Introduction of Related Party Transactions in Honduran Commercial Legislation.

Through Legislative Decree No. 284-2013, which contains the “Law for Job Creation, Promotion of Business Initiative, Formalization of Businesses, and Protection of Investor Rights,” Article 210 of the Commercial Code was amended to include the regulation of what is considered related party transactions, which are specifically aimed at the management bodies of a corporation.

According to this article, related party transactions are considered any transaction: 

1. Between the company and one of its administrators or directors.
2. Between the company and third parties in which an administrator or director has any interest, or in which they deal with the company through an intermediary; and 
3. Between the company and another company, if one of the administrators or directors is an owner or administrator or director of the latter. 

In contrast, before the amendment of this article, the Commercial Code did not regulate what constituted related party transactions and only regulated that administrators should “refrain from voting on resolutions concerning matters in which they have a personal or external interest contrary to the company’s interest, in accordance with the provisions of the second paragraph of Article 151, which shall be applicable as appropriate.” (Article 210, third paragraph, before the amendment)

Currently, and by virtue of the amendment, the Commercial Code clearly regulates which types of transactions will be considered related party transactions and establishes a procedure for 'Special Authorization' that must be followed when making decisions involving such transactions. This regulation provides greater control to companies regarding corporate governance and the limitations on the powers of administrators or directors.   

Special Authorization for the Approval of Related Party Transactions

Article 210 of the Commercial Code establishes that all related party transactions must be subject to special authorization for its approval. However, it is important to highlight that, depending on the value or amount of the transaction, this authorization may be granted by different bodies. The rules for special authorization are as follows: 

1. When the transaction or the sum of several transactions with the same counterparty during the same period is less than five percent (5%) of the company's assets, the Board of Directors must authorize it.. 
2. When the transaction or the sum of several transactions with the same counterparty during the same period is exceeds five percent (5%) of the company's assets, the Extraordinary Shareholders’ Meeting must authorize it.  

Consequently, we can clearly see that there are two types of special authorization: the first is granted by the Board of Directors, and unless otherwise stipulated in the company's charter or bylaws, quorum requirements must be met, and resolutions must be adopted by a majority of those present. The second type of authorization is granted by the Extraordinary Shareholders' Meeting, and unless otherwise agreed, the quorum and resolution criteria established in the Commercial Code must be met, with at least three-fourths (¾) of the voting shares present and resolutions adopted by the majority of those present.

Article 210 of the Commercial Code clearly regulates which body is designated for each case. However, it is important to note that this article leaves a significant legal gap when the Board of Directors must grant the special authorization. For example, considering that an Administrator or Director with a conflict of interest must abstain from voting, what happens in cases where a company does not have a Board of Directors and instead has a Sole Administrator?

In cases where a commercial company has a sole administrator as its management body, the legislator fails to designate which body and how related party transactions with a value less than five percent (5%) of the company's assets should be authorized. 

In the absence of such designation, it should be understood by analogy that this authorization should be granted by the supreme body of the company, which is the Shareholders' Meeting. Additionally, considering the dispositive nature of Commercial Law and the principle of autonomy of will, shareholders can agree in their bylaws the rules they deem appropriate for the authorization of transactions between related parties, provided they do not contradict the provisions of Article 210. 

Nullity of Related Party Transactions

The Commercial Code does not expressly prohibit related party transactions. On the contrary, if these transactions are approved through the special authorization mechanisms, they will be valid and will have all their legal effects with respect to the company. 

However, related party transactions may be subject to nullity in the following two situations:

1. When the conditions stipulated in Article 210 of the Commercial Code are not followed, specifically those related to the special authorization granted by the Board of Directors or the Extraordinary Shareholders' Meeting. 
2. When related party transactions cause harm or damage to the company or its shareholders. (6)

It is relevant to note that, regardless of whether related party transactions have been approved by the appropriate legal means and mechanisms, they will be subject to nullification when they cause harm to the company or its shareholders. If this agreement is declared null, it will result in the non-existence of the act, without prejudice to the liability that the directors may have towards third parties acting in good faith. 

This is an additional protection that shareholders have in order to safeguard their interests against the interests of the management bodies, and it will be up to the judicial authorities to resolve any nullity actions that may be presented in this regard. 

Conclusions

The amendment to Article 210 of the Commercial Code adopted through Legislative Decree 284-2013 regulates the means and mechanisms that corporations must follow to authorize related party transactions and protect them from potential conflicts of interest that may arise between the company and its administrators or the board of directors. 

Considering that these related party transactions usually involve a conflict of interest between the company and the management bodies, they must be approved by the competent authorities depending on their value or amount. Furthermore, the company and/or shareholders have special guarantees to file nullity actions against these agreements if they cause harm to the company or to the shareholders themselves. 

The special authorization of related party transactions aims to provide greater control to companies, especially to their shareholders, over the decisions made by the management bodies and the discretion they possess. The Commercial Code provides the minimum guidelines for the authorization of related party transactions; however, it is important to highlight that shareholders can regulate this type of authorization in their bylaws as they deem convenient. 

(1) Publicado en el Diario Oficial la Gaceta número 33,445 de fecha 05 de junio del año 2014.  

(2)  Las partes vinculadas o relacionadas, ya se encontraban reguladas por la Legislación Fiscal Hondureña mediante el Decreto Legislativo número 232-2011 el cual contiene la Ley de Regulación de Precios de Transferencia.

 (3) Artículo 151, párrafo segundo del Código de Comercio – “El accionista que contravenga esta disposición será responsable de los daños y perjuicios, cuando sin su voto no se hubiera logrado la mayoría necesaria para la validez del acuerdo.”

(4)  Artículo 210 del Código de Comercio.

(5)  Artículo 186 del Código de Comercio. 

(6) Artículo 193, Numeral VI del Código de Comercio. Nulidad de los Acuerdos Adoptados por las Asambleas de Accionistas. 

(7) Artículo 1596 del Código Civil. “La nulidad absoluta, lo mismo que la relativa, declarada por sentencia firme, dan derecho a las partes para ser restituidas al mismo estado en que se hallaban si no hubiese existido el acto o contrato nulo…”

 (8) Artículo 194 del Código de Comercio. “La acción de nulidad se regirá por las disposiciones del derecho común…”