In Argentina investments are usually channeled through corporate entities with limited liability or by trusts, the main features of which are indicated below.
3.1. Corporate Vehicles. General Principles in our Business Companies Law
Business Companies are regulated in Argentina by the Law 19,550 (Ley de Sociedades Comerciales, LSC). This is a federal law that determines permitted types of business associations. Two or more persons are necessary to organize a business company that is a legal entity under the law.
Under our LSC, there are no restrictions for a foreign individual or legal entity to participate in a local business entity, subject to registration as contemplated under sections 118 or 123 of the LSC.
A regularly organized business company requires a written contract registered with the Public Registry of Commerce relating to the address chosen by the entity.
The contract must include the details of the participants, the address, corporate purpose, term, equity and the type of organization of the different bodies.
An entity having a commercial purpose, which does not fulfill such requirements, is considered by the LSC as a non-regularly organized entity. In this case, both the participants and whoever entered into contracts on behalf of the entity has joint, several and unlimited liability for the obligations thereof.
3.2 Interest Holdings by a Foreign Company in Argentina
The existence and formalities of a foreign company are governed by the law of the jurisdiction where it was organized. A foreign company may operate in Argentina in different manners:
• Doing isolated (i.e. non-habitual) acts or things or being a party to a lawsuit. For this purpose it must not fulfill any requirements, nor be registered with any registry whatsoever;
• Doing acts of commerce regularly in the country, start a branch, office or any type of permanent agency. For this purpose it must register under section 118 of the LSC and demonstrate to the RPC: (i) that the entity exists in the venue where it was organized; (ii) that it has selected a domicile of choice in Argentina; and (iii) demonstrate the decision of the entity to create the agency in Argentina, and appointing the person who will be responsible for the agency. By principle, no capital needs to be allocated for the purpose, but the agency accounts must be kept separately; and
• Organizing an entity in Argentina, or acquiring interest in a local entity, for which purpose it must register with the RPC under section 123 of the LSC, and: (i) demonstrate that it is organized under the laws of its country of origin; and (ii) register its articles of association and the documentation relating to its representatives.
We should note that, in the case of offshore Foreign Entities registering within the Autonomous City of Buenos Aires, they must fulfill certain additional requirements provided by the RPC, which is exercised –in such jurisdiction– by the Inspección General de Justicia (IGJ).
3.3. Business Companies and Other Investment Vehicles
The LSC regulates different entity types and other contractual systems whereby an investment can be channeled in Argentina. Most registered entities are corporations or limited liability companies.
Both basically limit the liability of a shareholder or partner to the payment of the committed contributions. Once the party has paid in such contribution, it is released from any debt of the entity, except in cases such as abuse, acts or things clearly unrelated to the entity purpose, or deviation from the entity interest.
3.3.1. Corporations (S.A.)
A corporation (sociedad anónima, S.A.) is regulated under Sec 163 and subsequent sections of the LSC. The minimum capitalization of an S.A. is Arg$ 12,000 (Twelve thousand Pesos), equivalent to U$S 3,000 (Three thousand U.S. Dollars) at the present exchange rate. However, lately the IGJ is reviewing if the capital must be consistent with the business to be carried on by the entity, and registration denied where it is not sufficient.
The main features of this entity type are that the equity is evidenced by shares, and the shareholders limit their liability to the payment of capital subscribed for in the articles of association.
The capital must be fully subscribed at the time of the organization act. The payment must be in cash and may not be less than 25 % of the subscribed amount at the time the entity is registered. Non-monetary contributions must be fully paid at the time of registration.
Shares in an S.A. may be common or preferred. Shares of common stock entitle the holder to preference in the subscription of new shares of the same class, in proportion with the holding. Such shares also give rights to increase the holding in proportion to the shares subscribed on each occasion. Preferred shares may lack voting rights, except in certain cases contemplated under section 244 of the LSC.
The bodies expressing the corporate will at an S.A. are the following: (i) the Chair of the Board is the representative body; (ii) the board of directors is the management body; (iii) the shareholders’ meeting is the governing body; and (iv) the control body may consist of a Controller, if exercised by one person, or a Supervisory Committee, if exercised by multiple persons.
The board may consist of one or more directors. If the directors are multiple, a majority must have their actual residence in Argentina. There is no restriction for a director and/or the chair of the board to be foreign.
There are two types of shareholders’ meetings: i) annual and ii) special. Each has competent jurisdiction under sections 234 and 235, respectively, of the LSC. A shareholder may be represented at a meeting but may not be a representative on behalf of a director, a controller, a manager or any other employee of the SA. Annual shareholders’ meetings are held to discuss the financial statements, distribute profits and elect directors and controllers.
An S.A. is –usually- internally controlled by a controller, or a supervisory committee where the number of controllers is 3 or more. Likewise, an SA has outside control by the Public Registry of Commerce.
3.3.2. Limited Liability Companies (S.R.L.)
A sociedad de responsabilidad limitada is regulated under Sec 146 and subsequent sections of the LSC. It may have up to 50 partners, who may be individuals or entities.
This is a type of entity that includes certain personal features and certain features relating to a stock-based entity.
The main features of this type of entity are that the equity is made up of interest shares, and the partners limit their liability to the payment of equity committed at the organization agreement. However, the entity is jointly, severally and unlimitedly liable for the payment of equity subscribed by the other partners.
The equity must be fully subscribed at the time of entering into the organization agreement. Payments in cash may not be lower than 25 % of the subscription at the time of registering the entity. Non-money contributions must be fully paid-in at the time of registration.
Each interest share entitles the partner to one vote.
The bodies expressing the will of an SRL are: (i) the management is the representative and administrative body, and (ii) the governing body, and (iii) the control body.
The entity is managed by one or more managers, who may be partners or not. If the management is plural, the contract may provide for joint management. Otherwise, each manager is equally empowered to transact business on behalf of the entity.
The governing body of an SRL is generally indicated in the organization agreement. Where the entity has an equity in excess of Arg$ 10,000,000 (Ten Million Pesos), the partners must indispensably hold a partner meeting.
As regards the control body, it is optional and regulated by the organization agreement as the case may be. Where the SRL has an equity in excess of $ 10,000,000 (Ten Million Pesos), a control body is mandatory.
3.3.3. Joint Ventures (UTE)
The LSC legislates for so-called Business Cooperation Contracts (CCE). Such CCEs include the joint venture, referred to as a Unión Transitoria de Empresas (UTE).
The purpose of a UTE is to enable two or more persons to provide or perform a specific project, service or supply, within or outside Argentina. Its primary feature is the temporary nature of the association to fulfill the objective pursued.
The UTE may consist of entities organized in Argentina, individual business persons with domicile therein, and entities organized abroad, provided that they register under section 118, paragraph 3 of the LSC.
A UTE is not a business or a legal entity under the LSC. It is an associative and contractual type. However, it is considered as an obligor for certain purposes such as employment obligations, social contributions and taxes.
The UTE agreement must be in writing and comply with the requirements in section 378 of the LSC. It must provide the purpose, term, and name of the UTE, a special domicile, the duties accepted, contributions due to a common operating fund, distribution of profits and losses or, as the case may be, of the revenues and expenditures of the association.
The UTE must appoint a representative to act on behalf of each member, to exercise the rights and accept the duties relating to the development or performance of the project, service or supply.
Unless agreed otherwise, there is no presumption of joint and several liability among the members of the UTE for obligations to third parties.
3.4. Mergers and Adquisitions (M&A).
3.4.1. Mergers
There are two ways of effecting a merger under the LSC: a consolidation and a merger.
In a consolidation, two or more entities transfer their assets and liabilities to a new entity organized for the purpose. The shareholders in such entities receive shares in the new entity in proportion to their respective holdings, at the exchange relation provided for the purpose.
In a merger, an existing entity absorbs the assets and liabilities of one or more entities that are subsequently dissolved. The members of the merged entities receive shares in the surviving entity, at the exchange relation provided for the purpose.
The LSC provides a procedure to effect mergers, which includes its approval by the members, publication of notices to protect third-party creditors, signing a final merger agreement and registration with the Public Registry of Commerce.
Upon registration with the Public Registry of Commerce, the property of the entities being consolidated or absorbed is transferred in its entirety to the new entity or to the absorbing entity, as the case may be. There is no additional requirement to be fulfilled, except in the case of property subject to registration, in which case the final merger agreement must be registered with the relevant registry.
The merger mechanism is regulated as an entity restructuring procedure under the Income Tax Law. Subject to compliance with certain requirements, the transaction will obtain a tax treatment that is advantageous to the absorbing entity.
3.4.2. Purchase and Sale of Shareholding Interests
For the purchase and sale of share holdings we must consider various matters relating to its proper documentation. The first is preparing and conducting a suitable due diligence process on the target company, so as to identify its main contingencies and risks.
Likewise, we must consider which will be the most suitable way to channel the acquisition of the shares. In the case of an entity that already exists in Argentina, which has a similar corporate purpose, we must review if the acquisition must be reported for approval by the National Commission for Defense of Competition (CNDC), as controlling authority of the Law for Defense of Competition.
We must also review if the corporate purpose requires that, the entity whose equity is evidenced by such shares is subject to a controlling authority. In this case, an application should also be submitted to the relevant controlling authority for approval of the change of shareholder.
In the case of an SA, the share transfer must be registered in the Register of Shares kept by the Entity whose shares are the subject of the transaction, in which case the entity must be notified under section 215 of the LSC.
3.5. Ongoing Concerns Transfers
The Law No 11,867 regulates the procedure for the transfer of an ongoing concern. An ongoing concern comprises all the tangible and intangible property that is a part of a certain business concern.
In order for the transfer of an ongoing concern to be valid in relation to third parties, the Law No 11,867 provides that the transaction must be advertised in the Official Journal during five days. The transfer document may only be signed upon the lapse of ten days since the last such notice. Within such time, a creditor of the ongoing business involved in the transfer may object and claim for the withholding of the claim and its deposit in an account at Banco de la Nación Argentina.
The deposit must be kept for twenty days so the alleged creditors may move for a judicial attachment of such funds.
Upon such terms, the sale document may be validly signed. Its effect upon third parties is subject to the document being entered into in writing and registered with the RPC.
An omission or violation of the Law 11,867 results in joint, several and unlimited liability of the purchaser, seller or broker who committed the violation, for the amount of the unpaid claim and up to the amount of the selling price.
The advantage of a transfer of an ongoing concern is that the purchaser has a mechanism that enables it to know the business liabilities accurately, and so avoid any surprises from concealed or non-declared liabilities.
In the case of an acquisition of a share holding in an entity, a contractual mechanism must be sought to guarantee that the purchaser will be kept harmless against concealed or non-declared liabilities of the seller with respect to the issuer.
3.6. Trusts
The Law No 24,441 regulates a trust, wherein a person (grantor) transfers trust ownership of certain assets to another person (trustee), who agrees to use the property for the benefit of whoever is appointed in the contract (beneficiary), and transfer the property at the end of a term, or upon a condition, to whoever is indicated in the contract.
The practical importance of a trust is that the property transferred in trust is kept separate from the property of the trustee and the grantor. For this reason, such property may not be claimed or affected by any creditor of the grantor or the trustee, except in the event of fraud by the grantor.
The trustee may be any individual or entity, but if the trust is offered to the public, the only party who may be a trustee is a financial institution or a legal entity authorized by the national securities commission Comisión Nacional de Valores (CNV).
The trustee must transact business with the prudence and care of a reasonable man, and fulfill any contractual or legal duties and account for his/her/its management.
The trust may be a management, guarantee or financial trust.
Where the trust is financial, the trustee must be a financial institution and/or legal entity authorized by the CNV. Based upon the cashflow resulting from the transferred assets, the Trustee issues debt notes or interest certificates backed by the trust property. Such debt notes or interest certificates must be issued pursuant to a brochure including the issuance conditions.
Where the notes or certificates are the subject of a public offering, the relevant CNV rules apply.
3.7. Defense of Competition
The Law No 25,156 regulates defense of competition in Argentina. Basically, it regulates what are prohibited agreements and practices; dominant market position; concentrations and mergers and their prior administrative control by the controlling authority. We will discuss each of these questions below.
Subject to such law is an individual or an entity, public or private, for profit or not, who does economic business in Argentina, or outside Argentina insofar as the acts thereof may have effects on the Argentine market.
The present controlling authority is the National Commission for Defense of Competition (CNDC), within the National Ministry of Economy, so it is a part of the National Executive.
3.7.1 Prohibited Agreements and Practices
Under section 1 of the Law No 25,156, an act, thing or conduct associated to production or exchange of goods or services is prohibited if its purpose or effect is to limit, restrict, defraud o distort competition or access to the market, or if it constitutes an abuse of a dominant position in the market, in such manner that harm may result to the general economic interest.
Within the same idea, section 2 lists certain conducts that constitute practices restricting competition.
3.7.2 Dominant Position and Concentration
Section 1 penalizes an abuse of dominant position. Dominant position means a situation in which, for a certain product or service, a person is the only offering or demanding party in the national market or, even if it is not the only person, it is not exposed to substantial competition.
Under section 6 of the Law, economic concentration means taking control of one or multiple businesses, by any of the following: business merger, ongoing business transfer, acquisition of shares, or on any other account that enables the acquiring party to control the business, or any other act or thing whereby the assets of a business are transferred to a person or economic group, or gives such party a decisive influence in the making of management decisions of the business.
Under section 7 of the Law, an economic concentration is prohibited if its only purpose or effect is or could be to restrict or distort competition, in a manner that harm may result to the general economic interest.
3.7.3. Prior Administrative Control
In the event of any of the acts indicated in Section 6 of the Law, including a merger, ongoing business transfer or an acquisition of a share interest –where the total joint business volume of the businesses involved exceeds the amount of Arg $ 200,000,000 (about USD 50 million) in Argentina, notice must be given to the CNDC for prior examination, or within one week from the date the agreement is entered into.
The CNDC may authorize or deny the transaction, or require compliance with such conditions as this controlling authority determines.
The CNDC has 45 days to pass on the matter, as from the submittal of all the required documentation. Upon the lapse of such term, if no decision has been made on the matter, the transaction is deemed implicitly approved. |
