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Protecting minority shareholders

Thursday, February 28, 2013

Providing greater protection to minority shareholders is the subject of a model law, currently being considered by the Legal Committee of the Organization of American States.

A greater degree of protection for minority shareholders would in turn stimulate capital formation in the region.

The eventual adoption of the model law by the legislature of each country, would allow the incorporation of so-called simplified joint stock companies, in which minority shareholders can ask a court to annul action that benefits majority shareholders, instead of the company itself.

Currently, minority shareholders in Central America have limited opportunities to seek remedies, in the case of an alleged abuse by the majority.

Minority shareholders tend to have more rights in the case of companies, which list their shares on a stock exchange, and which have adopted a code of corporate governance.

However, only a handful of companies trade shares in one of three stock markets in the region, located in Costa Rica, El Salvador and Panama.

Given the reluctance of minority shareholders to risk their capital, given the current lack of protection, companies that are not publicly traded generally must turn to financial markets, in order to finance projects.

The proposed OAS Model Law should promote local discussion in each of the countries of the region on the adequacy of shareholder rights, including the economic benefits, which would come as a result of stronger capital formation.

The OAS initiative is in fact based on a successful experience in Colombia, applying similar standards.

For more information, please contact Juan Manuel Godoy at [email protected] or 506-2257-3553.