Reforming Outdated Commercial Laws

Three weeks ago I visited El Salvador and Honduras to discuss different aspects of their reform program inspired by the Doing Business (DB) indicators. In San Salvador, representatives from Central American governments met in a two-day workshop to share successful experiences of regulatory reform and learn from each other.

Panama and the Dominican Republic sent participants as did Honduras, Guatemala and Nicaragua. Some of the participating countries – such as the host nation, Guatemala and Honduras – have been reforming for a while and are planning their next steps. The Dominican Republic was a top-10 reformer last year. Others – such as Nicaragua and Panama – are relative newcomers to the reform field. We will see how much they can and will get done.

One thing that gathered attention at the workshop was how El Salvador succeeded to amend its Commercial Code last year. This was interesting for all, not least because Central American countries have decades-old commercial codes. Take, for example, Honduras. Its Commercial Code dates back to 1950 – a totally different time from today’s economy. It was very timely to meet with the newly appointed Supreme Court of Honduras one day after the workshop to discuss precisely the changes needed to make the Honduran code more in line with needs of the economy today. Some of these have to do with what DB measures in Protecting Investors indicator (150th rank for Honduras last year). Disclosure  requirements are minimal (1 out of 10 on the DB scale) and clearly needs to be strengthened. And rules on director liability and shareholders’ rights to sue company directors for prejudicial transactions that cause damages to the company are weak.

Notably, according to local legal experts, when the Honduran Commercial Code came into being in the 1950s, family-owned businesses dominated the economy. Family businesses are still very common today. Still, nearly everyone I met in Honduras agreed that changes are sorely needed. A lot of litigation has sprung up precisely due to the lack of transparency and clear rules of liability of company insiders. Ironically, most of these lawsuits are allegedly among heirs to the family-owned firms of the past. The opinion is that Honduras would do well to review and amend its Commercial Code. The El Salvador experience will come in handy.