25 February, 2022
Following the recommendations suggested by the Ibero-American Institute for Law and Finance, Ecuador implemented the most ambitious corporate law reforms observed in Latin America in the past decades. The Ecuadorian Parliament enacted the Corporate Modernization Act, intended to modernize its regulatory framework in several ways. Among other innovative reforms, the new legislation allows the use of electronic devices (including blockchain technology) to create and maintain corporate records.
According to the Ecuadorian Modernization Act, Ecuadorian companies will be able to record their accounting books on distributed ledgers or similar means, provided that the technology utilized allows the individualization of the accounting records and their subsequent verification. In other words, the Ecuadorian Modernization Act explicitly allows the use of blockchain for accounting record-keeping purposes. With that in mind, the use of blockchain for accounting purposes could reduce auditing costs since auditors, shareholders and any other authorized corporate user will have direct access to the ledger and will be able to examine the transactions or track any changes in it as they occur.
Furthermore, following Delaware and Wyoming, the Ecuadorian Modernization Act explicitly allows the use of blockchain for corporate record-keeping purposes, including the registry of shareholders. To begin with, the Ecuadorian Commercial Code allows the use of smart contracts for several purposes. Therefore, shareholders of an Ecuadorian company may deploy smart contracts to execute shareholders’ agreements automatically. As noted by Massimiliano Vatiero, smart contracts, as self-enforced tools, reduce transaction costs because contractors can codify their clauses ex-ante and then blockchain technology executes them automatically without their intervention. Therefore, implementing shareholder agreements through smart contracts will reduce contractual opportunism. For example, shareholders will not breach a smart voting agreement in a general meeting because blockchain technology will automatically execute it. Blockchain will reduce opportunistic behavior, becoming a powerful corporate governance tool. In the UK, the Law Commission has advised on the use of smart contracts under English law to allow the automatic execution of contractual provisions, in whole or in part, without human intervention. The adoption of smart contracts for several legal considerations (including corporate governance) is a trend currently observed internationally.
Ecuadorian companies may also implement blockchain technology for voting purposes. Generally, Ecuadorian companies are governed by a controlling shareholder who has all the incentives to monitor directors closely. In the typical Ecuadorian company, majority shareholders appoint themselves as the company’s directors. When they do not want to hold that position themselves, controlling members elect directors of their trust and, as a result, exercise an enormous amount of influence and control over them. Traditionally, Ecuadorian companies have had to deal with inadequate vote tabulation procedures and abusive behavior of the corporate constituencies that control general meetings. By allocating ‘utility tokens’ to all the company’s shareholders, these will be able to transmit their vote electronically, which will then be automatically recorded on the ledger without the intervention of controlling shareholders or corporate directors. As Fiammetta Piazza put it, ‘voting via blockchain would effectively solve ambiguities about election outcomes and thus reduce opportunities to manipulate such results and would therefore be an advisable corporate governance tool’.
Further, the Corporate Modernization Act allows for the tokenization of shares. The tokenization of shares entails their representation in an electronic format, as long as the share-related information is organized in blockchain. The allocation of non-publicly traded tokenized shares in Ecuador does not require any authorization by the regulator. Therefore, following the regulation of the United States, Singapore and Switzerland, the Ecuadorian regulator (i.e., the Superintendence of Companies, Securities and Insurances) is only required to approve the issuance of publicly traded tokenized shares. According to Gurrea-Martinez and Remolina, this approach will promote innovation and access to finance and will secure equal treatment among securities negotiated on the stock markets (such as bonds and traditional or tokenized shares). Noteworthy, VIPLECON-EC S.A. is the first Ecuadorian company that has successfully executed a negotiation of tokenized shares under the recent regulation. This example demonstrates that the implementation of blockchain for the tokenization of shares is fully operative in the country.
Finally, the Ecuadorian Corporate Modernization Act determines that corporate records and accounting books incorporated in blockchain technology and other electronic means are functionally equivalent to the corporate information documented in non-electronic means. Consequently, those records will be admissible as valid evidence and accepted for any other lawful purpose.
Ecuador will undoubtedly benefit from having a modern corporate regulation that, among other aspects, allows the use of blockchain for several corporate purposes. As some authors have argued, the improvement and modernization of the Ecuadorian corporate framework, implemented through the mentioned reforms, will promote entrepreneurship, innovation, access to finance and, more broadly, Ecuador’s economic growth.
A modified version of this post was previously published on the Oxford Business Law Blog.