Corporate Governance in Argentina Corporations. Part 2: director´s duties, guarantees, insurance, and fees. Conflict of interests, transactions with the company and competitive activities
Following with our series of articles on Corporate Governance in Argentina Corporations, we will now deal with the board´s duties, guarantees, insurance, and fees, as well as with different acts and activities the directors must refrain from engaging in.
1. Directors’ duties
Director’s general fiduciary duties are set out by Article Number 59 of the General Companies Law Number 19,550 (Ley General de Sociedades or LGS by its Spanish acronym): they must perform their tasks loyally and with the diligence of good business people. Failing to meet these duties or infringing the law, the articles of association or by-laws, causing damages by fraud, abuse of authority or gross misconduct, make directors unlimited, jointly and severally liable vis-à-vis the company, its shareholders and third parties for the damages arising out of the relevant acts or omissions (LGS, Articles Number 59, and Article Number 274, first paragraph, specifically providing for corporations).
Nonetheless, the imputation of liability shall be made taking into consideration the individual performance when duties have been assigned on a personal basis by what is laid down in the articles of association, the bylaws, or decided by a shareholders meeting. In the latter case, the decision of the shareholders ´meeting, and the appointment of the persons who are to fill the positions must be registered in the Public Registry as a requirement for the application of the said individual liability (LGS, Article Number 274, second paragraph).
A director may exempt himself / herself from liability as long as he/she objects in writing to the resolution – and gives notice to the syndic if any – before his liability be reported to the board of directors, the syndic, the shareholders meeting, the competent authority or a judicial action be initiated (LGS, Article Number 274, last paragraph).
The liability of the directors and managers with respect to the corporation may be extinguished on approval of their performance, or through express resignation or transaction, resolved by the shareholders meeting, if such liability is not on account of the infringement of the law, the articles of association or by-laws and provided there were no opposition from five percent of the share capital, at least. The extinguishment shall be innefective in the case of bankruptcy (LGS, Article Number 275).
Further to the above, directors of public companies are subject to additional and tougher loyalty´s duties (Capital Markets Law Number 26,831 – Ley de Mercado de Capitales or LMC by its Spanish acronym -, Article Number 78).
Additional liabilities may befall under specific circumstances, such as those provided for in bankruptcy, criminal, tax, labor and social security, customs, antitrust, environmental, health laws, and case law.
2. Codes of conduct for public companies and certain regulated activities
The Argentine Securities Commission (Comisión Nacional de Valores) and the Argentine Central Bank (Banco Central de la República Argentina) have approved specific governance regulations for companies under their relevant supervision.
3. Guarantee and insurance
Directors of corporations must set up a guarantee consisting of bonds, public securities, or national or foreign currency deposited in financial entities or securities depository, to the order of the corporation, banking guarantees, surety insurances, or civil liability insurances in favor of the company. Under the jurisdiction of the Autonomous City of Buenos Aires, the amount of the guarantee shall be equal for each director, and altogether never below the 60% of the capital stock. In no case may the guarantee be higher than AR$ 50,000, or lower than AR$ 10,000, per each director (LGS, Article Number 256, and General Inspectorate of Justice´s General Resolution Nº 7/2015, Article Number 76).
Directors & Officers (D&O) liability insurance may be purchased, but such policies do not release the board´ s liabilities. Further, indemnity agreements may be entered into by and between directors and shareholders.
4. Board´s remuneration
The corporation´s by-laws may establish the remuneration of the board of directors; otherwise, it should be established by the annual general meeting or the supervising committee, where appropriate.
The maximum amount of fees which the members of the board of directors may receive under any heading, including salaries and other remunerations for the carrying out of technical or administrative tasks on a permanent basis, may not exceed 25% percent of the profits of the relevant fiscal year. This maximum amount is to be limited to five percent when dividends are not distributed to the shareholders and should be increased proportionally to the distribution until it reaches the limit when all the profits are distributed. For these purposes, the reduction of distribution of dividends arising from deducting the fees of the board of directors and the supervising committee shall not be taken into account. The remuneration´s cap may be exceeded when one or more directors perform special technical or administrative duties or functions, and provided the annual general meeting of shareholders approve of the excess as a special issue on the agenda (LGS, Article Number 261).
5. Conflict of interests, transactions with the company and competitive activities
As a derivation of the directors´ general fiduciary duties, any director having an interest contrary to that of the corporation must make this known to the board of directors – and to the syndics if any – and abstain from participating in the discussions, under pain of incurring in liability for the damages arising thereof (LGS, Article Number 272).
Directors may enter into contracts with the corporation as long as the transactions are related to the activity in which the company operates and always provided that they are closed at arm´s length (LGS, Article Number 271, first paragraph). Contracts not meeting said requirements may only be entered into after approval of the board of directors, or with the agreement of the syndics if the board´s quorum were not to exist. The shareholders meeting must be informed of these transactions (LGS, Article Number 271, second paragraph). Should the shareholders meeting disapprove of the transaction, the contract is void and the directors – or the syndics where appropriate- shall be unlimited, jointly and severally liable for the damages incurred by the company (LGS, Article Number 271, third and fourth paragraphs).
A director may not participate, for his/her account or that of third parties, in activities competing with those of the company, except with the express authorization of the shareholders annual meeting. Failing to comply with this duty make the director liable for the damages arising out of the competitive activity (LGS, Articles Number 273 and Number 59). The framework for the liability assessment will be given by the corporate´s purpose, and the activities effectively carried out by the company, even on a sporadic basis.
As to public companies, confidentiality and trading abstention duties are provided for under Article Number 102 of the Capital Market Law Number 26,831.
Mario E. Castro Sammartino
 See our publication “Corporate Governance in Argentina: corporations. Part 1: management body, appointment and removal directors and operation of the board”, on http://www.mondaq.com/article.asp?articleid=598910
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