Trade and Commercial Law Assessment - Honduras - Economic ...

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TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS divestiture. As a consequence, when asked to spin-off a department or division of a company, lawyers create a new company or dissolve the whole original company and create different entities. Corporate governance principles are not strict. The code requires that companies appoint internal auditors, comisarios, to supervise administrators, but these auditors are rarely appointed. When comisarios are appointed, they usually are not independent and in many cases are shareholders of the company in question. Comisarios do not need to be certified public accountants (CPA). Companies are not required to publish financial statements. In addition, although it is mandatory to maintain corporate account books, most companies do not do so. Banks are the only companies required to publish annual audited financial statements. Even though banks face more stringent regulations than do other companies, it has been reported that corporate governance principles for financial institutions are lax. However, under the new Law on Financial Institutions, Ley Reguladora de Instituciones Financieras, to be passed shortly by Congress, the National Commission on Banks and Insurance Companies, Comisión Nacional de Bancos y Seguros (CNBS), will be able to issue regulations that impose stronger corporate governance principles, define and prohibit conflicts of interest, and establish the extent of the liability of related persons. According to the Commercial Code, Sociedades Anónimas are governed by an administrative body, and the shareholders assembly is the highest authority. 17 In practice, however, many companies do not have an administrative body and have never had a meeting of a shareholders assembly. There is no penalty for such a violation. Protection of minority shareholders is weak. Only shareholders holding at least 25 percent of shares are able to appoint directors. 18 Shareholders owning less than 25 percent of shares cannot call for shareholders meetings unless a general meeting has not been held during the year. 19 If no such meeting has been held, shareholders owning less than 25 percent of shares can ask the administrative body to call the meeting. 20 If administrators refuse the request, shareholders can make the request to the comisarios, and if they refuse or there are no comisarios, the request can be made to a judge. If shareholders disagree with a decision made in a shareholders assembly, such as capital increase or change of the company’s activities, the shareholders can request that their shares be bought back. 21 However, it is not clear whether the shares would be bought at market value or at face value. To operate, companies must obtain a great number of permits from various governmental entities. Business operation permits, issued by the municipalities, are expensive by local standards and require that the company have a physical address for operations, for which a property deed or lease agreement must be presented. The majority of companies are unable to present either of these documents. In San Pedro Sula, the municipality has threatened to close 16 CdCom. Art. 344. 17 CdCom. Art. 165. 18 CdCom. Art. 175. 19 Id. 20 Id. 21 Id. III-3
TRADE AND COMMERCIAL LAW ASSESSMENT DECEMBER 2004 HONDURAS 700 stores because they lack the municipal permit to operate. In addition, in the past a judicial review was required to legally operate a business, but this requirement was eliminated by the Law on Administrative Simplification. The law also includes the principle of afirmativa ficta, according to which certain requests to the government must be responded to within a given time period. (If there is no response within the given period, the request would be considered approved.) Before the Law on Administrative Simplification was passed, it took 9 months to obtain the required permits to start a business, but since the law’s passage it takes 3 months, according to individuals interviewed for this report. In Tegucigalpa, however, it can still take up to a year to obtain the municipal business license, although temporary licenses are available during the approval process. An environmental permit, which takes roughly 6 months to obtain, is required for most activities in Honduras. Because of all of these obstacles, businesses in Honduras often are not formalized. Estimates of informal operations range from about 50 percent to 89 percent of all businesses. 22 In fact, a business association interviewed reported that of the 2.8 million economically active inhabitants in Honduras, three-quarters are in the informal economy. According to interviews, roughly 600,000 Hondurans are employed by SMEs, while the large apparel companies known as maquilas employ about 130,000 people. Only 5 percent of the population has access to credit, according to an interviewee. SMEs, especially informal ones, have great difficulty obtaining credit because of a lack of guarantees. Microfinance institutions provide a potential alternative source of credit, but interest rates are often prohibitively high (up to 80 percent). Funds managed by microfinance institutions charge interest of up to 3 percent monthly. Other options include credit card financing (with $5,000 credit limits and interest rates of 2.75 percent annually) and special programs offered by some banks that grant $30,000 loans to be paid back in 5 years at 9 percent and require a guarantee such as a mortgage on real property. In the case of each of these options, stringent requirements often prevent their use. Companies pay income tax at a rate of 25 percent, sales tax at a rate of 12 percent, a solidarity tax (used to pay for social services) of 5 percent, and a business asset tax that is independent of profits. In an unusual provision, incomes accrued by companies operating a food franchise are untaxed. Dividends paid to shareholders are tax exempt. Due in part to the heavy tax load, tax evasion is prevalent. Overall, this account makes clear that the legal framework of Honduras needs to be modified and that obstacles to doing business need to be removed. C. IMPLEMENTING INSTITUTIONS Companies are required to register with the Commercial Registry to be considered fully legal. Articles of incorporation, bylaws, the minutes of shareholders assemblies, and various other documents must be registered. The Commercial Registry in Honduras is in poor condition. It is 22 See Instituto libertad y democracia. at www.ild.org.pe; World Bank, Snapshot of Business Environment – Honduras, at http://rru.worldbank.org/DoingBusiness/ExploreEconomies/BusinessClimateSnapshot.aspx?economyid=86. III-4
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