Published on Wednesday, 27 July 2016
What are the most common types of private equity transactions in your jurisdiction?
In recent years, PE funds have been taking equity interests in closely held portfolio companies (rather than debt interests). The equity interest is usually acquired through corporate acquisitions of ordinary shares of corporations or quotas in a limited liability company. In a lesser degree, PE transactions involve the acquisition of a minority interest.
In our recent experience, joint ventures or acquisitions through preferred stock are less common.
Debt interest, on the other hand, is currently being used in lesser degree (due to – among other things – the scope of current foreign exchange (FX) regulations), although some transactions use mezzanine debt and convertible debt.
LBOs were frequent during the 1990s. However, these types of transactions are now rarely seen due to multiple reasons (including current FX regulations, limited access to credit and capital markets, certain legal uncertainties identified as a result of the LBOs that took place during the 1990s, etc).
What types of investors are most active (and what jurisdictions are they most commonly from) in the private equity market of your jurisdiction?
As discussed in prior replies, over the past 10 years the deal activity has been extremely modest in Argentina, both in terms of number of deals and deal volumes, due to the limited foreign direct investment (inbound). In contrast, over the same period of time, many other countries in the region experienced an increase influx of foreign direct investment and the resulting increase in the deal activity.
As a result of the above-mentioned situation, recent years have been marked by less sophisticated transactions and deal amounts far from the average in the region.
Following the exit of the Kirchner administration in December 2015, the new Administration led by Mauricio Macri quickly addressed some of the most urgent economic and legal issues the prior administration had not, to restore confidence in the (local and international) business community and attract investments. Before completing six months in office, Macri put an end to more than 12 years of legal dispute with the holders of Argentine sovereign debt in default, put back Argentine into the international capital markets, eliminated taxes on certain exports, eliminated several foreign exchange restrictions (including on the transfer of dividends to foreign parent companies), among others.
While it is expected that the deal flow will increase significantly in within the next few months, there is already a clear renewed interest for Argentine assets. There are attractive opportunities in medium-sized companies with growth potential and an established product or market that need funds to expand operations, develop new products or acquire related businesses (that is, mid-market companies in growing sectors with low entry pricing) and new sectors such as renewable energy.
Within the context described above, foreign PE funds are the most active players (including foreign funds managed by Argentine nationals). While these funds come typically mainly from the
What historically have been the main target industries and what trends were noticeable throughout 2015? What trends do you expect to see in the next 18 months?
Historically, PE investments have been diversified with a presence in a broad range of industries (such as retail, energy, communications, real estate, financial services, biotechnology, pharmacy, entertainment, technology, media, agribusiness, publishing, metallurgy, mechanic and electric material industries, food and beverages, transportation and logistics services, etc).
In recent years, PE investments have been focused on certain specific markets, such as:
Due to a decline in asset values and a willingness to sell by owners, PE investors may find attractive opportunities to invest in other areas. Most notably, it is expected an interesting flowof investment in the renewable energy sector.
Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of any such local funds? Have any begun to participate significantly in transactions out of their local jurisdiction?
Local private equity funds are medium-sized to small in comparison with foreign private equity funds. Private equity funds operating in
Private equity is not strictly regulated in
Accordingly, PE funds are generally structured as foreign limited partnerships (managed by a general partner). These partnerships usually create offshore special purpose vehicles (corporations) in certain jurisdictions that allow an efficient tax planning. Recently, the Argentine government has terminated double taxation treaties with
Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?
There are no PE funds listed in Argentina. If a PE fund intends to raise funds in Argentina through a public offering, it needs to register with the Argentine Securities Commission (CNV) as a registered issuer, either as a corporation or as a financial trust. As yet, no private equity funds have been created locally using these structures.
Some local conglomerates (holding companies) that are listed and organised as corporations resemble a private equity fund, but no locally formed funds have offered securities to the public in Argentina. In addition, there are no reform initiatives currently under discussion that would modify this scenario.
What are the main issues in connection with the liability of fund managers?
Given that there are no specific regulations applicable to PE funds and PE managers, general corporate regulations apply.
Under the Argentine companies’ law (ACL), company managers and directors have a duty of loyalty and diligence (owed to the shareholders, the portfolio company and, under certain circumstances, to the creditors of the portfolio company). The scope of this duty is not entirely clear under the ACL but authors and case law have helped to define the scope.
Managers and directors must:
According to ACL, managers and directors can be held liable if the following occur: (i) violations of law or by-laws, provided such violations cause damage or loss; and (ii) any other damage caused by fraud, abuse of authority or gross negligence.
Regulations do not expressly recognise the “business judgement rule” as a standard of liability. However, Argentine courts rarely impose liability on managers and directors simply for bad judgement, and tend to abstain from reviewing the substantive merits of a director’s conduct.
In addition to the duties mentioned above, managers and directors of public traded companies are also subject to the following duties: (i) duty of loyalty, (ii) duty of confidentiality; and (iii) duty to inform.
What are the main remuneration schemes and related features for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?
There are no specific schemes or major differences in the schemes applied in other jurisdictions. Generally, the managers will charges an annual management fee which varies depending on the type of industry and the investment made. The remuneration may also include a success fee for goals achieved.
Typically, the remuneration is agreed under management agreements governed by foreign laws.
Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.
There are no specific regulations on leveraged buyouts in Argentina. Therefore, general rules apply. In principle, this type of financial assistance is allowed under Argentine laws. However, in some cases local courts have ruled that these transactions can be challenged in bankruptcy or company reorganisation proceedings as they may be deemed detrimental to the rights of company creditors if:
What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?
See question 4.
Note that, pursuant to the ACL, local companies must have at least two shareholders. In principle, the companies’ registry of the City of
A recent (comprehensive) amendment to the Argentine civil and commercial codes, however, has introduced important changes that include a new type of corporation with just one shareholder.
Further, and in order to qualify as “direct investment” and benefit from a more flexible capital repatriation regime under the FX regulations, the minority shareholder usually owns at least 10 per cent of the share capital of the portfolio company.
In the case of corporate foreign shareholders, they must register at the IGJ in order to be able to hold shares of a company incorporate in
What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?
The majority of the board of directors (or similar corporate bodies) of local companies must be Argentine residents (ie, they must be domiciled in Argentina). All board members must have D&O insurance.
Local corporations must submit annual audited financial statements with the IGJ (this is not required for local limited liabilities companies). All companies registered with the IGJ must pay an annual fee, which is not significant.
By-laws amendments must be registered at IGJ. ACL requires a minimum number of shareholders’ and board of directors’ meeting each year. Transfer of shares of local corporations (or any lien thereon) is only registered in the stock ledger of the portfolio company; however, transfers of quotas of local limited liability companies (or any lien thereon) must be registered at the IGJ.
Under certain circumstances, notices calling for shareholders’ meetings do not need to be published in the Official Gazette or newspapers. The shareholders may be represented by attorneys-in-fact. Representatives of foreign shareholders must be registered at the IGJ.
If permitted by the by-laws of the portfolio company, meetings of the board of directors may be held by video-conference or other electronic means.
For publicly-held companies, there are certain additional corporate governance requirements to assure transparency (including independence requirements for certain board members and statutory auditors [syndics]). There is also a requirement of providing regular information to the securities regulator (Comisión Nacional de Valores).
Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?
Under Argentine corporate law, the liability of shareholders of local corporations (sociedades anónimas) and limited liability companies (sociedades de responsabilidad limitada) is limited to their subscribed shares or quotas, as applicable.
As in other jurisdictions, however, there are certain cases in which the corporate veil may be disregarded and, therefore, the shareholders may be held liable with all of their personal property.
Based on Section 54 of the ACL, Argentine courts may pierce the corporate veil of a corporation and hold some or all of its shareholders (or controlling entities) personally liable for the damages inflicted upon third parties. Courts may pierce the corporate veil of a corporation when its shareholders divert the corporate interest of the corporation for purposes of violating the law or for purposes of frustrating the rights of third parties. There are no specific rules to establish when the corporate veil will be pierced. Adequate proof of affirmative fraud or wrongdoing by the shareholders is usually required.
In Argentina, courts tend to pierce corporate veils in very extreme cases. Under Argentine corporate law, a corporation will in principle shield its shareholders from being personally liable for the corporation’s debts.
What are the most common minority protection rights, whether granted by operation of law or contractual agreement? Are there any special issues to be considered under the laws of your jurisdiction?
Typically, the protection rights are negotiated in the respective agreements (which are usually governed by foreign law in accordance with international industry standards).
The relationship between the investor and the fund is subject to international standard rules and the contractual protections sought are generally the same as those found in international transactions, namely: (i) protections regarding potential conflict of interests (outside activities, investment guidelines, investment opportunities and related-party transactions); (ii) rules on indemnification of general partners, (iii) management fees and expenses; and (iv) changes in general partners (withdrawal, removal and buyout of the general partner’s interest).
At the shareholder level, the protections are included both in the shareholders’ agreement (which is also usually regulated by foreign laws) and the by-laws of the portfolio company (to the extent permissible under local laws). The minority protection rights may include (depending on the size of the minority shareholding): (i) board representation; (ii) veto rights at the board and shareholders level; (iii) appointment of auditors and/or corporate counsel; (iv) appointment of key personnel; and (v) reporting duties/information rights. In addition, minority shareholders would typically request tag and drag-along rights, anti-dilution mechanism, and a right of first offer or right of first refusal. Local laws also provides for pre-emptive rights.
In the case of publicly held companies, under certain circumstances, the sale of a certain percentage of the public company will trigger a public offering of acquisition of shares with voting rights owned by the minority shareholders to assure that the minority shareholders obtain a fair price from their shares.
What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the availability, effectiveness or enforceability of exit arrangements that are commonly used in other jurisdictions? Have you seen a shift away from or towards certain exit strategies over the past year?
Usually, exits are carried out through trade sales. Although IPOs appear as an attractive exit strategy in other countries (including Latin American countries), in
The most typical form of exit is a trade sale to a strategic investor. The sale may eventually be carried out in an auction.
What are the key legal issues to be considered when appointing or replacing directors and officers?
Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.
As in any agreement that contains foreign elements, parties are free to choose any foreign law to govern the purchase and shareholders’ agreement, and to select the forum to submit any dispute they may have in the future (including in favour of an arbitral tribunal).
Generally, these agreements follow international standards and practices. However, there are some aspects that will necessarily depend on and will be governed by Argentine laws (such as, for example, matter relating to consummation of the transaction, certain matters covered by local securities regulations, labour laws, FX regulations, etc).
Furthermore, there are a few matters typically covered by a foreign law governed shareholders’ agreement that may not be consistent with local corporate laws (for example, certain restriction on the transfer of shares and the waiver of certain shareholders rights will not be permitted under Argentine corporate law). Accordingly, such provisions will not be enforceable locally (between the parties, however, the shareholders agreement may reflect a different agreed solution).
Although in many jurisdictions the portfolio company is a party to the shareholders’ agreement, such practice is not customary in Argentina because of certain court precedents pursuant to which such agreements among the shareholders are not binding on the portfolio company (the same way they cannot bind or be enforced upon other third party shareholders). Other than as discussed above, local laws do not impose any specific execution formalities; however, it is an accepted sound practice to notarise the signatures of the parties involved (as to identity and capacity).
Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?
Arbitration proceedings are currently the most common type of dispute resolution mechanism being used for these agreements. The arbitration tribunal or forum depends on the type of transaction (arbitration under ICC rules is still the most used). Specific local arbitration forums are also available and some of them are seen as efficient and effective (such as the arbitration tribunal of the Argentine Chamber of Commerce and the arbitration tribunal of the Buenos Aires Stock Exchange).
What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?
Most private equity funds operating in
As discussed above, PE funds are usually incorporated as foreign limited partnerships (managed by a general partner). These partnerships usually create offshore special purpose vehicles (corporations) in certain jurisdictions depending on tax issues (the Argentine government recently terminated treaties with
For foreign investors, this structure used to be tax exempt. Dividends and capital gains were not taxed in
Investment vehicles were often located in
Dividends or profits, as the case may be, distributed by Argentine companies and Argentine branches of foreign entities in excess of accumulated taxed profits of such company or branch shall be subject to a 35 per cent tax on such excess, in all cases. In addition, such dividends or profits shall be subject to a 10 per cent withholding tax when distributed to individuals, regardless of residence, and non-resident entities.
Capital gains arising from the transfer of shares or other types of equity in Argentine companies shall be subject to a 35per cent income tax if made by another Argentine company and to a 15 per cent income tax if made by an individual, regardless of residence, or a non-resident entity. In the case of a non resident entity, the transferor may opt to pay a 13.5 per cent on the transfer price. If both the transferor and the transferee are non-resident entities, the transferee is liable to pay the tax.
Because of the existing FX regulations and difficulties in accessing the financial markets, local portfolio companies are being funded mainly through capital contributions. Therefore, debt obtained from foreign sources is used in lesser degree; and local financing is available although it may not cover all the financial needs of the portfolio company.
Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?
The financing market for PE deals in Argentina is currently limited. The financing sources continue to be located outside Argentina.
While interest under a debt has the advantage of being tax deductible, the current Argentine Central Bank FX regulations contemplate some conditions and requirements for financing by local companies. Loans to local companies must be reported to the Argentine Central Bank. In certain minimum repayment terms. In certain circumstances, 30 per cent of the loan proceeds must also be held in a mandatory non-interest bearing deposit account for one year. However, in a bankruptcy proceeding, debt holders have preference over equity holders.
What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?
Effective as of 12 December 2012, companies that are either controlled or constitute subsidiaries or affiliates of listed companies may prepare their financial statements in accordance with IFRS. Otherwise, privately held companies must prepare their financial statement in accordance with Argentine GAAP. Listed companies, on the other hand, must prepare their financials in accordance with IRFS.
Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?
No, there are no disclosure, registration or licensing requirements affecting PE funds investments in particular, other than those which may apply depending on the type of portfolio company, activity and industry.
If a private equity fund intends to publicly offer an investment in the fund in Argentina, it must have a licence. Most private equity funds are created offshore and the fund’s promoter, principals and manager will not require a licence unless they plan to make a public offering of the funds securities or partnership interests in Argentina.
Similarly, if a private equity fund intends to raise funds in Argentina through a public offering, it needs to register with the CNV as a registered issuer, either as a corporation or as a financial trust. If a local private equity fund is formed as a financial trust it has a maximum duration of 30 years.
Finally, please note that there are no restrictions on investors in private equity funds.
Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.
Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?
As explained above, there are no specific required approvals for PE investments.
However, depending on the type of portfolio company, activity or industry, as a general rule, certain investments may be subject to prior (or, in some cases, subsequent) approval from different regulatory agencies.
In some regulated industries such as financial services, insurance, telecommunications, aviation, oil and gas, mining, utilities, companies and utilities, the approval of the applicable regulatory authority is necessary to transfer the control or a relevant portion of shares of the company operating in any such industries. Investments in real estate may in certain cases require regulatory approval and restriction may apply for foreign entities or individuals.
These processes generally involve the filing of detailed information on the acquirer company, and various formalities (eg, translations, legalisations, specific forms, etc) will depend on the type of agency. Timing will also depend on the regulatory agency involved in the process (typically, these may take more than three months to complete).
Please describe any antitrust approvals or other competition law requirements that may apply connection with private equity investments into your jurisdiction?
Antitrust Law No. 25,156 (as amended, the Antitrust Law) requires the prior review and approval by the antitrust authorities (the Antitrust Authorities) of certain economic or business concentrations that exceed a specified threshold.
The transactions subject to review and approval are the ones listed below, if the business volume of the companies involved (ie, the target company and the purchaser), on an annual basis, exceeds in the aggregate 200 million pesos in Argentina:
There are a number of exceptions available under the Antitrust Law (including the first landing exception) that exempt certain transactions from the general rule.
Notice of any of the transactions subject to prior review and approval must be filed with the Antitrust Authorities prior to their consummation or within one week from the earlier of the execution of the respective agreement, the publication of a tender offer or exchange offer or the actual acquisition of a controlling interest.
Although, the failure to obtain the required prior approval does not entail the imposition of penalties insofar the filing is made within the specified deadlines, by consummating the transaction without such approval, the parties assume the risk that the approval may be denied or conditioned, thus resulting in a need to divest totally or partially the acquired assets. Therefore, the parties usually decide to assume the mentioned, particularly when the likelihood of a conditioned approval or divestiture order is low.
In our experience, in relatively simple transactions, the approval process takes between 9 and 12 months. In more complex transactions the approval process may take 18 to 24 months.
Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle?
In Argentina, there are anti-money regulations that apply to different types of transactions. These apply to PE investments, among others. Corporate regulations require the disclosure of the identity of shareholders of investment vehicles (as described above) up to certain level. Generally, these regulations are the same that apply in an ordinary M&A transaction.
Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?
While there are no specific regulations aimed at PE investments in particular, in Argentina there are certain FX regulations that have an impact on PE deals.
Currently, the FX regulations include: (i) controls affecting exports of goods or services (mandatory repatriation); (ii) controls affecting the purchase of foreign currency in Argentina by Argentine residents or non-residents; (iii) controls affecting the transfer of funds abroad (which exclude the transfer of dividends) (iv) conditions to repay financial loans funded by foreign sources; (v) requirements to create a mandatory deposit for certain type of financial transactions; (vi) rules regarding capital contributions; (vii) payment of imports of goods, among others.
Given the abovementioned, the planning of a PE deal must take into account all these regulations to design an efficient structure that mitigates the effect of FX regulations during the entire investment life cycle (including the exit).
What are the basic tax issues affecting private equity investments in your jurisdiction?
There are no specific tax incentive schemes for investment in privately held companies. Companies are subject to a flat tax rate of 35 per cent. The tax exemptions from income tax for the sale of shares by individuals and non-residents have been recently abrogated through Law No. 26,893.
Dividends or profits, as the case may be, distributed by Argentine companies and Argentine branches of foreign entities in excess of accumulated taxed profits of such company or branch shall be subject to a 35 per cent tax on such excess, in all cases. In addition, such dividends or profits shall be subject to a 10 per cent withholding tax when distributed to individuals, regardless of residence, and non-resident entities. Capital gains arising from the transfer of shares or other types of equity in Argentine companies shall be subject to a 35 per cent income tax if made by another Argentine company and to a 15 per cent income tax if made by an individual, regardless of residence, or a non-resident entity. In the case of a non resident entity, the transferor may opt to pay a 13.5 per cent on the transfer price. If both the transferor and the transferee are non-resident entities, the transferee is liable to pay the tax.
What impact are recent and projected changes in macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?
As anticipated above, the change of administration in December 2015 will most likely trigger a change in expectations that should translate in a renovated interest by foreign investors in Argentina. It is expected that the next administration will be friendlier to foreign investments. There are attractive opportunities in medium-sized companies with growth potential and an established product or market that need funds to expand operations, develop new products or acquire related businesses (that is, mid-market companies in growing sectors with low entry pricing).
Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.
As discussed above, private equity is not strictly regulated in Argentina and lacks a specific regulatory framework. We do not believe this will change in the near future. Accordingly, there are no regulations (other than as described above) that have a specific impact on the PE field.
Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.
The recent amendment to the public offering regime may have an impact on PE investment made in listed companies and/or exists through IPO. As this is a very recent development, it is yet too early to measure the impact. Otherwise, the above replies cover other current trends.
Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.