Pablo R Garcia Morillo and Diego S Krischcautzky of Marval O'Farrell & Mairal assess the regulatory landscape for mergers and acquisitions in Argentina
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A activity in Argentina is governed by the Argentine Companies Law 19550 (ACL), which is the general body of legislation applicable to all local companies and the more specific Capital Markets Law 26831, enacted on November 29 2012 (CML). The CML is complemented by General Resolution 622/2013 (CNV Rules) of the Argentine Securities Commission (Comisión Nacional de Valores, or the CNV).
The CNV is the governmental agency that supervises the public securities market and therefore intervenes in public M&A in Argentina.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Since the enactment of the CML in late 2012, the takeover of public companies requires mandatory tender offers addressed to the shareholders of the target entity. The role of the CNV is such that the process has become of greater importance.
The CNV's role includes: approving and rejecting offers; assuring fair treatment of the addressees of the offer, ensuring a fair price is received; and; adequate information is provided to shareholders. The CNV also has the power to ensure that the board of directors of the target does not interfere with the offer, unless it does so to seek alternative offers for the benefit of the shareholders.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Hostile acquisitions are extremely rare in Argentina.
In general, the prospective buyer enters into private negotiations with the controlling shareholder of the public target and then once the terms and conditions are agreed upon, the buyer has to make the tender offer, which is subject to CML and the CNV Rules.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
Given that most or all of the acquisitions are friendly, the structure of a public acquisition will essentially depend on the organisational structure of the target and on tax considerations.
The choice of a structure may also vary depending on the existence of different voting rights of the shares of the target (multiple-vote shares are allowed in Argentina, although they are becoming rarer in public entities), or plans for a post-closing reorganisation.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Transactions that do not require a mandatory tender offer, antitrust clearance or other regulatory approval may close quickly, with the timing depending on the parties. However, closing a transaction that requires a mandatory tender offer and antitrust clearance may take between 18 and 24 months.
Competing bids may be submitted as long as the initial offer acceptance term has not expired. The initial offer must, in principle, have an acceptance term of no less than 20 and no more than 30 business days.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
If the buyer has purchased shares of the same kind as those being targeted in the tender offer within the 90 days before the tender offer, then the offered price cannot be lower than the highest price paid in those transactions. When the acquiring party has already executed commitments with the controlling shareholder of the target company or any other shareholder with a right to participate in the tender offer, the price cannot be lower than the one agreed with those parties in those commitments.
The price must be fair and all shareholders should be treated equally. The price should be calculated considering the share's book value, the shares' average listing price during the six months immediately prior to the offer and the company's valuation based on the discounted cash flow method. The CNV Rules provide that the tendering shareholder must obtain a valuation from two independent valuation firms.
According to the CNV Rules, the price – except in certain particular cases – may be paid in cash, implemented as a swap, or a combination of both. If the deal is private, the purchase price will be agreed between the parties.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
The CML grants minority shareholders certain exit rights in the event that a single shareholder or group of shareholders become a quasi-total controlling shareholders of a public company. On the other hand, it also provides for squeeze-out mechanisms in favour of such quasi-total control shareholder.
According to the CML quasi-total control means holding 95% or more of the company's share capital.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Please refer to question 2.4.
Any mandatory offer rules apply upon change of control, ensuring minority shareholders will not be prejudiced by the payment of any control premium or differential pricing for selected shareholders.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
Section 86 of the Capital Markets Law permits conditional offers, but the conditions should be to limited to factors that can be objectively verified. Conditions must be clearly described and highlighted in the offer prospectus. Prior to making the offer, the prospective buyer must submit before the CNV a guarantee that it will be able to honour the obligations resulting from the acceptance of the offer. Further, at the time of filing for authorisation of the offer, the board of the prospective buyer has to declare that it has the financial resources to honour the offer.
Therefore, it is yet to be seen what the CNV will consider as acceptable conditions in the future. We do not expect that absence of material adverse changes or truth of representations qualify as such, as normally such representations will be made by the controlling shareholder in a separate deal alien to the offer.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
Capital gains obtained by Argentine corporate entities derived from the sale, exchange or other disposition of shares are subject to a 35% tax on net income. Capital gains of Argentine resident individuals are subject to income tax at a 15% rate on net income, unless such securities: (i) were traded on an Argentine stock market approved by the CNV; and/or (ii) have public offering authorisation, in which case an exemption applies.
Stamp duty is levied on the formal execution of public or private instruments. Documents subject to stamp duty include, among others, all types of contracts, notarial deeds and promissory notes.
3.2 Are there special considerations in cross-border deals?
Foreign shareholders are subject to capital gains tax of 15% or 13.5%.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Defensive measures used in Argentina include: (i) provisions in the articles of incorporation restricting the transfer of shares; (ii) increased quorum and supermajority requirements for shareholders' meetings; and (iii) staggered-term boards.
Poison pills are rare. However, some listed companies have included specific change of control provisions on note issuances.
4.2 How do targets use anti-takeover defences?
Implementation of defensive strategies depends on the type of defence to be used. Many potential defences are decisions that require shareholder approval in any event, even if they are not implemented for defensive purposes (for instance, all measures that require by-law amendments).
Besides, under Argentine law, the board of directors is limited on the type of actions it can take to block a takeover bid, since the performance of the directors is limited to acting in the company's interest.
4.3 Is a target required to provide due diligence information to a potential bidder?
The target company is not required by law to provide due diligence information to any potential bidder. Moreover, confidentiality of non-public information must be protected by the target.
4.4 How do bidders overcome anti-takeover defenses?
As mentioned above, the main anti-takeover defence now consists in the mandatory tender offer required by the CML. So, a bidder would have to make the mandatory tender offer to takeover a local company. However, as mentioned above, in practice a bidder would first negotiate with the controlling shareholder.
4.5 Are there many examples of successful hostile acquisitions?
For the reasons discussed above, the answer is no.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
When a friendly deal is being negotiated, the parties usually execute a letter of intent or memorandum of understanding which includes a no-shop or other exclusivity clauses in order to prevent the potential seller from negotiating with third parties during a certain period of time.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
There are no specific limits, and the parties have the authority to decide and agree the terms and conditions of the transaction. Nevertheless, those terms cannot be abusive or generate any damages to the target company due to the lack of commitment in closing the transaction for causes not related with the deal itself.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
A transaction should be submitted to the Antitrust Commission for authorisation if the transaction is deemed an economic concentration under the Antitrust Law and the aggregate turnover of the companies involved in the transaction exceeds Ps200 million ($23 million) in Argentina.
6.2 When will transactions falling below those thresholds be investigated?
If a transaction does not meet the thresholds explained in 6.1, the Antitrust Commission does not have jurisdiction to review it.
6.3 Is an antitrust notification filing mandatory or voluntary?
Antitrust notification is mandatory where the thresholds explained in section 6.1 are met.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Notification shall be made prior to or within one week of the first to occur of: the date that any transfer effectively occurs; or, the publication of any cash tender or exchange offer.
If the parties do not comply with this requirement, they will be subject to a fine of up to Ps1 million for each day they fail to comply.
6.5 How long are the antitrust review periods?
The approval period can take from 24 up to 36 months counted from the filing.
6.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
If a transaction meets the notification criteria and is not reported, the Antitrust Commission can impose a penalty, even if it is a negligible transaction with no effects on the market.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Foreign ownership of local companies is not restricted, except when it involves certain rural land or real estate in the so-called security zones. In general terms, foreign bidders have the same rights as local bidders. Other regulatory approvals will depend on the type of industry the target is in. For example, acquisition of banking entities, or insurance companies, will be subject to the prior approval of their relevant regulatory agencies.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The Public Ethics Act, which amended the Criminal Code; Decree 164/99, which implemented and regulated Law 25188; and Decree 41/99, which approved the Ethics Code applicable to governmental duty.
Another important law containing anti-corruption elements is Law 25164 (the Public Employee Act) that governs several aspects of public employee labour law.
In addition to criminal laws, Argentina has a large set of administrative regulations dealing with public ethics, which addresses certain bribery-related matters.
7.2 What are the potential sanctions and how stringently have they been enforced?
The Argentine Criminal Code punishes those who, directly or indirectly, offer or give anything of value: (i) to a public official because they hold public office; (ii) to a public official in exchange for such official doing, delaying or refraining from doing something related to their public office; and (iii) to anyone in exchange for such person inappropriately using their influence on a public official.
The Criminal Code also sanctions bribery of foreign public officers by punishing those who offer or grant anything of value to a public official of another state (country) or of a public international organisation, for their own benefit or for the benefit of a third party, in exchange for acting or refraining from acting in an official capacity, or using their influence as a public official, in a matter related to an economic, commercial or financial transaction.
There is no corporate criminal liability set out by the Argentine legal system in regard to corruption; only individuals are subject to criminal anti-corruption law.
The Argentine Criminal Code sets out penalties for individuals involved in corruption crimes. These penalties include: (i) imprisonment ranging from one month to 12 years, depending on the crimes involved; (ii) debarment from public office, which could be perpetual.
Section 17 of the Public Ethics Law 25188 provides that administrative decisions or contracts issued or entered into by public officers that fall within the incompatibilities of article 13 will be null and void, and the contracting firms involved will be jointly and severally liable for damages caused to the state by those actions.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
More than anything else, the recent macroeconomic conditions in the country have affected the investment climate.
8.2 What are the key recent M&A developments in your jurisdiction?
The Argentine M&A market has been very active in certain sectors such as technology (in particular software development) and agrosciences. An Argentine tech company has recently launched its initial public offering in New York (Globant) and some others are in the same process at the time of writing. In late 2015, a new government will be elected. This might help improve interest in investment in Argentina and create more activity in other strategic areas such as infrastructure, energy, and traditional brick and mortar industries. The discovery of Vaca Muerta, one of the largest shale oil reserves in the world, will most likely help boost foreign investment in the oil sector.
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Pablo R Garcia Morillo
Marval O'Farrell & Mairal
About the author
Pablo R Garcia Morillo is one of the most senior and active partners in Marval's corporate/M&A department. He specialises in business and corporate law and his practice is focused on M&A and joint ventures. He has over 20 years' experience.
In the M&A area, he has been involved in many transactions, advising both buyers and sellers in the transfer of assets and shares, in both listed and unlisted companies. He has also advised on joint ventures between local and foreign companies. His recent transactions include advising US based children's nutrition company, Mead Johnson, when it acquired a majority stake in Argentine dairy producer SanCor's infant milk business.
He has published several articles on M&A and commercial law related matters in national and foreign legal publications. He has also taken part in national and international conferences on matters related to his areas of specialisation.
Diego S Krischcautzky
Marval O'Farrell & Mairal
About the author
Diego S Krischcautzky focusses on M&A and corporate work, including private equity and venture capital matters. He has broad experience in M&A transactions; structuring and financing of private equity investments; corporate governance; and, structuring of insurance products. He advises major international companies and investment funds.
Diego has handled a number of major transactions in recent years. He was involved in SABMiller's acquisition of Cervecería Argentina Sociedad Anónima Isenbeck and has led M&A deals for clients such as Globallogic, Grupo Moura and DLJ Merchant Banking Partners. Diego provides day-to-day corporate assistance to VF Corporation, Kraft Foods, DLJ South American Partners, Assurant Solutions, GlobalLogic, Marsh McLennan Companies, Suez Energy Latin America, L´Equipe Monteur, and NYK Logistics.