Is there potential for the participation of Simplified Joint-Stock Company in the Colombian capital market?

I just finished my participation in the UNITAR - AGFUND Course of Developing Capital Markets, and I want to share with you two (2) main lessons learned from this course, that helped me to understand and perhaps assist in the development of an efficient capital market in Colombia (my country), which are the following:


1. The need to incentivize the use of the capital markets for small and medium companies (maybe, ¿even for microenterprises?), in order to allow them to raise capital; apart from the traditional focus of the capital market on the public offerings of large companies.


2. The need to guarantee a minimum of effective laws and regulations, that permit small companies to raise capital without going through an expensive public offering, with enough transparency for potential acquirers and regulating bodies.


I pointed out in a previous assignment (Week 3) that there is a need for a new law that allows us to regulate and supervise new financial developments, some of which don't fit into the conventional notion of "securities" and aren't authorized operations in our traditional financial sector. In fact, despite undisputed improvements since the Mission of the Ministry of Treasury in 2006, Colombia is still underdeveloped comparing to countries like Peru and Chile. This reform has been a long time anticipated by the Colombian government (following with the Mission of the Capital Markets in 2018 - 2019, the steps of the previous Mission of the Ministry of Treasury in 2006) but the COVID-19 pandemic obliged to postpose the initiative (Portafolio, 2020; Valora Analitik, 2020).


In addition, I stated that the concluded that the aforementioned Mission of the Ministry of Treasury in 2006 concluded that the Colombian capital market is not competitive, very concentrated in few actors and activities, with duplicities, inconsistencies, and incentives problems, apart from a blurred institutionally and a notorious lack of a central regulatory agency who set policies to follow. As a result, the market is not as deeper as required, illiquid, and inefficient. In fact, Colombia has Latin America’s third-largest public debt market after Brazil and Mexico, equivalent to about 30% of its $292 billion GDP, but it has also 68 companies listed on ints stock market, far behind its Pacific Alliance allies: Peru, Chile, and Mexico, which have 232, 212 and 142 listed companies, respectively. The average daily transactions on Colombia’s stock exchange total less than $50 million (Reuters, 2019).


I also highlighted (Week 2) the principle that the financial market (of which the capital market is an integral part) exists to link the resources needs of firms (to produce goods and services for consumption) with the people willing to provide the resources needed (in the form of funds and financial investments). In this sense, business firms and investors seek predictable, risk-free, and stable mechanisms. If this is important for the national economy, it is crucial for a stable capital market, in order to promote high trading volume and full confidence in traders.

In the assignment for Week 3, I explained the different kinds of shares that exist in Colombian legislation. For joint-stock companies, there exist the traditional ones explained in the course (ordinary shares, preferential shares without the right to vote, and privileged shares; Articles 379 to 391, Code of Commerce). There exist also industry shares (Article 380, Code of Commerce).


It is important to say that apart from the aforementioned kinds of shares (established as of 1971, with our Code of Commerce), the Act 1258 of 2008 created a new kind of joint-stock company, called Simplified Joint-Stock Company (Sociedad por Acciones Simplificada, SAS), that has become in the most popular type of company in Colombia nowadays, because of:


(i) The flexibility that it offers in the bylaws,

(ii) The possibility of being created by only one shareholder, and foremost,

(iii) The exemption of liability for shareholders in relation to labor, tax, and another type of obligations that the company might incur.


France introduced this type of society in 1994, which appears for instance, in Mexico (2016), Argentina (2017), Ecuador, and other Latin American countries.


The importance of this relatively new type of society for the purposes of this reflection is that according to the Colombian SAS Model Law, it is possible to create other kinds of shares apart from the ones defined by the Code of Commerce, as long as is endorsed the specific right in the title (Article 10, Act 1258 of 2008). In addition, there are payment shares, allowed as a way of payment for the company workers (Paragraph, Article 10, Act 1258 of 2008).


Another curious difference with the joint-stock company is the term of payment of shares: one (1) year for Joint-Stock companies (Article 387 Code of Commerce), two (2) years for SAS (Article 9, Act 1258 of 2008).


Nevertheless, this kind of society (very popular mainly for small and medium-sized businesses) cannot be inscribed in the National Registry of Securities, nor offer its shares in the securities market, by the explicit legal provision of Article 4 of the Act 1258 of 2008. By the way, exactly the same limitation foresaw in French legislation (that impedes also the access to resources from private savings; appellation a lépargne) (Betancourt et al, 2013).


Because of its flexibility, the SAS cannot be listed publicly held, because there is no guarantee of the transparency of its corporate governance.


Therefore, it arises the following question: it is possible to amend the Colombian legislation, allowing the inscription of the SAS companies in the National Registry of Securities, and the consequential offering its shares in the securities market, only when a minimum of additional requirements are accomplished?


I think that it is possible to think about the possibility, developing some strategic minimum requirements for ensuring transparency and competitiveness in the capital market, like mandatory fiscal auditing, minimum of capital or assets, etc. That is because I considered current legislation (Act 1258 of 2008) at some point too much influenced by the French tradition (which prohibits, ab initio, every possibility of participation in the capital stock market).


In Colombia, the Simplified Joint-Stock Company has evolved into the preferred type of society for small and medium enterprises (SMEs). Accordingly, it is certainly advisable to reevaluate the absolute deterrence of the Article 4 of the Act 1258 of 2008 in order to delineate some possibilities for the participation of such kind of companies in the capital market, of course, with enough guarantees of transparency and competitiveness for buyers, sellers, and regulators. In summary, it could be a sound and innovative contribution to the issue because of this AGFUND course.


Sources:



(2019, August 21) Reforms to Colombia capital market may face the rough road in Congress: experts. In Reuters. Retrieved from: https://www.reuters.com/article/us-colombia-economy-idUSKCN1VB2CB

(2020, June 4) Mercado de capitales: reforma se frenó por el coronavirus. In Portafolio. Retrieved from: https://www.portafolio.co/economia/mercado-de-capitales-reforma-se-freno-por-el-coronavirus-541476

(2020, July 21) Habrá proyecto de ley para mercado de capitales en Colombia. In Valora Analitik. Retrieved from: https://www.valoraanalitik.com/2020/07/21/habr-proyecto-de-ley-para-mercado-de-capitales-en-colombia

Betancourt, J. et al (2013, April - June). Ventajas y desventajas de la Sociedad por Acciones SImplificada para la empresa familiar en Colombia. Estudio exploratorio. Estudios Gerenciales. 127 (29). Retrieved from: http://www.scielo.org.co/scielo.php?script=sci_arttext&pid=S0123-59232013000200010

Correa, M. (2020, July 21). Advantages of the simplified joint-stock company. Retrieved from: https://corralrosales.com/en/simplified-joint-stock-company-corporate-milton-carrera/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration 

Tramhel, J. (2017) The Simplified Joint Stock Corporation: A new structure for going business in the Americas? Agenda Internacional. 35. 137 – 170. Retrieved from: https://dialnet.unirioja.es/descarga/articulo/6302300.pdf

(n.d.) France / Simplifies Joint-Stock Company – (SAS) In Multilaw. Retrieved from: https://www.multilaw.com/Multilaw/Business_Entities_Guide/France_Simplified_Joint_Stock_Company_SAS.aspx

Davy, D. (n.d.) The top 5 reasons for adopting the “SAS” (or “Simplified Joint-Stock Company”) corporate structure. In Guide Venture. Retrieved from: https://www.gide-venture.fr/best_practice/tout-savoir-sur-nos-best-practices-en-un-coup-doeil/?lang=en

(Zineb) (2017, October 19) France – The Simplified Joint Stock Company / Société par Actions Simplifiée (SAS). Retrieved from: http://www.thelegalhive.com/en/2017/10/19/france-the-simplified-joint-stock-company-societe-par-actions-simplifiee-sas/