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The Supreme Court has confirmed a decision passed by an Appellate Commercial Court in June 1995 In re NL SA v Bull Argentina SA, challenging the validity of agreements entered into among shareholders of Argentine corporations.

According to Argentine Commercial Corporations and Partnerships Law number 19,550, a corporation must be registered with the Public Registry of Commerce of the jurisdiction where it is domiciled. Any amendment to a corporation's by-laws not registered with the supervisory authority will not be enforceable, and the corporation will not qualify as a corporation under the Corporations Law, thus falling under special provisions governing irregular corporations (sociedades irregulares o de hecho). If the by-laws of a corporation contemplate supplementary general rulings (reglamentos), these must also be submitted for registration with the competent authorities.

The Corporations Law, originally enacted in 1972, does not address the issue of the validity of shareholders' agreements affecting local companies. The rationale for this absence of rules is that general principles of law should suffice for determining the enforceability of contracts, and that a law on corporations should not contain provisions on agreements that fall beyond the structure of corporations themselves. Legal standards in Argentina indicate that a shareholders' agreement may not be enforced against third parties or against the corporation concerned. The issues under debate are:

  • whether these agreements are valid among the parties; and
  • whether a party may seek damages in case of default.

The main topics addressed by the court in the Bull case are that the plaintiff was a party to a shareholders' agreement contemplating that all decisions at meetings of shareholders of the corporation should be based on unanimous consent. In this particular case, a meeting of shareholders decided to dissolve the legal entity without the approval of the plaintiff. The plaintiff then requested that the meeting of shareholders be declared null and void and sued for damages for breach of contract among the shareholders. The court decided that the contractual requirement to base all decisions on unanimous consent violated a principle in corporate law (ie the governance of corporations by majorities), thus making illegal the agreement among the shareholders.

In addition, because no deadlock provisions were included, it remained unclear which parties had defaulted under the agreement. The court concluded that such agreements may not be enforced against the corporation itself. The shareholders' agreement established it would be valid until terminated by the parties. In the opinion of the court, the fact that no term of validity was established, and that the contract applied to an indeterminate series of shareholders' meetings, meant:

  • that the contract had not been entered into for any specific or identifiable corporate purpose; and
  • that legal rights of the participants to the contract were indefinitely tied up (again, in violation of the rule of majority at shareholders' meetings). The court suggested it would consider valid only those shareholders' agreements entered into for a single and specific shareholders' meeting; otherwise, public order and the notion of corporate interest could be jeopardized.

The Bull case judgment has been strongly criticized on the grounds that this decision represents a step backwards from the principles established in an earlier case dealing with agreements among shareholders adjudged by the Appellate Commercial Courts in September 1982 (Sánchez Carlos J v Banco de Avellaneda SA). The Banco Avellaneda case stated:

  • that the term of validity of a shareholders' agreement is irrelevant for determining whether it illegally interferes in the functioning of a corporation; and
  • that agreements among shareholders are in principle valid and enforceable among the parties, except if they pursue illegal purposes, affect the notion of corporate interest, or cause damages.

Critics of the Bull case argue that Argentine legislation does consider shareholders' agreements valid based on the following arguments:

  • in 1989, the Structural State Reform Law number 23,696, entitling employees of privatized companies to become shareholders under special Employees' Participation Programmes, indicated that the voting rights of the shares issued under those programmes must be exercised through a voting syndicate until the shares were fully paid-in; and that an agreement among the shareholders should be entered into for this purpose;
  • Law number 24,441 of 1995 introduced certain mechanisms regarding trust agreements (fideicomisos). When implemented, the mechanisms may result in the creation of legal structures similar to those usually sought out in shareholders' agreements; and
  • regulations of the National Securities and Exchange Commission (Comisión Nacional de Valores) provide that members of the board of directors and the auditing committees of corporations under the Commission's supervision report the existence of shareholders agreements if known to them.

Ignacio Nicholson

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