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On August 21 1998, the Buenos Aires Stock Exchange circulated among the companies quoted on its market, the answer that the Comisión Nacional de Valores (the securities and exchange commission, CNV) gave to the question posed by the Mercado de Valores de Buenos Aires as to whether the fall in stock prices, caused by the global stock market crisis could be construed as constituting serious damage to the quoted corporations, thereby allowing them to buy back their own shares.

The chairman of the CNV stated in his answer that the CNV board's criterion on the topic is that abrupt and extraordinary falls in the price of a given stock (provided they are not due to any particular circumstance of the issuer) could be deemed as a serious damage to the corporation and thus construed as qualifying under the legal exception that allows corporations to buy back their own shares.

This implies a shift in CNV's view on the issue.

Buybacks under Argentine Partnerships and Corporations Law.

Under Argentine Partnerships and Corporations law No. 19.550 (as amended), corporations are forbidden to buy their own shares except in the following cases:

  • if the shares are bought back for the purpose of cancelling them, based on a previous shareholders' meeting decision to reduce the corporate capital stock;
  • on an exceptional basis, if the shares are fully paid up and the purchase is carried out with accrued and liquid earnings or free reserves and to avoid serious damage to the corporation (which will be justified at the following ordinary shareholders' meeting); and
  • if the shares are within the assets of any concern purchased by the corporation or of a company merged into or incorporated into the corporation.
CNV regulations.

As to the share buybacks carried on by public companies to avoid serious damage, the rules of the CNV provide that the decision should be taken by the board (with due notice given to the syndics). Notice of the decision should be given to the CNV and the stock exchange in which the company's shares are listed. The notice should include the purpose of the buyback, the time-frame and price range within which it will be carried out. Each individual purchase should be notified including its date, price and total amount.

The repurchase must be immediately published in the stock market bulletin or by any other means that assures wide publicity. The purchase is to be carried out on the stock exchange where the shares are listed and paid with accrued and liquid earnings or free reserves that arise from the last approved annual balance sheet and are pending distribution.

Public companies may not buy back their shares in the following circumstances:

  • if they are aware of any tender offer aimed to acquire control of the company;
  • if the shares to be purchased are directly or indirectly owned or managed by the company's board members, managers, syndics, officers or members of the supervisory committee; or
  • until one day after the publication of the company decision to buy back the shares.
CNV's and court's criteria on whether price falls constitute serious damage

On February 13 1979, in re Frigorífico La Pampa SA, the CNV stated that to qualify within the exception, the serious damage was to be suffered by the corporation itself rather than by its shareholders. It was implied that a price fall did not damage the corporation.

CNV's resolution in re Frigorífico La Pampa SA was reversed by the Commercial Court of Appeals on October 29 1979, on the grounds that a price fall caused by a shareholder's important public offering and the need to keep the ownership proportions that granted the peaceful management of the company, constituted serious reasons for the corporation to buy back its own shares.

During the Tequila crisis in 1995, the Buenos Aires Stock Exchange Bulletin published notices from certain local companies indicating their intention to purchase their own shares on the basis that the price fall constituted serious damage. Consequently, the CNV issued regulations containing certain requirements to be complied with regarding a buyback conducted by a public company (see above). Given that those requirements included a prior notice of the purpose of the buyback, it could be argued that a sort of de facto safe harbour arose: companies could file the notice and go ahead with the buyback if no objection was raised by the CNV (taking CNV's silence as an approval). However, no public statement or regulation was issued by the CNV expressly accepting the companies' view that a stock price fall was to be construed as serious damage.

Therefore, CNV's note of August 21 constitutes the first public statement changing the view it sustained in re Frigorífico La Pampa SA and accepting the holding of the Commercial Court of Appeals inasmuch as it refers to general price decrease.

CNV's note has been carefully worded to allow the CNV a future case-by-case analysis (the note states that price decreases could be considered as causing serious damage, not that they will be considered).

CNV's note is not binding on the courts. Although we are not aware of any case against the holding of Frigorífico La Pampa SA, it has been stated that the facts in Frigorífico La Pampa SA were different from the situation under the Tequila crisis or the present crisis. In that line, it has been said that the buyback upheld in Frigorífico La Pampa SA was carried out to avoid the artificial effect that a significant sale would have on the company stock price, whereas in the case of a general market crisis, the buyback would artificially impede a price fall caused by the market.

CNV's regulations dealing with price manipulation activities include, as a forbidden manoeuvre, share buybacks that even if approved by a shareholders' meeting, do not qualify under the legal exception, according to CNV's view.

Therefore, if it is finally established that the buyback does not qualify under the exception, the corporation could be subject to fines or a public offer suspension or prohibition. Further to those sanctions certain authors consider that the buyback should be considered null and void.

The matter, thus, in spite of CNV's note of August 21 is still not clear.

Lucio Leverone

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