Investments in Argentina – Legal framework
Investments in Argentina are likely to pick up renewed steam in the near future. A new administration took office in December 2015, putting and end to a 14-year period of strong state presence and populism and is strongly committed to reduce the intervention of the State over the economy and leave far more room for private initiatives and ventures. In line with this new business environment, we will review the legal environment for business in our country.
The following laws basically set the legal framework for investments in Argentina:
- The General Companies Law Number 19,550 (Ley General de Sociedades – LGS);
- The Capital Markets Law Nº 26,831 (Ley de Mercado de Capitales – LMC) and the regulations of the controlling authority, the National Securities and Exchange Commission (Comisión Nacional de Valores) for companies making public offering of their securities;
- The antitrust provisions contained in Law Number 25,156 (Ley de Defensa de la Competencia – LDC) if applicable to the transaction;
- Specific additional legal provisions for certain regulated industries, such as oil and gas, energy and media and broadcasting; and
- The Law on Transfer of Commercial and Industrial Establishments Number 11,867 (Ley de transmisión de establecimientos comerciales e industriales – LTECI) regulating transactions on going concerns.
Investments in Argentina may be carried out through different legal structures, such as: setting up a brand new subsidiary to start the business or conducting a merger and acquisition operation to purchase either a going concern (asset deal transaction) or the shares of an already existing and active company (stock deal transaction).
Choosing the most cost-effective and expeditious structure will depend on not only corporate considerations but also on tax schemes, exemptions and benefits, and assets of the target company, especially when acquiring an already existing ongoing business or company, being such acquisition either an asset deal transaction or a stock deal transaction.
As we have already dealt with how to set up a subsidiary company in Argentina, we invite the reader to visit the relevance entry (See our Guide to set up and maintain a company in Argentina on our Legal Blog and successive posts). Following, we will summarily analyze the differences between a stock deal transaction and an asset deal transaction.
Stock deal transaction
The key point to consider here is that the transfer of shares also passes on to the purchaser all the liabilities borne by the target company. Therefore, the due diligence must allow the purchaser to have reasonable assessments of the risks and liabilities. Whether such is the case and the issue of the potential hidden debts may be sufficiently addressed in the contractual documents with the relevant covenants, this way of structuring the deal is easier and less expensive that the asset deal transaction.
However and frequently when dealing with small and medium size targets, it may be difficult to reasonable assess contingencies. In these transactions and after conducting the due diligence, it is fairly common to find defective accounting and imperfect tax, labor and social security compliances. Addressing the purchaser’ s concerns in these situations will surely mean deferring the payment of a significant portion of the purchase price until the expiration of the statute of limitations or place in escrow such amount for the same period, which all make the transaction far less interesting for the seller. There is when the asset deal structure may present itself as a better alternative.
Asset deal transaction
Under Argentine law, the transfer of an ongoing business as a whole (comprehending its assets, goods, facilities, employees, tangible and intangible property like contracts, trademarks, trade names, patents, goodwill, etc.) is named transfer of a going concern and regulated by the LTECI.
Conducting the procedure governed by said law will release the purchaser of all tax and commercial liabilities the seller may have, save for labor and social security obligations. In this latter respect, under Argentine labor laws, the assignment of labor agreements makes seller and buyer jointly liable for all labor and social security obligations related to such employee relationships.
In future articles to be posted in our Legal Blog, we will cover the procedures and considerations to be weighed for both mergers and acquisitions transactions: the stock deal and the asset deal.
Mario Eduardo Castro Sammartino
For additional information on these or any other issues related to doing business in Argentina, please, sign up for our Legal Blog or contact us at any time. Our publications exclusively express the author´s opinion and do not purport to be legal counsel on any case. Should you need it, you must consult with your trusted lawyer.
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