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The Companies Law does not allow limitations to the shareholders’ right to freely negotiate their shares (Article 191)[1]. However, the reform of December 29, 2017, included in the same article an exception to this general rule[2], through agreements or covenants between shareholders (hereinafter “Covenants”).

The reform recognizes the validity of Covenants and expressly allows establishing conditions for the negotiation of shares. There is no other provision in the Ecuadorian legislation on this subject in addition to this norm.

Main points that we must know about the Covenants between shareholders:

* Can neither contravene the Companies’ Law, nor the company’s bylaws, and must have a lawful purpose;

* Can be subscribed by two or more shareholders;

* Are not opposable against third parties, but only for those who signed it;

* Cannot harm minority shareholders;

* Usually contain agreements on:

o Preferential acquisition rights for all or some of the shareholders;

o Obligations to assign or acquire shares when certain conditions are met (tag along, drag along or similar clauses)

o Joint selling right;

o Obligations not to increase participation in capital above a certain percentage,

o No competition with the company;

o Intermediation in the products of the shareholders;

o Composition and participation of the shareholders in the administrative bodies;

o Arbitration for conflicts between shareholders;

o Powers of the administrative bodies, quorums and majorities that are not regulated by the bylaws;

o Ways to exercise the rights of minority shareholders;

The Covenants are increasingly common and necessary for the development of companies in family businesses, new ventures or in companies that receive new shareholders and are ideal instruments that allow clear rules for all shareholders.

[1] “The right to freely negotiate shares does not allow limitations.”

[2] “Agreements between shareholders establishing conditions for the negotiation of shares will be valid, however, such agreements will not be opposable to third parties, without prejudice to the civil liabilities that may arise, and in no case they may undermine the rights of the minority shareholders.”

This May one year ago the Ecuadorian Government notified those countries with which it had executed Bilateral Investment Treaties (“BITs’”), with the formal denunciation. As a consequence, those new foreign investments that are executed in Ecuador will no longer be subject, nor will they enjoy, the protection that the BITs’ granted to the nationals of the countries with a BIT. Therefore, we consider this to be an appropriate time to analyze in general terms the protection regime for foreign investment under Ecuadorian legislation.

As a general principle the Constitution recognizes and protects private property, which includes the investment made by private parties. The Constitution makes no exception to such principle that signifies that all private investment is protected under its terms, no matter its categorization (local, foreign, etc.).

Similarly, the Investment, Commerce and Production Code (“COPCI”) is in force since December 2010. The COPCI contains a detailed classification of the investment, differencing between: (1) investments for production, (2) new investments, (3) foreign investment, and, (4) local investment. The legal effect of this classification is important only to define which tax incentives apply to new investment and to the investment for production.

Moreover, the COPCI develops the constitutional principle that protects private property by recognizing other principles that naturally derive from the first. Non-discrimination is the first principle that the COPCI recognizes. Under this principle, all investors have the right to enjoy equal conditions for the administration, operation, expansion and transfer of their investments; additionally, foreign investors have the right to enjoy the same rights as local investors. The second principle recognized by the COPCI is the prohibition of arbitrariness. This principle provides that the investment cannot be subject to any arbitrary actions. The third recognized principle is an express prohibition on any form of confiscation[1].

In relation to the protection of foreign investments, and as was mentioned in the introduction, in May 2017 Ecuador denounced all the BITs’ that were in force with third nations.  Most of the BITs’ contained provisions under which the protection granted was extended for an additional period of time[2] to those investments made until the effective termination date[3]. In that sense, foreign investments executed under the umbrella of a certain BIT and made before the BIT effective termination date, are protected and guaranteed by the terms of such treaty. On the other hand, new foreign investments to be made subsequently to the BIT’s effective termination date will no longer be protected by its terms.

As a consequence, the main instrument that a foreign investor currently has in order to protect its investment in Ecuador is an investment protection agreement with the Ecuadorian Government under the terms of the COPCI (an “Investment Protection Agreement”).

Under the COPCI and its regulations, any investor that (1) makes new investment[4], and (2) has a minimum disbursement of 250,000 USD during the first year, is eligible to request and sign an Investment Protection Agreement with the Government. The COPCI sets forth that under an Investment Protection Agreement the parties can establish: (a) the treatment that the Government shall grant to the investment, namely, the principles that shall govern and protect the investment and the rights granted to the investor; (b) stability over the tax benefits detailed in the COPCI; and, (c) national or international arbitration, provided that some conditions are met.

Since the entry into force of the COPCI, investors have used the Investment Protection Agreements mainly to obtain certain tax benefits and stability over their investments. They have developed a tax chapter in the agreement, leaving aside the investment protection chapter.

In this particular moment in which Ecuador has no longer valid BIT’s, and until the Ecuadorian Government signs the so called “Bilateral Investment Agreements” with third countries, the Investment Protection Agreements are the best instrument that a foreign investor has in order to agree to the principles that shall govern and protect the investment and the rights granted to the investor.

[1] There is one exception in the COPCI that allows for the confiscation of private property and relates to the expropriation of real state for the sole and only purpose of executing social development programs, sustainable projects for the environment and collective wellbeing. In the case of an expropriation for the detailed purposes, the Government must apply due process, prepare a valid assessment and pay the owner an adequate and fair compensation.

[2] Most TBIs’s provide for a protection period of 15 years counting from the effective termination date.

[3] The effective termination date for most of the TBI’s was 12 months from the date in which the Ecuadorian Government notified with the denunciation, which in most cases was done on May 16th, 2017.

[4] Under the COPCI new investment is defined as the flow of resources destined to increase the capital on the economy, through an effective investment in production assets that allow for (1) extend the future production capacity, (2) generate a larger level of production of goods or services, and (3) generate new employments.

Court Decision rejects the petitioner’s submission on procedural technicalities, and doesn’t reflect on the merits.

Any project in any industrial sector with potential environmental impacts should be consulted to communities as part of the licensing process (prior consultation). This is not the kind of consultation at issue; instead, petitioners resorted to the public consultation process, a mechanism contemplated for quite different political participation purposes.

Under the Ecuadorian Constitution (EC), public consultation requests should be approved by the Constitutional Court (CC) before the National Electoral Council calls for a local or national vote, in order to ensure that the subject matter proposition is consistent with constitutional provisions. Respondents -including mining companies, business associations, government agencies, business chambers and other stakeholders- argued thorough amicus curiae that public consultations should not be allowed by the CC to the extent it calls into question constitutional or legal rights or would otherwise contradict constitutional provisions. Also, to the extent a given consultation is not intended to amend the law -there is a very specific and qualified national process in that regard-, the CC must also ensure that consultation requests do not attempt to by-pass the legal constitutional process that would otherwise be necessary in order to change the legal framework.

In case 0002-19-CP, where the consultation’s question would have called fora vote on whether mining is accepted or not, the CC could have rule out, once and for good, public consultation requests of the sort, particularly as the EC provides for specific mechanisms of prior consultation designed to ensure community participation. The CC avoided dealing on the case merits and limited itself to reject the petition on legal standing grounds and further technicalities. Given this outcome, the industry should expect anti-mining groups to reformulate their legal approach and come back in the short term with a number of public consultation requests to be heard by the CC.

It should be stressed that the threat the mining industry is facing as a result of the abuse of the consultation mechanism may extend to any other industry, so it can be also expected that other business sectors will get organized and join the defence of the rule of law.

The mining industry has still a number of legal and communication initiatives to advance its cause and deal with the upcoming wave of political consultations, this time hopefully through a proactive strategy.

For more information and deeper understanding of this ruling or of the legal and political battle ahead, please contact INFO@TZVS.EC.