is not only a grammatical difference, since the latter can be freely transferable and the

shareholders are generally unidentified in front of the public. Additionally, shareholders are

generally separated from management, and consequently, their liability is limited to the amount

of their investment3. The classical example of companies of capital in France is the Socit

anonyme (SA), and can be comparable with the American Corporations, while the Socit en nom

collectif (SNC) are equivalent to the US Partnerships.

Additionally, the Socit responsabilit limite (SARL) can be considered as an intermediate

figure, since it grants limited liability to the partners, while keeping characteristics of the

companies of persons. For instance, they have a maximum limit of partners (100)4, and

consequently, they cannot be traded in the public stock market. Furthermore, the Socits en

commandite (SCS and SCA) also combine the characteristics of corporations and partnerships,

regarding the liability of each partner. Indeed, they require two types of partners: limited and

general. The former are investors, whose liability is restricted to the amount of their contribution,

which can be in shares (SCA) or in parts of interest (SCS). On the contrary, the general partners are

personally liable, since they are responsible for the management of the company. In general

terms, they can be compared with the Limited Partnerships under US law.As a response to the

barriers established by the corporate law dogmas discussed below, the French company law has

introduce new figures. They are Socit par actions simplifies (SAS), Entreprise unipersonnelle

responsabilit limite (EURL), which will be analyzed in a later stage.

3Although shareholders can take part in management, the responsibility derived from fiduciary duties is not

the same as the limited liability as shareholder.4French Code of Commerce, see L223-1 to L223-43.


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FIGURE 2. French Company Law Structure

1.3. Colombian Business LawAs the French regulation, Colombian company structures can be classified as companies of

capital and companies of persons. The Colombian Code of Commerce establishes the principal

types of companies, whose characteristics are very close to their French counterparties.

Traditionally, the Colombian company law regulated the Sociedad Annima (S.A.);Limited Liability

Company (Sociedad Limitada (Ltda)); Collective Company (Sociedad Colectiva); Sociedades en

Cominadita.

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TABLE 1. Characteristics of the Traditional Colombian Company Structures

SociedadAnonima SociedadColectiva Sociedades enComandita SociedadLimitada

Legal statusIs the company able to

own assets, incur in

liabilities and to be a

party in a contract?

YES YES YES YES

Limited LiabilityIs Partners/Shareholders

liability restricted to their

contribution?

YES NOGeneralPartner

NOYES

LimitedPartner

YES

Management

Can

partners/shareholders

take part on

management?

NO YESGeneralPartner

YESYES

LimitedPartner

NO

Minimum number of

partners/shareholders 5 2 GeneralPartner 1 2LimitedPartner

1 (SCS)5 (SCA)

Maximum number of

partners/shareholders N/A N/A GeneralPartner N/A 25LimitedPartner

N/A

Are

partners/shareholders

publicly known? NO YESGeneral

Partner

YES

YESLimitedPartner

NO

Capital Shares Parts of interest SCA Shares Parts of interest

SCS Quotes

Is the interest in the

company freely

transferable?YES NO

GeneralPartner

NONO

LimitedPartner

NO (SCS)YES (SCA

All the corporate forms require the partners/shareholders to define a specificcorporate purpose and maximum duration term of the company.

Equivalent counterparts

in France and US Societe AnonymeCorporation Socit en nomcollectif GeneralPartnership

Socits encommandite

Limited Partnership

Socit Responsabilit

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Furthermore, before the introduction of new hybrid forms (Sociedad por Acciones Simplificada

S.A.S.5), there already were two kinds of business forms that reformed the Colombian corporate

law: Sole Proprietor Enterprise(Empresa Unipersonal) and Single Shareholder Company (Sociedad

Unipersonal). This flexible business forms will be discussed later. At this stage, it is sufficient to

present an overview of the most important Colombian Business Law structures.

FIGURE 3. Colombian Company Law Structure

2. BUSINESS LAW DOGMAS2.1. Plurality of shareholders:

This requirement is referred to the number of members that are necessary to create the

business forms. Its origin is found in the traditional understanding of companies as a contract,

5This type of company is going to be explaining in detail in chapter 3.

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which implies the agreement between two or more parties6. The treatment of this plurality

requirement varies from one jurisdiction to another, and each corporate entity has its own

regulation under this requisite. For instance, the French Socit Anonyme (S.A.) requires a

minimum of 7 shareholders, the Socit Responsabilit Limite (S.A.R.L.) habitually has a

minimum of 2 shareholders. Besides, in the United States, the general partnership is established

by at least two partners. In contrast, the Corporation does not have any requirement of

shareholders.

A similar situation is found Colombia. Indeed, the Collective Company (Sociedad Colectiva)7

requires a minimum of two shareholders and there is no maximum limit for the existence of the

company. Furthermore, the Limited Liability Company (Sociedad Limitada, Ltd) established that it

is indispensable minimum two members and maximum twenty five shareholders. Finally, the

Sociedad Annima (S.A.) has to be conformed for a minimum of five shareholders and there is no

maximum requirement. These limits are mandatory, bear in mind, that it is not allow, for

example, to create a Sociedad Limitadawith twenty six or more members. Furthermore, if during

the development of the company the number of partners exceeds the legal limit the firm has to be

dissolved or at least it has to be transformed in different company form that allow the presence of

a higher number of shareholders. On the contrary, if the shareholders on a Sociedad Annima isreduced below the minimum number, the company has to be liquidated unless adequate measures

are adopted.

The new hybrid business forms eliminate this requirement, allowing that one person could

create a company alone without the presence of partner or shareholders.

6The adoption of the plurality concept is illustrated by the Colombian regulation. The Code of Commerce

defines the Company as a contract between two or more parties (article 98). Under the Civil Code, thecontract implies two or more parties (article 1495).7In the Sociedad Colectiva.


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2.2. Minimum Capital Requirement:

The capital required for the formation and development of a business form depends of the

legal regime and the structure of the company. However, it is generally established as a means to

protect third parties from companies behavior. Regulators expect this measure to be a warranty

for contractual and non-contractual liability of the company, granting a patrimony that creditors

can pursue.

In the United States the legal capital rules vary widely from State to State. In this regard, a

Delaware corporation must specify a par value for its shares (or that the shares are without par

value). Shares may not be issued by the corporation for any amount less than par value.

Limitations on the form of payment for shares are limited to the amount paid to cover par value 8.

On the other hand, in France the minimum capital necessary for the creation of a Socit Anonyme

(S.A.) is between 225.000 and 37.000 euro, which depends if the company trades publicly or if it is

not listed on a stock exchange. Furthermore, the Sociten nom Collectief (S.N.C.) and the Socit

Responsabilit Limite (SARL)do not have limit, it is determine by the shareholders.

The Colombian Code of Commerce9establishes that the shareholders have to determine

the maximum capital of the company, as an indispensable requirement for the constitution of a

firm. In this sense, the Colombian legislation does not determine quantitative limits of capital for

some corporate forms. Instead, it only regulates the way and the period of time the capital has to

be paid. In the case of the Sociedad Annima (S.A.) it is divided in authorized share capital,10

subscribed capital,11and paid capital12. The Colombias Commerce Code13ascertain that at least

the 50% of the authorized share capital has to be subscribed, and no less than the third part of the

8R. Booth. Capital Requirements in United States Corporation Law. School of law, University of Maryland.

Page 10. Available at SSRNhttp://ssrn.com/abstract=8646859Article 122 C.Co.10

This figure corresponds to the value or agreed by the founding shareholders as necessary to develop thepurpose of the company at the initial stage or within the near or far.11

It is part of the Authorized Capital shareholders have undertaken to cover, it corresponds to thecontributions that partnersgiveto society or promised to pay off in a period not to exceed 1 year. (Art. 387of C.Co.)12

It corresponds to the amount of subscribed shares that the shareholders have to pay.13

Article 375 C.Co.
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price of each share of capital that is subscribed has to be paid at the moment of the creation of

the company. In a similar sense, the capital of any Sociedad Limitada (Ltda.) has to be paid at the

moment of its formation. Although, in some business forms there is no capital requirement it is

expressly determined that if the company loses more that its 50% of capital, it has to be dissolved.

At this stage, this requirement may seem as adequate to protect third parties from

opportunistic behavior from shareholders. Nevertheless, this is far from being adequate. First,

regimes which set quantitative minimum levels can be considered arbitrary. Think about the

French regulation of non-listed S.A. How can be determined that 225.000 is a fair limit? A second

critic calls into question the feasibility to prevent misbehaviors. Using the same French regulation,

any company can commit a fraud which exceeds by far the minimum requirement of capital. For

instance, a mining company can acquire obligations reaching millions of euro, and the corporate

capital can be insufficient in case of breach of certain obligations.

The New hybrid forms desire to make this dogma flexible or to abolish it, with the idea to

allow the small entrepreneurs to constitute their own company with the capital they have.

2.3. Maximum Duration Term of the Company:As the dogmas explained above, a requirement of duration of a company depends of the

legal regulation that each country has. As an illustration, French company law established that the

maximum time of existence of a commercial company is ninety nine years from the date of the

registration of such company on the Commercial Register. In contrast, although Colombian

Legislation does not establish a maximum duration term, it requires the investors to do so at the

moment of setting up the company.

No plausible reason can be found to justify this traditional dogma. On the contrary, when

fixing a certain maximum period, regulators appear to be arbitrary. One may call into question the

term established by the French regulation: why 99 and not 95 or 100 years? Additionally,

regulations as the Colombian are less than effective. Indeed, the temporary requirement is

circumvented by entrepreneurs in an easy way, determining long term companies.


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With the existence of the business hybrid forms this requirement is eradicate, because this

companies forms aim to allow the entrepreneur to constitute his own firm with the fewest

restrictions.

2.4. Specific Corporate Purpose:Some regulations require investors to determine a particular scope of action for the company

they are setting up. According to this principle, the capacity of the company is established, and its

acts have to be focused on the development of those objectives. The managers of the company

cannot perform out of this scope. In this respect, the French regulation determines that the

shareholders have to establish a legal purpose for the company. On the other hand, the Colombian

Code of Commerce requires the shareholders to determine in a clear and complete manner the

main activities of the company, as an indispensable requirement for the creation of the firm. The

stipulations of undetermined activities or activities that not have direct relationship with the scope

are null.

In this matter, the corporate law developed a doctrine called ultra vires, which means beyond

the powers. Under this theory, any act attempted by a corporation outside its particular purpose

is not legally binding, since the company lacks the capacity to perform them. Further, this doctrine

establishes that such acts cannot be ratified by the shareholders.

Nevertheless, although it can be plausible to determine the scope of action, such requirement

can be easily circumvented. The practice demonstrates that entrepreneurs make the scope of

action as broad as possible, making feasible to perform activities beyond the initial purposes. For

instance, initially a technology company can focus its purpose on the manufacture of computers,

but as the business expands so does the possibility to enter in new activities not originally

considered. Under this dogma, the company is obliged to modify its statutes in order to incur in

activities not initially mentioned. This generates high transaction costs and leads to inefficiencies.

On the contrary, it is called into question the differentiation between the capacity of natural

persons and legal entities, since the former are able to incur in any legal act of commerce.


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However, with the modification of the business law, this doctrine became obsolete because

the new hybrid forms allow the members of the companies to determine as a scope of the firm

every legal action, without restrict it to specific commercial activities.

3. IMPORTANCE OF HYBRID FORMSHybrid business forms have attracted attention from policy makers and entrepreneurs from all

over the world. This is due to their expansion and popularity, which has been bigger than

expected.14

Several factors have contributed to the growth of the new legal business forms. One of the

reasons is the regulatory competition in the whole world. In Europe, the Centros decision,15has

had its impact on the competition between countries on the area of lawmaking. Today, in Europe,

it is possible for start-up firms of all sizes to select a statutory seat anywhere in Europe. This

means that a start-up firm can choose to incorporate in another European country, regarding the

most favorable conditions.16As a result, many entrepreneurs started a company in the UK, using

the new LLP business form, since it is the most flexible business form in the EU. Also in the US,

different business forms of the LLC arose as a result of the competition between states.17

Thecompetition between countries also had its effect on the minimal capital requirements in different

EU member states. This led to the elimination or reduction of the minimal capital requirements.18

Furthermore, interest groups have played an important role in the introduction of the hybrid

business forms. According to the public choice theory, interest groups are needed when a

14J.A. McCahery, E.P.M. Vermeulen, Corporate Governance of Non-Listed Companies, Oxford University Press,

2008, p. 102.15

ECJ 9 March 1999, case C-212/97, ECR 1999, p. I-1459 (Centros Ltd. v. Erhvers-og Selskabsstyrelsen)16W. Bratton, J. McCahery, E. Vermeulen, How does Corporate Mobility affect lawmaking? A comparativeanalysis, Amsterdam Center for Law & Economics Working Paper No. 2008-01, p. 3. Available at SSRNhttp://ssrn.com/abstract=1086667.17

M. Siems, Regulatory Competition in Partnership Law, International and Comparative Law Quarterly,2009, p. 767-80218

W. Bratton, J. McCahery, E. Vermeulen, How does Corporate Mobility affect lawmaking? A comparative

analyses, Amsterdam Center for Law & Economics Working Paper No. 2008-01, p.7. Available at SSRNhttp://ssrn.com/abstract=1086667.


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entrepreneur to act under a different name, although its liability is personal, as occurs with the

partnerships.

In contrast, the French Entreprise unipersonnelle responsabilit limite (EURL) does

create a new legal entity. This implies a separated patrimony and limited liability for the sole

proprietor.22 In Colombia, the regulation is similar to the French. Indeed, the Sole Proprietor

Enterprise (Empresa Unipersonal) creates the possibility to establish a new legal entity with a part

of the assets of a legal or natural person in order to perform commercial activities. Therefore, the

sole proprietor is protected by a limited liability regime and the traditional requirement of

plurality of shareholders was removed. Additionally, it is possible to create this enterprise by a

private document without the notarization requirements. Furthermore, when determining the

purpose and the duration of the company, the entrepreneur can state that the enterprise can

involve in any business, and that the enterprise is not subject to any temporal limitations.

Nevertheless, this entity does not have the legal status of a company.23 As a result, it excludes

other forms of business involving two or more investors.

A further hybrid business form in Colombia is the Single Shareholder Company (Sociedad

Unipersonal), a single entrepreneur was able to create a company. The entrepreneur could choose

between the Collective Company, Limited Liability Company (Ltda.), and the Anonymous Company

(S.A.) regimes. This new law was based on the principles stated before about the Sole Proprietor

Enterprise. Therefore, this corporate form represents an improvement of thelatter, introducing

the first formal companywithout the plurality requirement, and not just an enterprise vested

with legal entity.

Nevertheless, the Single Shareholder Company faced significant limitations, since it was just

available for the small companies (those with an amount of capital equivalent to US $ 126.605 in

2009 and with less than ten employees). This did not only exclude the middle and big enterprises,

but also excluded the successful entrepreneurs. Indeed, if a company who initially fulfilled the

22French Law number 85-697 of 11 July 1985.

23The Sole Proprietor Enterprise has been defined by the Colombian Constitutional Court as an enterprise vested with

legal entity (not as a company). C.A. Arcila Salazar, Simplified Joint Stock Company e-Mercatoria Legal Review.Available athttp://www.emercatoria.edu.co/PAGINAS/VOLUMEN8/PDF01/sociedad.pdf
http://www.emercatoria.edu.co/PAGINAS/VOLUMEN8/PDF01/sociedad.pdfhttp://www.emercatoria.edu.co/PAGINAS/VOLUMEN8/PDF01/sociedad.pdf


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was abused, leading to monopolistic power which was reflected, inter alia, in high taxes. As a

result, the US rapidly intended its independence as a country, and since the late eighteenth

century, its legal regime has been autonomous. Over the years, its regulatory importance

increased, and foreign countries became attracted by regulations within the US. For this reasons,

nowadays the United States is seen as an origin country, in which the judicial review plays a

relevant role for the adoption of legal changes and the legal developments depends directly of the

regulation made by each State. Particularly, Delawares law is the most significant company law

regulation, and is usually transplanted by foreign countries.

On the other hand, the French legal system belongs to the civil law tradition, like most of the

continental European countries. France is often classified as part of the Romano-Germanic family

of law, because of its historical links with both Roman law, and Germanic customary law. From the

thirteenth century, the Northern part of France was under the influence of droit coutumier

(Germanic tribe customs), and the Southern part was controlled by droit crit (Roman law

influence). During the Ancien Rgime (ancien droit), dated among the 16th century until the

Revolution, France emerged as a nation-State, under the strong centralization of royal authority.

The sources of law of that period included coutumes locales (local customs), Roman law, canon

law, royal ordinances, the case-law of the Parliaments, and doctrinal writings (doctrine). Law wastaught in the universities. Academic writers exercised an important influence on the development

of a droit commun (jus commune) through systematic expositions of the law. The period of the

Droit intermdiaire (1789-1803, between the Revolution and Napoleon), saw a period of

tumultuous and violent alteration to the social order. In the midst of much bloodshed, the

Revolution abolished ancient privileges, while establishing equality before the law, the guarantee

of individual liberties, and the protection of private property. It introduced a fundamental break

with regard to constitutional law, with the introduction of a written constitution separating

legislative, executive and judicial powers, and establishing a dual court structure, regular and

administrative courts. Napoleon's major achievement was the drafting of the Code Civil des

Franais, as well as four other codes which unified private law. Under this view, the French

Corporate Law is expressly regulated in legal mandates, without giving faculties to the judge to

create rules, the authority is given to the lawmakers, and the judges are only law applicants and


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interpreters. Regarding this development, countries as Spain, with a clear influence of the civil law

regime, transplanted its civil and commercial law from France, adopting, for example, the

Napoleonic Code, which later has an impact in Latin America countries as Chile and Colombia.

Quite the opposite occurred in countries as Colombia, whose entire legal regime was mainly

transplanted from France, Spain, Chile, and in the last few years from the United States. During

the colonization period the Colombian Commercial Law was directly influence by the Spanish Law

by the Ordenanzas de Bilbao (Bilbaos Ordinances). The first Commercial Code was issued 1853,

which was almost an exact copy of the Spanish Commercial Code of 1829. However, with the

expedition of a new Constitution in 1886, Colombia ceases to be a federal State to be converted as

unitary Republic. As a result of these legal changes, it was issued a second Commercial Code in

1887, which was the recompilation of norms taken of the Commercial Code of the extinct State of

Panama, and the federal Government, which regulated the maritime commerce. Both legislations

were transplanted from the Chilean Law, which in turn it was a copy of the Spanish and French

legislation. On 1971, a new Commercial Code was issued. The articles were drafted in accordance

with the country's realities of the moment. For this reason, some of its rules are the reproduction

of norms sufficiently known and praised at that moment in the world. This new code had a direct

influence from several legislations, such as the Italian, French, Swiss, German, Venezuelan,Honduran and Argentinean. This code was written in accordance with the commercial situation

in America and in the world, and regarding the commercial experience acquired by Colombia

as an independent nation. This commercial code (adopted in 1971) is currently in force, and has

been partially amended and modified through the years.

FIGURE 4. Chronological Line: Colombian Company Law History

Colombian Independence

Federal Regime Unitary RepublicSpanish domain in

Colombia

1514 1819 1853 1886 1887 1971New Constitution New Constitution Second Code of Current Code of

First Code of Commerce Commerce Commerce


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Furthermore, in 1999, Berkowitz et.al. (hereinafter Berkowitz) researched the influence of

effective legal institutions (or legality) on the economic development of transplant countries

regarding the process of transplanting a law.26 Berkowitz distinguished between receptive and

unreceptive transplant countries27, and between direct and indirect transplant countries28. A

receptive transplant country is a country that made an informed choice in deciding to adopt and

adapt the law or has familiarity with the chosen law. An unreceptive transplant country is a

country that lacks both of these conditions. On the other hand, a direct transplant country is a

country that obtained the law directly from the origin country29, and an indirect transplant country

is a country that obtained the law from another transplant country. For the purpose of this paper,

it is important to note that Berkowitz concluded that Colombia was an indirect-unreceptivetransplant country.

Additionally, Pistor et.al. (hereinafter Pistor) undertook a similar study which will be

discussed latter. However, at this stage is sufficient to state that both theories (Berkowitz and

Pistor) conclude that successful transplants are obtained only if prior the introduction of a new

law, the lawmaker studies its convenience and necessity in the light of the socioeconomic

environment of the country. It means that the modification of certain law has to correspond with

the social and economic demands of the country, since they determine its efficiency. Furthermore,lawmakers shall bear in mind that the success of a legal rule in one country does not guarantee

the same outcome in the transplant country. Indeed, the socioeconomic circumstances of origin

countries arenormally different than those on transplant countries, and their legal evolution tends

to take place continuously and gradually30. In contrast, in spite of having a long period of

evolution, transplanting countries tend to adopt radical legal changes. Pistor consider such

differences as the major causes of the failure of an imported law in a host country, as presented in

the following section.

26D. Berkowitz, K. Pistor, J. F. Richard, Economic Development, Legality and the Transplant Effect, 1999, p.

1-2. Available at SSRN: http://ssrn.com/abstract=183269. (Hereinafter: Berkowitz et.al.).27

Id. p. 10-13.28

Id. p. 13-15.29

The origin countries are those from which the transplanting countries adopt its law models.30

Id. K. Pistor et. al. p.91


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2. EFFECTS OF THE LEGAL TRANSPLATS

As explained above, in order for a law to become as effective in a transplant country as it is in

an origin country, a demand for that particular law must already be present in the country to

facilitate the actual use of the law in practice. In addition, it was found that the legal institutions

must be swift in responding to this demand by developing the transplanted law according to the

specific needs and circumstances of the country. 31When these two circumstances are not present

in the country at the moment of the legal transplant, the effectiveness of the law will be lower

than in the origin country, the so-called transplant effect. Berkowitz concluded that every

transplant country is exposed to the transplant effect, unless it is a direct-receptive transplant

country.

Pistor and Berkowitz concluded that Colombian company law fits the general rule, rather than

the exception. In other words, the adoption of foreign laws was followed by the transplant effect,

since the performance of the transplanted law would be less effectively then in its country of

origin. Their analysis of the Colombian company law was limited to the codes of commerce

adopted in 1853 and 1887, which were transplanted from Spain and Chile, respectively. According

to Berkowitz, Colombian laws during this period were chosen and adopted without even

considering their contents.32

In 2003, Pistor delved into the development of corporate law all over the world.33Pistor found

clear distinctions in the development of corporate law between origin countries that developed

their respective corporate law systems internally and the transplant countries that copied and

adopted the entire (or part of the) corporate law of the origin countries into their legal systems.

Pistor observed two different patterns of change in the legal environments of transplant countries,

which in turn could not be detect in the origin countries. The first pattern is lethargy, while the

31Id. p. 2

32D. Berkowitz et. al. Economic development, legality, and the transplant effect. European Economic Review

47 (2003), p. 180.33

K. Pistor, Y. Keinan, J. Kleinheisterkamp, M.D. West, The Evolution of Corporate Law: A Cross-CountryComparison, Columbia Law School Center For Law and Economic Studies , Working Paper No. 232, 2003, p. 3-7. Available at SSRN http://ssrn.com/abstract=419881


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second pattern is the direct opposite, namely erratic change.34Pistor argued that the pattern of

erratic change could be found in French civil law countries, including among other countries,

Colombia. In this regard, Pistor uphold that with the Code of Commerce of 1853, which followed

the Spain model, Colombia enacted an unsuccessfully liberal corporate law, as a consequenceof

the economic backwardness of the country, which rendered corporate law largely irrelevant.35

Pistor also consider the Colombian Code of Commerce of 1887, based on the Chilean model, as

another erratic change. She concluded that this legal change occurred because lawmakers felt a

need to follow one of the most advanced legal systems in Latin America of the time, not because

there were particular domestic reasons for doing so.36

In conclusion, according to Pistor, the erratic changes in Colombia did not result directly

from the effect that the transplanted corporate law had on Colombian domestic affairs, but were

more due to the diverse choice of countries from which it decided to transplant corporate law. 37

Pistor pointed out that after several transplants of corporate law, Colombian corporate law was

still not much of a success, since these changes in corporate law did not have any significant effect

on Colombian economy. Pistor also concluded that in transplant countries the development of

corporate law either tends to be erratic or to decline altogether,38since transplanting countries

are not prepared to assume the changes inherent to the change in the law. Pistor found that legaltransplants cannot function in the host countries as they do in the home countries.39

Furthermore, related to legal transplants, Alan Watson40analyzed the basic factors that

may determine the failure or success of a legal transplant. These factors include among others the

problems that occur when transplanting legal concepts and the political and historical differences

34Id. p. 37.

35 K. Pistor et. al. Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries. TheWorld Bank Research Observer. Vol 18. No 1 (Spring 2003). Page 98.36

Id, Pistor et.al. Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries.Pag 9837

Pistor mentioned corporate law transplants from Spain in 1853 and from Chile in 1887. See Id.p. 41-42.38

Id. p. 59-60.39

Id, Pistor et.al. Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries.Pag 9940

F. Reyes Villamizar, Corporate Governance in Latin American. A Functional Analysis, Paul M. Hebert LawCenter; Louisiana State University. Available at http://ssrn.com/abstract=1005208. See supra note 9.


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between the origin and the transplant countries. All of these factors must be considered in our

analysis of the effects of legal transplants in Colombia.

3. LEGAL TRANSPLANT THEORY. THE KEYSTONE FOR LEGAL CHANGES?3.1. Analysis of the Legal Transplant TheoryThe Legal Transplant Theory proposed by Pistor, Berkowitz and Alan Watson, described in the

previous section, deserves some comments and observations. First, lawmakers in both, origin and

transplanting countries, shall undertake a comprehensive analysis about the socioeconomic

circumstances of the country prior the adoption of a legal change. Origin and transplanting

countries must follow an adaptation process to guaranty the successfulness of the modification. As

a result, unsuccessful legal changes can occur in either system, resulting from uninformed

decisions.

Since origin countries create the law under the basis of their own experience in a particular

moment, the effectiveness of legal changes is expected to be higher than in transplanting

countries, which merely replicate foreign models. However, although the successfulness of a legal

change is more feasible in an origin country than in transplanting countries, not all the legal

transplants are called to fail. The German and Brazilian experience of the Neuer Markt and Novo

Mercado (New Market), respectively, is illustrative of the previous affirmation. Neuer Markt and

Novo Mercado are considered as alternative new markets created within the established stock

exchange. Their similar characteristics allow us to conclude that Brazilian Novo Mecado is a legal

transplant from German Neuer Markt, despite no author has explicitly reached such conclusion.41

As a result, Germany is deemed to be the origin country, while Brazil shall be the transplanting

country in this case. In such circumstances, Neuer Markt is expected to be more effective and

successful than Novo Mercado, applying the general rule stated above. However, the Neuer Markt

41() To be sure, Brazils Novo Mercado and Costa Ricas Mercado Alternativo para Acciones appear to be

less modeled on AIM than on the now extinct German Neuer Markt. (See 3rd Board Listing: A viablealternative for SMEs looking for growth, Entrepreneurs Digest Association of Small and Medium Enterprises,

Singapore, available at http://www.asme.org.sg/).


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was closed in the end of 2003 after losing nearly all of its value, in no more than six years of

existence. In contrast, Novo Mecado is almost the most successful stock exchange market in the

world.42

The previous example demonstrates how unsuccessful can be a legal change, in spite of being

adopted by an origin country, even if it theoretically corresponds with the specific socioeconomic

conditions of the country. On the contrary, the Novo Mercado proves that the legal change in the

transplant country can be even more effective, despite being imported. Indeed, Brazilian

lawmakers did not only reproduce the main characteristic of the German Neuer Markt, but also

adapted the legal change into Brazilian reality after an exhaustive examination of the economic,

social and legal needs.

Although the legal transplant theory suggest that legal changes in origin countries are

somehow infallible, several famous cases reveal the entirely opposite. For instance, it is hard to

explain under the legal transplant theory the financial crisis generated by Enron and Parmalat, in

the US and Italy, respectively. Indeed, it is irrelevant whether they where origin or transplant

countries regarding their financial systems at that moment. The truth is that American and Italian

corporate governance rules were insufficient to protect investors interests. For example, some

authors established that Enron scandal demonstrated that companys corporate governance

exhibited serious failures of monitoring, which can be traced back to conflicts of interest on the

part of board members and its auditors.43Particularly, the American crisis generated after Enrons

collapse proves that origin countries are not immune to unsuccessful legal changes. On the

contrary, failures in origin countries tend to have cross-border effects, since origin countries are

42 In 2007, Brazil was the third most active IPO market in the world, after China and the U.S., and was

responsiblefor 10% of the volume of such offerings worldwide.()The So Paulo Stock Exchange was hometo the largest IPO worldwide through the first three quartersof 2009, which, at approximately $8 billion, wasthe largest in its history. The Novo Mercados apparent success to date has not gone unnoticed by stock

exchanges in other developing countries. Major stock exchanges in India and the Philippines are drawing on

Brazils experiment as they design their own corporate governance listing standards (R. Gilson et. al.Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and the EU.Availableat: http://ssrn.com/abstract=1541226)43

S. Deakin and S. Konzelmann. Corporate Governance after Enron: An Age of Enlightenment. Available atthe book: After Enron. Improving Corporate Law and Modernising Securities Regulation in Europe and theUS.Pages 155156.


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usually the most developed in the global context.44Actually, some authors argue that Enron was

the prelude of the current market meltdown45.

Bear in mind that the legal transplant theory states that origin countries always adopt their

legal changes in an informed manner, regarding the particular socioeconomic circumstances of the

country. Under such statement, Pistor, Berkowitz and Alan Watson conclude that legal changes in

origin countries are deemed to be successful. If the theory is accurate, the Sarbanes-Oxley Act

(SOX) shall comply with all these conditions. However, this is far from being the case. In the

second semester of 2001, some listed companies in the American markets collapsed. Nonetheless,

it is uncontested that the Sarbanes-Oxley Act (SOX) was adopted as a direct response to a specific

situation: the Enron crisis. Even if the SOX dealt with some of the legal loopholes, 46 those are

precisely the legal failures revealed by Enron. Additionally, the SOX was adopted in less than nine

months after Enrons bankruptcy which proves that the SOX was not the result of a conscientious

decision by the US Congress. This conclusion is reached by D. Skeel, summarized by J. McCahery

et. al.,

Skeels account is thus sympathetic to the widely-held view that Sarbanex-Oxley Act was

a knee-jerk response to populist pressure. It is doubtful whether this piece of legislation,

passed as quickly as it was, can have been adequately thought through.

47

Consequently, the Neuer Markt and Enron cases prove that legal changes in origin countries

can fail. It is not a matter of origin or transplanting countries.

Another relevant aspect of the Legal Transplant Theory is the similarity of the legal regimes

between origin and transplanting country. Pistor stated that legal transplants between members

44Origin countries are not necessarily developed economies. Instead, legal rules adopted by developing or

less developed countries can be transplanted into other systems. However, this is the exception, rather than

the general rule.45

R. Bryce, From Enron to the Financial Crisis, With Alan Greenspan in Between Today's disaster is a result oflessons not learned during the Enron mess. U.S. News & World Report. May 14th, 2010. 46

Mainly, the SOX adopted specific rules concerned auditors and protection of their independence; imposesstandards on the certification of annual and quarterly reports by CEO and other leading officers; introducesa definition of non-executive director independence, and so on.47

J. McCahery and J Armour. After Enron, Improving Corporate Law and Modernising Securities Regulationin Europe and the US. Hart PublishingOxford and Portland, Oregon. 2006. Page 4.


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realistic reasons, mainly the budget constraints. Indeed, an adversarial system requires huge

investments, in which a developing country as Colombia cannot incur at once. The adoption has to

be progressive and the rate of growing will not be the same as in a developed State. Nevertheless,

regardless of the transplant effects, the Colombian criminal law is more efficient and guarantor.

3.2. Analysis Undertook by Pistor and Berkowitz Regarding ColombiaHowever, the previous example is not the most important case in Colombian Law for the

purpose of this paper. Instead, it is necessary to refer to Pistors and Berkowitzs studies of

Colombian company law, mainly to the codes of commerce adopted in 1853 and 1887. Bear in

mind that Pistor issue its study in 2003, while Berkowitz did so in 1999. In spite of that, their study

about the Colombian case was based in laws that were issued approximately 157 years ago, and

which are no longer applicable, leading to an outdated and erroneous study.

Although it is true that Colombia transplanted its Code of Commerce in 1853 from Spain, its

decline cannot be adjudicated to the Legal Transplant Effect. To understand why this Code

failed, it is necessary to analyze the socioeconomic conditions of the country. Colombia was a

colonized country by the Spanish crown, and only 34 years after the independence the first Code

of Commerce was issued. For the Colombian reality of that moment it was clear that its legal

regime had to follow the steps of Spain, because they governed the country for more than 200

years. Colombia followed the legal system of its colonizer, as all the colonized countries made. For

instance, although in the present days the United States have an independent legal regime, in the

immediately years after their independence of England they pursued the British rules. The

adoption of the Code of Commerce in 1853 was neither an uninformed decision nor an

unnecessary decision, on the contrary, the socioeconomic conditions of the country claimed for a

Commercial regulation. It was a decision made by a country that did not have any independent

commercial practice at the moment. In consequence, neither a new law created in Colombia nor

the transplanted laws were called to success. Furthermore, it is not plausible to pretend that a

colonized country had to set up a commercial regulation from nothing, ignoring the tradition

learned from Spain.


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The failure of the second Colombian Code of Commerce, issued in 1887 based in Chilean legal

regime, was explained by Pistor as follows. The legal change occurred because lawmakers felt a

need to follow one of the most advanced legal systems in Latin America of the time, not because

there were particular domestic reasons for doing so.50This statement deserves several comments,

demonstrating that the further change of this Code of Commerce did not result from the Legal

Transplant effect either. Indeed, several socioeconomic circumstances determined the need for a

new regulation. As mentioned above, in 1886 Colombian ceased to be a federal state to become a

Unitary Republic. For that reason, the legislator analyzed the commercial circumstances of each

extinct State and after a comprehensive study of Colombian reality, adopted the regulation of one

of them (Panama), based on its great development and success, adding some former federal rules.

Consequently, Pistor fails in asserting that there were no particular domestic reasons for

adopting the legal change. Additionally, the Code of Commerce was not adopted merely because it

was based on the Chilean model. It is true that Panama (at the moment part of Colombia)

transplanted its commercial regulation from Chile. However, the early constituted Republic of

Colombia adopted the Panamanian Code of Commerce based on its great performance in that

State. It is plausible for the lawmaker to suppose that a successful regulation in one of its States

(Panama) would succeed in the rest of the country. Consequently, the lawmaker considered thatthe risk of failure were low, based on such experience.

Surprisingly, neither Pistor nor Berkowitz studied the current Code of Commerce, adopted in

1971, in spite of being a legal transplant from different countries, as mentioned above. It was a

Code adopted after a broad analysis of the socioeconomic conditions of the country, with the

objective to introduce Colombia in a globalized world. Prior its adoption, the most notable legal

experts in the country debated the content of the code. After their advise, the Colombian

Congress enacted the Code of Commerce, transplanting new rules from other advanced legalsystems and adjusting former Colombian norms to the new reality.

50Id, Pistor et.al. Evolution of Corporate Law and the Transplant Effect: Lessons from Six Countries.Pag 98


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Nowadays, this Code regulated all the commercial transactions developed in the country,

including company law. Through the years, the legislator modified and complemented some rules

of it, in order to actualize its content to improve Colombian economy and make it an attractive

country for foreign investors. As a result, it could be concluded that the Colombian Code of

Commerce of 1971 is a successful legal transplant because it has been survived for 39 years, and it

is witness and one of the direct promoters of the positive evolution of the Colombian economy in

the last years.51

Bear in mind that the entire Colombian legal regime is a transplant especially from France,

Chile, Spain, and in the current years US. For instance, the Colombian Code Civil of 1887 is the

copy of the Chilean Code Civil, which in turn was adapted from Napo leons Code. In spite of the

decline and modification of some rules, it contains the founding rules of Colombian legal system.

However, under the Legal Transplant Theory, the Colombian legal regime is called to fail,

particularly regarding rules imported from common law countries. This assumption leads to the

conclusion that non-origin countries should come up with new legal rules, ignoring successful

developments obtained through the world.

Additionally, the adoption of further legal changes replacing current transplants is not a proof

of their failure. Law shall follow society, and therefore even origin countries are introducing

changes regarding the evolving socioeconomic circumstances. This is not to say that every legal

transplant is necessarily successful. Transplanting countries, such as Colombia, are full of examples

of imported legal changes whose outcome is contrasting. While some are real failures other prove

to be efficient in their implementation in the country. However, either outcome cannot be

explained under the legal transplant theory. The Congress is the main lawmaker in democratic

societies, and its political character is undeniable. Its decisions do not always met the social needs,

and sometimes its decisions are rather uninformed. Nevertheless, legal changes (transplantsincluded) can also be the result of coherent and informed decisions.

51 The BBCMundo.com on April 2007 classified Colombia the third Latin American country attractive for

private investment.


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Wyoming as a response of the oil and gas enterprises needs, in order to adapt a legal entity that

allowed the entrepreneurs to keep the tax benefits with a limited liability regime. Nowadays,

every US State has a LLC statute.

From the creation of the Limited Liability Company until the present days, it is the most

attractive business form for small entrepreneurs, and every year increase the percentage of

companies that are constituted under this type of business form. Quite the opposite occurs with

Limited Partnerships that, in comparison with the LLC, their constitution do not have substantial

variations per year. Limited Partnerships became unattractive for the entrepreneurs since it is

require, for its constitution, at least one general partner that always assumes personal liability for

the debts of the company, condition that ends to be the biggest drawback of this form.

Furthermore, although the limited partners have limited liability, the role that they have on the

running of the company is also limited and if they exceed their limits, they have the risk to lose the

limited liability benefits, which also constitute a disadvantage. The following graphic

demonstrated the successful of the Limited Liability Company in the last few years while the

Limited Partnership does not have further progress.

FIGURE 5. Limited Partnership Vs Limited Liability Company

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LP

LLC

Mariana Acua2010

Source: Internal Revenue Service United States Department of the Treasury


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1.1. Characteristics of the Limited Liability Company

Firstly, it is important to establish that although the US Federal Legislator promulgated the

Uniform Limited Liability Company Act, each State has its proper legislation, based in the above

mentioned act, to regulate the Limited Liability Companies. However, those regulations are default

rules, which only apply in the events that are not expressly regulated by parties in the LLC

operating agreement, and they can be modify by the LLCs members.

Limited Liability Companies are consider as entities separated from their members, and can be

formed for any purpose necessary for the development of their activities. The only requirement is

that the purpose has to be lawful. The LLC has to be constituted trough articles of organization53

,

and the members could created an operating agreement54, in which they decide how the company

is going to be governed, that is, under which legal regime the company is going to perform.55

Moreover, for the formation and development of the LLCs, it is necessary to fulfill some

formalities, such as maintaining a registered office and keeping certain records, as well as,

including in the name of the company specific words, such as LLC or Limited Liability Company,

that allow third parties to know the owners of the company are protected with limited liability.

Furthermore, most States require that the operating agreement establishes the LLCs existence

period (usually 30 years). In the absence of such clause the LLC will cease to exist in the event of

53The articles of organization are comparable to the corporate articles of incorporation. They are the basic

organizational document of the LLC. This document is obligatory for the formation of an LLC, is consider asthe certificate of formation. Articles of organization are filed with the secretary of the State where the LLC isto be created, and only after they are filed the limited liability protection come into effect.54

The operating agreement is a contract between the members of the LLC related to the operation andgovernance of the LLC. In this agreement can be found who the members of the LLC are and what theirinterest in the capital of the LLC is. This contract is also useful for the members of the LLC to modify the

statutory default rules that might otherwise apply to the company.55

Most Statutes, known as flexible Statutes, permit members (who are owners) of an LLC to enter into anyagreement they desire to govern internal relationship within the LLC; they are only limited by broad public

policy restrictions () In other words, you can agree in the contract between the members (the operating

agreement which is analogous to a shareholders agreement for corporate shareholders or a partnership

agreement in the partnership context) to almost anything you wish. If, however, you dont agree as to a

specific matter then the rules of the State law where the LLC is formed will apply. (M. Shenkman et. al.

Starting a Limited Liability Company. Second Edition. United States of America, 2003. Page 5).


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the death, retirement, withdrawal or bankruptcy of a member. However, in the present of any of

those events, the members could decide to continue the LLC's existence at a later date.

Most States allow the LLC to be set up by one person (single member) and there is not any

maximum number of membersrequirement. In this respect, members are considered as persons

who have the right to vote on the LLC matters, the right to obtain information from the LLC and

the right to act as an agent of the company (non-economic rights), as well asthey have the right

to allocate LLC profits and losses, and the right to receive distribution of the LLC assets (LLC

interest - economic right)).56 The member interest could be transferable only if there is

unanimous consent, unless the operating agreement provides different regulation in this respect.

All the restricting transferability rules can be changed by the owner of the LLC. Moreover, the

members could delegate the management of the company in third persons. Nonetheless, if they

do not make it expressly in the operating agreement, the default rule provides that the LLC shall

be managed by its members. The fact that the members are managers of the LLC does not mean

that they lose the limited liability protection.

On the other hand, the LLC provides flexibility in the way the members structure the voting

rights and the decision-making processes. Normally, the financial rights and control of the

company through voting rights are given according to members contributions to the company.

The contributions could be made in many forms, including cash, property, services, promises to

provide those things, or debt guarantees. Additionally, one of the benefits of a limited liability

company is that there is no minimum amount of contributions. In fact, the members do not have

any obligations to make contributions.

As previously explained, the most attractive quality of the LLC is the assignation of limited

liability to all its members. However, the limited liability does not imply owners are always fully

protected from personal liabilities. Courts canpierce the corporate veil of LLCs when some type of

fraud or misrepresentation is involved. Furthermore, the members are personally liable for the

collection and payment of employment taxes, as well as for failure to submit withheld taxes.

56J. Cunningham. Drafting Limited Liability Company Operating Agreement. Aspaen Publishers Inc., 2004.

Page 3-14.
http://en.wikipedia.org/wiki/Pierce_the_corporate_veilhttp://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Pierce_the_corporate_veil


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Additionally, it is possible to transform a Corporation, Partnership or a Limited Partnership in a

Limited Liability Company. Nevertheless, the debts or the obligations that the corporation, the

partnership or the limited partnership had acquired automatically became debts of the LLC.

Finally, in the operating agreement the LLC members should established the taxation regime

that is imposed to the company. However, the default rules determine that the LLC itself does not

ordinarily pay taxes on its own behalf as a separate entity. The income of the Limited Liability

Company passes through to its members, who report the income on their personal tax returns.

2. SOCIT PAR ACTIONS SIMPLIFIES (S.A.S): THE FRENCH BUSINESS FORMSocit par actions simplifie (S.A.S.)was introduced by Law 91-1 of 3 January 1994. It was

created under the idea to give the founder of the company more flexibility setting its basic rules.

It is considered as the first hybrid business form adopted under the French Law. It is modeled by

the Common Law Principles, which means that have similar characteristics to the US Limited

Liability Company and the UK Limited Company. Nowadays, Socit par actions simplifie (S.A.S.)is

increasingly used, especially by small and mid-size businesses. Furthermore, the SAS are clearly

favored by foreign groups which are setting up subsidiaries in France.

2.1. Characteristics of the Socit par Actions Simplifies (S.A.S)The organization of the

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