Arbitration and Bylaws: Foreign Investors Can Be Protected By a Foreign Arbitration Clause in the Bylaws of a Colombian Corporation?
Investors seeking confidence in how shareholder disputes will be handled may prefer arbitration, even foreign arbitration. Corporate bylaws often provide minority shareholders with important protections in terms of corporate governance rights. Can disputes arising under corporate bylaws be submitted to arbitration?
Arbitration, as I have written here before, provides investors an extra sense of security when partnering up with Colombian entities. Perceptions of the Colombian local courts remain freighted by corruption, delays, and poor-quality decision-makers, although there have been improvements, and Colombia outperforms many of its Latin America neighbors in terms of its overall dispute resolution system, as I have written here. The Latin America Venture Capital Association reports on the 2009 LAVCA Scorecard that Colombia’s strengths include improved minority shareholders rights and corporate governance, while among its challenges are perceived corruption and the weakness of the local judicial system (“still roadblocks”). The World Bank 2010 Doing Business report (link is to Colombia page) acknowledges significant improvements in some respects, but much work to be done in the civil litigation sphere. Specifically, Colombia ranks a stunning 5th in the world for protecting investors, and a quite respectable 32nd for closing a business, but 152nd for enforcing contracts.
In Colombia there is a trend toward greater freedom of contract in creating business entities and in resolving disputes. Colombia’s simplified stock companies, which are compared to a limited partnership (that is a suggested translation – here is a discussion of the translation) are designed to maximize party choice and freedom of contract in setting up an enterprise. Professor Professor Francisco Reyes Villamizar has written a very useful description of simplified stock corporations here and published a model set of bylaws for a simplified stock company here. Professor Villamizar’s model set of bylaws contains an arbitration clause for challenging decisions by the shareholder assembly and it provides for arbitration when challenging decisions of a shareholder assembly:
Article 35. Conflict resolution. All disputes between shareholders by reason of the social contract unless exempted by law, will be settled by the Superintendent of Companies, with the exception of actions for challenging decisions of the general assembly of shareholders, whose resolution will be submitted to arbitration, as provided in Clause 35 of these statutes.
Presumably, the “social contract” disputes that are to be determined by the Corporations Superintendent, SuperSociedades, are those which arise under non-contractual law, that is, matters of regulation. Leaving those aside, arbitration, whether domestic or foreign arbitration, should be available for a dispute under corporate bylaws concerning the actions taken by the authority in a corporation, the shareholders assembly. (For a discussion on corporate governance, see here.)
In general, arbitration provides certain advantages over local courts. In my opinion, the predominant features are confidentiality and a superior level of professionalism by the decision-makers, under many circumstances. Another is focus: private arbitrators can take the time a commercial case warrants, without compromising due to strained dockets. If arbitration provides commercial parties with efficiency, speed, and professionalism, its flaws are that arbitrators regularly bring their own common-sense to bear on questions, and sometimes disregard legal provisions in the process, which may dash at least one side’s reasonable expectations. In those cases, arbitration may be seen as “arbitrary,” but that may also be a “plus” especially where the decision relates to value or pricing, as in determining a fair damages number. That process is, ultimately, one that has inherently subjective components. Another negative is the complete lack of any real appeal rights, which, again, may be seen as an advantage in terms of reduced process, but it means bad decisions cannot be fixed.
The Bogotá Chamber of Commerce, like the Chambers throughout the country, provides arbitration services. The Bogotá Chamber is highly regarded, and a number of the country’s top lawyers regularly serve on commercial arbitration panels.
Thus it is an important factor to consider in Colombia that arbitration is broadly permitted, subject to some normal formalities and a couple of substantive limitations. Foreign arbitration is permitted (where at least one party is a foreign national) on almost completely equal footing. Importantly, there are very limited circumstances where arbitration is permitted but must be national, typically when dealing with the government. There appears to be no difference between foreign arbitration and domestic arbitration of investor disputes, whether in Bogotá or under the auspices of the International Chamber of Commerce in New York, London, or Paris, or in the London Court of International Arbitration, among others – foreign aribtration is chosen becuase it is perceived to provide international investors a viable mechanism to minimize an aspect of country risk.
Daniel Posse Velasquez & Carolina Posada, of Bogotá law firm Posse & Herrera, write in their article “Colombia Arbitration” in the Latin Lawyer (available by searching for ”arbitration” at the “News” tab on that law firm’s website) that there has been positive change in Colombia’s laws relating to foreign arbitration. A similar questionnaire-response format report was published by the Global Arbitration Review by German Marin of Cavelier Abogados. The Colombian laws on arbitration and other helpful links can be found on the Latin Laws website. Law 315 of 1996 provides the framework, and Decree 1818 of 1998 (link is in Spanish) modernized the law to protect and enhance the viability of foreign arbitration awards.
Nothing in these laws expresses a limitation on arbitration or even foreign arbitration of an investor dispute under the bylaws that can be resolved by private agreement. Nor has any such limitation been by commentators like Drs. Posse and Marín.