Abstract
The new Limited Liability Company — New Firm Act in Spain is analysed as a compromise between a laissez faire legislature trying to speed up the process of incorporation of companies and lowering legal barriers to entry and interest groups that make a living through the regulation of entry. The substantive review of company contracts by registrars is criticised and some proposals for deregulation are made.
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References
Mancur Olson, Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships (New York, Basic Books 2000) p. 195.
Law 7/2003 of 1 April (BOE of 2 April). See R. Melchior and C. Schulte, ‘Feliz Año Nuevo oder: Glückliches Spanien — Armes Deutschland? Blitz-GmbH bald auch in Deutschland?’, 1 GmbHR (2003) p. R1: ‘ein sensationelles Gesetzesvorhaben aus Spanien, dass in Europa bislang einmalig ist: Die Schaffung einer sog. Blitz-GmbH’; A. Madridejos, ‘El regimen juridico de la sociedad nueva empresa’ (‘The legal regime of the limited liability company — new firm’), 39 Cuadernos de Derecho y Comercio (2003) p. 161 at pp. 163–164.
S. Djankov, R. La Porta, F. Lopez de Silanes and A. Shleifer, The Regulation of Entry, 1 Quarterly Journal of Economics (2002) pp. 1–37.
Djankov et al., loc. cit. n. 3, at p. 11: ‘They range from 1–11 procedures, demand from 1 to 120 days, and cost from 0.25% to 210% of per capita GDP.’ ‘Entry regulation in the average sample country requires roughly 63 days and fees of 34% of GDP per capita.’ (p. 15)
Other alternative explanations — discarded by Djankov et al. — are those ascribing to economic regulation the nature of a helping hand from the State. One explanation holds that unregulated markets exhibit frequent failures, ranging from monopoly power to externalities, and that such regulation resolves or reduces these market failures by screening new entrants so as to make sure that consumers buy high quality products from desirable sellers in such manner as to reduce the external costs brought about by the entry into the market of entrepreneurs who cannot be taken seriously. A variant of this explanation could consist of affirming that the legislation governing the entry of entrepreneurs into the market is of a paternalistic nature, that is, its function is to reduce the costs of failed business projects by encouraging the entrepreneur to ’think about it once again’ before initiating his activities.
See Djankov et al., loc. cit. n. 3. According to these authors, the empirical data do not even support the concept that this regulation protects future business owners, since they come face-to-face with the entry of new competitors in the market.
Djankov et al., loc. cit. n. 3, at p. 24: The incorporation of a limited liability company offers common features to all the countries of the European Union in the application of the first Company Law Directive. The European Union has maintained a contradictory stance in respect of market entry. On the one hand, and at least since the Recommendation of the European Commission of 22 April 1997 on improving and simplifying the business environment for business startups (OJ 1997 L 145), it has requested Member States to simplify procedures for the incorporation of companies and to devise one sole official form and point of contact to handle all formal procedures. On the other hand, however, Community law imposes the requirement for official publication of the incorporation of companies, which makes this more expensive, in the first Company Law Directive.
See <http://www.ipyme.org/temas/empresas/trage.htm>, last visited on 20 January 2004. According to Djankov et al., loc. cit. n. 3, Spain occupies an intermediate position on the list as regards the costs imposed by the regulation on company owners’ market entry. The Spanish data is as follows: (Spanish data/average data) number of procedures: 11/10,17; safety and health: 0/0,71; environment: 0/0,35; taxes: 2/1,55; labour: 2/1,51; screening: 7/6,07; time: 83/63,05; cost: 0.1269/0,34; GDP per capita in 1997: 13,499/9,448. According to other sources, the number of procedures to be complied with should be fourteen, but these differences are not particularly relevant, as they depend on the criteria that are being used to define a ‘separate’ formality.
Act 7/2003 of 1 April (BOE of 2 April 2003) and Royal Decree 682/2003 of 7 June regulating the system of compliance with formalities by means of electronic data transfer (BOE of 10 June 2003).
There are more than 2,800 notary’s offices in Spain, many of which are to be found in very small populations. It is interesting to note that public notaries are more enthusiastic users of new technologies than other civil servants. P. Galindo, ‘The electronic data transfer procedure for constituting a limited liability company-new firm’, 39 CDC (2003) p. 77 at p. 100, n. 31.
Ministry of Justice, Ministerial Order 1445/2003 of 4 June 2003, adopting the form of articles of association of a limited liability company — new company (BOE 5 June 2003).
For a detailed description of each of the steps to be taken during this procedure, see E. Valpuesta, La sociedad nueva empresa (The company — new firm) (Barcelona 2003) p. 27; Galindo, loc. cit. n. 10.
See R. Cabanas ‘Constitutión de la sociedad nueva empresa: Escritura y procedimiento registrar (‘Incorporation of the company — new firm: public deed and registration procedure’), 39 CDC (2003) p. 143 at p. 147.
Logically, there is no room for the re-registration of a company of another kind as an LLCNF, as the latter follows a simplified way of incorporating a business. The use of this form to create a firm by those who have already incurred the costs and efforts of incorporating another would therefore make no sense.
Compare this to the control foreseen with regard to the articles of association of a non-profit association (Royal Decree 1497/2003 of 28 November adopting the Regulations of the National Registry of Associations and their relationship to the regional registries (BOE of 23 December 2003). See also R. Arenas Garcia, Registro Mercantil y Derecho del Comercio International (The Commercial Registry and the Law of International Trade) (Madrid, Colegio Registradores Propiedad y Mercantiles de Espana, Centro de Estudios Registrales 2000) pp. 197 ff.
Registrars deny that dual control of legality exists, as notaries public ‘assess’ and ‘caution’ with respect to the legality of legal transactions but do not pass judgement on such legality. However, this argument is absurd, since notaries public are under an obligation, pursuant to the legislation governing their activities, to deny any assistance if the transaction for which the documentation is requested is illegal. See the provisions of Arts. 1 and 17 bis of the Notaries Act (LN) and Art. 145 RRM.
See, for example, Art. 129 LSA, which establishes the opposite, namely, that even if it can be deduced from the registry entry that the business carried on by the directors does not fall within the corporate purpose, the company continues to be bound by the acts of the directors vis-à-vis third parties acting in good faith, which the latter do not forfeit as a result of not having consulted with the registry.
Contra, Arenas, op. cit. n. 15, at pp. 187–188.
See Arenas, op. cit. n. 15, at p. 22. See, for example, RDGRN of 21 March 2002 (Ar. 2889), where the registrar denied registration of the appointment of the liquidator of a limited partnership which was dissolved because the sole general partner died, alleging that he — the registrar — had no record of the fact that those who agreed to appoint X as liquidator — all of the surviving partners unanimously — were partners at the time of the adoption of the resolution, and for which reason, in order to register said appointment, it would have been necessary for the partners to reproduce all of the transfers carried out since the time the company was incorporated, as the original partners did appear in the register (a typical rule of the Property Registry for dealing with registration of property transfers). The governing administrative body ordered the registrar to proceed with the registration of the appointment.
On this issue, see extensively B. Arrunada, ‘Property Enforcement as Organized Consent’, 19 JLEO (2003) p. 401. The administrative supervisory body for Spanish registries has reacted timidly to this intention on the part of registrars to put the Property Registry and the Commercial Registry on the same level.
Arrunada, loc. cit. n. 20, at pp. 420–421.
See, inter alia, RDGRN of 30 June 1994 (BOE of 11 August 1994); RDGRN of 5 June 2002 (Ar. 8986); and RDGRN 30 March 1999. In the case of the clause dealing with the distribution of voting rights or dividends, or the removal of a disloyal member, the grounds for denial of registration consist of the contradiction between this clause and regulations, not between the clause and legal norms. Very often, the nullity of articles of association is founded on mere prejudices. On these prejudices, see C. Paz-Ares, ‘Cömo entendemos y cómo hacemos el Derecho de sociedades’ (‘Understanding and Implementing Company Law’), in C. Paz-Ares, ed., Tratando de la sociedad limitada (Madrid, Fundacion Cultural del Notariado 1997) pp. 159–205.
On the right to association, see Act 1/2002 of 22 March, in particular Arts. 1.2 and 1.4 on the not-for profit aim of the associations; Art. 5 which attributes legal personality to an association after the contract between the founding members has been signed, with no compulsory registration, and Arts. 10 and 30.1 III on registration.
If the registrar refuses registration because he considers that some item in the articles of association is illegal, the members or the notary public can file an appeal for review, a final ruling on which will be given by the Directorate General of Registries and Notarial Affairs, an administrative office affiliated with the Ministry of Justice (Arts. 67–77 RRM). A judicial remedy can be filed against the ruling of the Directorate, which will be dealt by the administrative courts (not the civil ones).
The Commission drafting the LSRL was appointed by the Minister of Economy, which augured well for liberalising measures. However, to the extent that the new regulations had an impact on the tasks of notaries public and registrars, representatives of the Ministry of Justice also took part in the preparatory work, who were themselves notaries public and registrars.
The notaries public, in exchange for retaining the requirement for a public deed for the incorporation of a limited liability company — new firm, have converted their offices into ‘formal procedures offices’.
Cf. Commercial Registry, Guía fácil de la nueva empresa (Making the new firm easy) (Madrid 2003): ‘The New Firm [LLCNF] has been conceived for companies in respect of which the relevance of the autonomous will of the founders, in relation to the free fashioning of the articles of association, is of less importance. Usually the official form is followed … the law permits articles of association that do not conform to a standard model; the fact is that the simplification of procedures has been devised with a view to achieving the very rapid issue of the certificate of registration (registration by the registrar within twenty-four hours as of the moment of filing the petition) when using one of the standard models.’ If there is an interest in the inclusion of particular or specific covenants (such as ancillary contributions, particular limitative or prohibitive clauses on transferability, singular covenants concerning the expropriation of shares, arbitration clauses, exclusion or separation of members clauses, causes for dissolution, etc.) it could be that the LLCNF model is not the most suitable one.
The number of founding members is limited by the Act to five individuals (Art. 133.1 LSRL in fine). This number can be higher later on if one of the members sells part of his company shares to a third party. The reason for this limitation is to be found, once again, in the aim of the LSRL to reduce the complexity of incorporation. It is obvious that it is far more complex to incorporate a company with thirty-five members — who all have to appear at the notary’s offices on the same day and at the same time — than a company with only five members.
Martin Calero, ‘Comment on Art. 131’, in Boquera, ed., La sociedad limitada nueva empresa. (The Limited Liability Company — New Firm) Comments on Articles 130 to 144 and Additional Provisions 8 to 13 of the LSRL (Pamplona 2003) pp. 44–45.
In fact, since January 2004 it is possible to consult the registry by means of data processing to find out whether or not a given name appears in the Central Commercial Registry (see <http://www.rmc.es>, last visited on 7 February 2004), but the procedure continues to be that indicated in the text.
Calero, loc. cit. n 29.
The mechanism employed for assigning alphanumeric codes is governed by Ministerial Order No. ECO 1371/2003 of 30 May 2003 (BOE of 31 May 2003).
See, for example, L. Cano Zamorano, ‘Incidencia de la LSLNE en la situatión de la empresa familiar’ (‘Effects of the limited liability company — new firm on the situation of family firms’), in J. Reyes, La empresa familiar: encrucijada de intereses personales y empresariales (Family firms at the crossroad of personal and business interests) (Pamplona 2004) pp. 33–34. The lack of sensitivity of some in respect of the costs that the current system imposes on entrepreneurs is noteworthy, since they affirm that this system achieves the purpose pursued by the new regulation without taking into account the fact that it is not a matter of questioning the effectiveness of a system, but rather its efficiency in terms of time and money.
Instructions of the General Directorate of Registries and Notarial Affairs of 30 May 2003 (BOE 12 June 2003). For a critique, see Madridejos, loc. cit. n. 2, at p. 176.
‘The frequency with which registrars deny registration on the basis of the object clause becomes manifest in view of the abundant Resolutions of the General Directorate of Registries and Notarial Affairs dealing with this issue.’ See Olavarria, op cit. Commentary Art. 13 pp. 64–65. Along the same lines, see Madridejos, loc. cit. n. 2, at p. 183.
Arts. 117.1 RRM (corporations) and 178.1 (limited companies): ‘the company’s corporate purpose (object clause) shall be recorded in the articles of association, determining the activities comprising the same’. Art 178.3 RRM: ‘in no case shall engagement in any other activity of licit business be included as part of the corporate purpose, nor shall generic expressions of analogous meaning be employed’.
Arts. 117.2 RRM (corporations) and 178.2 (limited companies): ‘the object clause shall not include the legal acts required to carry out or develop the activities indicated in the same’.
The reason for this prohibition lies in the fact that such a corporate name could mislead third parties. This is absurd, however, because the corporate name is not of a distinguishing nature but merely identifies the company, which is what differentiates corporate names from business names. Secondly, as we have seen, the company is bound vis-a-vis third parties by any action taken by directors, even those that fall outside the object clause.
As recognised by Cano, loc. cit. n. 33, at p. 34. No credibility can be attributed to the other reason for justification of this regulation as alleged in the preamble of the Act since it affirms that ‘this decision [to permit such generic corporate purposes] obeys a verifiable reality which is none other than that of the changing nature of small businesses during their first years of activity’. The advantage of this generic corporate purpose is that the company can change its activities within the industrial field without having to modify its bylaws, thus saving the corresponding costs. I am unaware of any empirical study in this respect but I find it strange to believe that when an entrepreneur commences his activities he changes these frequently within the framework of the same business project. He might extend or reduce it with respect to that originally envisaged, but he would not change sectors of activity. In the same sense, see Olavarria, op cit. Commentary Art. 132 p. 65.
See Olavarria, op cit. Commentary Art. 132 pp. 68–69. Against the admission of these clauses, see Cano, loc. cit. n. 33, at p. 35.
Cano, loc. cit. n. 33, at p. 36.
Ibid., at p. 38.
Ibid., at p. 37.
An issue that has precipitated, as almost all others, registry litigation in connection with corporations (sociedades anónimas) RDGRN of 19 March 2001 (BOE of 8 May 2003); RDGRN of 15 October 1998, with comments by Tusquets, 12 RdS (1999) p. 311.
Criticism by Cano, loc. cit. n. 33, at pp. 42–43 is based on dual prejudice. Firstly, the fact that the company is not bound by law to keep a members register impedes the LLCNF from availing itself of one. Secondly, the commercial registrar has to publish the names of the members of a limited company so that anyone can know who they are.
The relevance of corporate governance to the value of businesses is very significant when comparing developed countries with developing countries, but not so much so when comparing the overall systems of two developed countries. See, for example, B.S. Black, ‘Does Corporate Governance Matter? A Crude Test Using Russian Data’, 149 U. Penn. L. Rev. (2001) pp. 2131–2150.
Like the appearance of entrepreneurs who specialise in carrying out formal procedures and are known in Spain as gestorias administrativas. See Expansion (7 January 2004) p. III: ‘“I remember going to a gestoría and they took care of all the paperwork and in less than a week we were functioning,” explains one small business owner.’ See <http://www.sociedadeslimitadas.com> (last visited on 24 February 2004), which offers companies that are already incorporated and have complied with all legal requirements for the sum of £1850. See also RDGRN of 30 March 2000, Westlaw (Spain) 2737/2000 (<www.westlaw.es>) which considers the registration of a business whose corporate purpose was in fact the incorporation of companies legitimate.
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Águila-Real, J.A. Lowering Legal Barriers to Entry through Technology without Touching Vested Interests: The Spanish Sociedad Limitada — Nueva Empresa . Eur Bus Org Law Rev 5, 449–469 (2004). https://doi.org/10.1017/S1566752904004495
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DOI: https://doi.org/10.1017/S1566752904004495