Introduction

On September 11, 2019, the Entrepreneurs Law (hereinafter, “the Law”) was enacted. In this article, we provide a first overview of the various topics regulated by the Law in summary form.

In future publications, we will analyze in greater detail everything relating to the simplified stock companies (sociedades por acciones simplificadas, hereinafter “SAS”), as the Law creates a new type of stock company with significant differences from the companies regulated by the Companies Law 16,060 (hereinafter “LSC”).

The Law essentially regulates the following topics, which will be discussed below:

• Promotion of entrepreneurship (Title I)
• Simplified stock companies — SAS (Title II)
• Collective financing systems — Crowdfunding (Title III)
• Other provisions (Title IV)

Promotion of Entrepreneurship

The Law declares of national interest the promotion of entrepreneurship through the consolidation of an entrepreneurial ecosystem in the country, the development and dissemination of an entrepreneurial culture, and the promotion and development of entrepreneurial ventures and entrepreneurs.

The National System for Productive Transformation and Competitiveness will contribute to the coordination and articulation of initiatives and actions by public and private institutions in the area of entrepreneurship promotion, incorporating the National Entrepreneurship Plan.

An Advisory Council on Entrepreneurship is created, with the various functions set out in Article 6 of the Law.

The third Thursday of November of each year is declared National Entrepreneurial Culture Day.

In this way, a legal framework is created within the State to promote entrepreneurial ventures and entrepreneurs — a framework that did not previously exist.

Simplified Stock Companies (SAS)

Without a doubt, the SAS is the centerpiece of the Law. It creates a new type of commercial company with significant differences from the regime applicable to commercial companies governed by the LSC and, in particular, to corporations.

In this first overview of the SAS, we will highlight the most novel aspects, since a thorough analysis of the regulations will require further time and dedication. As with any new legal structure, operators and clients will likely raise questions regarding its functioning and application, which will be addressed by the implementing regulations and the relevant regulatory bodies.

3.1 Concept and Regulation

The SAS is a new type of commercial company — it is not a corporation, although it is a stock company. It may issue negotiable obligations (bonds), in compliance with the rules applicable to publicly traded corporations.

Its shareholders are not liable for any debts of the company, unless the doctrine of piercing the corporate veil, as regulated by Law 16,060, applies. The principle of contractual autonomy is recognized, allowing the parties freedom to regulate various aspects of the company. In this regard, Article 9 establishes that matters not governed by the Law shall be regulated, in order, by: the company’s articles of association and, thereafter, the rules applicable to corporations — with certain articles being mandatorily applicable, as listed exhaustively. The primacy of the articles of association deserves particular emphasis.

Pursuant to Article 10, SAS entities whose annual revenues exceed 37,500,000 UI (indexed units) will be subject to oversight by the state control body — except as provided by the implementing regulations — on the same terms as corporations. This means that companies that do not reach that threshold will not be subject to state oversight.

Please note: contractual autonomy, freedom to agree, few mandatory rules, and no AIN oversight. This represents a radical departure from the current reality and will require significant advisory work when establishing and regulating the operation of SAS entities. The protections currently afforded by the default rules applicable to corporations may be modified or may not apply, leaving investors subject to whatever the articles of association provide.

This is not a criticism — the new system that allows for the structuring of a fully customized company, free from the constraints of the mandatory rules currently imposed by the LSC, is welcome.

For example, regarding capital increases: there will be no pre-emptive right, Article 287 of the LSC will not apply, share premiums may be mandatory, optional, or set at different amounts in each issuance, capital increases will not be notified to the AIN, etc. All of this undoubtedly facilitates capital raising and company financing, but may also allow the dilution of an unsuspecting shareholder with little recourse.

3.2 Incorporation

Incorporation and operation by a single person is permitted, thereby establishing the unipersonal company from the moment of formation. To be validly incorporated, the articles of association are executed and registered with the National Commercial Registry, and the company is considered duly incorporated as of its registration. There is no requirement to make publications.

As a novelty, the possibility of incorporating the company by digital means and electronic signature is provided, as regulated by the implementing regulations.

Article 12 of the Law sets out the contents of the incorporating instrument. The possibility of approving standard form articles of association with non-binding content is contemplated, to streamline the incorporation process.

It is likely that with standard-form documents and digital incorporation, a rapid incorporation process will be achieved. This will undoubtedly be a significant advantage for operators, but it should not be the only one. Most relevant, in our view, is that this new type of company be used to create fully customized entities that allow shareholders to specifically address their needs — something that is frequently not possible due to the mandatory nature of many of the LSC’s provisions.

3.3 Capital and Shares

In the area of capital and shares, several innovations are introduced:

• Full subscription of the authorized share capital, with a maximum period of 24 months to complete the subscription.
• Minimum or maximum capital amounts may be established for certain shareholders.
• Shares with different share premiums may be issued.
• Shares must be registered or book-entry shares — they may not be bearer shares. The rules of Law 19,484 on the identification of shareholders and ultimate beneficial owners apply.
• Shares may carry single or multiple votes, or may be non-voting.
• Irrevocable contributions are expressly regulated for the first time in Uruguayan corporate law, for a maximum period of 24 months from the date of acceptance by the management body.
• The transfer of shares may be prohibited for a period of up to 10 years.

3.4 Corporate Governance

Several innovations are also introduced regarding corporate governance:

• The articles of association may freely determine the organizational structure — for example, there could be a single administrator, a board of directors, or no shareholders’ meetings at all. There is no obligation to have a management body, but there must be a legal representative.
• Shareholders’ meetings may be held at the company’s registered address or abroad, and may be held in person or by videoconference. This also applies to meetings of the management body.
• Resolutions may be adopted by written consent by any of the corporate bodies, without the need to hold meetings.
• Self-convening for shareholders’ meetings is permitted, and meetings may be held without prior notice when the entirety of the voting paid-in capital is present.
• Shareholders’ agreements are expressly regulated, providing that a vote cast in violation of such an agreement shall not be counted.
• The derivative action and the individual action for directors’ liability are expressly recognized, as is the liability of de facto administrators or representatives.

3.5 Amendments to Articles of Association and Corporate Reorganizations

Amendments to the articles of association must be adopted by the vote of shareholders representing a majority of the voting paid-in capital, except for matters relating to restrictions on share transfers, shareholder withdrawal rights or exclusion, and resolution of corporate disputes, for which the unanimous vote of 100% of the paid-in capital is required.

An amendment is enforceable against shareholders and the company from the date the decision is adopted — unlike Article 10 of the LSC, which requires completion of the amendment process. The latter is required for enforceability against third parties.

The right of withdrawal is recognized in specific cases of transformation, merger, and spin-off, when these materially affect shareholders’ proprietary rights.

Any commercial company — except a corporation — may be converted into a SAS. Similarly, a SAS may be converted into any of the types provided for under the LSC.

3.6 Other Matters

The articles of association may provide for grounds for shareholder withdrawal or exclusion. The “squeeze-out” mechanism is expressly regulated, permitting the exclusion of shareholders whose participation does not exceed 15% of the capital, by shareholder resolution approved by 75% of the voting capital, not counting the excluded shareholders.

For tax purposes, SAS entities are treated as partnerships (sociedades personales). This offers certain advantages for income tax purposes if the company’s revenues do not exceed certain thresholds. For share transfers, the same tax treatment applicable to transfers of shares in corporations applies.

Regarding social security contributions, the administrator or legal representative — provided a board of directors structure is not adopted — contributes pursuant to Article 172 of Law 16,713. If a remunerated board of directors is in place, Article 170 of Law 16,713 applies. If board members do not receive remuneration, they contribute on a deemed basis at the higher of the maximum salary paid by the company or the individual’s actual remuneration.

Arbitration may be agreed upon as a means of dispute resolution, including disputes concerning directors’ liability and challenges to shareholder resolutions, if so provided in the articles of association.

A particularly interesting provision is the possibility of converting a sole proprietorship (empresa unipersonal) into a SAS by transferring its business on a universal basis, with the SAS continuing its rights and obligations, without the rules on the transfer of commercial establishments being applicable. This provides a conversion solution for businesses that was not previously available (except for transportation companies during a specific period). To facilitate this conversion: no special certificates are required for the transfers; tax exemptions apply with respect to VAT, real estate transfer tax (ITP), and income tax for conversions carried out within twelve months of the Law’s entry into force.

Collective Financing System (Crowdfunding)

The Law provides for two amendments to the Securities Market Law 18,627, with the aim of permitting financing through crowdfunding and regulating collective financing platforms.

Crowdfunding is a non-traditional financing system, operating through internet platforms, through which a company receives small donations (non-financial crowdfunding) or small investments in exchange for equity (equity crowdfunding). In the latter case, investors expect a return on the project if it proves successful. In essence, it is a form of public savings collection and must therefore be adequately regulated.

Through equity crowdfunding, the aim is to supplement traditional financing (bank financing, friends and family, angel investors, etc.) to boost entrepreneurship.

The Law regulates the registration of issuers and securities offerings made through collective financing platforms. Platforms are defined as securities trading markets open to direct investor participation and reserved for reduced-amount issuances. The Central Bank of Uruguay (BCU) will establish maximum limits per issuer and maximum participation limits per investor.

Institutions managing platforms will require prior BCU authorization, based on grounds of legality, opportunity, and convenience. Legal entities whose revenues exceed the maximum value established by the BCU may not raise funds through crowdfunding.

In order to determine the feasibility of using this system, the implementing regulations and BCU provisions must be consulted.

We remain at your disposal for any clarification or further information you may require. You may contact us at [email protected]