What is Quota-based Ownership for Global Subsidiary Entities?

Business teams operating global subsidiary structures will often encounter quota-based ownership in foreign entities. If your background is in a Common Law jurisdiction (US, UK, Canada, etc.), quota-based ownership can be confusing. This article unpacks and describes in practical terms quota-based ownership and how it compares to corporate ownership structures found in Common Law jurisdictions. Understanding quota-based ownership structures is important for legal and finance teams to collaborate with in-country teams, advisors, and regulators to operate global corporate groups.

Legal System Background

The two dominant legal systems in the world are Common Law and Civil Law. Common Law is a system historically developed in the UK, while Civil Law is a system historically developed in continental Europe rooted in ancient Roman Law. Through European colonization, these legal systems were spread around the world. In the below map, we can see the geographic distribution of these two systems. Quota-based ownership is primarily found in Civil Law countries. If you have foreign subsidiaries in countries colored in red, it is likely that you have quota-based ownership in your structure. 

In Common Law jurisdictions, there are a variety of entity types with different ownership structures. For example, Corporations can only organize ownership as shares. However, an LLC is able to distribute its ownership interests among its members more flexibly such as units, percentage, or profit interests. An LLC can also create different classes of membership interests, which allows it to organize rights and restrictions in a specific way. This is different from a corporation, which typically has a more rigid structure for distributing ownership and decision-making power (i.e., votes and votes per share).

Civil Law jurisdictions have the same concept. Corporation equivalents are available for usage in more complex business arrangements. However, the equivalent of LLCs are also available for usage in simpler business arrangements and provide greater flexibility. Ownership is described as capital contributed (either cash, assets, or services) and the equivalent of a member interest is referred to as a quota or sometimes as a “social part”. Similar to how the rights and restrictions of each member are described in an LLC operating agreement, the rights and restriction of each quota holder is described in the articles of incorporation or similar organizational agreement. 

A difference for Civil Law LLCs compared to US LLCs is minimum capital requirements. For example, the minimum share capital contribution requirement at formation of a Spanish LLC is €3,000. The requirement for Spanish corporations is €60,000. 

Generally, multi-national businesses will establish an LLC equivalent as a foreign subsidiary in a Civil Law jurisdiction because the entity type is simpler and provides more flexibility. The other reason is that corporation equivalent entities in Civil Law jurisdictions often require a minimum number of shareholders (often five) and that is not practical for wholly owned subsidiaries. 

Quotas and Ownership Structure of Civil Law LLCs 

Civil Law LLCs do not issue shares or units, they issue quotas to quotaholders. A quota is very similar to a class of shares in a Corporation or a member interest in  US LLC. Each quota represents the total capital contribution of the quota in the capital of a Civil Law LLC. In most jurisdictions, more than one party (individual or entity) can hold a quota - there can be multiple quotaholders in a quota. 

The rights of each quota and quotaholder is established in the organizational documents (i.e., articles of incorporation). The rights and restrictions of each quota can be different for decision making, profit distributions, and liquidation preference. 

Unlike shares, a quota is not divisible. Either a quotaholder holds a quota or does not. Generally, transferring a  quota to another party requires the approval of all the other quota holders in the entity. Quotas are not represented as certificates. In many jurisdictions, they are not recognized as a security and cannot be listed on public stock exchanges. 

The below is an example quotaholder register. As we can see, there are two partners, each holding one quota, one with a minimum required capital investment of $1.00 and another with $2,999. One quotaholder holds 90% ownership via invested capital of $7,056,247,838 and another holds 10% via invested capital of $749,401,755. 

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