The history of registration requirements imposed on securities in Argentina illustrates the volatility of the country's economic conditions and regulations over the last decade. More recently, it has also been evident that when a desperate need for higher tax revenues is the driving force behind its implementation, this seemingly technical requirement may even threaten to wreak havoc in the secondary market for debt securities.
This article first discusses a recent decision on the transferability of securities which had not been registered as required by the previous registration law, and then briefly summarizes the main aspects of and problems with the new registration law.
Validity of certain security transfers
Eleven years ago, amid concerns of tax evasion in connection with undisclosed holdings of bearer securities, Law 23,299, (in addition to Law 20,643, as amended (the Registration Law)), was enacted by the Alfonsín administration. Under its provisions, corporations could only issue registered securities in Argentina, and holders of bearer securities who failed to convert them into registered securities were prohibited from transferring, encumbering or exercising any right arising from such securities. In addition, an annual fine equivalent to 20% of the accounting value of the unregistered securities applied to such holders from May 1 1986. Any remaining bearer securities were to be cancelled four years after that date.
In September 1989, the Menem administration enacted Law 23,697 (the Economic Emergency Law), a pillar of its deregulation programme. A provision in the new law repealed the mandatory registration of bearer securities established by the Registration Law, including its restrictions and sanctions. This allowed corporations to issue both registered and bearer securities as set forth in the original version of Law 19,550 (the Corporations Law). However, it was not clear from the language of the provision whether it was intended to have a retroactive effect on securities which had not been previously registered in accordance with the Registration Law.
The retroactivity issue was addressed in S, JA v T, de SA (issued in 1995, published in La Ley on April 15 1996), a unanimous decision by the Supreme Court of the Province of Mendoza, Section I, following an opinion delivered by Kemelmajer de Carlucci, a highly respected judge and scholar in Argentina.
In this case, a closely-held corporation had been established in 1968 with capital stock consisting in its entirety of bearer shares. After the enactment of the Registration Law, neither the corporation nor any of its shareholders tried to register the shares. According to the plaintiff, who in his complaint requested the removal of a corporate director and the calling of a shareholders' meeting, a shareholder who later died had donated and delivered to him 100% of the corporation's stock certificates in 1990, ie, after the repeal of the restrictions and sanctions set forth in the Registration Law. The defendant director opposed the claim, arguing that the plaintiff had in fact stolen the securities.
The lower courts agreed that the issue of whether the plaintiff held the shares as the result of a donation or an illegal act was not relevant in this case (the plaintiff had been found not guilty of misappropriating the shares in a separate criminal action), and that the decisive issue was whether the shares had been transferred in compliance with the Corporations Law. The judge of first instance rejected the complaint, concluding that a formal assignment of the shares to the plaintiff (as opposed to mere delivery) was required under the Corporations Law because the transferor's bearer shares had been converted by operation of law into non-endorsable registered securities pursuant to the Registration Law. The Court of Appeals reached the same conclusion following a different rationale, stating that the prohibition of the Registration Law against the exercise of any right arising from unregistered securities had not been retroactively repealed by the Economic Emergency Law.
The Supreme Court reversed, supporting its unanimous decision with the following line of reasoning:
- The Court of Appeals decision was incorrect because it failed to indicate who, if not the plaintiff, was the owner of the shares, and how, if not by delivery, such shares could be transferred after the enactment of the Economic Emergency Law.
- Although the Economic Emergency Law did not expressly provide for a retroactive repeal of the restrictions and sanctions under the Registration Law, the repeal of the relevant articles meant that its restrictions and sanctions were no longer enforceable. This conclusion followed a widely-held criminal law theory, applicable by analogy to tax sanctions, which states that a law which is more favourable to a defendant (ie, the transferor) must be applied retroactively.
- Because the restrictions and sanctions were no longer in force and the shares had been transferred to the plaintiff in compliance with the the Corporations Law, the plaintiff was the legitimate owner of the shares and, as such, entitled to request the corporate actions in question.
In articulating the grounds for the decision, the Supreme Court noted that the Registration Law was not limited solely to the prevention of tax evasion (which might have supported greater emphasis on its sanctions) but also effected a controversial change in the method for transferability of securities. Developing a policy argument entirely consistent with the deregulatory spirit of the Economic Emergency Law, the Supreme Court underscored the effect of its interpretation, which was to eliminate obstacles to the transfer of securities, at the cost of leaving unpunished those holders of securities who violated a law that was now repealed, rather than punishing such holders at the cost of blocking the free transfer of a significant volume of securities.
The New Registration Law
Five months after the issuing of the decision discussed above, a growing fiscal deficit prompted the Menem administration to enact another securities registration law, containing similar provisions to the Registration Law. Law 24,587 (the New Registration Law) provided that from May 22 1996 all private securities issued in Argentina shall be registered and non-endorsable, and that public and private bearer securities issued outside Argentina but authorized to be publicly offered in local markets shall be exchanged for non-transferable registered certificates representing such securities.
The New Registration Law also provided that transfers and encumbrances shall be documented in the certificate (if existing), registered in a special registry, and notified to the issuer, with such transfers and encumbrances having legal effect with respect to third parties and the issuer only from the date of registration. Attachments on private securities will have full effect from the date of registration and notification to the issuer, but will not prevent transfers of publicly-offered securities until the securities exchange in question is notified.
On March 18 1996, the government issued Decree 283, regulating in detail several aspects of the New Registration Law and providing that the registration of publicly-offered debt securities will be deemed complete if they are represented in global certificates or partial certificates, and registered or deposited in national or foreign depositary systems authorized by the National Securities Commission. On May 14, the National Securities Commission issued General Resolution No. 283, designating Caja de Valores SA as the national depositary system, and Cedel, Euroclear and The Depositary Trust Company as the foreign depositary systems.
Like the previous Registration Law, the New Registration Law requires all existing private bearer securities to be converted into non-endorsable registered securities, and prevents holders of non-converted securities from transferring, encumbering or exercising any rights arising from them. However, instead of confiscatory fines on the value of unregistered securities, the New Registration Law provides that certain tax exemptions on interest and other income resulting from private bearer securities will no longer be applicable and that a 10%, 20% and 30% tax rate will be applicable on income arising from private bearer securities during the first, second and subsequent 12-month periods, respectively, from the expiry of the term set for conversion. While conversion is tax-free, sales of non-converted bearer securities will be taxed at a one-off 30% rate on their gross amounts, and purchases at the income tax rate applicable to non-documented payments on the remaining balances.
Complaints from both issuers and investors forced the government to issue Decree 547 on May 22 1996 to postpone the deadline for the conversion of private debt securities from May 22 1996 to May 22 1997. Because a large proportion of negotiable bonds (obligaciones negociables) issued by Argentine companies in the last few years have been placed outside Argentina, it turned out to be extremely difficult for the issuers to obtain the bondholders' consent to effect the conversion, as well as to reach the required quorum to hold bondholders' meetings to modify the terms and conditions of the bonds. In addition, in many cases it was impossible to obtain such consents from the international financial entities acting as fiscal agents. Most importantly, the terms and conditions of nearly all negotiable bonds provide that issuers should bear the cost of new taxes imposed on negotiable bonds, and consider changes in laws regulating the terms and conditions of the issue as an event of default.
Therefore, if the term for conversion had not been extended, the New Registration Law would have forced the call of a large portion of the medium- and long-term debt issued by many Argentine corporations, making international financing even more difficult for many local industries still struggling to overcome the deep recession that followed the Mexican peso crisis.
In sum, while the decision discussed above is likely to eliminate any uncertainty regarding the validity of past transfers of securities never registered as required by the Registration Law, it is still uncertain whether the problems leading to the recent postponement of the registration requirement imposed by the New Registration Law will be solved before the new deadline. The court decision and the postponement decree, however, show that the moral of the two stories is the same -- when common sense prevails, the law yields to the market.
Curtis, Mallet-Prevost, Colt & Mosle
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