Simplified corporations and entrepreneurship

ABSTRACT

The World Bank's Doing Business project encourages the reduction of business registration requirements to stimulate entrepreneurship and economic development. Over the last two decades, it has contributed to the harmonisation of these requirements worldwide, but the rates of newly registered firms have not always followed through. Its unparalleled influence and emphasis on procedural reforms shadowed the development and comparative evaluation of alternative incentives to entrepreneurship.

This article contributes to filling this gap, by empirically examining the impact of simplified corporations, legal forms designed to stimulate entrepreneurial activity in Chile and Colombia. These new corporate forms provide not only abbreviated registration and operation rules, but also single ownership and the ability to issue classes of shares, two features that remain unavailable in many jurisdictions. The results confirm that company law reforms – both procedural and substantive – are insufficient to significantly increase the annual number of newly registered firms. Still, simplified corporations have quickly become entrepreneurs’ preferred legal form in those countries, contributing to expanding new businesses’ access to external finance.

KEYWORDS:

• Regulation of entry
• entrepreneurship
• company law reform

JEL CLASSIFICATION:

• K22
• L22
• L26
• L53
• M13
• O10

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 To be sure, the Doing Business Project currently covers eleven topics. This article focuses on the ‘Starting a Business’ portion, which adopts the regulation of entry methodology, developed by Simeon Djankov and others, ‘The Regulation of Entry’ (2002) 117(1) Quarterly Journal of Economics 1.

2 Data available at the World Bank's Doing Business website <www.doingbusiness.org> accessed 12 June 2021.

3 Differences in entrepreneurial activity are accounted for by the Doing Business project itself, as well as by the Global Entrepreneurship Monitor. Ibid. Also see Zoltan Acs and others, ‘What Does “Entrepreneurship” Data Really Show?’ (2008) 31(3) Small Business Economics 265.

4 The latter cannot be overstated, considering that the DB has mischaracterized relevant institutions and legal reforms when preparing indexes, leaving empirical researchers with the impression that changes have not occurred. See, e.g. Luca Enriques and Matteo Gargantini, ‘Form and Function in Doing Business Rankings: Is Investor Protection in Italy Still so Bad’ (2016) 1 University of Bologna Law Review 1 (detailing the DB's repeated misrepresentation of the Italian investor protection framework).

5 See section 3.

6 See OAS (2017), Ley Modelo sobre la Sociedad por Acciones Simplificada, AG/RES. 2906 (XLVII-O/17).

7 UNCITRAL, 2014 Yearbook (2015) 539–600.

8 See Isaac Hacomo and Ristoph Kleiner, ‘Forced Entrepreneurs’ (2021) Journal of Finance (forthcoming) (reporting evidence that ‘forced entrepreneurs’, i.e. experienced workers those who start a business because of labor market distress, ‘are more likely to survive, innovate, and receive venture-backing’).

9 This was explicitly acknowledged by Chilean President, Ricardo Lagos, when introducing the legislative project to Congress on 30 June 2003. The complete message is available at the Chilean Library of Congress’ report on the history of Law 20.190 (2007) <https://www.bcn.cl/historiadelaley/nc/historia-de-la-ley/5361/> accessed 12 June 2021.

10 A comparative analysis of new business forms (e.g. the French SAS), and the relevance of specific legal features not considered by the Doing Business is in Joseph McCahery and others, ‘A Primer on the Uncorporation’ (2015) 14(3) European Business Organization Law Review 305. Also see section 3.2.

11 Despite the lack of consensus on what ‘entrepreneurship’ comprises and how to properly measure it, the number of incorporations or business start-up rate remains a common factor in global models and comparative indicators that inform policy. See, e.g. Nadim Ahmad and Richard G Seymour, ‘Defining Entrepreneurial Activity: Definitions Supporting Frameworks for Data Collection’ OECD Statistics Working Paper 1/2008 <https://doi.org/10.1787/243164686763> accessed 12 June 2021 (finding that multiple approaches converge in that ‘entrepreneurship is about the creation of new businesses’), and Niels Bosma and others, 2018/2019 Global Report (Global Entrepreneurship Monitor 2018) 10–14 <www.gemconsortium.org/file/open?fileId=50213> accessed 12 June 2021 (reporting similar findings).

12 Notably, small and medium enterprises (SMEs), the segment that contains most new businesses, employ two-thirds of the world's working population. For employment data see International Labour Office, Small and Medium-Sized Enterprises and Decent and Productive Employment Creation: Fourth Item on the Agenda (ILO 2015). Also see David B Audretsch and A Roy Thurik, ‘Capitalism and Democracy in the 21st Century: from the Managed to the Entrepreneurial Economy’ (2000) 10 Journal of Evolutionary Economics 17 (finding significant evidence of lower unemployment in countries ‘that have experienced a greater shift from the managed to the entrepreneurial economy’).

13 José Ernesto Amorós and others, ‘Quantifying the Relationship Between Entrepreneurship and Competitiveness Development Stages in Latin America’ (2012) 8(3) International Entrepreneurship and Management Journal 249.

14 Stephen J Nickell, ‘Competition and Corporate Performance’ (1996) 104(4) Journal of Political Economy 724.

15 Innovation comprises people's ability to make new products, processes and, generally, new ideas. A classic overview of innovation and its impact in growth is Joseph A Schumpeter, The Theory of Economic Development (Redvers Opie trans. 10th edn, 2004).

16 See Robert D Cooter and Hans-Bernd Schäfer, Solomon's Knot: How Law Can End the Poverty of Nations (Princeton University Press 2011) 5 (showing that even necessity entrepreneurs in developing countries are able to anticipate or outperform established firms in the creation of new markets).

17 Robert D Cooter and Aaron Edlin, ‘Overtaking’ in Robert D Cooter (ed) The Falcon's Gyre: Legal Foundations of Economic Innovation and Growth’ (Berkeley Law Books 2014) 6.

18 See, e.g. Thomas Piketty, Capital in the Twenty-First Century (Harvard University Press 2014) 72 (finding that ‘over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills’), and Andrea Apetrei and others, ‘The Controversial Link Between Entrepreneurial Activity and Inequality’ (2019) 15(2) International Entrepreneurship and Management Journal 1 (reaching similar conclusions).

19 According to the World Bank Doing Business database, over 700 reforms reducing the business registration requirements were implemented in 190 countries between 2005 and 2019. Data available at the Doing Business website <www.doingbusiness.org/en/reforms> accessed 12 June 2021.

20 See Hernando De Soto, El Otro Sendero: La Revolución Informal, (Diana 1987) 171–237.

21 See n 1.

22 Leora Klapper and others, ‘Business Environment and Firm Entry: Evidence From International Data’ (2004) World Bank Policy Research Working Paper No. 3232/2004 <https://doi.org/10.2139/ssrn.557830> accessed 12 June 2021.

23 The first Doing Business report presented data collected from of 133 countries in the year 2002. The 2019 report expanded the indicator sets (scope), from 5 to 11, covering 190 economies. Updated information is available at the Doing Business website <www.doingbusiness.org/> accessed 12 June 2021.

24 The index distinguishes three types of procedures: preregistration, which involves name verification and notarization of documents; registration of the articles of incorporation and bylaws, which might be required before different agencies; and post-registration procedures, whose fulfillment is required for operation, such as a social security registration. See Doing Business Methodology <www.doingbusiness.org/methodology> accessed 12 June 2021.

25 Time is, in fact, an influential measure of a country's business environment, as it is not related to the regulation but to practices and customs. Timothy Besley, who served as independent reviewer of the rankings, acknowledged that ‘time’ was not even measured in many countries before the Doing Business report. See Timothy Besley, ‘Law, Regulation, and the Business Climate: The Nature and Influence of the World Bank Doing Business Project’ (2015) 29(3) Journal of Economic Perspectives 99.

26 Common reforms include the elimination of public deeds and authorizations by different public authorities (procedures), allowing electronic filling of documents (time), and reduction of the minimum capital requirement (costs). See Doing Business Reforms <www.doingbusiness.org/en/reforms> accessed 12 June 2021.

27 The Doing Business ranking is significantly more influential than the data with which it is elaborated. A recent scandal involving Chile's drop in the ranking illustrates how it can destroy the positive perception of reforms that are successful, according to the index's own standards. See The Economist, ‘Undoing business: The World Bank's “Ease of Doing Business” Report Faces Tricky Questions’, The Economist (London, 20 January 2018) <https://www.economist.com/finance-and-economics/2018/01/20/the-world-banks-ease-of-doing-business-report-faces-tricky-questionsl> accessed 12 June 2021.

28 See, e.g. Marco Becht and others, ‘Where do Firms Incorporate? Deregulation and the Cost of Entry’ (2008) 14(3) Journal of Corporate Finance 241, and Reiner Braun and others, ‘Does Charter Competition Foster Entrepreneurship? A Difference-in-Difference Approach to European Company Law Reforms’ (2013) 51(3) Journal of Common Market Studies 399.

29 See, e.g. Miriam Bruhn, ‘A Tale of Two Species: Revisiting the Effect of Registration Reform on Informal Business Owners in Mexico’ (2013) 103 Journal of Development Economics 275 (identifying an inconsistent impact of a reform reducing registration times and procedures in Mexico, which varied among municipalities and type of entrepreneur).

30 The World Bank's methodology is based on Djankov and others (n 1), who, at 7, state: ‘For concreteness, we focus on a ‘standardized’ form, which has the following characteristics: it performs general industrial or commercial activities, it operates in the largest city (by population), it is exempt from industry-specific requirements (including environmental ones), it does not participate in foreign trade and does not trade in goods that are subject to excise taxes (e.g. liquor, tobacco, gas), it is a domestically owned limited liability company, its capital is subscribed in cash (not in-kind contributions) and is the higher of (i) 10 times GDP per capita in 1999 or (ii) the minimum capital requirement for the particular type of business entity, it rents (i.e. does not own) land and business premises, it has between 5 and 50 employees one month after the commencement of operations all of whom are nationals, it has turnover of up to 10 times its start-up capital, and it does not qualify for investment incentives’.

31 Id. This approach persists, despite updates to the methodology. Interestingly, the latest version of the data collection questionnaire includes a section allowing respondents to report changes to the most common limited liability company. However, it merely collects information on the type of change (‘correction, reform, other’) and reduction of minimum and/or paid-in capital. See Doing Business Methodology <www.doingbusiness.org/methodology> accessed 12 June 2021.

32 That was indeed the case in both Chile and Colombia. For a comprehensive comparative analysis of the emergence and evolution of corporate law in both origin and transplant jurisdictions, including these two Latin American countries, see Katharina Pistor and others, ‘Evolution of Corporate Law: a Cross-Country Comparison’ (2002) 23 University of Pennsylvania Journal of International Economic Law 791 (2002).

33 Frank Easterbrook and Daniel Fischel, The Economic Structure of Corporate Law (Harvard University Press 1996) 42–43.

34 See, e.g. Martina Eckardt, ‘Legal Form and Internationalization of Small and Medium-Sized Enterprises in the EU’ (2014) Andrássy Working Paper Series No. 31/2014 <https://doi.org/10.2139/ssrn.2445834> accessed 12 June 2021 (finding, from a performance analysis of 9,480 European small and medium size enterprises, that firms with limited liability – as opposed to unincorporated – had a positive impact ‘on internationalization, independent of firm size effects’). Also see Judith Freedman, ‘One Size Fits All – Small Business and Competitive Legal Forms’ (2003) 3(1) Journal of Corporate Law Studies 123.

35 Notably, the cost of engaging and amending contracts. See Michael C. Jensen, A Theory of the Firm (Harvard University Press 2000) 88.

36 These benefits derive from what Hansman and Kraakman call ‘affirmative asset partitioning’, which is inherent to the concept of juridical person or legal entities. Henry Hansmann and Reiner Kraakman, ‘The Essential role of Organizational Law’ (2000) 110 Yale Law Journal 387, 394.

37 ‘The corporation is a decisive improvement in financing innovation because investors receive a marketable share of future profits. In contrast, a personal organization provides no mechanism to guarantee investors a fraction of its future profits, and a partners’ rights in a firm are not freely marketable’. Cooter and Schäfer (n 16) 127.

38 The practice, commonly known as portfolio investment, reduces investment risk as well as firms’ cost of capital. One of the most influential accounts of how shares maximize capital allocation efficiency for both firms and investors is in Henry J Manne, ‘Our Two Corporation Systems: Law and Economics’ (1967) 53(2) Virginia Law Review 259.

39 Jonathan R Macey and Leo E Strine, ‘Citizens United As Bad Corporate Law’ (2019) 3 Wisconsin Law Review 451.

40 In a historical comparative perspective, Pistor and others (n 32), at 806, find that, ‘until well into the nineteenth century, the allocation of control rights among the shareholders of the corporation was secondary to the reservation of control by the state. The state's veto power over incorporation can be traced to the incorporation of state-chartered companies in the Middle Ages’.

41 Braun and others (n 28), at 401–402, summarize the findings of the main economic literature in the following terms: ‘Regulatory costs may be justified by countervailing benefits because the registration process can serve as a screening process. Restricting start-up activity can protect uninformed creditors and reduce information asymmetries … More specifically, minimum capital requirements may sort out ‘necessity nascent entrepreneurs’ who start a business only to escape unemployment. Such entrepreneurs are less wealthy … and therefore more strongly affected by registration costs … At the same time, they have been shown to have no beneficial effect on technological development … Stricter requirements can thus help to prevent market failures, as the ‘public interest theory of regulation’ contends … ’ Similarly, Djankov and others (n 1).

42 See Mohammad Amin, ‘Obstacles to Registering: Necessity vs. Opportunity Entrepreneurs’ (2009) World Bank Research Paper No. 53032/2009 <http://documents.worldbank.org/curated/en/730701468161108215/Obstacles-to-registering-necessity-vs-Opportunity-entrepreneurs> accessed 12 June 2021 (presenting evidence that registration requirements have a higher impact on necessity entrepreneurs than on opportunity entrepreneurs).

43 See Jonathan R Macey, ‘The Limited Liability Company: Lessons for Corporate Law’ (1995) 73 Washington University Law Quarterly 433, 440 (noting that registration of business entities, in general, ‘creates a need for the cadres of white collar bureaucrats necessary to process the requisite corporate forms. And, of course, the filing requirement creates artificial demand for the services of the lawyers who prepare the papers that must be filed in order for a firm to achieve limited liability status’). Macey also notes that registration of business entities, in general, ‘creates a need for the cadres of white collar bureaucrats necessary to process the requisite corporate forms. And, of course, the filing requirement creates artificial demand for the services of the lawyers who prepare the papers that must be filed in order for a firm to achieve limited liability status’. Ibid 440.

44 See, e.g. Luciano Lavecchia and Carlo Stagnaro, ‘There Ain't No Such Thing As a Free Deed: The Case of Italian Notaries’ (2019) 47 European Journal of Law and Economics 277.

45 For an overview of the agency problem between corporate investors and insiders, as well as alternatives strategies to mitigate them, see John Armour and others, ‘The Basic Governance Structure: The Interests of Shareholders as a Class’ in Reiner Kraakman and others, The Anatomy of Corporate Law (3rd OUP 2017).

46 The historical relevance of foreign firms in Latin America is documented in Ben Ross Schneider, ‘Hierarchical Market Economies and Varieties of Capitalism in Latin America’ (2009) 41(3) Journal of Latin American Studies 553 (2009).

47 An extreme example of the high costs of incorporation is Chile, where, until 1981, ‘two presidential decrees were required for a company's complete incorporation: one authorizing incorporation, the other verifying lawful incorporation and allowing the commencement of business’. Pistor and others (n 32) 844. Cf also Ben Ross Schneider, ‘Economic Liberalization and Corporate Governance: the Resilience of Business Groups in Latin America’ (2008) 40 (4) Comparative Politics 379 (arguing that, despite discouraging entrepreneurship, dominance of family groups contributed to economic stability in Latin America).

48 In Mexico, for instance, there is evidence that unincorporated businesses are exposed to higher risks and tend to remain small. See Luc Laeven and Christopher Woodruff, ‘The Quality of the Legal System, Firm Ownership, and Firm Size’ (2004) 89(4) The Review of Economics and Statistics 601.

49 See World Bank Enterprise Survey (2010). More recent data shows improvements in Colombia (66.1) and retreats in Peru (75.9), which suggests that Colombian reforms might have had an impact on informality. See World Bank Enterprise Survey <www.enterprisesurveys.org> accessed 12 June 2021. In historical perspective, the reduced number of registered firms (which are also the result of an underdeveloped business legal culture) might also explain how a handful of family groups accumulated business experience and market dominance, at the expense of new market participants. See Katharina Pistor and Daniel Berkowitz, ‘Of Legal Transplants, Legal Irritants, and Economic Development’ in Peter Cornelius and Bruce Kogut (eds), Corporate Governance and Capital Flows in a Global Economy (OUP 2003) 350 (showing that during the nineteenth century, ‘only a few large companies were operating in [Colombia,] and most had been chartered under imperial Spanish rules that applied in Latin America prior to the dissolution of the Spanish empire’).

50 See Rafael La Porta and Andrei Shleifer, ‘The Unofficial Economy and Economic Development’ (2008) 47(1) Brookings Papers on Economic Activity 123 (presenting evidence that formal firms have higher productivity levels in multiple jurisdictions), and Mauricio Cárdenas and Sandra Rozo, ‘La Informalidad Empresarial y sus Consecuencias: ¿Son los CAE una Solución?’ (2007) Fedesarrollo Working Paper Series No. 38/2007 <http://hdl.handle.net/11445/802> accessed 12 June 2021 (showing that, in Colombia, informal businesses have, on average, less access to credit and training programs, greater problems with technical services and lower profits per worker compared to formal companies with similar characteristics).

51 For an overview of the informality debate in Latin America, and common policy reactions, see Cathy Rakowski, ‘Convergence and Divergence in the Informal Sector Debate: A Focus on Latin America, 1984–92’ (1994) 22(4) World Development 501.

52 To be sure, the first statute was enacted in Wyoming in 1977 and gradually adopted by other states. For a detail account of the legislative process and its impact in the proliferation of LLC statutes across the US, see William J Carney ‘Limited Liability Companies: Origins and Antecedent’ (1995) 66(4) University of Colorado Law Review 855.

53 McCahery and others (n 10), at 307, report that the proliferation of non-listed business forms ‘have been shaped by a mixture of learning and professional advice arising from the company law review process, as well as the indirect influence of overseas business forms’, in which the US LLC has been preponderant.

54 In fact, historical evidence demonstrates that the LLC was, mostly, an attempt to offer pass-through taxation to closely-held corporations. Susan Pace Hamill, who served in the Chief Counsel's Office of the Internal Revenue Service (IRS) when LLC reforms were discussed, noted that ‘the LLC's more recent origins come from the twentieth century's disparate business tax regime accorded partnerships and corporations, the comparative tax burdens of doing business in those forms arising out of that system, and the peculiar policies of the IRS concerning the impact of statutory limited liability on the ability to achieve partnership classification. The IRS singlehandedly prevented LLC experimentation before 1960, and, through its own regulations, set the legal stage for the LLC's invention after 1960. Once the legal landscape allowed for the combination of limited liability and partnership classification, the LLC could emerge’. Susan P. Hamill, ‘The Origins Behind the Limited Liability Company’ (1998) 59(5) Ohio State Law Journal 1459, 1519.

55 To some extent, flexibility (or higher private ordering) was a return to notions of the closely-held business entities that, despite being popular for a significant period, vanished with the dominance of the listed corporation in most of the twentieth century. See Carney (n 52) 856.

56 J William Callison, ‘Venture Capital and Corporate Governance: Evolving the Limited Liability Company to Finance the Entrepreneurial Business’ (2000) 26(1) Journal of Corporation Law 97.

57 John Armour and others, ‘Foundations of Corporate Law’ in Reiner Kraakman and others, The Anatomy of Corporate Law (3rd OUP 2017).

58 Macey (n 43) 434–35.

59 n 10.

60 ‘[T]he corporate-type uncorporate forms in France and Colombia, which are both treated as corporations for fiscal purposes … have become the most favorable choice of entity for non-listed firms for other considerations than a more beneficial tax status … . [Even though the French] SAS does not provide a detailed set of default rules that could easily fill the contractual gaps for the parties’ omissions … the SAS is perhaps the most entrepreneur-friendly uncorporation in Europe today that is also available to individuals’. McCahery and others (n 10) 23.

61 Francisco Reyes, ‘Modernizing Latin American Company Law: Creating an All-Purpose Vehicle for Closely Held Business Entities-The New Simplified Stock Corporation’ (2010) 29(3) Penn State International Law Review 523 (2010) (noting that ‘Company law in most Latin American jurisdictions continues to follow the taxonomy of business associations inherited from the nineteenth century's French codification movement. The point of departure for these systems can be found in the Code Civil and Code de Commerce of 1804 and 1807, in which the basic types of companies were included’. Pistor and others (n 32), at 843, offer a broader overview of the historical origins of legislative preferences: ‘After 1815, an independence movement swept Latin America. New states were formed and constitutions adopted, which were modeled after the French constitution of the First Republic, or the U.S. constitution, or a combination of both. The enactment of civil and commercial law was delayed until mid-century in most of the newly independent states’.

62 Comparatively, Latin American countries had more registration procedures in the first World Doing Business report, which captures requirements applicable to most entities. The traditional alternative to the corporate form is the sociedad de responsabilidad limitada (limited liability company), which required public deed, registration before certain authorities, and, in some cases, publication. Because of its cumbersome registration requirements, certain scholars classified it as a ‘solemn’ business entity form, highlighting that procedural requirements were part of the ‘essence of the entity and indispensable for its creation. A common account in Carlos G. Villegas, Tratado de las Sociedades (Editorial Jurídica de Chile 1996) 269. Statutory provisions in the countries of interest: Chilean Law 3.918 (1923); Colombian Code of Commerce, Articles 110–16; Mexican General Law of Mercantile Companies, Chapter VI; and Peruvian General Law of Business Organizations, Book I and III.

63 Illustrative of it are articles 58 and 61 of Mexican General Law of Mercantile Companies, which respectively require a minimum of two founders and a maximum of 50 members. Article 65 of the same statute provides that ‘for the transfer of interests in the entity, as well as for the admission of new members, the consent of the partners representing the majority of the share capital will suffice, unless the bylaws provide a higher proportion’. Reyes (n 61) and Pistor and others (n 32) provide complementary accounts on the development of company law in Latin America.

64 See Vito Tanzi, ‘Tax Reform in Latin America: A Long Term Assessment’ (2013) CEQ Working Paper No. 15/2013) <https://ideas.repec.org/p/tul/ceqwps/15.html> accessed 12 June 2021 (showing that tax incentives in Latin America have been introduced through general tax reforms to promote certain economic outcomes rather than connecting them to the use of specific business forms), Rodrigo Cerda and Felipe Larraín, ‘Inversión Privada e Impuestos Corporativos: Evidencia para Chile’ (2005) 42 Cuadernos de Economía 257 (asserting that, in fact, the traditional corporate form in Chile had a higher income tax rate than the alternative for a long time, before the rates were equated in 1986), and Mauricio Olivera, ‘Tasas Marginales Efectivas de Tributación en Colombia’ (1996) CEPAL Estudios e Investigaciones No. 34280/1996 <http://hdl.handle.net/11362/34280> accessed 12 June 2021 (noting that in Colombia, except for the period 1953–1960, the corporate form was subject to a higher income tax rate, which was then equated to the rate for the alternative form in 1992). In Mexico, the tax legislation does not distinguish business entities but includes all of them in the broad category of moral persons. In this regard, see Mexican Income Tax Law, article 7, and the analysis by Abigail Rodríguez and Camelina Ruiz, ‘Contribución Efectiva al Impuesto Sobre la Renta en Personas Morales del Régimen General’ (2013) 38 Economía: Teoría y Práctica. In Peru, small and medium enterprises can benefit from certain tax incentives, regardless of the legal form that they adopt, pursuant to a legislative decree. See Decreto Supremo N° 007-2008-TR – Texto Único Ordenado de la Ley de Promoción de la Competitividad, Formalización y Desarrollo de la Micro y Pequeña Empresa y del Acceso al Empleo Decente (Ley MYPE), article 4.

65 In Colombia, members of limited liability companies can be liable for specific duties, such as labor or tax. The statutory provisions are Law 222 (1995), article 163; Labor Code, Articles 353-355; and Colombian Commerce Code, article 356.

66 An updated version of the law is available on the Chilean Library of Congress’ history of Law 20.190 (2007). See n 9.

67 Article 444 of the Chilean Commerce Code, amended by article 17 of Law 20.190 (2007), provides that the SpA is ‘a legal entity created by one or more persons … whose participation in the capital is represented by shares’.

68 Article 425 of the Chilean Commerce Code, amended by article 17 of Law 20.190 (2007).

69 In Chile, the default incorporation procedure is found in article 5 of its corporate statute, Law 18.046 (1981), which provides that ‘an extract from the public deed, authorized by the respective notary, must be registered in the Commercial Registry corresponding to the company's address and published only once in the Official Gazette’ (emphasis added).

70 The expectations were particularly high for the government. See Andres Jara, ‘Sociedades Por Acciones, Ley 20.190: Publicada en el Diario Oficial con Fecha 5 de Junio de 2007’ (2007) 34(2) Revista Chilena de Derecho 381 (noting, in an account of the legislative history, that Law 20.190 was part of a broader policy aimed at promoting entrepreneurship and stimulating the venture capital industry, which was a crucial component of the government's economic agenda).

71 Law 1258 (2008), article 5: ‘The simplified corporation shall be created through a contract or a unilateral decision, that must be consigned in a private document filed before the Mercantile Registry’.

72 A thorough explanation of these and other features of the SAS is in Reyes (n 61), who accurately describes it as an ‘all-purpose vehicle for closely held business entities’. For an updated analysis on the impact of these legal innovations see Aurelio Gurrea-Martínez, ‘The Colombian Simplified Stock Corporation as an Example of Legal Innovation: Thoughts About the Role of Legal Scholars’ (2018) Instituto Iberoamericano de Derecho y Finanzas Working Paper Series No. 2/2018 <https://doi.org/10.2139/ssrn.3097775> accessed 12 June 2021. Cf Felipe Cuberos de las Casas, Sociedad por Acciones Simplificada (SAS): Novedades, Aciertos y Desaciertos (Pontificia Universidad Javeriana 2012).

73 According to the Latin American Private Equity and Venture Capital Association (LAVCA), Chile and Colombia captured almost 10% each of all Venture Capital in Latin America, only surpassed by the region's largest economies, Brazil and Mexico. See LACVA, ‘4th Annual Review of Tech Investment in Latin America’ <https://lavca.org/research/> accessed 12 June 2021.

74 General information about Orbis is available at Bureau van Dijk's website <www.bvdinfo.com> accessed 12 June 2021.

75 See e.g. Carsten Gerner-Beuerle and others, ‘Why do Businesses Incorporate in Other EU Member States? An Empirical Analysis of the Role of Conflict of Laws Rules’ (2018) 56 International Review of Law and Economics 14, Braun and others (n 28), Wolf-Georg Ringe, ‘Corporate Mobility in the European Union – a Flash in the Pan? An Empirical Study on the Success of Lawmaking and Regulatory Competition’ (2013) 10(2) European Company and Financial Law Review 230 (2013); and Becht and others (n 28).

76 It includes ‘loans, purchases of nonequity securities, and trade credits and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises. The financial corporations include monetary authorities and deposit money banks, as well as other financial corporations where data are available (including corporations that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other financial corporations are finance and leasing companies, money lenders, insurance corporations, pension funds, and foreign exchange companies’. World Development Indicators <https://datatopics.worldbank.org/> accessed 12 June 2021.

77 The method is also known as natural experiment or quasi-experiment, to acknowledge that the experiment occurs ‘when some exogenous event – often a change in government policy –changes the environment in which individuals, families, firms, or cities operate’. Jeffrey Wooldridge, Introductory Econometrics: A Modern Approach (6th ed., Cengage 2015) 410.

78 In 2014, Peru introduced a reform that, despite not creating new entities, was intended to influence patterns of business registration, potentially affecting the results of the test. Specifically, it created the SID (Sistema de Intermediación Digital), an online platform for the registration of new businesses and documents subjected to official registration. See Decreto Supremo N° 007-2014-JUS, and Resolución del Superintendente Nacional de los Registros Públicos N° 234-2014-SUNARP/SN Chile also simplified registration of all business entities by the end of 2013, through Law 20.659 (2013).

79 E.g. Braun and others (n 28).

80 See Rafael La Porta and others ‘Law and Finance’ (1998) 106(6) Journal of Political Economy 1113 (classifying it as French civil law).

81 See Reyes (n 61) and Pistor (n 32).

82 For almost three decades, all three economies have experienced an average annual GDP growth rate of 2–5%, and an average annual population growth of 1–1.2%; according to the World Bank's WDI and Data Population Division, respectively. See World Development Indicators <http://data.worldbank.com> accessed 12 June 2021.

83 The most recent comprehensive study of these economies found that ‘SMEs account for approximately 99% of businesses and 67% of employment in PA countries’. See Irene Hors, How to Foster the Internationalization of SMEs Through the Pacific Alliance Integration Process (OECD 2015) 12.

84 According to the same study, ‘81%, 78%, and 84% of exports [consist] of primary commodities for Chile, Colombia and Peru, respectively’. In all three of them, 70% of exports are accounted for by large multinational enterprises. Ibid 7 and 14.

85 Inflows of FDI have fluctuated between 2% and 10% of annual GDP in all three countries. Although the rates are historically higher for Chile (often above 10%), the trend in recent years is almost equivalent. Interestingly, in 2017, which is the latest reported data, Chile had the lowest participation of FDI in GDP (2.3%), compared to Colombia (4.5%) and Peru (3.2%), according to the World Bank. See World Development Indicators <data.worldbank.com> accessed 12 June 2021.

86 See Tor Jansson and Geoffrey Chalmers, ‘The Case for Business Registration Reform in Latin America’ (2001) Sustainable Development Best Practices Series, MSM 110 <https://publications.iadb.org/publications/english/document/The-Case-for-Business-Registration-Reform-in-Latin-America.pdf> accessed 12 June 2021, and Cathy Rakowski ‘Convergence and Divergence in the Informal Sector Debate: A Focus on Latin America, 1984–92’ (1994) 22(4) World Development 501.

87 The three countries are among Latin America's most liberal economies, as evidenced by their early adherence to the General Agreement on Tariffs and Trade (GATT), and their continuous membership in the World Trade Organization (WTO). Chile became a member of the GATT in 1949, Colombia in 1981, and Peru in 1951. Complementary information is available at the WTO's website <www.wto.org> accessed 12 June 2021. For critical overview of the liberalization process, see Joshua Aizenman, ‘Financial Liberalizations in Latin America in the 1990s: A Reassessment’ (2005) 28(7) World Economy 959. For commentary and empirical evidence on the role of FDI in the liberalization process, see Alvaro Pereira, ‘Legal Stability Contracts in Colombia: An Appropriate Incentive for Investments? Historical Causes and Impact Analysis of Law 963 to 2005’ (2013) 12(2) Richmond Journal of Global Law and Business 237 (2013), and Glen Biglaiser and Karl DeRouen, ‘Economic Reforms and Inflows of Foreign Direct Investment in Latin America’ (2006) 41(1) Latin American Research Review 51.

88 While Chile and Colombia (along with Mexico) are the only current OECD members in Latin America, Peru is in the process of becoming the fourth and ‘is amongst the first countries to engage with the OECD through an OECD Country Programme’, which supports a best-practice approach to institutional reform. Complete information on Peru's ongoing relation with the OECD is available at its country website <www.oecd.org/latin-america/countries/peru/> accessed 12 June 2021.

89 For complementary analysis of the process and prospects see Jaime García, ‘Alianza del Pacífico, ¿Hacia dónde vamos?’ (2013) 31 Agenda Internacional 43.

90 María del Pilar Rodríguez, Klender Cortez and Alma Berenice Méndez, ‘Financial and Economic Convergence in Pacific Alliance Countries’ in Mónica Blanco-Jimenez and Jesús Cruz Álvarez (eds) Regional Integration in Latin America (Emerald Publishing Limited 2019).

91 Monica Blanco-Jiménez and others, ‘Pacific Alliance: Political, Economic, and Commercial Implications’ in Mónica Blanco-Jimenez and Jesús Cruz Álvarez (eds) Regional Integration in Latin America (Emerald Publishing Limited 2019).

92 MILA is also enhancing harmonization in accounting, tax, and securities regulation. See Diego Auvert and Guillermo Perry, Financial Integration in the Pacific Alliance (Inter-American Development Bank and Wilson Center 2016).

93 See Alberto Abadie and Javier Gardeazabal, ‘The Economic Costs of Conflict: A Case Study of the Basque Country’ (2003) 93(1) The American Economic Review 114.

94 For an overview of that trend, see Oliver Cadot and others, ‘The Protectionist Bias of Duty Drawbacks: Evidence From Mercosur’ (2003) 59 Journal of International Economics 161.

95 Mexico introduced a comprehensive reform facilitating firm registration in 2002, and introduced a new corporate form in 2006. For an analysis, see, respectively, Bruhn (n 29), and Rodrigo Dominguez and Carlos Treistman, The Future Of Private Equity In Mexico, 6 Latin Lawyer (May 10, 2007) <https://latinlawyer.com/article/1085800/the-future-of-private-equity-in-mexico> accessed 12 June 2021.

96 On the DiD Method see Michael Lechner, ‘The Estimation of Causal Effects by Difference-in-Difference Methods’ (2011) 4(3) Foundations and Trends in Econometrics 165, and Alberto Abadie, ‘Semiparametric Difference-in-Differences Estimators’ (2005) 72(1) Review of Economic Studies 1.

97 In the three jurisdictions, the articles of incorporation and bylaws must contain the same information. They also have to be written in a public deed and registered in the commercial registry. Chilean law requires an additional publication in an official gazette. Relevant statutory provisions are Chilean Law 18.046 (1981), articles 3–5; Colombian Commerce Code, Decree 410 (1971), articles 110-111; and Peruvian, General Law of Corporations, Law 26887 (1997), article 5.

98 James Stock and Mark Watson, Introduction to Econometrics (3^rd Global Ed., Princeton University Press 2015) 539.

99 Its last major company law reform was, in fact, in 1997, when the current corporate statute was enacted. For a detailed historical account see Oswaldo Hundskopf, ‘Reseña Histórica de la Ley General de Sociedades No. 26887’ in María Elena Guerra-Cerrón (ed) Ley General de Sociedades. Estudios y Comentarios a Veinte Años de su Vigencia (Gaceta Jurídica 2018).

100 Jorge Guzman, ‘The Direct Effect of Corporate Law on Entrepreneurship’ (2020) Center for Open Science, SocArXiv No. 967ph/2020<https://EconPapers.repec.org/RePEc:osf:socarx:967ph.> accessed 12 June 2021.

101 Anticipation effects occur when ‘individuals began changing their behavior in response to an expectation’ of changes in the future, which is reasonable to expect from forward-looking individuals and firms. See Anup Malani and Julian Reif, ‘Accounting for Anticipation Effects: An Application to Medical Malpractice Tort Reform’ (2011) National Bureau of Economic Research Working Paper 16593/2011 <10.3386/w16593> accessed 12 June 2021.

102 Ibid.

103 The legislative history is available the Chilean Library of Congress. See n 9.

104 As noted in section 3.3, the law did not eliminate all registration requirements, such as the publication note of the registration of the entity.

105 See, e.g. Pedro A Troncoso Martinic, ‘La sociedad unipersonal en Chile después de la Ley Número 19.857’ (2005) 9 Revista Jurídica UCES 24, and Maria Fernanda Vásquez, ‘Sobre la Limitación de Responsabilidad en El Derecho de Sociedades y su Posible Extensión en el Contexto de la Modernización’ (2014) 27(2) Revista de Derecho (Valdivia) 105.

106 The technical nature of the law explains why it was debated and negotiated for four years. In June 2003, the (then) President, Ricardo Lagos presented the project to Congress, stating that stimulating the venture capital industry was an economic priority that justified changes to the regulation of banks, corporate insolvency, investment funds, and capital markets, among others. See n 9.

107 Twenty-two articles introduce various reforms to different regimes, and eight articles establish special provisional measures.

108 For doctrinal analysis of the new system to register movable assets see Alejandro Guzmán, ‘El Llamado Contrato de Prenda Sin Desplazamiento’ (2009)13 Revista Chilena de Derecho Privado 161.

109 See n 9.

110 Because Colombian SAS Law was introduced in December of 2008, it was reasonable to consider 2009 as the first year. Still, several tests were conducted to identify potential anticipatory or delayed effects, and none found any impact.

111 Vásquez (n 105).

112 Ibid. Numbers reflect percentages of overall business registration. Entities unrelated to the present analysis are excluded.

113 See, e.g. Francisco Reyes ‘The Colombian Simplified Corporation: An Empirical Analysis of a Success Story in Corporate Law Reform' (2015) 4(1) Penn State Journal of Law and International Affairs 392, 420 (affirming that the number of incorporations ‘has increased exponentially since the enactment of Law 1258 on December 5 of 2008').

114 For illustration purposes, entities with less tan 0.1% were excluded. The exact numbers for these entities are 70.3% SpA (7.574), 18.5% EIRL (1.997), and 11.0% SRL (1.186). See Ministerio de Economía Fomento y Turismo, Informe Mensual de Constitución de Empresas y Sociedades (December 2020) <www.economia.gob.cl/wp-content/uploads/2021/02/Informe-RES-diciembre-2020.pdf> accessed 12 June 2021.

115 Reyes (n 61). ‘Stock Company’ refers to the non-listed corporation, and ‘single member enterprise’ to the EIRL.

116 The report also noted that 20% were private corporations (requiring a minimum of 5 founders) and 13% a weaker version of single owner entity with no equity. See Cámara de Comercio de Bogotá, El Perfil Económico y Jurídico de las SAS en su Primer Año (CCB 2010).

117 See El Espectador, ‘Hasta Octubre se Han Creado 10.288 Sociedades por Acciones Simplificadas’ El Espectador (Bogotá, 11 November 2009)<www.elespectador.com/economia/articulo171633-hasta-octubre-se-han-creado-10288-sociedades-acciones-simplificadas> accessed 12 June 2021.

118 The agenda, entitled ‘Visión Estratégica de la Alianza del Pacífico al año 2030’, was signed by the heads of state of member states in their XVIII meeting, held on 24 July 2018 at Puerto Vallarta, Mexico. The document is available at the Pacific Alliance's website <https://alianzapacifico.net> accessed 12 June 2021.

119 Blanco-Jiménez and others (n 91).

120 Mexico introduced its own SAS in a March 2016 amendment to the General Law of Corporations, but relevant limitations deprive it of the benefits offered by its Chilean and Colombian counterparts. First, only natural persons can be shareholders and must not have control of another business entity. Second, SAS have an annual revenue cap of five million Mexican pesos (approximately, $250.000USD). If exceeded, shareholders must transform into other legal form or lose the limitation of liability. Third, the articles of incorporation must be elaborated through an electronic platform provided by the Secretary of the Economy that prevents additional agreements. Fourth and most importantly, shareholders might be liable for criminal activities committed by the corporation, even if they had no involvement in said activities. The Mexican SAS, in this sense, does not grant access to limited liability like a corporation. See Mexican General Law of Mercantile Companies, article 262. For an analysis, see Soyalah León Tovar, ‘Las Sociedades por Acciones Simplificadas en México’ (2016)7 Revista Perspectiva Jurídica UP 135.

121 In September 2018, Peru created a simplified corporate form. Despite being inspired by the Colombian experience, the new legal entity does not allow ingle ownership or the regulation of shares through by laws, but rather focuses on the regulation of entry. See Presidential Decree 1409 (2018), authorized by Law 30823 (2018) <www.leyes.congreso.gob.pe/> accessed 12 June 2021.

122 Known as SAPI (standing for ‘Sociedad Anónima Promotora de Inversión’) and created through a capital market reform, this special corporate form allows bylaws regulation of shares, board, and management structure. Notwithstanding, it maintained the traditional corporation's costs of entry and governance formalities. See Mexican Law of Capital Markets, articles 12–18. For an analysis, see Dominguez and Treistman (n 95).

123 See Auvert and Perry (n 92).

Additional information

Funding

This work was supported by Fundación CeiBA.

Notes on contributors

Alvaro Pereira

Alvaro Pereira is a Max Weber Fellow in Law at the European University Institute, Italy.