The Mergers & Acquisitions Litigation Review: Argentina
In Argentina, there are two ways of acquiring a local company, namely the purchase of stock or assets. The choice between one or the other will depend upon the circumstances of the target company and on tax considerations.
There is no specific regulation as to the provisions of a share purchase agreement. Therefore, parties are free to negotiate and agree on its terms subject to general rules applicable to contracts under Argentine law.
The most relevant risk from the buy-side perspective is associated with hidden liabilities. Although this risk can be reasonably assessed and covered by appropriate representations, indemnities and guarantees in the stock purchase agreement, disputes arising from hidden liabilities should be anticipated, particularly tax and labour ones, first, because if parties have not included specific provisions addressing this issue, prevailing judicial doctrine states that the seller cannot be held responsible for such liabilities; and second, because regardless of what the parties have contractually foreseen, the occurrence of such a situation should also trigger a retrospective review of the conduct of the parties during the legal and accounting due diligence, in whose dynamics two opposing forces converge: the duty to provide all relevant information or documentation, at the expense of the seller, versus the duty to investigate the financial situation of the company whose controlling shareholding is intended to be purchased, at the expense of the acquirer, respectively.
On the other hand, the asset purchase option provides reasonable protection against past hidden liabilities through the procedure of sale of going concerns foreseen in the Law of Transfer of Going Concerns 11,867. This procedure basically consists of the announcement of the transfer in certain gazettes so creditors have the opportunity to oppose it unless they receive full payment of their credits or satisfactory guarantees of their cancellation. Lack of compliance with the described procedure does not affect the validity of the transaction but the buyer will be jointly responsible with the seller for the debts of the going concern up to the amount of the price. However, under this scenario, post-closing litigation is expected if creditors file oppositions.
Finally, shares of public companies may also be purchased in the stock market through a tender offer. This procedure is regulated by the Argentine Securities Commission. However, the relatively small number of companies listed in Argentine securities markets and the small percentage of its total number of shares being publicly traded makes this procedure only of interest to majority shareholders willing to purchase the remaining shares in ongoing private transactions.
Regarding M&A litigation, there is little volume of litigation, and commercial courts preside over these issues. The procedure applicable before most of the aforementioned courts is written and may involve any of the following stages: complaint, answer, defences to the complaint, counterclaim, evidence stage and final ruling.
The covid-19 pandemic has certainly had an impact on M&A litigation, since buyers have attempted to terminate merger or purchase agreements for deals signed before the pandemic but that had not yet closed by March 2020 or, from another perspective, sellers have responded by bringing actions to enforce the sales. The real impact on this M&A litigation may be seen in the coming years.
Legal and regulatory background
Merger and acquisition transactions are governed by the Argentine Civil and Commercial Code (CCC), the Argentine Commercial Companies Law No. 19,550 (ACCL) and the Argentine Capital Market Law No. 26,831 (CML). A set of rules enacted by the Argentine Securities Commission (CNV) complement the CML.
All publicly listed companies in Argentina are under the regulatory control of the CNV, so, if certain conditions are met, transactions require addressing mandatory tender offers to the shareholders of the public target entity (Sections 87, 88, 91 and 98 CML) and the CNV is entitled to object the purchase price if it does not comply with conditions set forth in Section 88. However, since there are few publicly listed companies in Argentina and the control is usually held by a small numbers of shareholders, the prospective buyer enters into private negotiation with the controlling shareholder. Minority shareholders have exit rights under the CML (Section 91) if a single shareholder or a group of shareholders become a quasi control shareholder of a public entity (i.e., holding 95 per cent or more of the company's share capital directly or indirectly).
If the CNV objects the transaction, parties are entitled to file an appeal before the Federal Court on Civil and Commercial matters.
In the case of private companies, M&A transactions are governed by the CCC and the ACCL. Parties enter into negotiations through a letter of intent, which sets forth the contractual terms of the intended sale. Letters of intent are non-binding under the CCL (except as to exclusivity and confidentiality provisions). If any conflict arises from breach of contract or violation of these clauses, commercial courts are competent, unless the parties have agreed to an arbitration clause.
From an antitrust perspective, M&A may fall under the scope of the Competition Act, (Law No. 27,442) if certain conditions are met.2 Parties to a transaction have the right to judicial review of decisions by the Antitrust Commission blocking the transaction or imposing a sanction. As is the case with all regulatory agencies in Argentina, judicial review is unrestricted in scope if a penalty is imposed.3
i Common claims and procedure
As stated above, due to the fact that M&A transactions are not public and require approval at the shareholders 'meeting, there has been limited development in M&A litigation in Argentina compared to the United States or the United Kingdom.
Under the ACCL, an ordinary shareholders' meeting agenda should include the discussion and approval of the financial statements, the appointment of directors and their fees and the payment of dividends, while all other business (e.g., amendment of by-laws, mergers and acquisitions) must be transacted at extraordinary shareholders' meetings.
Shareholders are entitled to file a liability action against directors. Corporate action against the directors must be previously adopted by the shareholders' meeting, even in the event it does not appear on the agenda, provided that it is a direct consequence of the resolution of the matter included in it and even if it is promoted by the director.
Directors and officers are jointly and severally liable without limitation to the company, the shareholders and third parties in the event of qualified malperformance of their duties or infringement of the law or the articles of association or by-laws of the company, and for any other damage caused by fraud, abuse of authority or serious fault.
Directors are thus expected to act with loyalty and under the good businessperson diligence standard. Such duty to act diligently is not a guarantee of good results in their tenure but a standard of performance with best efforts to fulfil the corporate purpose as per the circumstances of time, mode and place. Directors and officers must give preference without exception to the company's corporate interest and the common interest of the shareholders over any other interest.
Additionally, to find the director liable, the court shall verify the existence of other general conditions of civil responsibility: unlawful behaviour (through action or omission); wilful misconduct or negligence; damages; and adequate causal relationship between the unlawful behaviour and the damage.4
In corporate matters, the existence of pecuniary damage can only be predicated either as consequential damage, loss of profit or loss of chances, excluding moral damage. There shall be no basis for legal action if the company does not suffer any damage.5
The judicial procedure for the purpose of determining a director's liability corresponds to a commercial court through what is known in the Argentinean judicial system as ordinary proceedings. The process is written and is conducted by a judge. The typical time frame for a first-instance judgment is three to five years.
Corporate directors and officers owe the corporations they serve the fiduciary duties of loyalty and due care. A violation of the duty of loyalty would allow the filing of liability actions by the prejudiced parties. Not only would the liability action arise with regard to the corporation but also to the shareholders and third parties (creditors). Thus, the parties are entitled to seek compensation from directors.
The ACCL rules several actions to determine directors' liability.6 Section 276 of the ACCL sets forth that these actions, which can be exercised by the corporation, are aimed at compensating damage caused to the corporation. The appropriate action shall be decided by the shareholders' meeting,7 even when said decision has not been included in the agenda, as long as it is the direct result of the decision of any matter included therein. The action can be filed even when the company is under winding-up proceedings.8
In addition, any shareholder may file this action if the company fails to bring the action after three months as from the shareholders' meeting decision to file the legal claim, without detriment to the liability arising from the failure to comply with the decision.9
Although the ACCL does not foresee derivative actions as established by UK and US law, scholars understand that there are similarities between derivative actions and individual corporate actions.10 The scope of this action is not limited to the plaintiff's concerns as it is filed in the interest of the company.11
Finally, shareholders or third parties are entitled to seek compensation for individual damage suffered on their assets by filing an individual liability action as provided by Section 279 ACCL. Therefore, this action is absolutely independent of the corporate action of liability.
This individual action refers to damage suffered personally or as a member of a class of shares (that is, it is not damage suffered indirectly, as part of the greater damage suffered by the company and of the same nature as that of all the other shareholders).12 Thus, the damage is a result of the malicious conduct of the director that induced him or her to buy or sell his or her shares (false balance, false information, among other things), or a delay in registering the transfer of shares (Section 215), which subjects those actions to prosecution of the seller's creditors or prevents him or her from exercising the right of Section 194 (the pre-emptive right, etc.) or, in general, for the violation of any of the individual rights of the shareholder that correspond to him or her by law, the company by-laws or regulations.
There are no limits to the directors' extent of liability, other than the damage proved by the company or a third-party claimant (e.g., a shareholder). Directors found liable shall indemnify all damage proved in trial, without any limitation. This is a general principle foreseen in the CCC.13
The approval by the shareholders' meeting of the performance of the directors during a fiscal year or during their tenure, or the express waiver of the directors' liability approved by the shareholders' meeting, shall extinguish any corporate action for directors' liability if such liability is not due to a violation of the law or by-laws and absent an opposition or challenge by shareholders representing at least 5 per cent of the corporate capital. However, shareholders shall still be individually entitled to sue the directors, although the scope of the action shall be limited to their personal interests.
Directors may also be exempted from liability arising from a decision of the board of directors if they have declared in writing their opposition thereto and notified the statutory supervisor of such circumstances.
Courts have decided that the fact that the director recognises that he or she was not aware of the misconduct could be considered as evidence of his or her lack of due care.14 Thus, liability arises unless the director adopts concrete actions for the misconduct to cease, according to his or her possibilities.15 Directors' duties include compliance with the laws (e.g., labour laws), payment of taxes, fulfilment of the obligations based on good faith, and so forth.16
Accordingly, directors can be exempted from liability only if they have acted with due care.17
Section 159 of the CCC and Section 59 of the ACCL foresee that directors shall act with loyalty and diligence.
In this context, the business judgment rule grants protection to directors and officers. This standard implies that a director should be capable and should have adequate knowledge of the business,18 but also vests directors with more freedom when adopting decisions when an unavoidable business risk is involved.19 Neither the general negative economic situation nor financial difficulties were acceptable as defences for the negligent administration of the company.20
To verify whether the director's behaviour complies with these standards, the following circumstances should be considered:
- the size of the company;
- the corporate purpose;21
- the general and specific functions assigned to the director; and
- the facts surrounding his or her performance and how his or her duty of diligence was complied with.22
Therefore, directors are deemed to have complied with their duties if they prove to have acted prudently and with due care.23
Directors' and officers' insurance policies are valid under the Insurance Law. Wilful misconduct is not generally covered.
iv Advisers and third parties
Advisers are unlikely to be held liable for pre-contractual misrepresentation, misleading statements or similar matters. However, to impose civil liability for an act or omission over any subject, Argentine law requires the existence of an unlawful behaviour; damage; an adequate causal relationship between the unlawful behaviour and the damage; and wilful misconduct or negligence.
v Class and collective actions
A class action arises 'if the parties who have a direct claim against a corporation are too numerous to be joined in a direct action'.24
Class actions in Argentina do not have a particular and comprehensive regime, but are unsystematically foreseen in diverse rules, such as Section 43 of the Argentine Constitution, Section 30 of the General Environmental Act and Sections 52–58 of the Consumers Protection Act, which set forth procedural rules regarding consumers' class actions.
Said actions are conducted under fast-track proceedings unless any of the parties request the implementation of an ordinary trial grounded on the complexity of the matter.
Although class actions on commercial matters have increasingly developed in the past decade in Argentina, they have mainly involved consumer protection and environmental cases.
There are no public records of cases involving class or collective actions against transactions.
vi Insurance and indemnification
It is unusual for eventual post-closing disputes between shareholders resulting from an M&A transaction to be covered by insurance.
Instead, contractual coverage mechanisms such as indemnity clauses are widely extended, especially when the transaction involves the transfer of share control.25 These clauses work as true civil liability insurances26 intended for the seller of the shares to keep the buyer's assets immune if any of the assumptions included in their scope occur.
The inclusion of indemnity clauses and the thoroughness and clarity of their terms are key issues in M&A transactions under Argentine law as they do not have legal reception. Therefore, what the parties agree and reflect in the literality of their terms prevails in their interpretation and application. For this reason, what is not expressly foreseen as achieved in their scope will remain outside their coverage and, if their wording is ambiguous or obscure, they are interpreted against the party that wrote them.
The practical issues that indemnity clauses normally include refer to:
- the events that may be subject to compensation;27
- the specific items to be compensated;28
- who will be its beneficiaries and obligated;29
- the temporal30 or patrimonial31 limitations, or both, to the seller's liability;
- the procedure to be observed for its execution; and
- its combination with clauses that ensure effective compliance with the indemnity.32
Given the purpose for which they are established, the breach of an indemnity provided by the seller inevitably leads to litigation if it is not possible to reach an amicable solution.
Argentine law does not set forth specific rules for settlement agreements related to shareholder claims; nor is there much case law on the matter. For this reason, the general rules contemplated in Sections 1641–1648 of the CCC and the specific sections of the local procedural codes of the City of Buenos Aires and of each province are taken into account.
Such agreements are admitted in conflicts between shareholders insofar as they do not deal with matters of public order or inalienable rights. They must necessarily be made in writing and only take effect from their presentation in the judicial file. Until then, they can be withdrawn by either party.
Filing of the agreement before the court produces res judicata effects with no need of court approval. Once filed, the litigation ends with the scope agreed by the parties.
i Common claims and procedure
Under Argentine law, most of the claims between the contracting parties occur after closing and relate to:
- breach of the seller's representations and warranties;
- violation of non-compete duties;33
- effectiveness of the indemnities and complementary guarantees granted to the buyer;
- adjustment of the price according to the agreed mechanisms;34
- the appearance of hidden or contingent liabilities;35
- breach of the eviction guarantee by the seller;
- the existence of manoeuvres by the seller of the management of the target company to artificially increase the price of the transaction; and
- in general, the breach of post-closing obligations by the obligated party (e.g., delivery of the stock certificates, registration of the deal in the pertinent registries).36
As Argentine law does not regulate the merger or acquisition contract of companies but rather its requirements and corporate effects, contractual provisions are highly relevant in local practice. Therefore, any eventual post M&A litigation will be governed essentially by what the parties agreed and, as far as applicable, by the general rules of law or those more specifically related to the business in question and the conflict raised.
Consequently, it is customary to maximise diligence and care to determine meticulously under what circumstances and assumptions each party will respond or, alternatively, will be released from liability in the event of any of these eventualities, once the transaction is concluded. It is given that these clauses are of restrictive interpretation and application so that in the case of conflict their scope will be weighted in a limited way to what was expressly provided,37 with no margin for extensive or analogical interpretations to unforeseen cases,38 except that the clauses at stake had been established in a broad and comprehensive manner.39
In this context, the inclusion of indemnity clauses to remedy the consequences that these conflicts could generate is an unavoidable practice. These warranties are usually agreed for specific terms (generally, 12 to 24 months from the closing date) and are triggered by claims from third parties or direct claims from the parties raised during the validity of the warranties. Another common alternative is the inclusion of clauses allowing part of the price to be withheld to set off the agreed compensation and even to determine the restitution of part of the price.40 This is a relevant issue because in the case of conflicts arising, the content of the clauses at stake will be the main source of consultation by the court to unravel the intention of the parties for their resolution.
Another relevant issue to be taken into account regarding potential post-closing conflicts is the significance or relevance of the contingency to determine whether it constitutes a compensable event in accordance with the agreed contractual provisions. Depending on what such provisions establish, the materialisation of a non-significant or irrelevant contingency could entail a limit in the assumption and distribution of patrimonial risks between the parties. Although there is no specific regulation on this issue either, in practice, certain comparative standards are usually established to determine whether the contingency raised is significant or not. The most common are:
- the liability recorded in the financial statements of the target company at the closing date;
- the price paid; and
- the liability originated during the year immediately following the closing in which the company was already managed by the acquirer.
As a general criterion, the demonstration that the event materialised after closing constitutes a contingency borne by the seller and is therefore covered by the warranties granted in the contract corresponds to the buyer under the legal principle that the party who alleges must prove.41
Just as there is no specific legal regulation related to M&A litigation, under Argentine law there are no specific remedies applicable to such conflicts between the parties to the transaction. Therefore, the provisions of the agreement regarding the possible occurrence of conflicts and the way to resolve them are essential to arbitrate efficient mechanisms for the resolution of the dispute in terms of time and money.
It is usual that dispute resolution clauses set forth an initial instance of amicable resolution of the conflict generally through private conversations for a specified time limit of 30 days.
In absence of an agreement or even if the private amicable conversations stage was not foreseen, it is practical to foresee the jurisdiction before which the conflict will be heard as being either the judiciary or some arbitration court.
If parties opt for the judiciary, it is customary to agree on the jurisdiction of the courts located in the capital of the province to which both parties or one of them belong, or in which the contract was entered into. In the City of Buenos Aires, where the most relevant M&A transactions are held, it is usual to establish the jurisdiction of commercial courts of that city, which is even possible if the parties have their domiciles in other jurisdictions or if the contract was concluded in another province.
Within the City of Buenos Aires, a mediation stage must be exhausted prior to filing the claim.42 The process is flexible and confidential, and mediators' fees are relatively low.43 In the case of reaching an agreement, it will have the same effect as a judicial ruling passed as res judicata. If an agreement is not reached, the judicial process becomes available.
In the City of Buenos Aires,44 the remedy available to enforce civil and commercial liabilities45 derived from an M&A transaction is provided for in the National Civil and Commercial Procedural Code (NCCPC) and consists of an ordinary action that will be carried out through a written procedure.46
In Argentina, there is not a stage similar to the discovery of American law that involves compulsory disclosure, at a party's request, of information or documentation related to the litigation, performance of interrogatories, requests for production of documents and depositions, etc. In contrast, the admissibility of evidence is discussed once the judicial process has started and not at a previous stage.
However, in this type of conflict it is common for the parties to try to pre-constitute evidence before entering the process by two different means – preliminary investigations and the anticipated proof.
Preliminary investigations give both parties the opportunity to obtain the information needed for the claim or response without which the process could not take place.
Anticipated proof is only admitted if the requesting party proves that there are justified reasons to believe that it will be impossible or very difficult to produce said evidence during the litigation.
Finally, parties may make use of interim measures both before or after a claim is filed to protect a party's assets, rights or proof when there is a reasonable doubt about the possibility of said means of proof to be able and undamaged at the moment when the production of the rest of the evidence shall take place. They are usually granted without prior involvement and participation of the counterparty.47
The process of enforcing post-M&A claims is developed in three main stages. The first consists of the filing of the claim and its answer where the defendant can pose prior defences; a second stage of production of the evidence and pleading; and a third stage, which is the judgment.
M&A disputes are usually very complex and therefore slow, especially in a written process, so it usually takes between five and seven years to obtain a final ruling from the court of appeals passed as res judicata.
If an extraordinary appeal is filed and the case is taken by the National Supreme Court to resolve, three more years could elapse since this tribunal does not have a legal term to resolve. For this reason, cases that come to their stands tend to stay there for an extremely long time.
Under Argentine law there are no specific defences in post-M&A claims between the parties to the deal but all defences based on the circumstances of the case are admitted.
These defences can be grounded on the merits of the case or on formal issues (i.e. lack of jurisdiction, lack of legal standing, among other things). Substantial defences deal with the substantive issues of the conflict, so they vary according to the circumstances of each case. They must be filed when answering the complaint, for which there is a period of 15 business days from the service of the lawsuit. The documentary evidence must be accompanied with the written answer to the claim and all other evidence must be offered.
These defences are also applicable in arbitrations to the extent that the applicable regulations refer to Argentine procedural law.48
It is usual in Argentine corporate practice that M&A agreements set forth arbitration rather than court proceedings for reasons of confidentiality, costs and time. Indeed, arbitration proceedings are, in general, confidential while court trials are not, so that the information provided in the file about the transaction, the conflict itself and the parties can be easily known by third parties. In the same way, arbitration processes tend to be faster and generally cheaper than court proceedings since the general practice is that the award is final and therefore not appealable.49 Likewise, the arbitration procedure has the advantage that parties can choose the arbitrators, which allows the use of professionals specialised in the subject matter to be discussed.
Arbitration clauses are enforceable and respected by local courts. According to the CCC50 and the NCCPC,51 only those matters that are eligible for settlement between the parties can be submitted to arbitration proceedings. Depending on the magnitude of the conflict, arbitrations are usually agreed under the regulations of the International Chamber of Commerce (ICC) or the UNCITRAL rules (the latter concerning ad hoc arbitrations, the former administrated ones). There are also several permanent arbitration tribunals applying their own procedural rules with the capacity to issue awards.
Likewise, Argentine law accepts the formation of ad hoc arbitration courts, which may be appointed before or after a claim is filed before judicial courts. The applicable proceedings and the matters to be settled by such arbitration courts are decided by the parties through arbitration agreements.
In July 2018, Argentina enacted Law No. 27,449 on International Commercial Arbitration. From then until now, many of the M&A agreements have contemplated the application of their provisions in the event of a dispute to be resolved under Argentine law. In substance, this Law incorporates the contents of the Model Law on International Commercial Arbitration adopted by the United Nations Commission for International Trade Law.
v Enforcement of foreign judgments and awards
Argentina is party to the Convention on the Recognition and Enforcement of Arbitral Awards 1958 (New York Convention) (Law No. 23,619) and of the Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitral Awards 1979 (Montevideo Convention) (Law No. 22,921). Argentine procedural law allows for the enforcement of judgments issued by foreign courts including arbitration tribunals. Therefore, this issue is also contemplated in most M&A agreements regarding potential conflicts abroad which judgment or award must be enforced in Argentina. Depending on the applicable treaty or law, the enforcement procedure could last from six months to one year.
According to Argentine law, parties executing an agreement are entitled to choose the law applicable to said relationship, but to choose a foreign law the agreement must have an international connection (the parties' domiciles, the place of performance of the obligations under the agreement, the place of execution of the agreement, etc.).
Based on this principle, in Argentine corporate practice it is usual for M&A operations involving some international component to agree to the application of foreign law and the jurisdiction of foreign judicial or arbitration courts, generally in the state of New York.
If no such provisions are made, the CCC establishes that contracts are ruled by the laws in force at the place where the contract was signed. This statement is only applicable to agreements that do not define a specific location for their execution. The parties' right to select the law applicable to a contract is only limited by international public order provisions.
Argentine law specifically rejects the application of foreign laws when they are contrary to public order or criminal law, freedom of worship or morality, or when their application is contrary to the principles of Argentine law, related to rules that establish arbitrary privileges, or if foreign laws are more restrictive than local laws as to the validity of a given legal act.
As for the choice of jurisdiction, Argentine law foresees two situations:
- if the contract is to be executed in Argentina, even when the debtor is not domiciled therein, the contract can be adjudicated before an Argentine judge; and
- if the contract is to be executed in another country and the debtor is domiciled in Argentina, the creditor can sue the debtor either in Argentina or in the place where the contract was executed, even if the debtor is not located there.
Year in review
The covid-19 pandemic has certainly had an impact on M&A litigation, since buyers have attempted to terminate merger or purchase agreements for deals signed before the pandemic but that had not yet closed by March 2020 (and as a consequence thereof may have alleged the disruptive impact caused by covid-19 or, from another perspective, sellers have responded by bringing actions to enforce the sales.
Legal scholars52 and recent case law have stated that the covid-19 pandemic constitutes a force majeure event. Force majeure and hardship may be thus invoked in the case of unforeseen events that make performance impossible or impracticable (force majeure) or that substantially affect the economic balance of the contract (hardship). In the first case, the party successfully invoking force majeure will be relieved from performance while in the second case the party subject to hardship will be entitled to renegotiate the contract.
In light of this change of circumstances and based on the bona fide principle governing Argentine Contract Law, parties are required to exercise good faith efforts to amend or modify the contract to neutralise or at least diminish the effects of force majeure and then avoid any abusive exercise of law.53 In this context, the proactivity of the parties to negotiate and adopt measures to mitigate the losses arising out of the pandemic before taking the matter to arbitration or litigation is vital to determine the chances of success of such claim (the more a party resists reaching a negotiated solution, the less the chances of having a successful claim before a court or arbitration tribunal).
Under this scenario, and based on the economic crisis experienced by Argentina in 2001, legal scholars agree that courts shall apply the shared efforts theory. This criterion is inspired in justice and equity and requires parties to renegotiate the terms of the contract in order to share the efforts, and distribute losses and the negative consequences of the crisis so as to mitigate the effects of the crisis on the aggrieved party.54
Therefore, although there are not yet relevant precedents from the courts regarding this issue, legal scholars conclude that it is probable that the existing disputes arising from the economic crisis generated by the covid-19 pandemic should be resolved by applying the shared efforts theory as it occurred in the past.
Outlook and conclusions
As a result of the serious consequences that the isolation measures decreed by the government had on the local economy, the Argentine legislative agenda is essentially focused on establishing measures that allow the reactivation of economic activity. Consequently, no significant change is expected in the general regime described applicable to M&A litigation.
Given the prolonged situation of isolation that has taken place in Argentina for the past 15 months (and which has not concluded at the time of writing), parties entering into negotiations (both on the buy-side and on the sell-side) may be cautious when drafting and negotiating transaction agreements in order to foresee any adverse effect that may be caused by the pandemic and distribute and assign risks.
This situation has created new challenges for the parties and their corporate lawyers to implement specific risk assumption clauses or hardship clauses in preliminary negotiations in order to prevent future litigation. Under this scenario, defences like impossibility, impracticability or frustration of purpose may be unlikely to succeed in court where sophisticated contracting parties have affirmatively allocated risk through negotiated provisions relating to closing conditions and termination rights.
At a procedural level, video-conference and virtual data rooms have become standard protocols for deal making and litigation. Commercial courts have implemented remote hearings and electronic security measures to corroborate the authenticity of documents. These virtual conferences have proven not only workable but extremely efficient, so we expect their continuance in the future.
1 Martín Torres Girotti is a partner and Melisa Romero is a senior associate at Bomchil.
2 Section 7 of the Competition Act provides for the mandatory notification of certain economic concentrations within a period of seven calendar days. Section 9 of the Competition Act provides that acts of concentration shall only produce effects between the parties or with regard to third parties once the provisions of Sections 14 and 15, as appropriate, are complied with. Concentrations falling under the aforementioned scope are subject to review by the administrative authority prior to the date of conclusion of the agreement or the acquisition of a controlling participation, whichever happens first. An economic concentration is understood as the acquisition of control over one or more enterprises through any of the following acts:
- a mergers;
- b transfers of going concerns;
- c the acquisition of ownership or any right over shares or capital participations or debt instruments of any type granting rights to be converted into shares or capital participations or to have any type of influence over the decisions of the issuer when such acquisition grants the acquirer control or substantial influence over them;
- d any other act or agreement transferring de facto or de jure to a person or economic group the assets of a company or granting them a determining influence in the passing of decisions of the ordinary or extraordinary administration of a company; and
- e any of the acts or agreements identified under item (c) entailing the acquisition of substantial influence over the competitive strategy of an undertaking.
3 An appeal can be submitted before the Antitrust Commission within 15 business days and, once the decision is appealed, the competent court in the City of Buenos Aires is the Federal Court on Civil and Commercial matters (Law No. 27,442 set forth the creation of a specialised Antitrust Chamber within this Federal Court, but it has not been created), while in the case of the provinces, the corresponding federal appellate court will review the decision.
4 National Court of Appeals on Commercial Matters (NCACM), Chamber E, Industrias Record SA v. Calvo, Marta (2000-IV) JA, síntesis; Chamber A Eledar SA v. Serer, Jorge A (1999-B) LL, 123; NCCA, Chamber B, Mourín, Jose L v. Editorial Molina SA y otros (1995) 162 ED, 436.
5 NCACM, Chamber A, Flor de Lis SA v. Guarneri, Juan y otro (2000-I) JA, 584.
6 E Zaldívar et al., Cuadernos de derecho societario (Buenos Aires: Abeledo-Perrot, 1976), 532–534.
7 However, courts have held that the shareholders' meeting decision prior to filing the action is not required when it will have no practical effects, thus delaying the conflict. NCACM, Chamber B, Forns, Eduardo A v. Uantú SA y otros (2003-IV) JA, 897.
8 Nissen, Ricardo, Ley de Sociedades Comerciales, vol. 4, 2nd edn (Buenos Aires: Abaco, 1995), 395.
9 Nissen, Ricardo, Ley de Sociedades Comerciales, vol.4, 2nd edn (Buenos Aires: Abaco, 1995), 397; see Companies Act, Section 277.
10 Rovira, Alfredo L, Responsabilidad del directorio por la gestión empresaria (La Ley 14/09/2005, 14/09/2005, 1 - La Ley2005-E, 1127 - Derecho Comercial Sociedades, Doctrinas Esenciales Tomo III, 839).
11 NCACM, Chamber D, Alvarez, Manuel y otros v. Guezeui, Julio y otros (1985-A) LL, 317.
12 Halperin-Otaegui, Sociedades Anónimas, 2nd ed., Depalma, 1998, p. 557.
13 NCACM, Chamber D, Ojeda, Leonor v. Empresa de Ferrocarriles Argentinos (2000-E) LL, 580. See Sections 1738, 1740 and related CCC.
14 NCACM, Chamber E, Crear Credito Argentino SA v. Campos, Antonio y otros (2000-E) LL, 67.
15 NCACM, Chamber D, Comision Nacional de Valores, Lexis No. 70010718.
16 Ferrer, G L, Responsabilidad de los Administradores Societarios (Buenos Aires: La Ley, 2009), 99.
17 NCACM, Chamber B, Forns, Eduardo A v. Uantu SA y otros (2003-IV) JA, 897. Regarding scholars, see Rovira, Alfredo, Responsabilidad del directorio por la gestión empresaria (14 September 2005) LL, 1.
18 NCACM, Chamber B, Estructuras Elcora SA v. Yurcovich, Rosa y otra (1999-IV) JA, 178. Accordingly, the director shall be able to foresee any event that is not highly unusual in the business; see NCACM, Chamber B, Estancia Procreo Vacunos v. Lenzi, Carlos y otros (1996-B) LL, 193.
19 Ferrer, footnote 16, LL, 103.
20 NCACM, Chamber B, Estructuras Elcora SA v. Yurcovich, Rosa y otra (1999-IV) JA, 178.
21 In this sense, it has been decided that the director's misuse of the company's funds when the company's purpose is the administration of third parties' funds aggravates his or her liability; see NCACM, Chamber E, Crear Credito Argentino SA v. Campos, Antonio y otros (2000-E) LL, 67.
22 Odriozola, CS, Reforma del régimen de responsabilidad de los directores o necesidad de una adecuada interpretación (1982-B) LL, 711 et seq.
23 NCACM, Chamber B, Estructuras Elcora SA v. Yurcovich, Rosa y otra (1999-IV) JA, 178.
24 19 Am Jur 2d Corporations § 1934. Accord Parnes v. Bally Entertainment Corp, 722 A.2d 1243 (Del. 1999) and Brill v. Blakeley, 281 A.D. 532, 537 (N.Y. App. Div. 1953) ('[These] actions are representative and not derivative. [. . .] The right to bring a representative class action arises from necessity where the parties are too numerous to be joined').
25 Papa, Rodolfo G, El pacto de indemnidad en la transferencia de control accionario, La Ley, 2014-D, 701.
26 Otaegui, Julio, Contrato de transferencia accionaria, La Ley 2007-593.
27 Generally speaking, said events are (1) breach of representations and warranties; (2) third-party claims; (3) breach of pre-closing obligations assumed by the seller; (4) appearance of hidden liabilities against the target company; (5) tax obligations due against the target company for amounts greater than those provisioned or reserved in its financial statements; (6) deficiencies in the working capital of the target company; etc.
28 Typically, such items consist not only of the damage caused by the compensable event but also the costs, expenses and fees derived from them. Within the damage, emergent damage is usually included, not the loss of profits.
29 In general, the beneficiaries are not only the buyer but also the target company, its directors, managers and employees, including all those who must resign due to the transaction.
30 It is the practice that indemnity clauses are agreed for the statute of limitation corresponding to each one of the items that they make their object.
31 Patrimonial limits usually consist of thresholds from which the seller responds so that if the economic content of the compensable event were below that threshold, the guarantee would not be activated.
32 For example, partial price withholding, setting off the balance pending payment with the compensable liability or constitution of an escrow.
33 These clauses are not expressly regulated in Argentine law, but case law has recognised their validity provided that they are set for a maximum term of five years in order not to affect the constitutional right to work and exercise legal industries (NCACM, Chamber D, Rodríguez, Sergio OR v. Pereiro, Eduardo E et al, La Ley, 2010-A, 50).
34 The most common mechanisms are those of an accounting nature and usually take as the basis of calculation the net worth of the target company or its working capital adjusted to the closing date. Case law has admitted the readjustment of the price of the transferred shares even if no mechanism was established in the contract to the extent that the plaintiff shows that said price was not adequate to the real value of the transferred shares and that it was set taking advantage of the inexperience, levity or necessity of the vendor, all of which is applicable and interpreted in a restrictive way (NCACM, Chamber C, Diz Rodríguez, Adriano v. Cagnoli, Romano, Thomson Reuters, 2011021).
35 The notions of hidden or contingent liabilities do not have legal reception but are a theoretical doctrine created by scholars and received by case law. Hidden liabilities are those of cause or origin prior to the operation that the seller knew about but deliberately concealed or concealed in the due diligence process and were not discovered; nor could they have been even using the care and diligence of a good businessperson. Contingent liabilities are those of cause or title prior to the operation that were known to the seller and the buyer but that, given their eventual, litigious, doubtful or merely contingent nature, cannot be evaluated in the results of the final impact that they will produce with respect to the legal, accounting and financial situation of the company when the due diligence process is carried out (Papa, Rodolfo G, Transfer of stock control with hidden liabilities, La Ley, 2013-C, 891).
36 Papa, Rodolfo G, Escenarios de conflicto resultantes de la ejecución de un contrato de compraventa de acciones, La Ley, 2018-D, 128.
37 This criterion is relevant in the case of warranties for hidden liabilities since case law considers that the vendor only transmits his or her shareholder rights and that he or she is not liable due to that only fact for the existence of hidden liabilities or other irregularities related to the state of the company's assets, unless such responsibility had been expressly agreed (NCACM, Chamber C, Rocha, Ramón y otros v. Puente, Osvaldo, RDCO, 1988-829).
38 Richard, Efraín H, Garantía por contingencias en el patrimonio social otorgada por el accionista que transfiere su participación. Transferibilidad de esa garantía, Thomson Reuters, 0021/000221. The same criterion was applied by case law when resolving that non-competition clauses included in a share purchase agreement cannot be interpreted broadly or extensively since it would affect the constitutional right to work and to exercise a lawful industry (NCACM, Chamber E, Nestlé Waters v. Pontiero, Alejandro T, La Ley, 2005-C, 212; NCACM, Chamber D, Rodríguez, Sergio Omar R et al v. Pereiro, Eduardo Enrique et al, La Ley, 2010-A, 50).
39 NCACM, Chamber B, Pocovi, Osmar Miguel et al v. Brennan, Horacio Marcelo et al, La Ley Online, AR/JUR/29203/2012.
40 Richard, Efraín H. op. cit 38.
41 This understanding has been particularly developed in claims for hidden liabilities where the buyer has been ordered to pay the entire balance price in absence of evidence (NCACM, Chamber C, Peredo, Daniel and others v. Alchurron, Alejandro M et al. Thomson Reuters, AP/JUR/668/2013).
42 In the City of Buenos Aires mediation is regulated by Law No. 26,589 as amended by Law No. 27,222 and Law No. 27,551 and Decree No. 320/2020.
43 The mediator's fees depend on the amount of the controversy and cannot exceed 98,400 Argentine pesos.
44 Each Argentine province has its own procedural code that regulates the specific actions applicable in each jurisdiction. No provincial code contemplates specific actions for post M&A litigation being ordinary actions applicable in most of them. These actions used to be structured in a very similar way to that established in the National Civil and Commercial Procedural Code (NCCPC).
45 Under Argentine law, post M&A conflicts can also give rise to criminal liability, which must be settled under the rules of the Argentine Criminal Code and the National Criminal Procedural Code. The most recent case with the greatest repercussion was the criminal liability for fraud attributed by a French supermarket company to a local investment group and its auditors for their manoeuvres used to artificially increase the sale price of a supermarket chain (National Chamber of Criminal Appeals, Chamber IV, The Exxel Group on dismissal).
46 The process also has oral stages but they are very few. The first oral stage consists of a preliminary hearing before the judge, which is held once the defendant has answered the claim and the plaintiff has answered the preliminary defences that the defendant would have opposed. The purpose of this hearing is to attempt a conciliation agreement between the parties and can take place in several days, depending on whether the parties express their intention to negotiate an eventual agreement. If no agreement is reached, the judge indicates which evidence is admitted. Another oral stage is witness hearings. Outside this, the entire procedure is written.
47 Thus, for example, Argentine courts have admitted precautionary measures designed to prohibit the seller of a stock package from carrying out activities in competition with the company in Argentina while it is definitively determined whether there is a violation of the duty of non-competition, to the extent to prove that such violation would not be repaired enough with the compensation for damage (NCACM, Chamber D, Searle Ltd v. Roemmers SAICF, La Ley 2006-A, 239).
48 This was decided in the precedent Edf International SA in which the filing of the exception of lack of legal status was admitted within the framework of an arbitration under ICC regulations derived from a sale of shares in which the exception was finally rejected (NCACM, Chamber C, Edf International SA v. Endesa Internacional-Spain et al ).
49 Under Argentine law, the appeal against the award may be waived as well as any other remedy that may be applicable. Lacking the waiver, the appeal against the award issued by an arbitration tribunal based in Buenos Aires is resolved by the NCACM. The only remedy that cannot be waived is that of nullity, which only proceeds in three specific cases: in the event of an essential fault in the procedure (that is, when the constitutional defence guarantee has been violated); if the arbitrators fail outside the established period; or if they do so on points not submitted to arbitration (Section 760 of the NCCPC).
50 Sections 1,649–1,665 of the CCC. The CCC, in place since 1 August 2015, recognises the most accepted arbitration principles, such as party autonomy, Kompetenz-Kompetenz and the effectiveness of arbitration. Section 1651 of the NCCC provides that disputes relating to marriage, family law, consumer law, standard form contracts, labour law and those in which the state is a party cannot be submitted to arbitration. However, those exclusions do not apply to M&A transactions.
51 Sections 766–772 of the NCCPC. These procedural rules and the provisions of the Argentine Civil and Commercial Code that regulate the arbitration contract apply to domestic arbitration.
52 Martinotti, Diego F, The impact of the COVID-19 pandemic on contracts: some recommendations for Corporate Lawyers, LL, 17 June 2020. Online Index: AR/DOC/1762/2020.
53 Galdós, Jorge M, The legal duty to renegotiate and prevent the business damage, LL, 10 August 2020. Online Index: AR/DOC/2567/2020. Sections 8, 10, 12, 955, 956, 961, 963, 964, 14, 249, 729, 960, 961, 964, 1,082, 1,710 a, 1,713 y, 1,032, 1,730, 1,732 and 1,733 of the CCC.
54 Cornet, Manuel. Tinti, Guillermo, Contracts in the context of COVID-19 emergency, LL, 20 August 2020. Online Index: AR/DOC/1770/2020.