Protecting Minority Shareholders in Costa Rica.
In corporate governance, balancing majority control and minority shareholder rights is fundamental for fairness, transparency, and investor confidence. Costa Rica’s legal framework aims to provide some mechanisms to protect minority shareholders within corporations. These include safeguards such as the right of withdrawal (derecho de receso) and actions to prevent abusive decisions by majority shareholders (impugnación de asambleas). This article not only explores the key legal protections for minority shareholders in Costa Rica but also outlines their rights, remedies, and practical implications, ensuring that you are well informed and prepared.
The Rights of Minority Shareholders in Costa Rica:
Minority shareholders are often vulnerable due to their limited voting power, particularly in sociedades anónimas (standard corporations) and limited liability corporations (sociedades de responsabilidad limitada). The decisions in these entities are typically driven by majority control, leaving the minority shareholders at a disadvantage. Costa Rica’s legal system, grounded in the Commercial Code and jurisprudence, not only recognizes the vulnerability of minority shareholders but also the need for specific rights to protect their interests. However, the current protections are insufficient in many ways, indicating the need for further action.
Key Minority Rights:
1. Right to Information:
Minority shareholders have the right to access essential company records and financial statements. Articles 155 and 173 of the Commercial Code entitle shareholders to request information during general assemblies, ensuring transparency and accountability in corporate decision-making.
2. Right to Challenge Resolutions:
If the majority adopts resolutions that violate the law, company statutes, or minority shareholder interests, dissenting shareholders can challenge these decisions. Articles 176-178 of the Commercial Code provide the legal basis for nullifying unlawful or oppressive resolutions.
3. Right to Proportional Dividends:
Minority shareholders are entitled to dividends in proportion to their shareholdings, as stipulated in Articles 143 and 144 of the Commercial Code. Any breach of this right can lead to judicial claims.
4. Right to Convene Assemblies:
Shareholders representing at least 25% of the capital can demand the convening of a general assembly to address specific concerns (Article 159). This ensures minority voices are heard in critical decisions affecting the company.
5. Preemptive Rights: In the event of a capital increase, minority shareholders have the right to maintain their proportional ownership by subscribing to new shares before they are offered to third parties. This prevents the dilution of their shares.
The Right of Withdrawal (Derecho de Receso):
One of the most significant protections afforded to minority shareholders in Costa Rica is the right of withdrawal (derecho de receso). Under Article 32 bis of the Commercial Code, this mechanism allows shareholders to exit the corporation, with their share value reimbursed. This reimbursement is ordered according to the value of the shares, a value that is established by a court-appointed professional (Perito judicial). The value must be proportional to the corporation´s patrimony, which is composed of its assets and debts.
When can the Right of Withdrawal be exercised? (Derecho de Receso):
The right of withdrawal is granted to shareholders who dissent from specific corporate decisions, including:
Extension of the Company’s Term:
If the shareholders’ assembly approves the extension of the company’s duration, dissenting shareholders may exercise their right to withdraw.Transfer of Corporate Domicile Abroad:
If the company decides to relocate its legal domicile outside of Costa Rica, dissenting shareholders can opt to exit the corporation.Transformation or Merger that Increases Liability:
If a transformation, merger, or similar restructuring leads to an increase in shareholder liability, dissenting shareholders are entitled to withdraw.Failure to Distribute Dividends:
Shareholders may exercise the right of withdrawal if the company, despite having profits in two consecutive fiscal periods, fails to distribute at least 10% of the profits as dividends.Change in Corporate Purpose Causing Harm:
If the company changes its business activity (giro social) in a way that harms a shareholder’s interests, the affected shareholder may withdraw within one year of the change.
Legal Remedies Against Abusive Majority Decisions:
To further protect minority shareholders, Costa Rican law provides legal remedies to combat abusive or oppressive actions by majority shareholders or corporate directors.
Challenge of Resolutions: Shareholders who voted against a resolution can initiate legal proceedings to annul it if it violates the company’s statutes or the law (Article 178).
Liability of Directors: Corporate directors have fiduciary duties to act in the best interests of the company and all shareholders. Minority shareholders can hold directors personally liable for damages caused by mismanagement, fraud, or conflicts of interest.
Judicial Intervention: In some cases, judicial proceedings involving civil actions or filing a criminal complaint may be established.
Corporate Governance Policies:
In addition to the right of withdrawal, Costa Rican law establishes governance policies to protect shareholders and ensure transparency in corporate operations. Article 32 ter of the Commercial Code mandates that companies adopt corporate governance policies approved by the Board of Directors (or equivalent body). These policies must include the following:
Conflict of Interest Reporting:
Any transaction involving the acquisition, sale, mortgage, or pledge of company assets with the general manager, board members, or related parties must be reported to the Board of Directors. The individual involved must provide all relevant information and abstain from participating in the decision-making process.
Related parties are defined based on criteria established by executive decree issued by the Ministry of Economy, Industry, and Commerce (MEIC), in coordination with the National Council for Financial System Supervision (Conassif), and aligned with International Financial Reporting Standards (IFRS).
Approval for Significant Transactions:
Transactions involving the acquisition, sale, mortgage, or pledge of assets representing 10% or more of the company’s total assets must receive prior approval from the Board of Directors. The total assets are determined based on the financial statements of the preceding month.
Disclosure of Transactions:
Companies must disclose these significant transactions in their annual financial reports, as required under Article 155 of the Commercial Code. For small and medium enterprises (PYMES) and companies whose securities are not publicly traded, the disclosure terms are determined by executive decree issued by the Ministry of Commerce of Costa Rica (MEIC). For publicly traded companies, disclosures must comply with regulations issued by Conassif.
Implications for Investors in Costa Rica:
For minority shareholders, understanding their legal rights is crucial for protecting their investments in Costa Rican corporations. The right of withdrawal, access to information, and the ability to challenge unlawful decisions provide essential tools for safeguarding shareholder value.
Additionally, Costa Rica’s emphasis on legal remedies against majority abuse fosters a more equitable corporate environment, encouraging investment and trust. For foreign investors and expatriates, this legal framework offers confidence. However, it’s important to note, that I can’t recommend investing as a minority shareholder. The alleged minority rights, are not sufficient to guarantee your investment.
Final Considerations:
Protecting minority shareholder rights is a cornerstone of corporate governance in Costa Rica. At least the law tries to compensate the minority shareholder’s position. Through mechanisms like the right of withdrawal (derecho de receso), corporate governance policies under Article 32 ter, judicial remedies, and strict director accountability, the legal system has some mechanisms of fairness within corporate law. For investors, these safeguards are at least something to rely upon in the business environment.
Contact me, at CPG Legal, before you proceed to invest in any business venture in Costa Rica.
Dr. Christopher Pirie Gil
Attorney at Law – CPG LEGAL.
