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30 August 2007
In September 2006 the Aruban government presented its plan for a new form of Aruban company, known as a vennootschap met beperkte aansprakelijkheid (VBA), a form of limited liability company. The VBA was to have been introduced with effect from January 1 2007. Introducing a new limited liability company was thought to be an easier option than revising the Aruba exempt company and implementing Book 2 of the Civil Code; moreover, the Aruba exempt company does not enjoy a good reputation internationally. However, owing to understaffing at the Directorate of Legislation, the VBA has not yet been introduced. The proposed introduction date will probably be January 1 2008. The aim is to introduce Book 2 of the code at a later date, but this will take years.
The VBA is intended to improve the investment climate for local and international investors, and encourage Aruba's growth as a financial centre. Aruba's tourism industry is very well developed, but it is vital that Aruba also develops its financial services market. Aruba's corporate laws are very old and in need of modernization. The introduction of the VBA is part of the programme of improvement and relates directly to the recently introduction of the revised Aruba exempt company and the ability to opt for fiscal transparency.
The legislature intends the VBA to be attractive, simple, multi-purpose and suitable for tax planning. In addition, it is intended to be recognized internationally (in accordance with the standards of the Organization of Economic Cooperation and Development and the Financial Action Task Force) and be compatible with Dutch and Netherlands Antilles corporate laws, thereby ensuring that that the jurisprudence of the Netherlands and the Netherlands Antilles can be applied. The influence of Dutch limited liability company structures, such as the naamloze vennootschap and the besloten vennootschap, and of the US Delaware limited liability company is clearly recognizable.
The VBA is a hybrid. It can operate as a limited liability company, but its articles of association and its operating agreement can be arranged in such a way that it can operate as a partnership, albeit a partnership which is also a legal entity. The forms of company available in Aruba are as follows:
In addition, a legal entity may be established as a foundation (stichting).
In order to show why the VBA is so different from the existing legal entities, it is necessary to review its key features:
In principle, a shareholder in a limited liability company cannot lose more than the paid-up capital of its shares, unless the articles of association state otherwise. The company has its own equity, which can be reduced by payments to the shareholders. However, in order to prevent a situation in which the ability of creditors to recover their claims decreases over time, the company's payments to its shareholders are limited: payments are not allowed if the equity is or will become lower than the paid-up capital. This rule also applies to no-par-value shares. If the company has such shares, it can decide what the amount of protected capital will be. This amount must be registered with the Chamber of Commerce so that creditors have access to the information.
In order to ensure capital protection, special rules for the reduction of capital will be introduced. A capital reduction must not result in negative equity. The shareholders' meeting takes decisions relating to capital reduction, but such decisions are null and void if they contravene certain regulations. An invalid decision may even constitute improper performance of duty or an unlawful act, and may lead to legal action in the latter case. If valid, the decision is published and registered with the Chamber of Commerce.
Articles of Association
The name, statutory seat and purpose of the VBA must be included in the articles of association. Any limitations on representation must also be included. The articles of association must be published, but all other provisions and arrangements can, in principle, be included in an operating agreement, which is not made public. The operating agreement must be attached to the deed of incorporation and filed with the minister of economic affairs.
Decisions taken by a vote regarding the granting of certain powers are invalid if they are unsupported by law or by the articles of association. However, in some cases such a decision may be approved retrospectively. Decisions can be reversed if they are made without taking into account the procedures stipulated in the articles of association or the operating agreement. However, a reversible decision can also be confirmed. Third parties which act in good faith on the basis of decisions which are subsequently reversed or found to be invalid are protected by law. Nevertheless, such protection in connection with decisions made by the management and board of directors is limited to a right to compensation.
Companies that do not have a managing director resident in Aruba must nominate a registered agent. The registered agent is a point of contact for the local authorities and helps the company to fulfil its administrative obligations. The registered agent is required by law to maintain the shareholders' register, issue share warrants, file documents and convene general meetings. He or she is not a managing director and therefore cannot be held responsible as such. However, a lawsuit may be filed against a registered agent in the event of improper performance. Existing trust companies are not required to change their articles of association in order to act as registered agents for VBAs.
The purpose clause of a VBA can be extremely brief: it may declare its corporate purpose to be 'any lawful business'. The use of such a brief description for business activities has drawn considerable international criticism. Therefore, the legislature has decided that a VBA may have a brief purpose clause, but that its activities must be registered with the Chamber of Commerce. If a VBA repeatedly contravenes its purpose clause, it may be dissolved.
A VBA may issue no-par-value shares. If such shares are issued, its authorized share capital(3) cannot be expressed as an amount. Therefore, it must express its authorized capital in terms of the maximum number of shares it will issue.
Shares can be issued with full, variable, limited or no voting power; they may confer rights to profit, units and membership interests, and may be divided into sub-shares. Bearer shares are not allowed.(4) The paid-up capital must be indicated on the share certificate in order to protect future shareholders, as a new shareholder will become responsible for the old shareholder's share of the capital which has not yet been paid up.
Shares may not be issued without some form of consideration, although this may be in kind (eg, labour or services). The consideration must have a stated economic value. If services have already been rendered or labour performed, it is easy to calculate the value of such consideration and settle the obligation to pay up the capital. However, with respect to labour to be performed or services to be rendered in the future, the value of the consideration must be stated in the deed of incorporation. Difficulties arise if (as a result of some intervening event) the services or labour do not have the value previously agreed. Therefore, it is preferable to decide on a monetary consideration and agree on that basis that the obligation to pay up the capital will be settled by the remuneration for the services or labour under the obligation. The capital must be fully paid up within five years.
In principle, every share confers a right to an equal share of the profits, unless the articles of association state otherwise.
The articles of association or operating agreement may stipulate that shareholders must meet certain requirements. If such requirements are not met, the shares can be revoked, in which case the shareholders must be compensated.
In principle, shares are transferable, unless the articles of association or operating agreement limits this right. The right of lien may be limited, but the right of usufruct may not.
Every shareholder must be able to check the company's financial statements. Information disclosed to one shareholder must be shared with the rest.
Shareholders are not obliged to meet once a year. Unless the articles of association or operating agreement states otherwise, every share represents one vote and decisions are made by absolute majority.
A VBA may have a one-tier board which combines managerial and supervisory roles - one or more board members are responsible for day-to-day management, while other members are responsible for supervisory tasks. The executives should be in the majority if they are to perform their duties properly. The president must be a member of the board who is not responsible for day-to-day management. The executives on a one-tier board must hold the same position as those on a two-tier board. Members of the board who are not responsible for day-to-day management cannot be held severally liable in the event of bankruptcy, but if the bankruptcy is the result of improper performance by the management, they become liable. Therefore, trust companies that manage VBAs can be held responsible when their clients are negligent. If certain administrative requirements are not met, there is a presumption of improper performance; however, the management is given the opportunity to prove otherwise.
VBAs allow for derivative suits (ie, actions for compensation instituted by shareholders in the company's name). Aruban legislation does not otherwise allow for derivative suits at present, but individual shareholders will be able to hold the company's management legally accountable for its actions. However, such an initiative cannot be taken by an individual shareholder. Rather, the decision to act is at the discretion of the shareholders' meeting; this is intended to avoid abuses. The articles of association or operating agreement may limit or exclude derivative suits.
Conversions, divisions and mergers are not permitted under existing legislation. This is a significant disadvantage, especially in situations where a company must be restructured. The introduction of the VBA will make restructuring much easier, even though no fiscal measures will be made available to facilitate such a change.
A naamloze vennootschap or Aruba exempt company can be converted into a VBA. It is also possible to convert a foreign legal entity which is similar to a limited liability company into a VBA, and vice versa. However, a VBA cannot be converted into an Aruba exempt company. Any form of conversion requires a resolution to change the articles of association. A conversion is treated the same way as the incorporation of a VBA (ie, a notarial deed and a declaration of no objection are necessary). The state authorities may object to a conversion - for example, if it involves a company that has a public duty or responsibility, such as the provision of drinking water.
The legal entity does not cease to exist during the conversion process. In the case of a cross-border conversion, a declaration of completion must be registered and a foreign authority or legal expert must declare that the conversion has the stated and intended legal consequence. As cross-border conversions can be effected in this way, it will not be necessary to change the Ordinance on the Transfer of the Statutory Seat.(5)
Conversions, whether cross-border or not, are covered by rules to protect creditors and minority shareholders. A letter must be sent to all known creditors to inform them of the conversion. Minority shareholders have the right to liquidate their participation in the company, having had their shares valued by an independent expert. A company in a cross-border conversion must be deleted from the Trade Register.
Shareholders will receive shares in the acquirer in exchange for their shares in the target. If a certain asset could not be transferred during the merger and further action is required, the acquirer may undertake such action.
A merger proposal must also include a merger balance sheet. This balance sheet must be deposited with the Trade Register, as it has vital information for creditors. For the protection of creditors, the company's equity must be at least equal to the amount of the share capital of the acquirer after the merger.
Taxation and VBAs
Fiscal measures have not been introduced to facilitate conversions, divisions and mergers; the legislature considered that to introduce such measures now would overburden the short-staffed tax authorities. However, certain tax facilities will be granted to a VBA, allowing it to:
The VBA will be an asset to Aruba, especially in light of new legislation, such as the revised Aruba exempt company regime, and the government's wish to have not only a very strong tourist industry, but also a booming financial sector. It will make restructuring much easier, even without fiscal facilities for mergers, divisions and conversions, and its flexibility will make it more appealing to investors than the existing legal entities. However, if the government decides to offer fiscal facilities for mergers, divisions and conversions, the VBA will be able to compete internationally.
(3) The annual fee of the Chamber of Commerce is calculated on the base of the authorized share capital. Either all VBAs pay the lowest amount of annual fee because they have no authorized capital or the Chamber of Commerce should choose a different method of calculating the fee.
(4) In the draft version of the proposed legislation bearer shares were allowed. However, considering their international reputation and the desire for transparency, the legislature decided to exclude bearer shares.
(5) This ordinance will not be extended to include the VBA, but the same objective can be achieved by a conversion. However, a cross-border conversion is possible only if the legislation of the other country so permits.
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