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Creating the Sociedad de Responsabilidad Limitada: The Use of Legal Flexibility in Spanish Company Law, 1869–1953

Published online by Cambridge University Press:  22 January 2016

Susana Martínez-Rodríguez
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Abstract

Spain approved the first law of Sociedad de Responsabilidad Limitada (SRL)—a legal form similar to the German GmbH—in 1953. However, the SRL had already been used, albeit without its own legislation, since the 1920s. How was this possible in a country whose legal system was based on civil law? Its 1885 Commercial Code lacked the numerus clausus principle for enterprise forms, a feature that gave entrepreneurs unusual freedom in organizing their firms, and in adopting new business forms not defined in the code. It also invites us to rethink the notion of rigidity in civil law.

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Type
Research Article
Information
Business History Review , Volume 90 , Issue 2 , Summer 2016 , pp. 227 - 249
Copyright
Copyright © The President and Fellows of Harvard College 2016 

A company's legal form is its identity card, reflecting its characteristics as established by the law (capital, number of partners and their liability for the firm's debts, management features), the conditions for its access to the credit market, and the types of guarantees it provides to third parties. A specific menu of business organizational choices is associated with belonging to a particular legal family. Over the last several decades, economists have stressed the economic implications of different legal families, in particular the common and civil law. Numerous high-quality studies support the view that common-law legal systems are more efficient than those rooted in the tradition of civil law.Footnote 1 Some argue that common law is more flexible and better able to support the development of financial markets and to react quickly to economic change. This distinction is an oversimplification, but it points to a general assumption that investors in a common-law system can contract as they please. Previous literature has produced significant policy measures, mostly through initiatives led or inspired by the World Bank.Footnote 2

Some scholars have identified cases where a common-law country was rigid and a civil-law country was innovative and flexible.Footnote 3 Research along these lines analyzes the set of organizational forms belonging to the major legal families and their ability to generate economic growth. The boundaries between legal models are unclear, and to a certain extent countries implement the legal innovations they consider appropriate for their progress without considering those innovations' places of origin.Footnote 4 This article demonstrates that civil-law systems can embed mechanisms that allow laws and rules to adapt to market forces in a way that admirers of common-law systems believe is unique to common law. To illustrate this, I focus on the Sociedad de Responsabilidad Limitada (hereafter SRL), a new type of business firm that was widely used without written law for almost thirty years. The SRL is the Spanish version of “private limited liability company,” a generic term adopted by Timothy Guinnane and his coauthors to refer to enterprise forms such as the British Private Limited Company, the German Gesellschaft mit beschränkter Haftung (GmbH), and the French Société à Responsabilité Limitée.Footnote 5

The SRL became the most important company form in the second half of the twentieth century in Spain.Footnote 6 Prior to its appearance, Spanish businesspeople had at their disposal partnerships (regular and limited) and corporations—and an enormous flexibility to adapt the company statutes to their needs. Unlike in other countries, in Spain corporations were largely unregulated; but this did not translate into greater use of this form, due to economic underdevelopment.Footnote 7 However, when changes in regulation allowed use of the SRL with guarantees, business owners welcomed the alternative form with enthusiasm.

The establishment of the SRL is the most striking result of a flexible legal context. The Spanish Commercial Code (1885) allowed numerus apertus for the legal form of enterprises. This means that Spaniards could import ideas from France and elsewhere. Most civil-law countries adhere to the legal principle of typicality for legal entities, which in company law implies the notion of numerus clausus: companies must organize according to one of the forms provided in the fundamental laws of business.Footnote 8 In Spain, on the other hand, companies could use one of the forms provided or adapt the standard forms to their specific circumstances (business code, § 122).

The freedom to create new types of companies was first subjected to the authority of the notary, because the law required that all deeds be notarized documents. Notaries, who wrote and certified the legality of a new company's articles of association, used the previously mentioned legal flexibility to help their clients develop business structures suited to their needs.Footnote 9 Contemporary notaries witnessed European legal innovations—such as the GmbH—and made an effort to import them into Spain on their own.Footnote 10

A second controlling entity was the business registry agency. After passing the new Commercial Code, registration became compulsory for all legal business types, under § 119.3. Publication in the registry made a firm's articles of association accessible to the public, drastically reducing the transaction costs of agents—including the general public and also the court, in case of conflict—who did business with the company. The 1919 regulation of the business registry allowed the SRLs to enroll; the first consequence was significant dissemination of SRLs.Footnote 11 Before then, SRLs had been very rare. Lacking an explicit template for the form and for how it would be treated in litigation, entrepreneurs were reluctant to organize their firms this way. However, from 1920 to 1953, the number of registered SRLs grew. In the early 1950s, about half of all new companies were enrolled under this legal form. The fact that SRLs had previously operated without their own law did not mean that there was no regulation at all. The necessary legal framework for their implementation was provided by the Commercial Code's default guidelines, which applied to all firms; the notaries' expertise in writing systematic and clear contracts; and case law.

SRLs displaced all kind of partnerships, especially limited partnerships, which had virtually disappeared by the early 1950s. The average year in the period from 1900 to 1919 saw the enrollment of 922 ordinary and 228 limited partnerships in all of Spain (along with 320 corporations). In the period from 1920 to 1936, those figures fell to 468 ordinary and 76 limited partnerships. The average number of corporations created each year in the period was 425.Footnote 12 Apparently, there was room for both types of firms with limited liability for all owners.

In other European countries, the popularity of private limited liability companies reflected the heavy regulation that applied to corporations. For instance, the GmbH, approved in 1892, was the answer to German entrepreneurs' demands to remove excessive obstacles to establishing corporations. Before the GmbH, investors usually had to either bear unlimited liability or accept the passive role of a silent partner in a limited partnership.Footnote 13

An analysis of the Spanish SRL constitutes a case that illustrates the variety of legal innovations that occurred in the menu of organizational forms in different civil-law regions. The freedom and flexibility provided by company law were balanced by the work of notaries and registers, which made sure the law was respected. Both elements enabled the successful implementation of the new private company with limited liability. The facts show a complex legal structure that allowed for adaptation and continuous renewal without having to modify Spain's commercial code. History also played a role, as a series of political setbacks delayed the adoption of a law that covered the SRL.

The article is organized as follows. Section one addresses the choices made by new firms registered in Spain from 1886 to 1936 in an international perspective. Section two shows how the flexibility in Spanish company law allowed variations in already-existing forms, resulting in characteristics close to those of future SRLs. Section three describes the guidelines governing SRLs in the period from 1919 to 1953, using Supreme Court (Tribunal Supremo) decisions concerning the SRL and resolutions of the General Directorate of Civil Registry and Notaries (Dirección General del Registro y del Notariado). These documents roughly outline the case law in common-law countries. The article closes with a brief commentary on legal flexibility.

Precedents for the Private Limited Liability Companies

A significant number of civil-law countries passed a commercial code during the first half of the nineteenth century, following the French code (1807).Footnote 14 As industrialization progressed, it became urgent to update company laws to match new economic needs. Limited liability for firms was one major issue. In Europe, the debate on free incorporation started in Great Britain but soon moved to the Continent.Footnote 15 The Limited Liability Act (1855) granted businesses the freedom to incorporate in Great Britain. Although the law was not originally written for medium- or small-sized enterprises, both groups took advantage of it.Footnote 16 In practical terms, this kind of limited liability company displayed features that differed from those of standard corporations. First, partners usually had some type of personal ties to the company, and they wanted to restrict the circulation of shares to maintain the benefit of those ties. Second, and due to the modest size of these businesses, partners did not resort to external financing.Footnote 17

In France, the creation of a Société Anonyme (corporation) required government authorization until 1867. Entrepreneurs evaded this restriction by adopting limited partnerships with tradable shares. In France, 1,340 limited partnerships with tradable shares were registered from 1823 to 1838, compared to only 157 corporations. In 1863, France had enacted a law that applied only to corporations with less than 20 million francs in capital. The name originally considered for the new form was Société Anonyme Libre (free corporation), but finally it was called Société à Responsabilité Limitée (company with limited liability). Several countries experimented with general incorporation for smaller firms, inspired by the French innovation of 1863.Footnote 18 Brazil failed to pass a similar project in 1865.Footnote 19 In Spain, the commission to draft a new commercial code mentioned the convenience of adopting “companies with more or less limited liability,” alluding to the European debate on free incorporation (decree of September 20, 1869, § 5).Footnote 20 Mexico introduced a new multiowner firm that reproduced the French act of 1863—and even had the same name—in 1884.Footnote 21 However, the form disappeared from the Mexican commercial code of 1889. Italy's 1882 commercial code also mentioned the Società Anonima per Quota (corporation by quota), although this alternative was never put into practice.Footnote 22 Another interesting attempt to widen the set of forms of business organizations was the “partnership association,” which was adopted in Pennsylvania in 1874.Footnote 23 This form was a partnership in which all owners had limited liability. A similar idea later appeared in the Spanish initiative regarding “regular partnerships with limited liability” but was rejected by the Parliament in 1883.Footnote 24

None of the formulas mentioned above became established in their respective countries, even though these innovations revealed a common urge for more variety in company law in terms of firms with limited liability for all owners. They also suggest the international circulation of economic ideas. Diffusion of free incorporation and limited liability was uneven and selective, depending on the specific problems for which particular solutions were required.Footnote 25

To meet the demands for corporate options, several European countries with civil-law legal systems introduced innovations into their company law. France and Germany removed entire sections of their business laws from the commercial code starting in the late nineteenth century, instead publishing specific laws for the different forms of multiowner firms.Footnote 26 This “decoding” allowed legislatures to enact detailed rules for the business world while preserving the doctrinal framework of commercial codes. Other countries, including Spain, Portugal, and Italy, renewed their business codes in the 1880s, introducing improvements and developments in company law.

Loopholes in the Law

The Spanish business code of 1885 did not contain much detail in the provisions of multiowner firms.Footnote 27 Multiowner enterprises chose from the same standard options set out in the business code of 1829: regular and limited partnerships and corporations. Regular partnerships consisted of two or more unlimitedly liable partners. Limited partnerships had one or more unlimitedly liable partners, with at least one investor who had limited liability. Corporations shielded all investors from liability beyond the amount of their investment, and their shares were tradable.Footnote 28 Notarized statutes and the registration process were compulsory for any multiowner firm. This fact allowed partners a great deal of freedom to specify the terms of their relations. In France, multiowner firms had similar advantages.Footnote 29 However, the Spanish code contained one clause, which was not included in the codes of other civil-law countries and which allowed for even greater freedom, facilitating the later introduction of the SRL.

During the process of developing the 1885 code, the drafting committee included a modification concerning libertad de contratación (freedom of contracting): the abolition of the numerus clausus principle for the menu of organizational forms. This change—set out in the preamble and § 117 and § 122—meant that the forms listed in the code were not the only ones allowed (by law). European civil-law countries usually provided a closed taxonomy for firms.Footnote 30 The Spanish set of organizational choices was open to virtually any other innovation. The drafters of the code offered two reasons for this feature. First, there was the convenience of incorporating new developments at a moment of clear corporate effervescence in Europe. Second, there was the freedom-of-contract principle vehemently defended in the code's preamble.Footnote 31 Some of the experts who were part of the draft code commission in 1880 had also participated in the previous draft commission of 1869 and in drafting the Free Incorporation Act of 1869.

Even though numerus apertus allowed the registration of SRLs, only a few of these firms appeared in the years following the adoption of the code. Two factors hindered the use of this new legal business form: the first was in the code, and the second in the commercial registry. The code provided freedom to create new companies, but if there was doubt about the type, the law would apply partnership rules. The SRL maintained close parallels with partnerships; for example, an SRL used the owner's name as part of the company name. The default rule in the Spanish business code was that any partner whose name was included in the firm's name, regardless of company type, had unlimited liability with respect to third parties (code of commerce, § 147). This implied that an SRL's owner may risk bearing unlimited liability, despite the fact that a main characteristic of the SRL was limited liability for all owners.Footnote 32 The fear that this could happen acted as a deterrent for the entrepreneurs and notaries who chose formulas other than the SRL.

Contemporary jurists point to the existence of the SRL before 1919.Footnote 33 The University of Barcelona database “Centre d'Estudis ‘Antoni de Capmany’” (Enterprises and entrepreneurs in nineteenth-century Catalonia) also offers some examples of SRLs registered before 1919. The database contains all multiowner firms registered in Barcelona between 1886 and 1919; of the more than ten thousand firms, only eighteen were registered as SRLs. In this subgroup there are three types of entities. Some resemble the partnership, as in the case of printer Manuel Ballarín and Co. (1907). Others are closer to the management model of a corporation: Irigoyen Pladellorens y Pass SL (1914), for instance, would years later be refounded as América Autos Sociedad Española de Automóviles y Ruedas SA. Third, the British-type “limited companies” are comparable to corporations, even if some notaries and registrars incorrectly translated the term and registered them as SRLs, for example, the Union Bank of Spain and England, which had branches in Spanish cities.

Another source confirms the creation of at least some SRLs prior to 1919. The 1951 Census of Companies and Enterprises counted nearly 25,000 multiowner companies in Spain that year, of which nearly 6,500 were SRLs. In other words, there were 6,500 SRLs in existence prior to the 1953 legislation that defined the form. The census also reports that 57 of the SRLs surviving in 1950 had been founded before 1920, and 28 of them before 1901.Footnote 34

The debate on the benefits of private limited liability companies became more active in Spain with the upturn of the economy that started in the early twentieth century. The first third of the century was highly dynamic for Spanish business, due first to prosperity at the end of the nineteenth century—specifically, between 1895 and 1904—and later to neutrality during World War I. This bonanza increased the absolute number of firms listed in the commercial registry.Footnote 35 Prominent lawyers participated in the discussion, and a few laws were drafted. Some authors published statutes from other countries that concerned this kind of firm.Footnote 36 Others made up new types of companies, invoking the freedom of business owners to establish their particular conditions instead of adopting the standard legal forms.Footnote 37 This last action exemplifies the use of the numerus apertus principle. It did not create a new type of legal form, in the sense of a modern private limited liability company, but took advantage of the flexibility granted by the law. The authors suggesting these contract innovations were from Catalonia, the most active business region in the country. They took into account the advantages that corporations and other forms with limited liability would have for industrialization.

On Flexibility: Using Other Legal Forms to Obtain SRL Advantages

Company law in Spain was highly contractual. Private agents had a great deal of freedom to write contracts according to their own needs by invoking the numerus apertus principle. Certain practices in the standard Spanish forms offered similar advantages to private limited liability companies in other countries.Footnote 38 In the previous section, I noted that the use of SRLs could have been initially discouraged because the (new) SRL could be confused with a regular partnership. As a consequence, if a disagreement took the SRL to court, the SRL would be judged as a partnership. Another hypothesis is that many family businesses used the corporation form, even though they behaved as partnerships.Footnote 39 This did not happen in other countries; it was a direct result of the flexibility that existed in Spain. For example, in Germany, the Aktiengesellschaft (AG) was used for big public corporations, while the GmbH enabled smaller businesses that wanted limited liability for all owners.Footnote 40 In Spain, since the end of the nineteenth century, a substantial number of listed partnerships had been dissolved and re-registered as corporations.Footnote 41

Contemporary experts identified fiscal motivations for creating corporations under these circumstances, notably, that they were taxed less than partnerships.Footnote 42 Some of these particular corporations closely resembled partnerships. The literature documents hundreds of corporations named after the majority shareholder—a practice forbidden by § 127 of the business code. Corporations used the name of their main shareholder as a mark of quality. A corporation of this sort could be a firm with strong relationships among its owners, no tradable shares, and permissive rules for shareholder meetings.Footnote 43 Years later, some experts pointed to this use of the corporation as the true origin of the SRL.Footnote 44

Another way to enjoy the advantages of an SRL without actually being an SRL was to create a company constituted under civil law, named Sociedad Civil con Responsabilidad Limitada (civil society with limited liability). In this context, a civil society entails a contract binding two or more persons to contribute money, goods, or effort in order to make profits. Such a company does not have legal personhood. Similar legal entities existed in other civil-law countries. The Spanish civil code (1889), § 1670, allowed any company to adopt any legal form included in the commercial code. This civil society was an appropriate form in which to include commercial companies as partners of a new corporation—an action prohibited for partnerships—and used a management model much more streamlined than the one offered by the corporation. In 1891, Portugal, Spain, and Mexico had a similar clause in their codes. Other countries allowed civil-law companies to adopt a particular form of company; for instance, in Italy a civil-law company could be a corporation.Footnote 45

Although there were instances of limited liability in civil societies before and after the regulation of SRLs, they were rare. The evidence is clear, as shown in the book of companies (1920–1936) at the business registry in Madrid. The average SRL had two or three owners, as did the civil society with limited liability, even though it had a smaller amount of capital on average. In round figures, the average capital for an SRL was around 125,000 pesetas, while for the civil society with limited liability it was 85,000 pesetas.Footnote 46 This is to be expected, because the latter was an association of people with a business project that required simple management and small capital.Footnote 47

A contemporary scholar argued that the civil society with limited liability opened the door to a company form characterized by capital shared among the partners, to avoid unlimited liability, and temporarily elected managers or administrators.Footnote 48 In Spain that was not the case, but the expectation generated by how simple it was to use the principle of limited liability for all partners is understandable.

Drafting Proposals for an SRL Law

Several draft laws failed to introduce the private limited liability company in Spain before 1953. The legal attempts illustrate the interest of legislators in giving Spain its own exclusive law for SRLs; they also show the constraints imposed by the political reality, as no proposed law came to be debated in the courts. Thirdly, these attempts explain why the government finally included the first specific reference to the SRL in a register regulation rather than by enacting a law.Footnote 49

At the turn of the twentieth century a prominent association of Barcelona lawyers opposed the idea of a specific law creating what other countries called private limited companies because “the corporation was enough.”Footnote 50 Years later, in 1914, the same group drafted a law regarding the SRL, its characteristics similar to those of the corporation. In multiple ways, the SRL draft reflected the Catalonian experience with widespread use of small and family corporations.Footnote 51 The proposal did not establish minimum capital for the SRL but hinted that a future law would require it. As with corporations, managers did not have to be owners, and partners could pay their capital contribution after the creation of the company; further, shares were tradable and inheritable. The SRL also had to register all the fundamental events of its life in a public document at the business registry. As with any multiowner firm, public registration gave the SRL its legal personhood (§ 24 business code).Footnote 52 The proposal set out administrative aspects that were simpler than those required of corporations. Despite the efforts of its writers, however, the proposal did not catch the interest of political leaders.

The second SRL draft was written by the minister of justice, José Roig, in 1918. But the document never arrived at the Parliament, because the author ceased to occupy his post due to the political instability of the period.Footnote 53 Roig drafted a proposal influenced by German and English laws. In its prohibiting insurance, banking, and finance businesses from adopting the SRL form, the text copied the English private limited company law of 1907. The number of partners could range from two to fifty, excluding employees or former employees. The text required the inscription of the SRL in the business registry and the publication of an abstract of the company charter in two local newspapers.

The SRL proposal required that the stock capital be fully subscribed at the moment of constitution, as with partnerships. Capital participations were not tradable at all during the first two years of the firm, and after that, they were tradable with the consent of the majority of partners; also, the agreement had to be registered in a public deed. The draft prohibited the issuing of bonds or shares to finance the SRL. The manager would usually be a partner, but owners could designate someone from outside the enterprise. Any partner could participate in the firm's deliberations; each one would have a number of votes proportional to his or her capital shares, up to a maximum of ten. In an important departure from the partnership law, in case of death or bankruptcy of any owner, the firm did not dissolve, as a reflection of its personhood. The legal proposal was intended to allow small and medium enterprises to enjoy the advantages of limited liability. In fact, it included an article, § 21, that allowed any partnership to be transformed into an SRL.

The next government cabinet passed new business registry regulation in September 1919. The regulation's preamble acknowledged the pressure to regulate the legal entity, but was silent on both the source of this pressure and the previous efforts to propose regulation. In Spanish legislation, because of the prestige of the registry and the authority of the General Directorate of Registries and Notaries, the administrative provisions were used repeatedly to solve problems related to high-level commercial standards, including the code, as was the case with the SRL.Footnote 54 In the same year, France (unsuccessfully) attempted to approve a law similar to that regulating the German GmbH.Footnote 55 France passed new business regulation in 1920, but without any mention of the new limited liability form.Footnote 56

The commercial register provision, § 108, allowed SRLs to be formally registered and confirmed that the SRL was a company form different from any other.Footnote 57 Inscribing the SRL in the business registry offered new guarantees to third parties and to the entrepreneurs themselves. September 1919 regulation had a direct consequence for the increasing number of firms registered under the new firm type. Only a few months after passing the new regulation, the government moved to tax the SRL on the same basis as all other multiowner firms.Footnote 58 Entrepreneurs interpreted the move as confirmation that the SRL was totally secure. From 1920 to 1933, the number of registered SRLs rose from 213 to 438 (after 1933 there is a clear decrease due to the deterioration of the economic situation prior to the Civil War in 1936); the mean number of owners per SRL was three and the average capital was around 125,000 pesetas. These figures were slightly larger than the corresponding numbers for partnerships, which on average had two owners and capital of 105,000 pesetas.Footnote 59

The tension between the numerus apertus principle and the SRL legality did not disappear once the SRL had a regulated process of registration. The failed project for a new commercial code (1926) included the need to introduce the SRL among the standardized business legal forms, which fulfilled the many demands made by entrepreneurs' organizations during the process of drafting the new code.Footnote 60 Years later, and stressing the need for a law exclusively for SRLs, experts said the lack of a law for the SRL had been an irregularity, since in case of conflict a judge could declare the form as invalid.Footnote 61 This never in fact happened, because in Spanish law judges considered registration certificates as conclusive evidence.Footnote 62

SRL Case Law before 1953

Since the government had declined to establish detailed rules for the SRL before 1953, it is hard to know what problems these firms faced and how they operated on a day-to-day basis. A promising approach to filling this gap can be found in an analysis of court decisions concerning the new business form. Here I examine the decisions of Spain's Supreme Court and those of the General Directorate of Registries and Notaries to identify an outline of the general guidelines for SRLs before 1953.Footnote 63

In 1933, when almost 40 percent of all new firms registered as SRLs, the General Directorate produced the first resolution about SRLs. Between 1933 and 1953, only fifteen resolutions were added. The Spanish literature argues that the lack of case law reflects the legal code's flexibility.Footnote 64

Court decisions would provide a set of rules indicating how the judges expected the SRL to behave. For this period, between 1920 and 1953, Spain did not have a special commercial court like France or Germany.Footnote 65 This meant that any dispute involving an SRL that ended up in litigation would be subject to the general court system—a situation that makes it hard to locate any relevant cases. It is also useful to remember that in civil-law countries, court decisions are less important than in the common-law system. In the common-law tradition, courts decide which law applies to a case by interpreting statutes and applying precedents that record how and why prior cases have been decided. Courts and judges can be agents for innovation, because changes in the common law require that some cases be litigated.Footnote 66

According to Spanish jurisprudence, the value of precedents depends on the authority that created them: case law applies to the decisions of the Supreme Court only after two decisions are made in the same direction. Case law may also apply to the resolutions of the General Directorate of Registries and Notaries regarding mortgage law and when business registers refuse to inscribe a notarized document in any official registry. This department of the ministry of justice—the General Directorate—maintained the utmost uniformity in the implementation of notary and registration law, instructing a highly qualified group of public servants. If there was a disparity in criteria between the notary and the officer of the registry in enrolling a new firm, the institution would hand down a resolution to cover the gaps in the law. Notaries could not appeal the General Directorate's final decisions.Footnote 67

The General Directorate ruled on the characteristics of the articles of associations of the firms that wanted to enroll. Discrepancies reported between notaries and commercial registrars were based on different interpretations of the business code referring to the partnership or the corporation and their subsequent application to the SRL. The registry users (here entrepreneurs) could choose the professional they wanted to prepare their official documents (a notary or lawyer), but not law administrators (judges or registrars). Both notaries and registrars aimed to fulfill the requirements of the law, even though their motivation may have been different. Here one should bear in mind (once again) the role of the Latin notary. Notaries wrote companies' charters, and they guaranteed that a document was authentic and did not violate the law. Notaries are public officials and private professionals who want to satisfy the demands of clients; for this reason, their behavior is more in tune with private interests. Registrars are also public officials who act as law enforcers, but they have the particular responsibility of defending their professional decisions before a judge, which provides a strong incentive to enforce the law.Footnote 68

A refusal to register an SRL ultimately reflected the registrar's doubts about the firm's true legal nature. For instance, if a notary included some articles that the business registrar considered inappropriate for an SRL, the registration would be denied. The registry might refuse to enroll SRL charters when (1) the notary was not following the commercial registry regulations or the company law or (2) the notary's view of the SRL was too similar to another legal form. In both cases, the outcome depended on the business registrar's interpretation. In the case of further conflict, one had to appeal to a higher authority to resolve the dispute.

Notaries and registrars often complained about the lack of written law, insisting that the absence of specific regulation was an obstacle to precisely defining the SRL. In disputes with notaries, the rulings of the General Directorate usually supported the registrars, which suggests a conservative attitude. That is, if this government agency backed the notary, the decision would generate a precedent for all of Spain; by supporting the local registry, the General Directorate was in effect declining to interfere. The evidence suggests that the justice department did not want to create a set of rules for the SRL itself; rather, it wanted to protect established boundaries among enterprise forms with as little intervention as possible. During the period between 1919 and 1953, none of the issues raised about SRLs concerned their management rules, corporate governance, or governing bodies. Nor did any decision imply a list of minimum characteristics required of an SRL. The dominant discourse emphasized the “hybrid” nature of the SRL—half corporation and half partnership—as well as the lack of written law.

The General Directorate's approach evolved at the same speed as notaries' expertise in writing articles of association for SRLs. At first, the institution stressed the similarity between the SRL and a regular partnership. For instance, a resolution of July 14, 1933, defined two international trends for classifying the private limited liability companies: the Latin trend (closer to partnerships) and the German trend (closer to corporations). The dictum said that the Latin tradition was dominant in Spain, but in the absence of any written law, the criterion adopted was eclectic to avoid the rejection of SRL charters that resembled corporations.Footnote 69 Years later, a June 3, 1948, resolution issued a warning on the growing dominance of Anglo-American business models, stressing that SRLs were acting like small corporations. The same idea appeared again in the preamble of the new corporation law in 1951.Footnote 70

Some resolutions listed the essential items that any SRL's charter must contain. The justice administration tended to follow the guidelines of the Spanish business code and even looked at international law. For instance, the absence of an expiration date in the notarized deeds was cause for rejection. A similar requirement applied to all kinds of partnerships—regular and limited—because they lacked legal personhood. The declaration of April 16, 1942, ratified the denial of the registry to enroll SRLs by arguing that § 223 of the business code said that the duration of a personal company had to be written in the articles of association; it could not exist just because its owners wanted it.Footnote 71

In another case, January 15, 1945, a resolution contradicted the actions of a business registrar that had refused to register an SRL because it had a person's name instead of a company name.Footnote 72 The registrar based his view on a strict interpretation of the business code provisions concerning partnerships (§ 127): any owner whose name appeared in the firm's name assumed unlimited liability, no matter what the firm's articles said. The General Directorate opted for a more open approach, emphasizing the nature of the SRL as a new type of company characterized by limited liability for all owners, regardless of the firm's name.Footnote 73

A previous resolution (March 9, 1943) had supported a past registry decision to reject an SRL whose owners were a father, a mother, and their offspring. The decision had been based on the excessive powers granted to the father, who was the only active member of the firm: the wife and children were subject to his authority. Among the reasons why the resolution took this approach was the international trend that did not allow underhanded uses of the company law.Footnote 74

Another group of decisions alludes to minority oppression.Footnote 75 The General Directory usually tried to limit the power of managers and guarantee all members a voice in decision making. An August 11, 1943 resolution rejected a charter for a firm without capital. The notary pleaded in this case that there was no legal requirement for an SRL to have capital. The dictum again appealed to international jurisprudence: all types of limited liability firms had to have a specific amount of capital as security for third parties.Footnote 76 The decision followed the Spanish company law that also required a firm's capital be declared.

The Supreme Court also ruled on the SRL prior to 1953. Its November 17, 1928, decision ratified the legality of entities that did not follow any of the standard multiowner forms defined in the code.Footnote 77 The Supreme Court based its position on the numerus apertus principle and the business registry regulation. Even after the Court's verdict, some scholars argued to the contrary, contending that the SRL was not written into the code of commerce and that § 122 applied only to variations of known forms.Footnote 78

Another Supreme Court decision (February 24, 1929) dealt with fundamental aspects of the SRL.Footnote 79 First, because the SRL was closer to a partnership than a corporation, its capital had to be in place at the time of the firm's creation. The court invoked the General Directorate's resolution of August 11, 1943, which rejected an SRL with undetermined capital, but went a step further.Footnote 80 Commercial law experts had different opinions on the matter: some agreed that the capital had to be paid in at the initial moment of the company's conception, while others openly disagreed with the court's decision, drawing on their experience writing articles for SRLs with shares.Footnote 81 The government added to the misunderstanding by adopting a measure contradicting the Supreme Court's decision. In a Fiscal Order (February 28, 1947), it indicated that at the moment of its constitution, any company with limited liability did not need to fully pay the total capital.Footnote 82

The same decision addressed the question of shares or capital participations.Footnote 83 Referring to their own expertise, some notaries divided the stock capital of the company into shares, alleging that this practice was totally feasible because there was no rule against it in the commercial registry regulation.Footnote 84 However, the Supreme Court rejected the idea of dividing an SRL's capital into shares. Some scholars also supported this opinion, emphasizing that the SRL was closer to a partnership than to a corporation and, therefore, the capital should be represented by participations (locked-in capital among members), not shares (tradable to third parties).

Another Supreme Court decision (July 5, 1940) described the essential items in the writing of any SRL, based on commercial registry regulations (§ 108, § 120, and § 123) and the commercial code (§ 125).Footnote 85 Any SRL articles of association must specify the name and address of each partner, the name of the partnership, each member's capital liability, its business activity, and the date of constitution. The court did not require rules for balance sheets or profit distribution criteria because the court considered the SRL as a partnership at the present moment. It also considered as optional the names of the owners entrusted as managers as well as their compensation and the company's lifespan. The same dictum classified the legal structure of the SRL as a hybrid—half partnership and half corporation—although the report highlighted that the SRL lacked the governance element of a proper corporation: a general meeting of shareholders.

In subsequent decisions, closer to 1950, the Supreme Court and the General Directorate defined the SRL as a particular type of corporation instead of as a partnership.Footnote 86 But the situation continued without a minimum regulation for the new legal entity. The strong disagreements over constituent elements suggest that a wide variety of companies with different characteristics was sheltered under the advantageous umbrella of the SRL.

Among the reasons that the SRL was closer to a corporation was the demand for a new corporation law. The groups of experts who prepared the two legal drafts—for SRLs and for corporations—were overseen by the same director, Joaquín Garrigues, who promoted harmony between the two laws. The outcome of World War II and the defeat of fascism forced Franco's regime to moderate its Falangist discourse and consider the opening of the Spanish economy. The law governing corporations followed the guidelines of a free market economy, reflecting the change in the regime and abandonment of the previous autarkic policies.

Contrary to what happened with corporations, which were subject to numerous reviews and extensive discussions, the drafting and approval of the SRL law was quick. Legislators conceived of the SRL as a byproduct of the corporation's law, in order to offer the possibility of limited liability to companies that did not meet the characteristics required of modern corporations.Footnote 87

Conclusion

In civil-law countries, the adoption of a law governing private limited liability companies provided small and medium enterprises an intermediate form that combined the advantages of legal personhood with a flexible internal organizational structure. Spain, a country strongly influenced by French law, presented other mechanisms to introduce legal innovations, making use of the flexibility and guarantees of the legal framework. The Spanish commercial code adopted the numerus apertus principle for multiowner firms, imbued with the liberal spirit of its law drafters—that is, freedom of contract distinct from the three standard forms (i.e., partnerships, limited partnerships, and corporations). Scholars supported the code's flexibility, but they warned that the absence of an explicit law would hold back the development of the SRL. Paradoxically, being free to introduce changes initially hindered the wide adoption of the SRL. The SRL was barely used because Spanish company law was so highly contractual that businesses could obtain advantages similar to those offered by the SRL through variations in the standard form. The most successful example of this was partnerships that reconstituted as small corporations at the beginning of the twentieth century. Another example is the civil society with limited liability, even though this organizational form was seldom used and almost disappeared after the regularization of the SRL.

The 1919 regulation of the commercial registry influenced the uses of the standard organizational choices. The SRL was declared a totally new and legal entity, distinct from those recognized previously. The impact of this administrative proclamation was enormous. Prior to 1919, the SRL had barely been used; after 1919, it quickly became one of the most-used legal forms in Spain.

The lack of a specific law for SRLs should not suggest the absence of a regulated legal framework. Court decisions on the SRL before 1953 and resolutions passed by the General Directorate illustrate the interest aroused by the new form. During the 1930s, different legal authorities treated SRLs like partnerships. Evidence suggests that the default rules used were those applicable to partnerships, but due to the absence of a proper law, both courts allowed SRLs that acted as corporations. At the end of the 1940s, the dictums issued by the General Directorate began to identify the SRL as a subsidiary form of the corporation. This evolution reflects changes in other European countries, which in turn were adopted by Spanish notaries, as well as the history of Spanish legislation itself. The preamble of the law governing corporations (1951) anticipated the fact that the law concerning SRLs would support firms that acted as corporations but did not qualify as corporations under the new act.

The case of the SRL adds support to arguments about the variable flexibility found in civil-law countries. In the period studied, notaries wove changes into the fabric of company law according to the demands of entrepreneurs, making use of a high degree of contractual freedom available in the law code. Their capacity for action, since all deeds had to be notarized, led them to try to introduce the SRL in Spain. The work of notaries was ratified by the registry agencies. Once the SRL had an inscription protocol in the commercial registry, it became popular with a speed that would not have been possible without the previous long debate among experts and trial-and-error work done by notaries. In that phase, from 1920 to 1953, the work of the General Directorate of Registries and Notaries was vital because it ensured the proper application of general commercial law through resolutions. Notaries and registrars were the makers of the SRL in Spain—the law came later.

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87 Joaquín Garrigues, the head of the team that drafted the two laws, belonged to the group of intellectuals that supported the totalitarian and antiliberal doctrines prior to the Civil War. Martínez-Rodríguez, “Sin ley.”