The Mergers & Acquisitions Review: Argentina
Overview of M&A activity
M&A activity in Argentina remains modest. This is consistent with the relatively low levels of foreign direct investments (FDIs) in the country in the last several years compared to those of other countries in Latin America. After reaching a record of US$23.988 billion in FDIs and 243 M&A deals (announced) in 1999, FDIs and M&As deals have consistently decreased. According to public data, FDIs amounted to only US$6.244 billion in 2019 and 83 M&A deals were announced in the same year.
The general view is that the pandemic situation because of the covid-19 pandemic will reduce M&A activity in Argentina (and the region) in at least 50 per cent during 2020. Most recent data seem to support this view as the total number of M&A deals announced as of 31 July 2020 is only 23.
However, the optimistic view is that there are some variables may have a positive impact of the level of M&A activity in the medium term. Factors including: (1) the size of the Argentine economy (still third in Latin America after Brazil and Mexico); (2) the relatively declining value of local assets or distressed opportunities; (3) the recent restructuring of the sovereign and sub-sovereign debt; and (4) the competitive advantages in certain key areas (agribusiness, technology, pharma, energies) may mark an increase in the flow of deals by 2021. Such a recovery, however, is certainly dependent on the local government implementing some structural reforms, including in the tax system, foreign exchange market, labour regulations and reduction of fiscal deficit.
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General introduction to the legal framework for M&A
The Argentine capital market is relatively small, lacks sufficient depth, has limited liquidity and is subject to regulations that still need to be modernised to meet international standards. Further, most Argentine public companies generally have a minority portion of their capital floating in the capital markets (between 10 and 30 per cent). Accordingly, public M&A transactions in Argentina are not frequent.
As a result of the foregoing, most of the M&A activity is done through private deals. These may involve shares, assets or a combination thereof. Share deals are preferred to asset deals.
Share deals are undertaken through stock purchase agreements that generally follow international standards for private transactions. These 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. 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, regulatory requirements).
Assets deals (such as the bulk transfer of assets) are less common in Argentina for tax reasons (as further detailed below), which in general make such transfers expensive, as the transfer of each asset is subject to a different set of taxes; and because of timing concerns.
Public M&A transactions that involve the acquisition of a controlling stake may require the acquirer to launch a tender offer to all the minority shareholders in the target company. A mandatory tender offer is not required when the acquisition 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, according to the parameters of recently enacted regulations.
On a separate note, corporate foreign shareholders must register at the Public Registry of Commerce to be able to hold shares of a company incorporated in Argentina. A foreign shareholder must submit certain corporate and accounting information to obtain registration. The registration procedure and requirements have been substantially eased recently. Further, the Capital Markets Law exempts foreign shareholders from such registration when the target company is listed on the stock market.
Strategies to increase transparency and predictability
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Developments in corporate and takeover law and their impact
The main recent changes include certain amendment to the Argentine Companies Law to allow single shareholder corporations (knowns as SAUs), and simplified stock company (known as SASs) that are corporations incorporated in an expeditious and online procedure. Both SAUs and SASs are aimed at promoting start-ups and entrepreneur activities in Argentina.
The current administration (that took office in December 2019) introduced several amendments to the foreign exchange regime and reinstated foreign exchange restrictions to acquire foreign currency and to transfer of the proceeds outside Argentina (including in the form of corporate dividends). These measures clearly have a negative impact on M&A activity.
There have been important changes in tax regulation with an impact on M&A transactions. The general rule is that local companies are now taxed on their worldwide income tax, at a corporate level, at a 30 per cent corporate income tax rate. The taxable income is determined by deducting all allowable expenses from the entity's gross income (including interest, salaries, etc.). Expenses incurred abroad are also deductible provided that the taxpayers can demonstrate that they were incurred for purposes of generating taxable income. The corporate tax rate is scheduled to be 25 per cent for fiscal years beginning after 1 January 2021.
Further, dividends distributed by Argentine companies to their foreign shareholders are subject to withholding tax depending on when the distributing company earned the profits out of which the dividends are paid. For income earned in fiscal years beginning on or before 31 December 2017, there is no withholding tax (provided the profits had been taxed at company level). For income earned in fiscal years beginning on or after 1 January 2018 and on or before 1 January 2021, dividends were subject to a 7 per cent withholding tax. For fiscal years beginning after 1 January 2021, dividends are subject to a 13 per cent withholding tax. Dividends are not deductible from income tax in any case. Gains arising from the sale or transfer of shares are: (1) subject to corporate income tax at the same tax rate if made by a local entity; (2) subject to a special capital gain tax of 15 per cent if made by a resident individual; and (3) subject to a capital gains tax of 15 per cent if made by a non-resident (non-residents may also opt to pay a 13.5 per cent on the sale price). As a general rule, the sale of equities listed in the local stock exchange and American Depository Receipts and Global Depository Receipts are tax exempt for individuals, regardless of residence, and non-resident entities.
A new antitrust law was passed by Congress in May 2018. An important change introduced by this new law lies in the timing for antitrust clearance. While the replaced regime established an ex-post control (i.e., transactions were reviewed after closing), the new law establishes an ex-ante control (i.e., transactions are now reviewed prior to closing). The Antitrust Law requires that transactions in which the aggregate business volume of all companies involved in the deal in Argentina is higher than certain threshold (US$27 million as of July 2020) be approved by the Antitrust Authority prior to closing, subject to certain exemptions such as the 'first landing' safe harbour. The new antitrust law has not been yet fully implemented so certain aspects of the antitrust procedure are still governed by the old regulations.
Finally, several amendments were made to the capital markets law. In particular, the new law amends the regime for mandatory tender offers.
Us antitrust enforcement: the year in review
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Foreign involvement in M&A transactions
FDI and M&As involving foreign investors in Argentina have remained at modest levels. During 2015 and 2019, however, foreign investors' appetite for local assets increased due to the government policies adopted by a pro-business administration. During such period local and foreign hedge and private equity (PE) funds were particularly active and closed transactions in different sectors, such as the energy (including oil and gas and renewable energy), agribusiness, hotel, food and beverage, infrastructure and real estate sectors.
The return to power of an interventionist administration in 2019 (led by Cristina Kirchner) has had a negative impact generally. Foreign investments are now on a 'wait-and-see' mode or exiting the country.
There are no specific required approvals for foreign investments either through PE funds or other types of foreign investments (other than antitrust approval, if applicable). 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 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 those industries. Investments in real estate (rural lands or land adjacent to country borders) 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 about the acquirer company, and the 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).
Significant transactions, key trends and hot industries
Some of the most relevant deals in the past two years include the US$650 million joint venture between ExxonMobil and the state-owned energy giant Qatar Petroleum whereby (as a result of which Qatar Petroleum acquired a 30 per cent stake of ExxonMobil's subsidiaries in Argentina) to develop multi-billion projects in Vaca Muerta (2018).
International trader Trafigura has also completed a deal worth more than US$250 million to start downstream operations in Argentina (in association with its affiliate, Puma Energy). Interestingly, a new regional player – DeltaPatagonia – also acquired a network of 125 service stations from YPF, which will be operated under the Gulf Oil trademark. Other relevant deals include the acquisition by private equity fund Advent of 51 per cent of the capital stock of Prima Medios de Pago S.A. (a leading player in Argentina's merchant acquiring, payment processing and electronic bill payment market) in a transaction worth between US$700 million and US$1.2 billion.
The largest deal of 2020 so far is the US$350 million acquisition by Shell and Equinor from Schlumberger (the worldwide leading oilfield service provider) of a 49 per cent participating interest in an exploitation concession located in Vaca Muerta (Bandurria Sur), which was followed by another acquisition by Shell and Equinor of YPF's 11 per cent participating interest in the same concession.
The recovery in the oil prices may trigger renewed interest in oil and gas assets (including the shale oil and shale gas projects in Vaca Muerta (see also Section X)), including over offshore oil and gas blocks. The agribusiness sector may also offers opportunities, and commodities prices have been recovering well in the past few years. This sector is critical to the Argentine economy, as it will trigger a cascade effect on the industrial and services sectors (in which deal volume remains modest).
Financing of m&a: main sources and developments
Acquisition financing originated in Argentina is very limited and costly. As a result, most foreign investors (including PE funds operating in Argentina) usually obtain their funding from foreign investors, including a wide 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.
Generally speaking, local portfolio companies are funded mainly through capital contributions. Therefore, debt obtained from foreign sources is used to a lesser degree, and local financing is available, although it may not cover all the financial needs of a portfolio company.
Interest under a debt has the advantage of being tax deductible. The Argentine Central Bank regulations contemplate that, under certain circumstances, some loans may need to be reported to the Bank. Currently, there are no foreign exchange regulations applicable to lending transactions or otherwise.
In the assignment of a business, all liabilities in relation to employees will be transferred to the purchaser. If an employee is seriously affected by the assignment of a business, it is possible for that employee 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) will 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 the assignment of a business is that the former employer is replaced by the purchaser or successor. It is not necessary that employees consent to the transfer.
A change of employer has consequences with respect to all the employment relationships that are in force, not only to all current labour relationships but also to those in which the obligation to effectively render services has been temporarily suspended (e.g., if personnel are on holiday or on sick leave).
A 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 the suspension.
The labour conditions currently in force regarding the assignment of a business, such as the office location, working hours and salaries, should be maintained by the purchaser or successor without prejudice to the legitimate right of the employer to modify labour conditions in the future within the limits established by the applicable labour law.
Pursuant to the mandatory case law, a 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 shall even be liable for the labour credits of previous employees who 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, as a result of 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 an employee can automatically consider that he or she is subject to constructive dismissal.
In cases of the purchase of the stock of a corporation, there would be no assignment of a business, since the employer (the corporation) would remain 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.
See Section III for details of important changes in tax regulation with an impact on M&A transactions.
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 income tax on any capital gain. For fiscal years beginning between 1 January 2018 and 31 December 2019, the income tax rate will be 30 per cent. For fiscal years beginning on or after 1 January 2020, the income tax rate will be 25 per cent.
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 movable 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 about 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 already stated, the tax is customarily shared by the seller and purchaser.
A new antitrust law was passed by Congress in May 2018.
An important change introduced by this new law lies in the timing for auditing M&A. The old regime established an ex post control (i.e., transactions were reviewed after closing), whereas the new law establishes an ex ante control (i.e., transactions are now reviewed prior to closing).
The Antitrust Law requires that transactions in which the aggregate business volume of all companies involved therein in Argentina is higher than 100 million mobile units (which is roughly equivalent to US$60 million (as at April 2019) be approved by the Antitrust Authority before closing. The aggregate business volume means the amounts resulting from the commercial activity and direct subsidies received by the companies involved in the transaction during the last financial year, corresponding to their ordinary business and calculated on an after-tax basis.
Authorisation will have to be obtained from the Antitrust Authority for a transaction to enter into force between parties and to be effective with regard to third parties. Failure to request and obtain authorisation, or if authorisation is not granted by the Antitrust Authority, shall render a transaction void, without prejudice to any sanction that may be applicable in the case of rejection.
The Antitrust Authority shall make the request for approval public so that interested parties can submit objections. Within 120 days of the request being made public, the Antitrust Authority will have to decide whether to approve the transaction, approve the transaction subject to certain conditions or reject the transaction. Failure to issue a decision within 120 days shall be regarded as an unconditional authorisation by the Authority.
Transactions closed prior to obtaining the Antitrust Authority's authorisation will render the companies involved subject to fines, regardless of the Authority's decision regarding the transaction. If the Authority finds that it was a prohibited transaction under the Antitrust Law, the companies will have to divest the acquired assets. The transactions subject to review and approval are:
- the bulk transfer of assets, including transfers of ongoing concerns;
- the purchase or acquisition of any interest in stock, equity participations or debt instruments convertible into stock, or equity participations that provide the right to influence the decisions of the issuer thereof, when, in either case, the purchaser of the same obtains through the acquisition of those securities or equity interests the control of or a substantial influence over the issuer; and
- other transactions that entail a de facto transfer or a dominant influence upon the decisions of the company in question.
The law does not contain any specific definition of substantial influence. However, recent rulings by the Antitrust Commission have concluded that the right to appoint a certain number of directors or to appoint key officers, or the existence of supermajorities, are relevant factors for deciding in a particular case whether the buyer of a non-controlling interest in a company nevertheless acquires a substantial influence therein.
During the first year of the Antitrust Authority being established, a notice of any transaction subject to prior review and approval may be filed with the Authority either prior to its consummation or within one week of closing. However, until the Authority is created, and the aforementioned one-year period elapses, the old antitrust regime will continue to apply.
Companies involved in a potential transaction may submit their situation to the advisory opinion of the Antitrust Authority, which will determine whether the proposed transaction should be submitted for authorisation.
Significant changes to the previous regime are being introduced. Even though transactions were only considered valid between parties and with regard to third parties upon review and approval under the old antitrust regime (a requirement that continues under the new regime), approval could be obtained after closing. The only real obligation of the parties was to notify the authorities either before closing or within a week of closing. Failure to notify was penalised with fines.
Although failure to obtain the required prior approval and denial of the approval after closing did not entail the imposition of penalties insofar as the filing had been made within the specified deadlines, by consummating the transaction without approval, the parties assumed the risk that approval could be denied or conditional, thus resulting in a need to divest the acquired assets totally or partially.
As has been outlined, since the presidential elections that took place in December 2019, the local market conditions have deteriorated and the new administration has taken several measures that have not yet restored confidence from the local and international business community.
The reinstatement of foreign exchange controls (which includes restrictions to acquiring foreign currency and for the transfer of proceeds outside Argentina, among other things), the temporary prohibition to layoff or suspend employees without cause and other recent legal changes (as discussed above), and the worldwide pandemic are affecting the economic activity in general and the M&A deal flow in particular.
The restructuring of the sovereign debt and a new programme with the IMF may serve as basis for going through some critical and long-term structural reforms (such as its tax system, labour laws, foreign exchange regime, etc).
It is certainly difficult to predict how much the covid-19 pandemic will affect the local economy in general and the M&A activity in particular. The local and international business community seems to agree that a strong recession is increasingly likely. The hit should be hard in the short term, and this is particularly true for certain countries (especially those in the periphery like Argentina) and industries. Many deals in the pipeline have been pulled or delayed.
However, the world keeps spinning as do the local and international markets. Distressed assets, declining valuation, divestures, and the long-term view of strategic investors will create opportunities that lead to the recovery in the M&A market.
1 Fernando S Zoppi is a founding partner of Martínez de Hoz & Rueda.