Contributed By Arias, Fábrega & Fábrega
Corporations (sociedades anónimas) are the principal form of organisation for conducting business in Panama. Foreign investors may elect to incorporate a Panamanian entity or register a branch of a foreign entity in Panama. From a corporate standpoint, a branch of a foreign corporation must abide by the laws of its jurisdiction of incorporation. A foreign branch is deemed an extension of the foreign juridical person but does not have distinct or separate legal existence from the overseas entity.
Besides corporations, limited liability companies (sociedades de responsabilidad limitada) have recently gained popularity as vehicles for doing business in Panama, especially for US taxpayers for the check-the-box purposes.
Corporations, limited liability companies and branches of foreign entities are all subject to the same obligations and responsibilities in carrying out a business activity in Panama, and any and all corporate action taken by such entities must be permitted under their own articles of incorporation.
Broadly speaking, shareholders of corporations and members of limited liability companies incorporated in Panama have all the same rights, responsibilities and liabilities, with the following exceptions:
Shareholders and members are not personally liable for the obligations of the corporation or the limited liability company, as applicable. Shareholders of corporations and members of limited liability companies are only liable for the unpaid portion, if any, of the subscription price of the shares that they owe to the corporation or limited liability company.
Similarly, directors of corporations and administrators of limited liability companies are not personally liable for the obligations of the corporation or limited liability company; however, as mentioned further below, directors and administrators have a general duty of care to the corporation or limited liability company, and may become personally liable for negligence in the discharge of these duties.
As to estate planning, the principal form of organisation in Panama is the private interest foundation (fundación de interés privado), which is frequently used as an alternative to a trust, as it allows the founder of the foundation to maintain more direct control and direct it at its discretion. As a general rule, private interest foundations may be profit-oriented, and may engage in commercial activities in a non-habitual manner or exercise the rights deriving from the capital of business companies held as part of the foundation’s assets, as long as the proceeds from such activities are used exclusively for the foundation’s objective. Unlike corporations, foundations do not have shareholders or other "owners" per se; the founder of the foundation is roughly analogous to the shareholder only in the sense that it is the entity that contributes assets to the foundation (although other persons may also make contributions to the foundation).
For the purposes of this chapter, unless expressly stated otherwise, the responses shall refer to corporations that are not subject to any particular industry-specific regulation (eg, securities, banking and insurance).
Corporate governance matters for corporations are mainly regulated under Law 32 of 1927 (the Corporate Law) and the Panamanian Code of Commerce. For entities regulated by the insurance, securities or banking regulators, there are additional corporate governance requirements and recommendations under the respective industry's regulations.
For example, with respect to regulated corporations, the banking regulations require the bank and its directors, officers and controlling shareholders to be persons with good moral character who have not been convicted of money laundering, terrorism and certain other crimes, nor declared bankrupt, and who have not been responsible for the failure of a bank or banned from engaging in commercial activities.
Corporations that have registered their securities (Public Companies) with the Superintendence of Capital Markets are subject to certain non-binding corporate governance recommendations, including the following:
In addition to these general recommendations, there are specific recommendations for the governing bodies of the Public Company. It is recommended that the majority of the board of directors shall be persons who do not participate in the daily administration of the Public Company, to reduce potential conflicts of interest. It is also recommended that one in every five directors is an independent director, and that none of the officers and directors of the Public Company demands or accepts payments or advantages for themselves at the expense of the Corporation's interests, nor pursues their own interests with their decisions, nor uses their position to benefit themselves through business opportunities of the Public Company.
Regarding the aforementioned support committees, it is recommended that Public Companies have an audit committee and a risk management and compliance committee, at least. For companies whose board of directors is composed of more than five members, a directors' assessment and nomination committee is also recommended.
The audit committee should be headed by the treasurer of the Public Company and comprised of members of the board of directors who do not participate in the daily administration of the Public Company. It is also recommended that at least 30% of the audit committee and the risk management and compliance committee shall be comprised of independent directors.
The majority of the corporate governance practices described in Accord 12 of 2003 are merely recommendations, and Public Companies are not obliged to comply with such practices. Nevertheless, Public Companies do have the obligation to disclose the implementation or lack of implementation of such corporate governance practices.
Panamanian law does not mandate significant corporate governance rules and requirements for corporations. However, it is common for shareholders to agree voluntarily to establish corporate governance rules that are set out in the constitutive document of the corporation, called the Pacto Social (the articles of incorporation). The board of directors may also agree to create corporate governance rules or requirements by way of estatutos (also known in English as bylaws).
As of 2020, there has not been any significant recent development in connection with corporate governance regulations generally applicable to corporations. However, there are two recent developments on corporate governance applicable to regulated corporations and to the board of directors of public entities and state-owned companies, as follows:
As of 2020, there are no mandatory requirements for companies in relation to reporting on environmental, social and governance (ESG) issues. However, there are certain recent developments on ESG that might suggest a new trend in ESG-related initiatives, as follows:
As of 25 May 2020, no special measures or restrictions have been implemented in Panama relating specifically to corporate governance to address any coronavirus (COVID-19) impact.
Notwithstanding, the government has enacted certain measures that may grant relief to local companies, including the following:
The principal bodies of corporations are the shareholders' assembly and the board of directors. The latter has the statutory power to control and direct the business of the corporation, except as otherwise agreed by the shareholders in the articles of incorporation and a few matters reserved to shareholders provided for in the Corporate Law.
In addition, the shareholders or the board of directors may issue special or general managing/administration powers of attorney in favour of agents (eg, chief executive officer, general manager), so that the regular business of the corporation may be managed by such agents.
The Corporate Law does not mandate the creation of any committees by corporations, but the board may appoint committees integrated by two or more of its members, which report to the board.
Shareholders have the flexibility to determine the decision-making process in the corporation through the articles of incorporation. However, Panamanian law reserves certain powers and decisions to certain governing bodies within the corporation, as follows.
Shareholders and the board of directors may make decisions through resolutions of their respective bodies. Resolutions may be adopted at meetings or by written resolutions in lieu of meetings, which may be signed in different locations on different dates.
Shareholder meetings can take place within the Republic of Panama or anywhere else in the world, if the articles of incorporation allow it. Shareholders owning at least 5% of the issued and outstanding voting shares have the statutory right to request that a shareholder meeting be called. The bylaws or articles of incorporation may also grant this kind of right to shareholders representing a smaller percentage than 5%. A notice of the shareholder meeting must be given not less than ten and no more than 60 days before the meeting, unless the articles of incorporation provide otherwise. The shareholders may waive notice and may appoint proxies to vote on their behalf. Panamanian law does not strictly specify the number or percentage of shares required to constitute a quorum of a shareholder meeting; therefore, the articles of incorporation commonly state that a simple majority is required, but it is not uncommon for higher quorum requirements to be set forth in the articles of incorporation or bylaws. Generally, shareholder decisions are adopted by holders of a majority of the issued and outstanding shares entitled to vote on the matter under consideration, but a supermajority vote for specific matters may be required by way of the articles of incorporation.
Meetings of the board of directors can also be held within the Republic of Panama or anywhere in the world, unless restricted by the articles of incorporation or the bylaws of the corporation. Directors shall receive notice of all meetings, and may waive notice of the meetings. Directors may also vote by proxy, if the articles of incorporation do not determine otherwise. The default quorum to hold a meeting is a majority of the directors in office. Decisions of the board of directors are commonly adopted by the favourable vote of the majority of the directors present or duly represented at the meeting; nevertheless, the corporation's articles of incorporation may determine a special supermajority and quorum requirements for certain matters. Directors’ resolutions may also be adopted by a written resolution in lieu of a meeting.
The boards of directors of corporations must be composed of at least three members, who can be individuals (the legal age required is over 18) or legal entities. There is no general nationality or residency requirement for directors, nor are the directors required to be shareholders of the corporation.
The only requirement under the law is that a person has the ability to carry out the commercial activities required due to the commercial nature of the corporation. This merely requires, pursuant to the Commercial Code, that the person must "(i) have the ability to enter into contract and obligations and (ii) is not otherwise prohibited from acting as a merchant (profesión del comercio)." Said differently, under law and practice, any person or entity (regardless of nationality or domicile) can act as a director of a Panama corporation.
However, note that regulated corporations (eg, banks) are subject to additional requirements set forth by the regulations of the respective industry.
Panamanian law does not specifically provide roles for the individual members of the board of directors. Generally, and as mentioned, Panamanian law grants the board of directors the power to control and direct the business of the corporation. Therefore, the board of directors shall exercise all the corporate powers that are not expressly reserved to shareholders by law and the articles of incorporation.
There are no further relevant requirements for the composition of the board of directors.
The members of the board of directors are elected and removed by the shareholders of the corporation, although the directors may – by a resolution of the board of directors – fill the vacancies that occur in the board, unless doing so is prohibited by the articles of incorporation. Directors may be removed from office by the shareholders with or without cause.
If the articles of incorporation do not state otherwise, corporate officers are appointed and removed by the board of directors. Panamanian law requires corporations to have at least a president, a secretary and a treasurer, and they may have such other officers as determined by the board of directors or the articles of incorporation. The corporation officers may be the directors, but this is not strictly required. A single person may hold more than one office.
Panamanian law does not require the appointment of independent directors in non-regulated corporations, nor does it require corporate governance practices to ensure the independence of the directors or the prevention of a potential conflict of interest. These rules and requirements, if established by the shareholder(s) or directors, are documented by way of the articles of incorporation or the bylaws of the corporation. As for regulated corporations, by way of example, under the securities regulations, neither an investment manager nor any of its directors, managers or related parties can acquire assets owned by the investment company it administers, nor shall the investment manager provide loans or guarantees to such investment companies, and vice versa.
The Superintendence of Capital Markets has issued non-binding guidelines that recommend that one out of every five directors of Public Companies is independent. The independent directors are described, by securities regulations, as individuals (or legal entities) who (i) do not directly or indirectly own 5% or more of the voting shares of the Public Company, (ii) do not participate directly or indirectly in the daily managing duties of the Public Company, and (iii) are not spouses of, or related by blood to, the individuals described before.
Generally, the duties of directors and officers are determined by the corporation's articles of incorporation or bylaws.
Under Panamanian law, the relationship between directors, on the one hand, and the corporation and its shareholders, on the other hand, can better be characterised as that of agent and principal. Directors are generally considered to have received a "mandate" to manage the affairs and assets of the corporation. As such, directors are responsible for discharging their mandate with the duty of care owed by agents, and may become personally liable for negligence in the discharge of these duties. The standard of care to which directors are generally subject is that which "ordinarily prudent men would usually exercise in the discharge of their own affairs."
There are few statutory duties for certain officers under Panamanian law, as follows:
As mentioned above, directors are responsible for discharging the mandate conferred to them by the shareholders with the duty of care owed by agents, and may become personally liable for negligence in the discharge of these duties. The Panama Code of Commerce describes the general liabilities of the members of the board of directors of the corporation. Directors are not liable for the corporation obligations, but they are personally or jointly liable, as the case may be, for the following:
Directors who were absent with cause or who protested in due time against a resolution adopted by the majority for any matter set forth above shall be exempted from liability. The aforementioned liability of directors may only be demanded by virtue of a resolution of the general shareholder meeting. In the absence of such resolution, only the corporation would be liable to third parties for damages resulting from the acts of its directors.
In addition to the above, the General Corporation Law provides three more personal causes of action against directors, who may become personally liable to creditors of the corporation in the following cases:
In such cases, directors who assent to such actions fraudulently or with knowledge of the fact that they will impair the capital of the corporation or that the statement or report is false as to any material fact would become personally and jointly and severally liable to creditors of the corporation. As opposed to liability arising under the Commercial Code, liability under the General Corporation Law, as referred to above, would not require the prior approval of the shareholders.
Furthermore, the directors are criminally liable in the fraudulent insolvency of the Corporation.
Unlike directors, officers of a corporation are not vested with such broad powers of management and responsibility, and Panama’s General Corporation Law does not specifically refer to their personal liability. However, in general, officers of a corporation may become personally or jointly and severally liable to the corporation, its shareholders or creditors of the corporation for negligence or wilful misconduct that causes harm to the corporation, the shareholders or the corporation’s creditors.
In addition, officers and directors of financial institutions (regulated corporations), such as banks or broker-dealers, may be subject to criminal liability under the Criminal Code of Panama if they commit any of the following crimes:
As mentioned above, a breach of the duties of directors may be enforced:
There are no statutory claims or enforcements against directors or officers of non-regulated corporations, other than as described above.
As mentioned above, directors who were absent with cause or who protested in due time against a resolution of the majority of directors in which a certain breach of duties was authorised shall be exempted from liability. Furthermore, as mentioned, such specific liability of directors may only be demanded by virtue of a resolution of the general shareholder meeting. In the absence of such resolution, only the corporation would be liable to third parties for damages resulting from the acts of its directors.
For regulated corporations, under the Banking Law, for example, the director, officer or employee of a bank that violates the Banking Law or its regulations is subject to private admonition, public admonition, and monetary fines. These sanctions are determined and issued by the Superintendence of Banks with regard to the seriousness of the infringement, its recurrence and the damages caused to third parties.
There are no statutory required approvals under the Corporate Law for the remuneration, fees or benefits payable to directors and officers, except for those set forth in the corporation’s articles of incorporation or bylaws.
There are no disclosure requirements for a corporation in relation to the remuneration, fees or benefits payable to its directors and officers.
However, Public Companies are required to disclose in their offering memorandums the compensation and benefit plans of their directors, officers, managers and executives.
The shareholders assembly of a corporation is the supreme governing body and there are certain decisions that are solely reserved to it, as discussed above. There are no particular rules and requirements that govern the relationship between the shareholders and the corporation, other than as described above. There is no mandatory minimum frequency of meetings of shareholders.
Shareholders are not personally liable for the obligations of the corporation and shall only be liable for the unpaid portion, if any, of the subscription price of the shares that they owe to the corporation; it is unusual for local courts to pierce the corporate veil without clear evidence of fraud. The doctrine of piercing the corporate veil or disregarding the legal personality of an entity under Panamanian law has been reviewed by Panama's Supreme Courts on a few occasions. Generally speaking, courts uphold the limitations of liability imposed by a corporate law, and have allowed the application of the piercing of the corporate veil doctrine only in exceptional fraud and/or criminal cases. Furthermore, courts have reiterated on several occasions that piercing the corporate veil is a very extreme remedy that must be applied only as a last resort (“ultima ratio”), under exceptional circumstances, and only in connection with the prosecution of criminal offences made within the territory of the Republic of Panama. A few examples cited by the courts are as follows:
In addition, the recently enacted Insolvency Law further confirms this principle by stating that the liquidation of an insolvent corporation shall not personally affect shareholders in such capacity. However, shareholders may be liable for any benefit received from an act (eg, fraudulent acts) that is subsequently declared null and void by the courts upon the liquidation of the corporation.
As a related point, note that shareholders of Panamanian companies have the following statutory rights vis-à-vis the corporation:
As mentioned above, the board of directors has the power to control and direct the business of the corporation, except for the matters reserved to shareholders by law and the articles of incorporation. From a practical perspective, the shareholders of relatively small corporations may decide to take management roles in executive capacities in such corporation, but that is a matter of practice and not a statutory obligation.
Under Panamanian law, there is no requirement regarding the frequency of shareholder meetings, although the articles of incorporation may establish a particular frequency of shareholder meetings with particular rules governing such meetings. Please see 3.3 Decision-Making Processes regarding the general default rules on meetings of shareholders.
As discussed above, shareholders may authorise legal actions against the breach of certain duties by directors of the corporation, for the following matters:
Shareholders may pursue a claim against the corporation for any violation of their rights, as shareholders, established under the law or the articles of incorporation or other constitutive documents.
Public Companies are subject to the following disclosure requirements set forth under the securities regulations, among others:
There are no financial reporting requirements for unregulated corporations under the Corporate Law. However, companies with commercial operations must have their accounting registries in the Spanish language at all times.
Furthermore, corporations in Panama that are engaged in commercial activities have the obligation to produce financial statements (and must be audited if they have capital of above PAB100,000 or an annual sales volume of more than PAB50,000). Other industry-specific regulations (such as the securities and banking regulations) require the supervised person to disclose audited financial statements annually and interim financial statements quarterly, depending on the regulated activities carried out.
Public Companies must publish interim financial statements on a quarterly basis no later than 60 days after the end of the relevant quarter and annual audited financial statements no later than 90 days after the end of the first year.
There are no requirements for corporations to disclose their corporate governance arrangements under the Corporate Law. Please refer to the discussions above, with respect to the disclosure of corporate governance arrangements by Public Companies. In addition, Public Companies must provide updates on changes in their corporate governance that constitute relevant facts, and must immediately publish press releases about certain other material events identified in the regulations issued under the securities regulations.
Companies shall register any amendments to their articles of incorporation, any changes to the board of directors, any dissolution, any continuation to another jurisdiction, and any mergers and spin-offs, as well as any board of directors and shareholders meeting that is binding to third parties. These filings are publicly available and, as of the date of registration, enforceable vis-à-vis third parties.
In accordance with the Corporate Law, there are no requirements to appoint an external auditor in connection with financial statements, but please note the financial reporting requirements for operative corporations in Panama, as stated in 6.1 Financial Reporting.
There are no requirements for directors of corporations specifically in connection with the management of risk and internal controls in a corporation under the Corporate Law. Please note that, under industry-specific regulations (such as the banking, securities and insurance regulations), there are additional regulations on the management of risk and internal controls.