Dispute Resolution under the Law of Entrepreneurship and Innovation

The Organic Law of Entrepreneurship and Innovation (Innovation Law) allows the shareholders of a simplified stock company (SAS for its acronym in Spanish) to resort to statutory arbitration for any dispute arising out of the constitution or operation of the company and between the shareholders. The Innovation Law constitutes an important development for dispute resolution in Ecuador.

On February 28, 2020, the Organic Law of Entrepreneurship and Innovation (Innovation Law) was published in the Official Registry N. 151. The Innovation Law brought important legal developments in the country. For instance, the company recognized the simplified stock company (SAS for its acronym in Spanish). This company offers some advantages compared to others. Among those benefits, the following stand out: the possibility to constitute the company by private documents, avoiding notarial costs, the option for the SAS to be operated by a single shareholder or that the shares might allow for multiple voting. In general terms, the SAS grants more freedom to the shareholders to agree on most of the company´s management conditions.

In terms of dispute resolution, the Innovation Law permits that any conflict between the shareholders or the SAS´s representatives may be solved through mediation. In the event that parties do not reach an agreement, then the dispute may be submitted to arbitration if that was agreed in the company´s bylaws.

Please bear in mind, that as mandated by article 5 of the Arbitration Act, for an arbitration agreement to be valid, it must be in writing or in an exchange of communications in which an Arbitral Tribunal might infer consent. Typically, a recurring question with respect to corporate disputes, occurs when shares have been transferred to a third party that did not participate during the constitution of the company. The question is, said third party is bound by the arbitration agreement incorporated in the bylaws? How can the Arbitral Tribunal infer consent?

On this regard, the Innovation Law establishes that in the event that an arbitration agreement has been incorporated in the bylaws of a company, then a reference of said arbitration agreement shall be mentioned in the reverse of the share titles in order for new shareholders to be aware of it.

Another doubt that this new law presents, is the possibility of resorting to arbitration in other type of companies recognized under the Ecuadorian legislation. On this regard, it is worth noting that the only requisite to submit a dispute to arbitration is that said dispute refers to a matter subject to transaction. Although the Innovation Law does not mention statutory arbitration in other types of companies besides SAS, we do not see a limitation for it to be applicable to other companies. Hence, any dispute arising out of shareholders disagreements might be submitted to arbitration, except in those cases in which the law has established a special dispute resolution mechanism (e.g. disputes arising out of a general shareholder´s meeting or challenges against administrative acts issued by the authority of control).

In conclusion, the Innovation Law offers an important development for arbitration in the country and will bring many advatanges for the resolution of conflicts arising out of shareholders disputes.

Disclaimer: This document is informative and does not, and is not intended to, constitute legal advice.