The Companies Law No. 19,550 (CL), the Securities Law No. 17,811 (SL) and regulations issued by the Comisión Nacional de Valores (the Argentine Securities Commission or CNV) had been the primary source of laws and regulations relating to corporate governance in Argentina until 2001. Decree No. 677/01 – the Transparency Decree (the Decree) – enacted in June 2001, introduced several changes to the legal framework that are applicable to publicly held corporations. The Decree addresses several aspects relating to transparency in the public offer regime and the protection of investors and minority shareholders. In 2007, the General Resolution No. 516/07 of the CNV complemented the legal framework established by the Decree and introduced the requirement – applicable as of 2008 – for companies, whose shares are publicly offered in Argentina, to have a corporate governance code (code).
Although there are a number of local companies listed, in reality there are no true public companies in Argentina. In most cases, the controlling groups own the majority of the shares, and only a minority percentage floats. Generally, the legal framework set up by the CL has been drafted having closely held corporations in mind and as a result, it does not always adapt to public companies. This became evident during the privatisation movement in the early 1990s, when local companies had to adapt to the expectations of the international markets.
The Decree was largely the result of requests from international institutional investors who wanted to find familiar protective devices. The solutions introduced, which mirror corporate governance rules from other jurisdictions, do not always fit well with existing rules.
Board of directors
Pursuant to the CL, the board of directors is responsible for the management of the company. In practice, the board decides on general aspects of organisation and management and performs other actions prescribed by law (eg preparation of financial statements and board's report (memoria) and assistance to shareholder meetings). The managers or officers implement the board's decisions.
Directors have a duty to act loyally towards the corporation and its shareholders and to perform their responsibilities with the diligence of a good businessman. The concept of loyalty embraces the obligation to act up to the standard of an honest person and in defence of the interests of the corporation. Thus, this duty prohibits directors from competing with the corporation in the furtherance of the director's own interest where such interest would generate a conflict with the interest of the corporation. When a director has a conflict of interest he or she must inform the board and the supervisory committee and abstain from participating in the decision-making process.
The good businessman standard is applied to the particular circumstances of each activity undertaken by a director. This standard requires, among other things, that directors have certain qualifications (ie technical knowledge, expertise) and that they perform their responsibilities in accordance with such qualifications.
Directors have personal and unlimited liability to the corporation, the shareholders, and third parties for non-performance of their duties, violation of the law or the bylaws, or regulations, or in case of fraud, abuse of power or negligence. Liability of directors to third parties may arise only in the event the fraud, deceit or negligence affect third parties; however, such liability does not give rise to a third party cause of action against the directors where the affected parties are only the corporation and/or its shareholders.
The regulation of liability imposed on directors is a matter of public policy. For this reason, the bylaws may not be changed to modify mandatory provisions of the CL for the benefit of directors.
Under the CL, each member of the board of directors is jointly and severally liable for any wrongful act, although different measures of liability can be allocated to each director depending on the director's individual participation.
Notwithstanding the foregoing, under Argentine law directors will not be held liable for any negative downturn in the corporation's business (ie losses during any given fiscal year) if such consequences are not a product of the directors' breach of their legal duties or their obligations, as described above.
All directors are jointly and severally liable for any wrongdoing engaged in by the board of directors. However, a director will be exempted from such liability if the director files a timely written objection to the corporate resolution that caused the damage in question. In addition, he or she must give notice to the company's statutory supervisors (síndico) or file a legal proceeding challenging the decision made by the board of directors.
A director who did not have knowledge of a decision or resolution and who did not participate in any discussion relating thereto would not be liable for any damages arising. This rule would apply to a director who was not present at the board of directors' meeting provided that the reason for such absence was legitimate. If a director's reason for being absent from a board meeting is to avoid involvement in the subsequently challenged decision or simply because the director is not diligent, then that director would not be exonerated from liability based solely upon his/her absence. Instead he/she would be required to object formally in the manner set forth in the preceding paragraph.
A director will not be freed from liability upon expiration of the term of the directorship, nor upon the director's removal or dismissal with respect to conduct that occurred while she or he was a member of the board of directors.
However, directors may be freed from liability for certain decisions upon subsequent approval of the decision by the shareholders at the shareholders' meeting, provided that such decision does not violate the law or the bylaws and that shareholders representing 5% or more of the company's capital do not object.
In any proceedings arising in connection with the alleged breach by a director of his/her duties or obligations, the plaintiff has the burden of proving that the corporation or the individual shareholders suffered damages that can be directly attributed to the decision made by the board of directors. To calculate the amount of damages, the general rules of civil law are applicable. Damages are calculated based on the effective reduction in the corporation's value which, in turn, is generally based on the difference between the present value of the company and what the value would have been had the wrongful action not occurred.
Shareholders
Some of the primary/main ways that shareholders are protected under the CL are as follows:
- Shareholders have appraisal rights enabling them to withdraw from the company and receive the book value of their holding, calculated on the basis of the company's most recent balance sheet if they disagree with a resolution adopted at the shareholders' meeting and in connection with certain matters specified in the CL.
- Apart from those cases where directors are appointed by different classes of shares or by the statutory supervisors (síndicos), directors may be appointed through a mechanism known as cumulative voting granting to minority shareholders the right to appoint up to one third of the board members.
- Any resolution adopted at the shareholders' meeting, which is contrary to law or to the company's bylaws may be declared void by a court if requested by the shareholders that did not vote in favor of such resolution or were absent from the meeting in which the resolution was adopted. This claim must be filed within three months after the end of the relevant meeting.
- Shareholders have preemptive rights to subscribe new shares (or convertibles) issued by the company, of the same class as its holding and in a proportion sufficient to maintain that shareholder's holding.
- Any shareholder may, in representation of the company, file claims against a board member for breach of duties, violation of the law, the bylaws or for damages caused by willful misconduct, abuse while in office or, negligence. Also, shareholders have the right to individual actions against directors.
- Shareholders have the right to obtain copies of the minutes from the shareholders' meetings.
- Shareholders have the right to request judicial overseeing of the company, which may result in the appointment of an inspector or co-administrator whenever the administrators of the company perform or omit actions that may result in serious danger to the company, provided that no other legal means are available to remove such administrators.
- Shareholders have the right to dividends, which can only be lawfully paid out of the company's retained earnings, as reflected in its annual financial statements and approved by the shareholders meeting.
Shareholders representing not less than 2% of the capital stock have the additional right to obtain information from the statutory supervisors (síndico) and also the right to give notice to the statutory auditor, in writing, of any corporate disorder. The síndico is obliged by law to investigate such facts and inform them to the shareholders' meeting. Shareholders representing at least 5% of the capital stock have the right to request that a shareholders' meeting be held to discuss the matters indicated in his/her request. The bylaws may establish a lower percentage to permit the exercise of said right and objecting to waiver of a director's liability. Finally, shareholders representing not less than 10% of capital stock have the right to request governmental control of corporate matters and also the right to request partial distribution during the liquidation of the company, if all corporate obligations are sufficiently guaranteed.
In regard to responsibilities, shareholders who have a conflict of interest with respect to a given transaction must refrain from voting when the matter is decided at the shareholders' meeting. Otherwise, they shall be held liable for damages, if without their vote the necessary majority to approve the decision had not been reached.
Public companies
The Decree introduced internationally accepted standard rules regarding corporate governance which are applicable to public companies. Some of the main innovations introduced are as follows:
- Companies shall appoint a person who shall be responsible for the company's market relations.
- When in doubt, the burden of proof regarding compliance by the directors with their duties of loyalty is reversed, now lying on the directors themselves.
- Shareholders' agreements shall be disclosed and submitted to the CNV.
- Transactions and agreements entered between a public company and a related party (as such term is defined in the Decree) and involving a significant amount (ie an amount in excess of 1% of the assets of the company pursuant to the last balance sheet approved, and provided further that such amount exceeds 100,000 pesos ($24,455) shall be subject to a special approval procedure and should be informed to the CNV.
- Encumbering material assets of a company must be approved by an ordinary shareholders' meeting.
- Management agreements must be approved at an ordinary shareholders' meeting.
- Prior to a shareholders' meeting, shareholders representing 2% of the capital stock may submit comments or proposals relating to the business of the company.
- Proxy solicitation is authorised subject to implementing regulations to be issued by the CNV.
- The adoption of certain guidelines for holding board of directors and/or shareholders' meetings by means of simultaneous transmission of voice, image or words (ie teleconferences and videoconferences).
- A digital signature on documentation submitted by electronic means to the CNV is awarded the same status as a printed signature.
- Disclosure information standards are enhanced.
- The duties imposed on directors are enhanced to resemble fiduciary duties imposed on managers under common law.
- Public companies shall create, within the board of directors, an audit committee composed of three or more members, the majority of which must be independent directors. The audit committee shall prepare an annual plan, opine on the appointment of external auditors, fee estimates, stock option plans and transactions with related parties. In addition, it must opine and inform on conflicts of interest and supervise internal control systems, accounting matters and risk management.
- Minority shareholders representing at least 5% of the capital stock shall be entitled to appoint an external auditor.
- Additional information requirements are to be included in the financial statements of the companies.
- For information purposes, the CNV may authorise the disclosure of consolidated financial statements to controlling companies, provided that such financial statements accurately describe the situation and information of the public company.
Corporate governance code
In 2007 the CNV approved the Code, which as of 2008 applies to corporations that are authorised to publicly offer their shares in Argentina. The Code provides new regulations related to compliance with the board of directors' obligations. It increases the requirements on disclosure of information regarding management of the corporation and independence of board members in order to protect public shareholders and the general market. As a result, it reinforces the transparency, full disclosure and efficiency principles that should govern corporations that offer their shares to the public.
The Code rules for fiscal periods starting as from January 1 2008 and applies to corporations authorised to publicly offer their shares (except small and medium sized companies (PyMES) for which it will be optional). The companies will not be obligated to adopt the Code, however, the board of directors shall annually indicate whether or not it follows its guidelines. If the board does not adopt the Code, it shall explain the reasons for such decision and also indicate whether the board will consider the possibility of incorporating the Code's guidelines in the future.
The board of directors must determine if the corporation's bylaws comply with the Code's regulations. Even though it is not expressly specified, if the board considers that such bylaws are not in line with the Code, it should probably propose their amendment.
The Code establishes certain obligations upon the board of directors in relation to corporate governance.
a) Role of the board of directors: the Code provides that the board must determine the strategy and main policies of the corporation and supervise their compliance. These shall include policies of investments and financing, corporate governance, corporate social responsibility, control of risk management, and continuous training programs for directors and executive officers.
b) Code Report: one of the main innovations is the requirement of the preparation by the board of directors of a report regarding compliance with the Code (the Code Report). The Code Report shall be included as a separate schedule in the board of directors' report in the annual financial statements (memoria). The board must also establish guidelines that will be used to measure its performance when preparing the Code Report. This document should be written and serve as a guide for the evaluation of the board, establishing the criteria to be measured when evaluating its performance. The Code Report will be publicly disclosed as relevant information of the corporation.
c) Committees: the Code provides that the board of directors must establish a sufficient number of committees to manage the corporation. The Code provides guidelines related to the audit committee and also proposes the creation of new committees, such as the compensation committee and the appointments and corporate governance committee.
The Code provides that the board must: inform as to who nominates members for the audit committee; indicate whether or not the audit committee should be presided over by an independent member; make a proposal, at a shareholders' meeting, regarding the number of members it considers adequate to have on the board of directors, including the number of independent directors; and establish whether or not it is appropriate for independent directors to hold meetings without the presence of non-independent directors.
The compensation committee must be composed of people with experience in human resources and must be responsible for: designing policies for the remuneration and benefits of directors, executives, advisors and consultants; administering the share purchase options systems; and informing on guidelines to design retirement plans for directors and executives.
The appointments and corporate governance committee must be in charge of: fixing the proceedings for the selection of directors and key executives; and elaborating corporate governance rules (which should include the Code regulations) and supervising committee;
The Code contains some guidelines related to the independence of directors, executive officers, statutory auditors and external auditors. It provides that the board of directors shall assure that the corporation's bylaws contain provisions which oblige directors to give information about their personal interests in order to avoid conflicts of interest.
In regards to directors and senior managers, the Code mandates that the board of directors shall indicate: if there is any independent criteria; if, at the time of their appointment, there should be a sufficient explanation with respect to the appointed member's independence; if there is a policy regarding the maintenance of a certain proportion of independent directors; and the proportion of executive, non-executive and independent directors.
With respect to both the statutory and external auditors, the board of directors shall inform whether or not it has established policies related to the rotation of their members and specifically regarding external auditors, the board shall indicate whether the renewal includes the external auditors' firm or just the appointed individuals. The board shall also consider whether it is convenient to appoint members of the external auditors' firm as statutory auditors of the corporation.
The board of directors shall inform upon the existence of policies regarding the relationship between the corporation and the group of companies to which it belongs and the transactions with related companies, shareholders and managers. With respect to the board's relationship with shareholders, the board shall inform if it organises informative meetings for shareholders, if the corporation has a specific office to answer investors' inquiries and if there are any policies for the payment of dividends in cash.
The Code also provides that the board give the shareholders notice of the corporation's free public access website – if they have one – where information shall be available and users' inquiries may be received.
| Author biographies |
Pablo García Morillo
Marval, O’Farrell & Mairal
Pablo García Morillo joined Marval, O’Farrell & Mairal in 1994 and has been a partner of the firm since 1999. He specialises in business and corporate law and his professional practice is centred around mergers, acquisitions and joint ventures.
In the area of mergers and acquisitions he has been involved in many transactions, advising both buyers and sellers in the transfer of assets and shares, both listed and unlisted companies. He has also advised on joint ventures between local and foreign companies.
He graduated as a lawyer from the Universidad de Buenos Aires in 1990 and obtained a Masters in International and Comparative Law from the Southern Methodist University in 1993. Previously he worked in the courts between 1985 and 1992 and with the firm Negri, Teijeiro & Incera during 1993 and 1994.
He has published several works on mergers & acquisitions and commercial law-related matters in national and foreign legal publications. He has taken part in national and international conferences on matters related to his areas of specialisation.
He is a member of the Colegio Público de Abogados de la Capital Federal and of the Colegio de Abogados de la Ciudad de Buenos Aires. |