Mergers and acquisitions in Argentina – Stock purchase agreements: preliminary negotiations and structuring of the transaction
In one of our previous articles, we have covered the basics of mergers and acquisitions in Argentina (see in our Legal Blog: Investments in Argentina – Legal framework, procedures and further issues to be considered by foreign investors). Following, we will explain the procedures to close a stock purchase transaction regarding mergers and acquisitions in Argentina.
Conditions to be a shareholder of an Argentine company
Under Argentine Law, foreign individuals and companies incorporated abroad are guaranteed the same rights than citizens and domestic companies. Except for few regulated activities and transactions, foreign individuals and companies may wholly own the shares of a domestic corporation.
As for foreign companies, a prior registration procedure before the Public Registry is mandatory to purchase stock shares of a company incorporated in Argentina (see in our Legal Blog our article Doing Business in Argentina Foreign Companies Previous Registration).
Structuring of the transaction
Term sheets, letters of intent and memorandums of understanding are usual practice in stock acquisition in Argentina. Lock-up and voting agreements may also by entered into and legally binding among the parties under Argentine law.
The new Civil and Commercial Code (Código Civil y Comercial de la Nación – CCCN), effective as of August 1, 2015, has introduced the regulation of preliminary negotiations (Articles Number 990 through 993). As a general principle, the parties have freedom to conduct preliminary negotiations and leave them at any time (Article Number 990). However, during such preliminary negotiations the parties must act in good faith not to unjustifiably frustrate them, even when no offer has been made (Article Number 991, first paragraph). The parties must also maintain confidentiality of the privileged information disclosed during preliminary negotiations (Article Number 992).
Letters of intent are expressly regulated by the CCCN, in Article Number 993, setting out that the instruments whereby one or all of the parties express their consent to negotiate on a certain basis, limited to matters related to a future contract, are to be construed restrictively and can only have a binding effect as an offer provided that they meet the relevant requirements (Article Number 993).
When drafting preliminary instruments under Argentine law, the parties should be aware of the CCCN´s provisions on partial agreements, to avoid entering into legally binding contracts. Pursuant to Article Number 982, the parties´ consent over the essential elements of a particular contract, executed with the appropriate formalities, conclude the agreement, which will be integrated with the supplementary provisions of the CCCN (first and second paragraph). However, if any doubt arises, the contract will not be deemed concluded (third paragraph); further, minutes or drafts will not be considered partial agreements (fourth paragraph).
Stock purchase agreements: usual content
No imperative or public order provision applies to these transactions under Argentine law. Therefore, the parties are free to agree on the representations, warranties and stipulations they consider appropriate.
Among others, the following provisions are normally found in the practice of stock purchases in mergers and acquisitions in Argentina:
1. Protection against hidden contingencies
To protect the buyer from potential undisclosed liabilities of the target company, the parties may agree on escrows, holdbacks or trusts.
The CCCN does not specifically regulate the escrow agreement. However, it is considered a warranty deposit agreement as regulated by the CCCN´s Chapter 11.
There are no specific regulations regarding holdbacks in Argentina. Complementing the stipulation of holdbacks and as protection for sellers regarding the payment of the withheld amount, it is customary to execute a pledge over the target company’s shares owned by buyer.
To cover from hidden liabilities, the parties may also set up a guarantee trusts, as regulated by Article Number 1,680 of the CCCN.
Regarding the duration of escrows, holdbacks and trusts, the statute of limitations of the different claims that the target company could be liable for should be thoroughly considered. The general statute of limitation term is five years (CCCN, Article Number 2,560). However, different terms apply to tax, labor, social security and other claims.
As actions the parties or the target company must comply with before or after closing, the parties may agree on any kind of covenants, which will be binding obligations under the general rules of Articles 724 and following of the CCCN.
The parties may stipulate on the liabilities and damages in case any party totally or partially defaults on the obligations assumed in the transaction documents. As a general background, under Argentine law, joint liability is not presumed and must be expressly agreed upon by the parties (CCCN, Article Number 828).
Mario Eduardo Castro Sammartino
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