This report contains a glimpse of Company Law and Corporate Governance in Venezuela, focusing in its most recent developments. Venezuela pertains to the Civil Law system and thus, Company Law is mainly comprised in a series of Statutes (laws, regulations, and other administrative rules). The Commercial Code (1955) and the Capital Market Law (1998) set up the legal framework for private and public corporations, respectively. Supplementary laws and secondary laws add to this framework, also encompassing the interests of other stakeholders. The limited development of capital markets in Venezuela in comparison with other countries of the region is the outcome of several features. Concentration of ownership in the hands of the State and familiar groups, though characteristic of the region are more accentuated in Venezuela. The financial crisis of 1990-1994 influenced the development of new rules of financial intermediation. Private initiatives (self-regulation of corporate governance matters) have recently gained more pre-eminence due to limitations of the legal and judicial mechanisms towards efficient functioning of the capital market. These initiatives thought, might lose importance in the light of recently announced reforms. Along with an emphasis in minority shareholders protection, such reforms comprise the Constitution and the general legal framework, including Company Law matters.

SOMMARIO:

Introduction - 1. Venezuela’s Legal System and Financial Market overview - 2. Company Law in Venezuela - 3. Venezuela in a Regional context - NOTE

Introduction

This brief look into Venezuela’s Company Law and Corporate Governance focuses on new developments and reforms. It describes the main features of the Venezuelan legal system and puts Venezuela into context within the Latin American and Andean region. Although capital markets remain underdeveloped, latest reforms have mostly targeted them. Those include the Reform of the Capital Market Law and secondary norms in different areas, produced by the National Securities Exchange Commission (Comision Nacional de Valores, hereinafter CNV). The First part of this report delineates the main relevant characteristics of the legal system and the capital market. The second part concentrates on the most important provisions that regulate private (non-listed) and public (listed) corporations, contained in the Commerce Code and the Capital Market Law, respectively. The third part puts Venezuela into a broader context by sketching the main features shared with Latin American and Andean Countries. Some of the latest reforms and discussions proposed at a regional level are briefly examined.

1. Venezuela’s Legal System and Financial Market overview

Legal System Venezuela’s legal system pertains to the Civil Law tradition. However, particular characteristics of the region have influenced and re-shaped it [2]. The legislative branch establishes the legal framework under the limits of the Constitution (1999). This latter, set up the rights to economic freedom and property, which are the basis for all other legislative and administrative regulation in the field [3]. As recently announced, the Constitution will be subject to a major reform, where all articles (except for the first 9) will be reviewed and eventually changed. Reforms in the subject could change the system of distribution of profits in companies and the governance system in order to allow workers participation. Company law is dispersed in a wide array of Statutes pertaining to diverse areas and with different hierarchies. Most of the rules that govern private enterprises are included in the Commercial Code (hereinafter C.C.) [4]. This Code regulates commercial operations whether or not executed by tradespersons [5], while the Civil Code regulates civil associations. However, the Civil Code is still applicable in the absence of specific rules and legal remedies. Regulation of capital markets and public corporations is contained in the Capital Markets Law (1998) and secondary laws developed by the CNV. As in other Private Law areas, the vast majority of commercial rules are default rules. Those regulating public offers in capital markets and a few others in the C.C. are, however, mandatory rules, aiming to protect a specific group considered «weak» (for instance, minority shareholders or employees) or a concept that entails public concern (such as public savings). Capital Market Venezuela’s capital market is underdeveloped even in comparison with other countries of the region [6]. By the end of March 2001, only four companies with major market capitalization had one domestic institutional investor. Participation of domestic financial institutions on the market of capitalization was 42.14% whilst participation of domestic non-financial institutions on the market of capitalization was 57.86%. Controlling shareholders held more than 20% of participation in 16 of the 20 companies with major capitalization at the Caracas Stock Exchange [7]. Although for the last few years, the economy has been growing due to higher oil revenues, a clear development of the capital market has not followed. [continua ..]

2. Company Law in Venezuela

The Commercial Code Venezuela’s legal system recognizes commercial companies [10] and their main features: legal and separate personality from its shareholders, separate patrimony and limited liability. It establishes four different types of companies. Only the «Sociedad Anónima» (hereinafter SA) and «Sociedades de Responsabilidad Limitada» (hereinafter SRL) have limited liability. Overall, the most used legal figure remains the SA, probably due to a legal capital cap for the SRL (their capital cannot exceed 2 million of Bolivares, approximately 950 $ at the current official exchange rate of 2,150 Bs. per $ [11]. As a consequence, the SA, designed to raise capital for large enterprises, is routinely used for small and medium businesses. The C.C., under Title VII (articles 200 to 352), regulates all aspects of private corporations (including unlimited responsibility companies) from their incorporation to their extintion (through dissolution, liquidation or merger). However, this survey focuses on limited responsibility companies, for they are the most commonly used. The doctrine of piercing the corporate veil [12] has been pursued by Courts rulings in accordance to criteria from other jurisdictions and in order to avoid abuse of legal fictions [13]. Likewise, judicial decisions and laws have endeavored to ascertain the real economic basis beyond legal formalities [14]. Some special laws have dealt with the abuse of legal formalities, mainly in the banking area and as a result of the financial crisis [15]. However, no general statute has so far regulated this doctrine. The C.C. establishes the essential features to be included in the incorporation articles and by-laws. Those include the name, social object, statutory auditors (comisarios), capital structure and shares and how dividends will be paid, among other issues. For practical reasons, the by-laws (containing the regulation of the company) and the incorporation articles are usually contained in one document. The C.C. sometimes refers to them together (Art. 213) or separately. The system thus differs from some jurisdictions where the incorporation is an administrative act and the by-laws are a clearly separated text, made by the company after its incorporation [16]. The C.C. does not directly regulate the «ultra vires» doctrine. Whether an act exceeding the objective of a company shall be nullified and until what [continua ..]

3. Venezuela in a Regional context

Latin America Latin American countries share a legal tradition based on Civil European Codes [50]. The inefficiency of the judicial system has increased the use of alternative dispute resolution mechanisms such as arbitration, conciliation and mediation [51]. A high degree of ownership concentration and the paramount role of State-owned companies are features shared with other Latin American countries. Moreover, Venezuela presents a higher level of State participation, in spite of privatization movements in the region. This tendency has accentuated within the last years [52]. Another important characteristic, shared with the region is the concentration of ownership in the hands of family economic groups [53]. As in other regions of the world, medium and small sized businesses are usually family-owned companies, not listed in the market, which «should also adopt sound practices if they wish to remain competitive». Therefore, not only public investors have an interest in good governance but the role of Banks and financial institutions outside the capital market is decisive given the limited role of this latter [54]. The reforms of public pensions in Latin America add another justification to care about corporate governance. Although Venezuela is behind other countries with regard to those reforms, it would be useful to develop such framework beforehand. Another relevant fact in the region is the reduction in the number of companies listed in domestic markets [55]. Companies have de-listed and the largest companies continue to change to the depository receipt markets in New York. Since foreign emissions were included under the Sarbanes-Oxley Act (2002), Latin American companies with American Depositary Receipt (ADR) programs have to adapt their corporate practices in order to comply with those requirements [56]. Between the CAN and MERCOSUR Despite the recent exit of Venezuela from the Andean Community of Nations (hereinafter CAN), some communitarian developments are worth to mention. The CAN has long established investment and other rules of importance for company law. Moreover, efforts to harmonize corporate governance under the CAN are based on the OECD recommendations (see White Paper above). Finally, Venezuela still has a Cooperation Agreement with the CAN and for the following five years (from 2006) it will maintain the liberalization schemes already in place. Although it is difficult to predict if it [continua ..]

NOTE