PUERTO RICO Law and Practice Contributed by: Fernando J. Rovira-Rullán and Andrés I. Ferriol-Alonso, Ferraiuoli LLC
1. Corporate Governance Requirements 1.1 Corporate Forms and Governance Requirements The principal forms of corporate/business organisa - tions in Puerto Rico are “corporations” and “limited liability companies” (LLCs) – the latter having gained popularity among business owners given the particu - lar advantages they offer, including: • the freedom to structure management (ie, member- managed, manager-managed, or with a centralised management structure such as board-managed); • not being required to file and disclose financial statements with the Puerto Rico Department of State; • enjoying streamlined corporate formalities; and • having the option to be taxed as a pass-through entity or as a regular corporation. Please note that although there are publicly traded companies organised under the laws of Puerto Rico that trade in national stock markets (ie, NYSE and AMEX) and over-the-counter markets (ie, NASDAQ), this chapter will not cover corporate governance requirements applicable to publicly traded compa - nies under United States federal securities laws and regulations and applicable securities exchanges rules and regulations. There are two main sources of corporate governance requirements. • Legal sources – Puerto Rico Corporations and LLCs are subject to the requirements of the Puerto Rico General Corporations Act of 2009, as amended (the “Corporations Act”) and regula - tions published under it, as well as case law from the Puerto Rico Supreme Court. It is important to note that the Corporations Act is modelled after the Delaware General Corporation Law, and that the Puerto Rico Supreme Court has stated that judicial decisions from Delaware courts in connection with the interpretation of the Delaware General Corpo - ration Law shall be highly persuasive and illustra - tive before Puerto Rican courts. This principle of interpretation has not been expressly extended by
the Puerto Rico Supreme Court to Delaware court decisions interpreting the Delaware Limited Liability Company Act (the “Delaware LLC Act”); however, it seems highly probable that the same principle would apply. • Organisational documents – a corporation’s or LLC’s organisational documents are an important source of corporate governance requirements, rights and obligations. A corporation’s articles of incorporation, by-laws and shareholders’ agree - ment may include particular provisions regarding voting requirements, transfer restrictions, meetings and shareholder rights, among others. Note that although a shareholders’ agreement is an impor - tant source of corporate governance for corpora - tions, the Corporations Act does not impose on a corporation or its shareholders the obligation to adopt such a document. • Although the Corporations Act has default provi - sions applicable to LLCs, an LLC’s limited liability company agreement is the principal source of cor - porate governance requirements, rights and obliga - tions. This is because one of the LLC’s principal benefits is the freedom provided to the members in determining the governance structure of the com - pany, the formalities (if any) that shall be required, and ultimately how the company is managed. The Corporations Act does not impose on the mem - bers of an LLC the obligation to adopt a limited liability company agreement. However, unlike Delaware law, which includes oral, written or implied forms of a lim - ited liability company agreement, the Corporations Act defines the limited liability company agreement as a written agreement. If no limited liability company agreement is adopted, the LLC will be subject to the default provisions contained in the Corporations Act. For the purpose of this publication, the authors will treat LLCs as if a limited liability company agreement had been adopted. 1.2 Corporate Governance Legislation and Regulation See 1.1 Corporate Forms and Governance Require- ments .
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