From 2003, there was a significant growth in foreign investment, mainly regional and in specific industries such as construction, agribusiness and energy. However, starting in 2007, M&A activity has decreased in Argentina mainly due to the worldwide economic and financial crisis. From 2007 to the first quarter of 2010, M&A activity has been focused on the acquisition of small and medium-sized family companies.
Lately, M&A activity has slowly been increasing, and the most significant transactions were related to oil & gas, telecommunications, and agribusiness. The high yield on the rate of returns offered by developing countries, have attracted the interest of Private equity funds and venture capital.
Tender offers
The regulatory framework of takeovers in Argentina varies depending on whether or not the securities involved in the transaction are publicly-offered. Takeovers of non-listed companies are not subject to specific regulations. General rules of the Companies Law, as well as of the Argentine Civil and Commercial Codes apply to these takeovers but do not include a specific threshold.
Decree 677/01 on Transparency and Better Corporate Practices in Capital Markets and implementing rules issued by the Argentine National Securities Commission (CNV) regulate tender offers for public companies. The mandatory tender offer regime is provided for all public companies, unless at the time of its incorporation to the public offering regime the company's by-laws provided that the company had opted out of the mandatory tender offer rules set forth in the CNV regulations.
The obligation to launch a mandatory tender offer is triggered in the event a person (directly or indirectly) intends to acquire an amount of voting shares, subscription rights or options to purchase shares, convertible negotiable securities or other comparable securities that represent (added to such person's prior holdings) 35% or more of the voting stock capital and/or voting power (in other words a significant interest) in a company admitted to the public offering regime and subject to the mandatory tender offer regime, unless (i) the acquisition of the Significant Interest does not result in a change of control, either de facto or de jure; and (ii) a change of control occurs as a consequence of certain corporate reorganisations.
Any intention to acquire a significant interest of 35% or more of the capital stock and votes of the public company will trigger the obligation to make a mandatory tender offer for at least 50% of such capital stock and votes. If the bidder intends to a acquire a significant interest of 51% or more, the mandatory tender offer must be made on 100% of the capital stock and votes of the company.
If the bidder already holds an interest in the voting stock and/or voting power equal to or higher than 35% but lower than 51% and intends to increase its interest by at least 6% over a 12-month period, the mandatory tender offer must be made in respect of an amount of securities that represents at least 10% of the voting stock capital.
The mandatory tender offer regime is applicable in those cases in which the acquisition of the significant interest is made in a single transaction or in a series of successive transactions over a period of 90 days. Also, it is applicable when the bidder acts individually as well as when it acts in concert with other persons. Additionally, the obligation to make a mandatory tender offer will be triggered when a company whose shares are publicly offered and listed in Argentina agrees to withdraw voluntarily from the public offering and listing system in Argentina.
In this case, the mandatory tender offer will be applicable even if the company had opted out of the mandatory tender offer regime. The CNV regulations also provide for certain specific rules applicable to mandatory tender offers upon a merger or acquisition of control of a company that holds, directly or indirectly, shares of capital stock and votes of a company subject to the mandatory regime.
Among other things, the CNV regulations establish disclosure obligations and price requirements applicable to mandatory tender offers.
As provided by Decree 677/01, if a person holds, directly or indirectly, 95% or more of the outstanding capital stock of a publicly-traded Argentine company, any minority shareholder may request that the controlling shareholder launch a tender offer for all outstanding shares of such company. If the controlling shareholder does not carry out the tender offer within 60 days from the minority shareholder's request, the minority shareholder is entitled to have his/her shares declared as acquired by the judicial authority, and have the court determine an equitable price.
In addition, a person that holds, directly or indirectly, 95% or more of the outstanding capital stock of a publicly traded Argentine company may issue a unilateral declaration of its intention to purchase all outstanding shares of such company within six months following the date of acquisition of near-total control, in exchange of cash or shares of the controlling company, and withdraw the company from public offering and its shares from listing and trading.
Conditionality
Tender offers can include conditions that must be objective and must be mentioned clearly in the offering memorandum. Conditions that depend on the will of the offeror are null and void by law. The most common conditions are material adverse event clauses, maximum or minimum number of shares, and conditions relating to variations on the prices of the shares, and/or exchange rates.
Governing law
Mid- and large-size domestic and cross-border deals are in most cases being conducted, structured and negotiated without major differences. The scope of the legal, accounting and financial due diligence to be performed, the extent of the representation and warranties to be granted by sellers and the duration and limitation of sellers' indemnity obligations, are much alike in domestic and cross-border transactions.
Argentine law generally permits parties to a contract to select the laws that will govern their agreements as long as there exists some connection to the system of law that is chosen. In cross-border deals where the buyer is a foreign company, New York law is the most frequent governing law chosen, but we have seen contracts where the parties have chosen the law of other US States; English companies usually elect English law.
Dealing with local quirks
When governmental approvals of a transaction are necessary, we have seen cases where obtaining those approvals take longer than expected. Also, in many cases, the Argentine government considers that certain industries have a strategic value or relevance (for example natural resources, broadcasting, telecommunications and public utilities) and in some of these industries there are legal restrictions for the participation of foreign companies. In those cases, the analysis made by the governmental authorities to grant, or not, the approvals are not only solely based on technical aspects, but political influence of the parties involved or the own interest of the government play a major role.
Since the early 1990s, it has been quite usual to include mediation and/or arbitration clauses in cross-border M&A deals. By providing for arbitration, investors have mainly aimed at solving their disputes confidentially and within a shorter period than that usually demanded by court proceedings in Argentina. It has also been quite common to provide for international arbitration (International Chamber of Commerce, for example), so that disputes are resolved in a neutral jurisdiction and in order to obtain an award than can be more easily enforced in jurisdictions outside Argentina. Decisions of international arbitration panels have been regularly enforced by Buenos Aires courts.
CIADI (Centro Internacional de Arreglo de Disputas de Inversiones) arbitration awards against the Argentine government, based on international treaties of protections of investments signed by Argentina and many foreign countries, have been difficult to enforce against Argentina either here or abroad. Most of those awards obtained by holding companies of public utility services have been challenged by the Argentine government (in some cases with success). The Argentine executive has deprived some local utility companies of some rights (for example receiving an increase in the tariffs of the services provided). The Argentine government aimed for the foreign shareholder to stay its claim against Argentina or to waive its rights recognised by the award issued by CIADI.
As a general rule, Argentine courts respect the rule of law. The courts of the Buenos Aires have historically been respectful of the principle of due process. The recognition and enforcement of foreign awards or judicial orders issued in proceedings between private companies should not bear significant risks except being time consuming and raising high court expenses and personal risks to the defendant (such as insolvency). In some jurisdictions, courts can be less unbiased to a foreign company and aim to protect the local company.
It is different in cases where the Argentine government is involved. First, the law limits the possibility of executing the government by means of a complicated proceeding that requires the Congress to approve the payment of the debt consequence of a judgment in the government's annual budget. In addition, the possibility of favouring the government or its officers' position regardless of due process may also be expected when the government or its officers are involved, or if the case has significant political impact. However, it should be noted the judiciary has started in the last year to rule, in different matters, with the outcome of limiting the powers of the government. These recent precedents certainly constitute a significant turn in the case law and an intent to leave behind prior judicial decisions that favoured the government. There still is a long way to go, however.
Protection for foreign buyers
Foreign investors can protect themselves by performing proper due diligence over the target and structuring each transaction on a tailor-made basis. If from the due diligence many contingencies or liabilities are identified, the parties may negotiate for the seller to lower the price of the target company, and consequently the contingencies or liabilities to be priced in.
In those cases where governmental approval is required, in general the authorities tend to take more time than expected to approve the transaction. These delays may affect the timing of projected investments by buyers' business plans. It is advisable to analyse this matter concurrently with the valuation/development of the business plan.
When buyers are US-based companies, there is an increasing tendency to include in the due diligence the target company's compliance with anti-corrupt practices in line with the US Foreign and Corrupt Practices Act.
Current trends and changes
A few years ago, due diligence processes analysed the contingencies of the target company in great detail and covered the statute of limitations of most business areas of the target company. As a consequence, due diligence reports were very comprehensive. Due to budgetary constraints due diligence processes are now shorter, usually focused on specific contingencies and rarely covering the statute of limitation period. In addition, potential investors have replaced due diligence reports by executive summaries of the contingencies.
Additionally, acquisitions in Argentina were usually structured as the acquisition of 100% of the target company. However, we have noted that recent transactions were structured differently, not by acquiring 100% of the equity of the target company at once, but in two tranches. In this structure a fixed cash price is paid for the acquisition of the control stake in the company. Simultaneously, a call option on the minority holdings is given to the buyer, which may be exercisable in certain agreed period of time at a price that may vary depending on the performance of the company in such period of time.
Regulatory changes
Elimination of the private social security system
Argentine Law No 26,425, enacted in December 2008, modified the current Argentine social security system by eliminating the private social security system and creating a uniform and public integrated social security system. The private pension funds were the largest institutional investors in the financial and capital markets of Argentina consequently, this law produced a significant negative impact in the Argentine capital markets and in the structure of M&A transactions. As a result of the enactment of this law, this role is currently being played by the Argentine National Administration for Social Security Agency (ANSES), and consequently the Argentine Government became the most important institutional investor in Argentina and holds shares of some of the most important Argentine public companies.
Audiovisual communication services
Argentine Law No 26,522 of Audiovisual Communication Services, enacted in October 2009, amended the previous Broadcasting Law. This new law, in accordance with previous laws that have addressed the topic, places restrictions on individuals and companies to the extent of their relationship with foreign companies. Also, it establishes a complex set of rules concerning multiple licensing. The consequence of this law is that current licensors and broadcasting and media shareholders will be forced to sell some of their holdings to third parties.
This law has been extensively criticised and its constitutionality has been put in doubt. It is not in force yet as it is under judicial review.
Antitrust
An increasing number of acquisitions now need to go through antitrust scrutiny. As a consequence, antitrust approval has become a central part of the negotiations between parties. Competition law in Argentina is governed by the Argentine Antitrust Law No 25,156, pursuant to which transactions which are deemed to be economic concentrations (as described below) must be notified and require the authorisation of the Antitrust Commission. Transactions that fall under the Antitrust Law are analysed not only from an economic and transactional perspective but also from a political point of view.
Pursuant to the Antitrust Law, transactions are deemed to be economic concentrations when they result in the assumption of control of one or more companies by means of any of the following acts: (i) merger; (ii) transfer of businesses; (iii) acquisition of shares; and (iv) any other agreement which gives decision-making control. These economic concentrations require the authorisation of the Antitrust Commission if the aggregate volume of business of the companies involved in the transaction exceeds ARS200 million ($49.6 million).
However, there are certain transactions which are exempt from the notification requirement:
(i) the acquisition of companies in which the purchaser already holds more than 50% of the shares;
(ii) the acquisition of bonds, debentures, non-voting shares or debt securities;
(iii) the acquisition of only one company by only one foreign company that has no assets or shares of other companies in Argentina;
(iv) the acquisition of wound-up and liquidated companies (which performed no activities in Argentina during the preceding calendar year);
(v) the acquisition of companies if the total local assets of the acquired company and the local amount of the transaction does not exceed ARS20million, provided that the exemption would not apply if any of the involved companies were involved in economic concentrations in the same relevant market for an aggregate of ARS 20million in the last 12 months or ARS60 million for the last 36 months;
(vi) gratuitous transfers of goods to the Argentine state, provinces, municipalities and the city of Buenos Aires; and
(vii) the transfer of goods among mandatory heirs, by acts among living persons or by cause of death.
The transactions that require authorisation from the Antitrust Commission must be notified before, or within one week of, the first to occur of either the date that any transfer effectively occurs, or the publication of any cash tender or exchange offer.
The proceedings to obtain antitrust authorisation normally take between 12 and 18 months depending on the complexity of the transaction from a competition standpoint. At the end of the procedure, the Antitrust Commission may decide whether to unconditionally approve the transaction, approve the transaction but impose conditions, or reject the transaction.
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About the author
Pablo García Morillo joined the firm in 1994 and has been a partner since 1999. He specialises in business and corporate law and his professional practice is centered around mergers, acquisitions and joint ventures. In the area of M&A he has been involved in many transactions, advising both buyers and sellers in the transfer of assets and shares, both of listed and unlisted companies. He has also advised on joint ventures between local and foreign companies. Garcia Morillo has published several works on M&A 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.
Garcia Morillo 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 from 1988 until 1992 and with the firm Negri Teijeiro & Incera in 1993 and 1994. 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. |
Contact information
Pablo García Morillo
Marval O’Farrell & Mairal
Av. Leandro N. Alem 928 (1001)
Buenos Aires, Argentina
Tel: +54 11 4310 0100
Fax: +54 11 4310 0200
Web: www.marval.com.ar |
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About the author
Pablo Artagaveytia joined the firm in 1995 and became a partner in 2000. His area of specialisation is centred around commercial and corporate law. His professional work includes all areas of commercial law, advising on stock purchase agreements, distribution agreements, legal auditing, structuring of local companies, foreign business operations and general legal assistance particularly focusing on the Mercosur region. In 1998 and 1999 he was seconded to Brazilian firm Demarest & Almeida. Before joining the firm, Artagaveytia was a member of the Drs. O’Farrell between 1990 and 1994 and was a court clerk in the National Civil and Commercial Courts from 1986 until 1990. In 1990 he was an assistant professor of Commercial Law at the Schools of Law and Economics of the Universidad de Buenos Aires.
He graduated as a lawyer at the Universidad de Buenos Aires in 1990 and obtained a Masters in International Law from the Southern Methodist University, Dallas, in 1995. |
Contact information
Pablo A Artagaveytia
Marval O’Farrell & Mairal
Av. Leandro N. Alem 928 (1001)
Buenos Aires, Argentina
Tel: +54 11 4310 0100
Fax: +54 11 4310 0200
Web: www.marval.com.ar |