I OVERVIEW OF M&A ACTIVITY
In the past few years, deal volume decreased compared to previous years due to the slowdown in the Argentine economy and uncertainty regarding the economic policy that was implemented by the previous administration since 2003.
Following the presidential election, a new administration led by Mauricio Macri took office with the clear intent of shifting policy towards a pro-business model. Furthermore, the Argentine economy still benefits from reasonable, well-priced commodities (in particular, agricultural commodities), an educated workforce and a strong entrepreneurial community.
The political and economic changes since December 2015 have triggered a renewed interest among foreign investors looking for opportunities in Argentina. While this interest has not yet resulted in a clear trend of foreign investments coming into Argentina, it is certainly a sign of the shifting expectations of the business community.
In the past year, M&A activity showed substantially the same (low) level seen in prior years. As we discuss below, however, the general consensus is that this trend should change in the last quarter of 2016, when an increase in activity should be led by investments in certain specific areas.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
Public transactions in Argentina are very rare, because most Argentine public companies generally have a minority portion of their capital floating in the capital markets (between 10 and 30 per cent). Additionally, due to the nationalisation of private pension funds, which occurred in 2005, the national government became the major minority shareholder in most Argentine public companies.
As a result of the foregoing, most M&A activity in Argentina is undertaken through stock purchase agreements that generally follow international standards for private transactions. Those agreements can be subject to foreign law and jurisdiction (including foreign arbitration tribunals). This is generally the case in transactions for high-end Argentine companies.
The bulk transfer of assets is not very common in Argentina due to tax reasons (as further detailed below) that make such transfers generally tax-expensive, as the transfer of each asset is subject to a different array of taxes.
However, there are some aspects that will necessarily depend on and be governed by Argentine laws (e.g., matters relating to the consummation of transactions, certain matters covered by local securities regulations, labour laws, foreign exchange regulations).
In addition, the acquisition of a controlling stake in an Argentine public company requires the acquirer to launch a tender offer to all the minority shareholders in the target. A mandatory tender offer is not required when the acquisition of a ‘significant ownership’ does not entail acquiring the control of a company (i.e., more than 50 per cent of the voting securities or de facto control) or when a change of control occurs as a result of a merger or a spin-off.
The tender offer shall contemplate a fair value for the shares of the minority shareholders. To determine the fair value, one or more of the following elements shall be observed:
- a the net value of the shares;
- b the net value of the company, according to the discounted cash flow;
- c the liquidation value of the company;
- d the average market price of the share during the six-month period prior to the tender offer decision; or
- e the previously offered price in a sale purchase or a new shares issuance over the previous 12 months.
Corporate foreign shareholders must register at the Public Registry of Commerce to be able to hold shares of a company incorporated in Argentina. The foreign shareholder must submit certain corporate and accounting information to obtain the registration (it must also submit certain other documents every year to maintain the registration). Basically, the foreign shareholder will be required to evidence that – either directly or indirectly – it owns substantial assets outside Argentina. Offshore companies may be restricted, and companies incorporated in ‘tax havens’ are not accepted except under certain limited circumstances.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
There have been no major amendments in corporate and takeover law in recent years.
However, certain amendments to the foreign exchange regime are critical to the future development of the M&A market. In particular, the lifting of the ‘de facto’ prohibition to remit dividends or profits, or both, outside of Argentina – one of the first measures taken by the new government – has permitted a new wave of foreign investment in Argentina.
Additionally, as detailed below, Congress recently approved a law to eliminate the 10 per cent tax on dividends imposed pursuant to Law No. 26,893.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
As detailed above, in recent years foreign investment in Argentina has sharply decreased as a result of a high level of state intervention in the economy coupled with a shortage of foreign exchange, which resulted in the former government freezing all outflow of dollars out of Argentina. As a result, companies were not allowed to transfer dollars abroad (such as in the form of dividends, royalties, payments for services), and thus foreign investment was drastically reduced.
In such context, most M&A activity involving foreign investors was related to the exit of foreign investors from Argentine assets due to the economic difficulties or as a result of multinationals leaving the region (such as Citicorp’s decision to exit the retail business in Argentina and the sale by Deutsche Bank of its Argentine franchise). Such divesture was generally achieved through the sale to an Argentine group with deep roots in the country that was thus better prepared to navigate the Argentine economy.
Also due to this difficult economic climate, it was extremely difficult for Argentine companies to obtain financing for an expansion abroad. Thus, outbound foreign investment by Argentine companies was minimal.
Following the election of a more pro-business government in December 2015, foreign investor appetite in Argentina has increased dramatically, and we are now seeing a lot of interest in Argentina.
Due to the fact that Argentina has been so isolated in the past few years, the prices of the country’s assets are relatively cheap compared with assets in similar countries in the region. As a result, foreign hedge and private equity funds (PE funds) are trying to take advantage of this difference by being the first to invest under this new scenario.
The main foreign investors in Argentina are from the United States and Spain. In the past few years, we have also seen a lot of interest from investors from China, mainly in the oil and gas, minerals and agribusiness sectors.
There are no specific required approvals for foreign investments either through PE funds or other types of foreign investments (other than antitrust approval as detailed above).
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 by 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 either the control of, or a relevant portion of the shares of, a company operating in such industries. Investments in real estate may in certain cases require regulatory approval, and restrictions may apply for foreign entities or individuals.
These processes generally involve the filing of detailed information on the acquirer company, and various formalities (e.g., translations, legalisations, specific forms) will depend on the type of agency. The timing will also depend on the regulatory agency involved in the process (typically, this may take more than three months to complete).
Additionally, there are no restrictions on investments made by foreign individuals or corporations in Argentina (other than restrictions on investment in certain specific areas, such as TV stations, and airlines that operate internally in Argentina). However, there are restrictions that limit the amount of rural land that ‘foreigners’ are allowed to own in Argentina; such limit is today established as 1,000 hectares in the premium rural zone (such limit being increased in the case of poorer quality land).
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
As discussed previously, over the past 10 years M&A activity has been extremely modest in Argentina, both in terms of number of deals and deal volumes due to limited foreign direct investment (inbound). In contrast, over the same time period, many other countries in the region (in particular Brazil, Mexico, Colombia, Peru and Chile) have experienced an increased influx of foreign direct investment and a resulting increase in M&A activity.
As a result, the past few years have been marked by less sophisticated transactions, and deal amounts are far below the average in the region. Only a few transactions have come close to, or crossed, the US$1billion barrier (YPF, Telecom Argentina, Apache). Instead, most deals closed at a price below US$100 million.
To restore confidence in the (local and international) business community and attract investments, following the exit of the Kirchner administration in December 2015, the new Macri administration quickly addressed some of the most urgent economic and legal issues the Kirchner administration had either created or failed to address. Before completing six months in office, Macri, inter alia, ended more than 12 years of legal dispute with the holders of Argentine sovereign debt in default, put Argentina back into the international capital markets, eliminated taxes on certain exports, and eliminated several foreign exchange restrictions (including on the transfer of dividends to foreign parent companies). While it is expected that the deal flow in Argentina will increase significantly in the next few months, there is already a clear renewed interest in Argentine assets. Since the chance of Macri winning has became a serious possible outcome of the elections, we have seen steady growth in the number of deals closed over the past nine months.
In our experience, there is an increased appetite for renewable energy (incentivised by a new special law). PE funds have already closed some deals in this sector. One interesting example of this trend was the acquisition by PointArgentum (a special fund created by PointState to invest in Argentine assets) of a controlling stake in Genneia, a local wind farm company. The deal was very much dependent on existing power purchase agreements (PPAs) entered into with the national government, and the payment of the consideration was tied to the effectiveness of these PPAs over time.
We believe that a recovery in the oil prices should also trigger a renewed interest in oil and gas assets (including the (for now) somewhat-postponed shale oil and shale gas projects in Vaca Muerta).
The agribusiness sector also offers opportunities. (Commodities prices have been recovering in the past few months. In addition, the Macri administration may amend the existing law that blocks the purchase of land by non-Argentine investors). This sector is critical to the Argentine economy, as it will trigger a cascade effect on the industrial and services sectors (where deal volume remains modest).
The telecommunications and media sector have also experienced increased activity in the past few months: Telecom Italia finally got its approval for the sale of a controlling stake in Telecom Argentina to Fintech, a US PE fund. Grupo Clarin has announced its acquisition of Nextel (mobile phones), and local groups have acquired TV and radio stations from other local or foreign investors. As the system migrates to 4G, and to provide triple play to consumers, investments are needed in this sector.
There have been also investments in the logistics sector, such as Amancay Partners’ acquisition of Interbarge (a barge company operating on the Parana riverway, thereby connecting Paraguay, Brazil and Argentina with the Atlantic Ocean).
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Acquisition financing originated in Argentina is very limited and costly.
As a result, most foreign investors (such as PE funds operating in Argentina) usually obtain their funding from foreign investors, including a broad variety of foreign institutional investors, pension funds, banks, hedge funds, multilateral institutions and individuals. Some PE funds incorporated abroad but managed by Argentine managers obtain funding from local family offices, private individuals and some investment companies. Local banks, insurance companies and government agencies do not normally invest in PE funds, and there are currently no regulations to promote or provide incentives for this.
Because of the existing FX regulations and difficulties in accessing the financial markets, local portfolio companies are 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.
While interest under a debt has the advantage of being tax deductible, the current Argentine Central Bank FX regulations contemplate several conditions and requirements for financing by local companies. Loans to local companies must be reported to the Argentine Central Bank, and are subject to certain minimum repayment terms. However, in a bankruptcy proceeding, debt holders have preference over equity holders.
VII EMPLOYMENT LAW
In the case of an assignment of a business, all liabilities in relation to employees shall be transferred to the purchaser or successor. If an employee is seriously damaged by the assignment of a business, he or she has the possibility to consider him or herself in a position of constructive dismissal. The same applies in the case of the leasing or temporary assignment of a business.
The transferor and transferee (on any title) shall be jointly and severally liable for the obligations deriving from the labour relationships that exist at the time of the transfer or assignment of a business.
The transfer of personnel (without the establishment) shall only be carried out with the written consent of the affected employees.
The main effect of an assignment of a business is that the former employer is replaced by the purchaser or successor. It is not necessary that employees consent to such transfer.
A change of employer has effects with respect to all of the employment relationships that are in force, not only to those labour relationships that are currently being performed, but also to those labour relationships where the obligation to effectively render services has been temporarily suspended (e.g., where personnel are currently on holiday or on illness leave).
The purchaser or successor may not oppose an employee whose services were suspended for any reason at the moment of the assignment of a business, even if the purchaser or successor has not been informed by the previous employer of such suspension.
The labour conditions in force at the moment of the assignment of a business, such as the office, working hours and salaries, should be maintained by the purchaser or successor without prejudice to the legitimate right of the employer to modify such labour conditions in the future within the limits established by the applicable labour law.
Pursuant to the mandatory case law, the purchaser or successor of a business is liable for the transferor’s obligations that derive from employment relationships that were terminated before the transfer. This implies that the purchaser or successor of a business shall even be liable for the labour credits of previous employees that have worked for the transferor within the statute of limitations period, which for labour credits is two years.
Under the applicable law, an employee may consider him or herself to be in a situation of constructive dismissal if the assignment of a business causes serious damage to him or her – for example, if he or she was working for an economically sound company and, due to the assignment of the business, he or she has to start working for a markedly insolvent company. The sole fact of the assignment of a business to a purchaser or successor does not mean that the employee can automatically consider that he or she is subject to constructive dismissal.
In the case of the purchase of the stock of a corporation, there would be no assignment of a business, since the employer (the corporation) would continue to be the same no matter who the shareholders are.
According to the majority of local legal scholars, the transferor of a business does not assume any liability for the labour obligations of the purchaser or successor after the date of transfer. All liabilities with respect to employees shall be assigned to the purchaser or successor in interest.
VIII TAX LAW
Capital contributions are not subject to any tax in Argentina, as long as the company receiving such contribution is located in the City of Buenos Aires or a province that does not apply stamp tax (which some provinces do).
Holdings of shares issued by Argentine companies when the holder is a foreign resident are subject to a 0.5 per cent personal assets tax on their percentage net equity on 31 December every year. The Argentine company is liable for the tax, but it has a claim against the foreign shareholder for the amounts paid. Under recent National Supreme Court case law, branches of foreign companies are not subject to this tax.
Dividends distributed by Argentine companies to their foreign shareholders are subject to withholding tax at a rate of 10 per cent.
A bill recently approved by Congress provides for a reduction of the personal assets tax rate from 0.5 to 0.25 per cent, the abrogation of this tax as of 2019, and the abrogation of the 10 per cent withholding tax on dividends.
In a share deal, capital gains arising from the transfer of shares issued by an Argentine company (including redemption) are subject to a 15 per cent income tax, when made by a foreign resident. 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. Stamp tax on the share transfer agreement may be avoided through a letter offer agreement in most provinces.
Capital gains tax does not currently capture transfers of shares of entities above the direct shareholder, so it is customary to structure the acquisition through the incorporation of a foreign special purpose vehicle to hold the shares of the Argentine company.
Transfers of assets as a going concern are subject to various taxes depending on the asset. The transfer of all sorts of assets is subject to a 35 per cent income tax on any capital gain. The transfer of real estate is subject to stamp tax at a rate of around 4 per cent, depending on the province where the real estate is located; the tax is customarily shared (half by the seller, half by the purchaser). The transfer of fixed moveable assets is subject to VAT at a rate of 21 per cent (10.5 per cent on machinery and similar equipment). The transfer of inventory is subject to VAT at a rate of 21 per cent (10.5 per cent on some agricultural products) and to gross turnover tax (at a rate of around 3 per cent, but this depends on the province to which the tax basis is allocated). In all cases, the agreement is subject to stamp tax, but this may be avoided through a letter offer (with the exception of transfers of real estate and automobiles). As stated before, the tax is customarily shared by the seller and purchaser.
IX COMPETITION LAW
The Argentine Antitrust Law 25,156 requires that certain economic or business transactions (i.e., M&A) that exceed specified thresholds be filed for the approval of the Antirust Authority.
The transactions that are subject to review and approval are those detailed below in which the business volume of the companies (i.e., the target and the acquirer) exceeds, in the aggregate, 200 million pesos on an annual basis:
- a mergers;
- b bulk transfers of assets;
- c the purchase or acquisition of any equity interest or debt convertible into equity that provides the right to influence the decisions of the issuer thereof in a substantial way; and
- d other transactions that entail a ‘de facto’ transfer of control or that grant a dominant influence on the decisions of the target.
The following transactions are exempt from the review of and approval by the Antitrust Authority when, in each of the below cases, the amount of the transaction and the value of the assets located in Argentina that are being absorbed, acquired or transferred, or that are under control, do not exceed 20 million pesos, except if in the preceding 12 months transactions were made in such same market that, in the aggregate, exceed said amount, or 60 million pesos if the transactions were made in the preceding 36 months:
- a acquisitions of companies in which the buyer already holds more than 50 per cent of the stock;
- b acquisitions of bonds, debentures, non-voting shares or other debt instruments not otherwise subject to prior approval;
- c acquisitions of a single company by a non-Argentine company that does not own any assets or stock in other companies in Argentina (first landing exception); and
- d acquisitions of liquidated companies (that have not carried out business in Argentina during the past year).
Notice of any transaction subject to approval can be filed before the Antitrust Authority either before closing or within ‘one week’ from closing.
Economic concentrations that fall under the applicable thresholds shall only be recognised as effective among the parties and in relation to third parties upon their approval by the Antitrust Authority. In the event of doubts about whether the transaction must be reported, the parties may file a request for a ‘consultative opinion’, which suspends the term to notify the transaction until a final and non-appealable opinion is issued.
Currently, the approval process for simple transactions takes more than two years in Argentina. However, we expect such term might be reduced in the near future due to the new administration and thanks to expected amendments to the applicable laws.
Another expected change is the adjustment of the above-mentioned monetary thresholds, which may reasonably be raised.
As outlined above, the change of administration in December 2015 triggered a change in expectations that should translate into the renewed interest of foreign investors in Argentina.
The government has clearly indicated that one of its main goals is to attract foreign investment into Argentina. To such effect, it has reached an agreement with certain holdout funds that have in the past refused to enter into the restructuring of foreign exchange debt. The holdout agreement has opened the way for Argentina’s return to the world financial markets after almost 12 years’ absence. This milestone, together with other measures detailed above (such as the lifting of FX restrictions), has resulted in a much more friendly environment for foreign investment in Argentina.
Additionally, investment in infrastructure and energy is greatly needed, and to that effect the government has launched a public auction to construct projects to provide over 1,000MV of energy from renewable sources (mainly solar and wind).
Additionally, Vaca Muerta (one of the bigger reserves of unconventional oil and gas located in the province of Neuquen) has attracted a lot of attention of foreign investors, which have position themselves in the area and are waiting for pricing conditions to develop (it is expected that over 25 billion pesos of investment is needed for development).
Opportunities are also available in the agribusiness sector.
1 Santiago Daireaux and Fernando S Zoppi are partners at Pérez Alati, Grondona, Benites, Arntsen & Martínez de Hoz (h).