Law analysis: The purchase of Cuban joint venture shares by foreign investors

Guest column headBy José María Viñals and Renato A. Landeira

What happens to the shares of a Cuban joint venture company when the foreign party is taken over by another company or wants to sell its stake to a third party? The Cuban Foreign Investment Law expressly provides the possibility of changing partners in a Cuban joint venture company.Viñals Landeira head

The Cuban Constitutional Reform on July 12, 1992 in many ways marks the pinnacle of the Cuban economy’s reorientation towards foreign investment. Among others, it recognized joint venture companies constituted under the law as a new form of property. Likewise, this reform was an important milestone in providing for, albeit exceptionally, the partial or total communication of the government’s economic objectives for the country’s development. This change would enable “other forms of property” to exist in Cuba, alongside the Socialist State Property. It is important to note that, before this date, Decree-Law 50/1982 on the Economic Association of Cuban and Foreign entities represented the only other favorable legal step towards foreign investment, with the creation of International Economic Association Contracts and — mixed — Joint Venture Companies in the form of limited, investee companies, made up by foreign and Cuban companies in a proportion that is mutually agreed upon and authorized.

A bit of history

Before the implementation of Decree-Law 50/1982, there was no concrete legal framework governing foreign investment in Cuba. Instead, there were merely bilateral agreements between COMECON member states, starting from the admission of Cuba as a full-fledged member state on the 11th July 1972, until its termination in 1991.

Once settled, following the principles for the entry of foreign investment into Cuba, it became necessary to create a legal body that offered guarantees and legal security to the foreign investor. This objective was first met by the implementation of the Foreign Investment Law 77/1995, which was in place until April 16, 2014, and is currently covered by the Foreign Investment Law (LIE) 118/2014, and the regulation that surrounds it — Decree 325/2014, Foreign Investment Law Regulation (RLIE). Both legal bodies regulate changes made to constituent documents, in this case for a Joint Venture company, due to a transfer of shares.

Thus, the LIE expressly provides for the possibility of changing partners in a Joint Venture, provided they give consent. Subject to the agreements that previously existed and are compiled in the Articles of Association, such as the right to first refusal or the existence of a special scheme for the transfer of shares, a foreign investor can generally acquire shares not only from the Cuban party but also from the foreign party. However, in practice, it is usually the foreign partner who transfers part or all of its shares either to a Joint Venture partner, or to a third party unrelated to the company, who may be either a natural person or a legal entity. It is necessary to indicate in advance that the determination of share capital to be carried by the partners of a Joint Venture is up to the parties themselves, although this ratio must ultimately be approved by the Executive Committee of the Council of Ministers of the Republic of Cuba. The current LIE does not, however, make it compulsory to distribute up to 49% of share capital to the foreign partner(s), as had been the case in the abolished Decree-Law 50/1982.

Requirements

Thus, the transfer of shares will rely on prior approval from the authority that originally authorized the constitution of said Joint Venture, which in the majority of cases, will be the Cuban Council of Ministers, or the head of the Central Administration of the State, if the Council of Ministers delegated the task (in this regard, note that the LIE provides for the possibility that some foreign investments and, where appropriate, any amendments to constituent documents, must be approved by the Council of State, as is the case with investments involving the exploitation of non-renewable natural resources, transport, communications, aqueducts, electricity, public works and the exploitation of goods in the public domain), a dossier must be submitted in advance to the Ministry of Trade and Foreign Investment (MINCEX), describing the changes to the constituent documents of the Joint Venture, indicating the transfer of shares. The RLIE then expresses that the demand made to MINCEX must be accompanied by the following documentation: (i) a certificate of agreement from the Joint Venture’s General Shareholders Meeting, formalized before a notary public, approving the transfer of shares; (ii) a certificate of the value of the transaction through which the shares will be transferred; (ii) endorsement from the head of the organization, a Central Administration of the State agency or a national sponsoring entity; and (iv) consent from the acquirer of the stocks.

If the acquirer of the shares is not a partner in the Joint Venture, it will also have to supply: (i) a copy of the society’s constituent document, duly legalized to take effect in Cuba and formalized before a Cuban notary; (ii) a registration certificate from the Commercial Register or the equivalent from the country of origin that attests its validity, no more than six months old; (iii) financial statements from the last approved accounting period, certificated by an independent entity; (iv) a bank endorsement that is no more than six months old; (v) a sponsorship letter from the parent company, if the investor is an affiliate or subsidiary, or is represented by an off-shore commercial society; (vi) powers of attorney duly legalized to take effect in Cuba; and (viii) accreditation of experience in the relevant field of investment and of the ability to manage exportation markets of goods and services, as applicable.

All of the submitted documentation must be (i) translated into Spanish, (ii) legalized before the relevant ministries and the Cuban consular representative in the foreign applicant’s country, and (iii) formalized before a Cuban notary. On that note, bear in mind that Cuba is not a signatory of the The Hague Convention which scrapped the requirement to legalize foreign public documents, made on Oct. 5, 1961.

Financial transaction

It is also worth bearing in mind that, regarding the entry of foreign capital in the interest of buying and selling shares, provided that the contribution is monetary, the transaction must be carried out by bank transfer subject to the Cuban National Banking System. The proposed funds will be analyzed by the General Management of Financial Operations Investigation of the Central Bank of Cuba who, where appropriate, will issue a licit provenance certificate, the investor’s prior declaration, and an evaluation of the financial statements and bank endorsements that the foreign investor in question has put forward. It is important to point out that Cuba has a firm and thorough international commitment in the fight against asset laundering and illicit movements of capital, regulated by the Decree Laws 317/2013, dated Dec. 7, and 322/2013, dated Dec. 30.

Steps

Once the formal procedures established by the RLIE have been completed, the Cuban party will present the dossier to MINCEX, which will then be submitted for consultation by the Evaluation Commission for Business Involving Foreign Investment, which has a period of 15 days to offer its opinion. This Commission can also make allegations and, where applicable, return the dossier to the applicant to carry out any appropriate amendments. At this point, the applicant will have a period of seven calendar days to do so and re-submit the dossier to MINCEX. Once these modifications have been approved — or in the case that MINCEX had originally issued a positive report — this organization will present the dossier, together with its evaluation, to the relevant authority so a final decision can be taken. The decision to deny or authorize the requests subject to the Council of Ministers’ approval will be made within 60 calendar days, starting from the date on which the request was taken on by MINCEX.
Once the amendments of the constituent documents have been approved, a copy of the registered legal documents and certification must be presented to MINCEX no more than fifteen calendar days after its enrollment in the Commercial Register.
Finally, in the case that the party wishes to expatriate the money for sale of shares, the LIE will guarantee free transfers abroad, with no taxes or levies.

Lupicinio is an international law firm established in 1979 with headquarters in Madrid and professional presence in Cuba since 1996 through an official correspondence agreement with Bufete Internacional in Havana and a local Cuban team of lawyers with expertise in the main areas of Cuban law, especially in foreign investment on the island and the Mariel Special Development Zone

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