In the event of an acquisition, particularly of holdings in a Dominican corporate entity, whether it be through a direct purchase of the shares or quotas of such entity, or of an upstream holding company, an often question posed by purchasers in this type of transactions revolves around the potential liabilities for the ultimate resulting parent, including labor and environmental liabilities of the local corporate entity, or its subsidiary in the Dominican Republic.
Traditionally, at least for the more common business associations and corporate vehicles used in the Dominican Republic, our legal regime has provided for companies to have separate legal capacity (as a legal person) and assets and liabilities different and separate from those of its shareholders, members, directors, officers and employees. Dominican corporate law recognizes the so called principle of separate legal capacity of companies and partnerships, except in the case of businesses carried out by sole proprietors and partners in general or limited partnerships, forms of business associations provided under Dominican law, in which the partners may each be liable for all the debts of the business (unlimited liability).
Our system follows accordingly the legal assumption of a “corporate veil” and that actions of the corporation are not the actions of its shareholders; therefore, in principle, shareholders have no individual liability for the corporation’s actions. Their liability is limited to the sums that they have contributed to the company’s capital stock, that is, to the extent of their investments in shares or quotas of such company or partnership. In the absence of fraud or other deceptive practice, there is no personal recourse against shareholders for the obligations of the company. Thus, in principle, the corporate entity will protect the shareholders from liability beyond their investments, i.e. shareholder’s liability is limited to the amount individually invested.
The abuse of the principle of separate legal personality is however penalized in the Dominican Republic, though the departure from the principle of separate legal capacity is very rare. A departure from the general principle could emerge, and thus the corporate veil could be pierced, when the legal capacity of the corporate vehicle has been used to protect fraud or defend crime. In principle, unless there is a fraudulent intention, none of the shareholders is personally liable for the operations of their company.
In addition to the general rules provided under our current business associations law in connection with the above, other Dominican statutes expressly include the possibility that the corporate veil may be pierced, as in the case of rules provided under our labor laws, tax laws, banking laws and cases of bankruptcy, provided fraud to the law or the existence of a wrongful act is being prosecuted or sanctioned either by ordinary justice or administrative authorities. That is to say, to judicially impose individual liability on corporate officers, directors and shareholders for the corporation’s wrongful acts, it is necessary that they had been personally involved in the violation of the law or malpractice.
In conclusion, the liability of a shareholder may only be inflicted if the willful misconduct of said shareholder is proven before a qualified judicial court, or following other applicable proceedings.
Despite the foregoing it’s important to consider the following provisions set forth in our environmental, labor and tax legislation:
a) Environmental matters: as per the provisions set forth in our General Environmental and Natural Resources Law (“Law 64-00”) “the consequences of environmental disasters originated by the negligence shall be of the exclusive responsibility of the persons or entities which have caused the same, which shall restore the areas or resources destroyed or affected, if possible, and shall respond criminally and civilly for caused damages” [Article 76]; additional, Law 64-00 provides that “notwithstanding the sanctions provided by the law, anyone who causes harm to the environment or to natural resources, shall have strict liability for damages that may occur, in accordance with this law and other supplementary provisions of law. Also, shall be compelled to materially repair, at its expense, if possible, and to indemnify in accordance with the law the environment” [Article 169].
In this same order of ideas, when an infraction under Law 64-00 is committed by more than one person, everyone participating in said infraction shall be jointly and severally liable for economic damages. The foregoing derives from the provisions set forth in Article 172 of Law 64-00 which also provides particularly that “in the case of legal persons, liability provided in this article shall be established when the direction or administration corporate bodies of the same have authorized the acts which caused the damage”.
Civil liability hence to a shareholder of a company which has caused damages to the environment or its natural resources may only be established in principle if such shareholder has participated directly in either the commission of the pertinent actions or has authorized the same. The foregoing rule does not apply entirely however, if the shareholder, despite being a corporate vehicle, also acts as a manager of the company or subsidiary, represented for such purposes by an individual (as required by law in such cases) in which case said individual and the corporate vehicle appointed as manager, are jointly and severally liable with respect to the obligations deriving from its role as manager or director.
Criminal liability of a shareholder, as per the provisions set forth in Articles 174 and 186 of Law 64-00 may only be established upon such person’s willful misconduct or criminal intent.
b) Labor matters: in accordance with Article 13 of the Dominican Labor Code (“Law 16-92”) “in any case where one or more enterprises, despite each one of them having their own legal capacity, were under the direction, control or administration of others, or in any way related in a manner upon which they constitute an economic group [affiliates] for the purposes of the obligations undertaken with their employees, such enterprises shall be jointly and severally liable, when fraudulent maneuvers have taken place”.
Following the above, a shareholder of a company operating locally, or ultimate parents of such shareholder of a local company, may be held liable under Article 13 if an employee proves before the qualified labor court the existence of an economic group (affiliation between said entities and shareholders) and the existence of fraud or fraudulent maneuvers in the detriment of said employee. The latter is an indispensable prerequisite for such liability to be established upon the shareholder, as has been determined by our Supreme Court of Justice [February 11, 1998, B. J. 1047, p. 342-348; December 17, 1997, B. J. 1045, p. 556-562; and July 8, 1998, b. M. 1052, p. 629-637].
It is not uncommon however for lower courts to assert such liability on affiliates of the local company and actual employer, and to determine the existence of fraudulent maneuvers. To evidence the existence of affiliation, employees will usually resort to documentary evidence, including letterheads of their employer when such makes reference to other companies affiliated to the same and similar documentation.
c) Tax issues: Finally, as provided under Article 11 of the Dominican Tax Code (“Law 11-92”) shareholders or partners of a company operating in the Dominican Republic, may be held jointly and severally liable for the latter’s fiscal obligations, but only in scenarios of liquidation of said local company.