The Technology M&A Review: Argentina
Argentina has a vibrant technology sector, especially in the software, fintech, agtech and primary services areas. In the past few years, Argentina has seen remarkable growth in the private capital (venture capital, private capital and corporate venture) sector, which went from a total amount invested of US$220 million in 2016 to US$547 million in 2020 (this is lower than 2018 and 2019). Most of this private capital investment went to technology companies.2 Five Argentine technology companies have reached the stage of unicorn (MercadoLibre, Despegar, Globant, OLX and Auth0), while there are many Argentine technology companies on the verge of achieving the same status.
The approval of the Entrepreneurs Law in 2017 helped bootstrap startup companies in the technology sector providing both tax incentives to investors as well as a simplified legal entity for companies conducting their business (as further discussed below). Additionally, several regulatory changes between 2016 and 2019 fostered the growth of a relevant fintech ecosystem.
Argentina also has sophisticated human resources dedicated to the technology sector, which, because of the exchange rate of the peso in relation to foreign currency, is more cost friendly than other countries, and has created a cross-border technology services industry focused on the development of software.
On account of Argentina having a very small capital market, the most common exit available to investors in technology companies is an M&A transaction where a local business is acquired by larger global technology companies. The most prominent example is the acquisition of Auth0 by Okta in May 2021. The three Argentine unicorns that went public (MercadoLibre, Despegar and Globant) conducted their initial public offering in New York rather than on the Buenos Aires Exchange.
Since the last quarter of 2019, and because of the ongoing economic crisis, several measures were approved by the prior and new administrations that have had an impact on the technology sector, including:
- the reinstatement of foreign exchange controls;
- the suspension of the application of the knowledge economy regime (further discussed below);
- restrictions on the dismissal without cause of employees;
- increased regulation of the fintech sector; and
- higher bureaucratic regulations for simplified corporations.
Argentina's economic crisis and the covid-19 pandemic significantly impacted the number of transactions conducted during the first quarter of 2021, with a decrease of about 25 per cent of the number of M&A transactions in relation to the average transacted during the previous 15 years. More than 95 per cent of the amounts involved in the first quarter were concentrated in the Auth0 transaction.3
However, the technology sector continues to represent an important portion of the M&A market, accounting for 22 per cent of the total M&A market during 2019 (compared to 5 per cent during 2018).
Year in review
The main M&A technology transaction during the course of 2021 to date has been the acquisition of Auth0 (Argentine unicorn) by Okta at a valuation of US$6.5 billion.
During 2020, the main M&A transactions in the technology sector were:
- the acquisition of Best Day Travel Group (Mexican company) by Argentine unicorn Despegar for a price of US$56 million and a variable price of up to US$20 million;
- the acquisition of Lagash (software factory) by MercadoLibre for an undisclosed amount;
- the acquisition of Checkars (online used car retailer) by Kavak (Mexican unicorn);
- the acquisition of the Latam operation of Glovo by Delivery Hero; and
- the acquisition of Peixe (online discounts) by Agrupate.com.
During 2021 and 2020, there were also significant venture capital investments, one of the more significant being:
- the Series A and Series B of Mural (digital workspace solutions) with an aggregate investment of US$133 million;
- US$200 million Despegar's private placement of shares and warrants; and
- the Series D of Tiendanube (software-commerce platform) for US$90 million.
Legal and regulatory framework
The Argentine Civil and Commercial Code, the Companies Act and the Securities Act (when dealing with public companies) govern the main aspects of M&A transactions in Argentina. Parties are free to choose a foreign governing law and agree on international arbitration or jurisdiction, provided there is a reasonable point of contact.
With regard to acquisitions of public companies, the most relevant provision of the Securities Act is the obligation for the purchaser to conduct a mandatory tender offer whenever control is acquired, as well as the disclosure obligations imposed on the target company.
Argentine antitrust law was amended in 2018. Pursuant to the new law, prior authorisation must be sought from the National Antitrust Authority for any transaction concerning an economic concentration where two or more previously independent businesses become dependent on a unified decision and direction centre; or entering into agreements tending to the total or partial integration or combination of their business or assets through a merger, transfer of ongoing concern, acquisition of ownership or other rights over shares or equity holdings, or which allow significant influence over the decisions of a business, or any other agreement or transaction with a legal or de facto transfer of assets of a company or that grants a significant influence over the ordinary or extraordinary management decisions of a business.
There are some exceptions to the prior authorisation requirement, namely:
- if the aggregate sales volume in Argentina of the purchaser's group and of the target company does not exceed 100 million mobile units (this currently equals 5.52 billion Argentine pesos);
- if the purchaser group already owned more than 50 per cent of the equity of the target, provided this does not change the manner in which control was exerted over the target;
- the acquisition of a single business by a foreign business that did not previously own assets or equity holdings in Argentina and whose exports to Argentina during the prior 36 months were not significant or frequent (first landing exception); and
- when neither the price of the transaction nor the value of the assets in Argentina involved in the transaction exceeds 20 million mobile units (this currently equals 1.1 billion Argentine pesos), and provided that no transactions exceeding that amount took place in the relevant market during the prior 12 months nor exceeding 60 million mobile units (3.3 billion Argentine pesos) during the prior 36 months.
These changes have helped clear the antitrust authority approvals pipeline, which had been clogged with a large number of small transactions under the previous thresholds.
Key transactional issues
i Company structures
Given that the Argentine capital market is very reduced, tech companies in Argentina are typically organised as private companies, under a corporate type granting limited liability to its shareholders. The main corporate types with this liability available under Argentine law are the corporation, the limited liability company and the simplified corporation.
The main advantages of the corporation and the simplified corporation lie in the method for transferring equity, which is implemented by way of a registration in the shareholders registry, while the limited liability company requires a registration of the transfer with the Public Registry of Commerce. Corporations are the only type of companies that are allowed to become public.
Corporations and limited liability companies have some additional restrictions. For example, corporations and limited liability companies require a minimum of two shareholders (sole shareholder corporations are authorised but require the appointment of an internal auditor) and the majority of the directors must reside in Argentina.
Since its introduction in 2017, the simplified corporation was the main alternative for new startup companies as it offers many advantages with a reduced bureaucratic burden and fewer restrictions than the other corporate types (allowing sole shareholders and requiring only one resident director).
However, during 2020 many of the advantages have been curtailed by the government, and an amendment to the law is being considered by the legislative branch that will further reduce the availability of this corporate type.
Additionally, if a company has already expanded to other countries or is about to begin its expansion, it is usual that a holding company incorporated abroad from Argentina be formed. The jurisdiction will vary depending on the corporate and tax planning of the company. It is usual that M&A transactions are performed at the level of the holding company; if the holding company does not exist at the time, it is usually formed as part of the transaction.
Another important item to note is that foreign companies need to register with the Public Registry of Commerce for purposes of holding equity of Argentine companies. This registration takes about a month and requires the filing of several documents of the foreign company, including an identification of shareholders and final economic beneficiaries as well as evidence that the main activity of the foreign company is conducted abroad from Argentina. Moreover, once registered, the foreign company must comply with an annual information regime updating the shareholders and final economic beneficiaries with activity information.
ii Deal structures
As most of the tech companies in Argentina are private companies, the main deal structures regarding tech acquisitions involve share purchases or asset purchases.
Share purchases provide the advantage for the acquiror of having access to a company already structured and operating, only requiring a registration of the transfer of the equity. On the other hand, a thorough due diligence is required for the identification and analysis of the assets, liabilities and contingencies of the target. From the point of view of the seller, these types of deals provide certainty as to the taxes applicable to the sale.
An asset purchase is usually more complex as it requires transferring different types of assets, which have different tax treatment, and which assignment may require third parties' consent. Moreover, because of successor liability, no significant advantages are gained from a strictly legal point of view. A special procedure for the transfer of ongoing concerns allows the limiting of a successor's liability regarding commercial debts and federal taxes (if certain filings are made), but not with regard to labour claims or social security taxes. This limited protection, together with the fact that this process is burdensome, usually leads to parties opting for implementing a transfer of assets without following it.
iii Acquisition agreement terms
Consideration in technology-related M&A transactions can involve both shares and cash, usually depending on the relationship the sellers will have with the acquirer post-closing. We usually see that if the founders will continue working in the target, they usually receive a mix of shares and cash, while investors of the target cash out. It is also very common for the consideration to include an earnout component for founders and executives.
Representations and warranties are usually granted by all sellers, although in some cases some difference in the scope is allowed between founders and investors, with the latter providing fewer representations regarding the business conducted by the target company. In Argentine tech deals, special emphasis is placed on the tax, labour, intellectual property (IP) and foreign exchange compliance representations and warranties.
Customary closing conditions involve consolidating ownership of IP on the target company as well as solving irregularities detected in the course of due diligence.
Indemnification limitations, including limited survival of representations and warranties, caps, de minimis and baskets, are customary in M&A transactions.
There is no preference for one type of financing of transactions. Buyers will finance an acquisition with debt or equity depending on their needs.
As noted above, it is not unusual for the consideration to include equity of the acquiring company (i.e., no financing is needed for part of the price).
v Tax and accounting
As a general rule, the sale of shares of Argentine private companies is subject to capital gains tax levied on the seller, regardless of its status (resident or non-resident), and whether the sale occurs directly or indirectly (i.e., a sale of shares in a foreign holding company). The applicable tax rate for a foreign seller is either 15 per cent on the net value of the sale or 13.5 per cent of the total sales price, at the seller's option. If a seller is based in a non-cooperative jurisdiction (or the funds come from such a jurisdiction), the rates to be applied will be 35 per cent of the net transaction value or 31.5 per cent of the gross price.
Indirect sales of equity participations acquired after 1 January 2018 are subject to capital gains tax provided that, at the time of sale or during the 12 preceding months, at least 30 per cent of the market value of the shares being sold derives from shares, assets or rights located in Argentina; and the shares being sold represent at least 10 per cent of the equity of the foreign company. Indirect transfers of shares within economic groups are exempt from this tax if certain conditions are met.
Foreign beneficiaries (other than those from non-cooperating jurisdictions) are exempt from capital gains tax on a sale of shares listed on stock markets authorised by the Argentine Securities Authority.
Argentina is a party to several double taxation treaties, which usually provide that a sale of shares can be taxed in the country in which the target company is incorporated according to its internal rules. In some particular cases, a limit of 15 per cent is established, unless the resident of the other country has a direct 25 per cent interest in the capital of the company being sold, in which case the taxable limit is usually 10 per cent.
Argentine tax rules provide for tax-free corporate reorganisations subject to certain conditions.
Finally, Argentina has its own generally accepted accounting principles approved by the Federation of Professionals of Economic Sciences. The use of International Financial Reporting Standards is mandatory for certain companies (financial entities, public companies) and optional for the rest of the types of entities.
vi Cross-border issues
Argentina's Constitution and laws grant equal rights to local and foreign investors, and foreign investment is not generally subject to prior approval by the authorities. Argentina has entered into bilateral investment protection treaties with several countries further providing for the protection of foreign investments. However, there are several regimes that regulate or limit foreign ownership of certain assets, including rural land4 and real estate property located in frontier zones.5
From an M&A technology perspective, the most relevant limitations are those set out in the Cultural Assets Act and in the Audio-visual Communications Services Act.
The Cultural Assets Act (CAA)6 prevents foreign nationals, foreign companies and local companies directly or indirectly controlled by foreign nationals from holding more than 30 per cent of the corporate capital and votes of broadcasting companies (i.e., newspapers, magazines, radio stations, internet service providers, television, digital and audiovisual content producers), while the remaining 70 per cent must be owned by Argentine entities (i.e., Argentine nationals or foreign or local companies controlled by Argentine nationals). This limit does not apply to countries where a respective bilateral investment treaty has exclusions for this type of assets (such as the treaty between Argentina and the United States).
The Audio-visual Communication Services Act (ACSA)7 prevents companies that own audiovisual broadcast licences from having corporate relationships with foreign broadcasting companies, and from being subsidiaries or affiliates of foreign companies. In this case, the definition of subsidiary or affiliate is not provided by the Act. The ACSA reproduces the limitation set forth in the CAA regarding the ownership of shares in local broadcasting companies.
Negative tax consequences are regulated in the case of foreign entities located in jurisdictions considered to be of low or no taxation (L/NTs) and in non-cooperative jurisdictions (NCJs). L/NT jurisdictions are those countries, domains, jurisdictions, territories, associated states or special tax regimes that establish a maximum taxation of corporate income below 15 per cent. NCJs are those countries or jurisdictions that do not have a tax information exchange agreement or an agreement to avoid international double taxation with a broad information exchange clause in force with Argentina, and are listed by the regulatory authority.
Among other consequences, the following are relevant for M&A transactions:
- the receipt of funds originating in L/NT jurisdictions is presumed to be an unjustified wealth increase of the local recipient that would be considered in full as net income of the Argentine resident and subject to tax (although this can be proved otherwise); and
- the tax rate for the sale of shares when the shareholder is based in an NCJ is increased to 35 per cent.
Finally, since 2019, foreign exchange controls have been reinstated in Argentina, which can be relevant to:
- a transaction itself (as Argentine residents will likely want to be paid abroad from Argentina);
- the type of transaction (the sale of certain assets currently obliges the seller to convert the cash price into pesos);
- the due diligence (as breaches to the regulations can result in criminal procedures involving the company and its directors); and
- the conduct of business after closing (for example, payment of dividends and intercompany services to foreign residents currently cannot take place through the exchange market; consideration received by the local company for a provision of services to non-residents must be currently converted into pesos at the official exchange rate).
Argentina protects different types of industrial and IP rights, including without limitation patents, trademarks, industrial designs, copyright, utility models, geographical denominations, trade secrets and web domains. Argentina is a party to the Paris Convention, the Berne Convention and the Trade-Related Aspects of Intellectual Property Rights provisions of the General Agreement on Trade and Tariffs.
Special criteria apply for pharmaceutical, biotechnological and software patents. The usual protection for software is obtained via copyright.
Argentine labour laws contain quite extensive regulation of the employment relationship with a significant pro-employee bent. Labour litigation is quite frequent in Argentina, although in the tech market this is, for the time being at least, more limited.
The most usual employment agreement is employment for an undetermined period of time, which can be terminated at will by any of the parties; but in the case of termination without cause by the employer, this requires the payment of severance. As the severance is based on the salary paid to an employee, discussions frequently arise with regard to the inclusion in the salary of different benefits paid to employees such as stock options (further discussed below), bonuses, use of company phones and cars, and other similar benefits.
Argentine law requires the registration of employees with the tax authorities, detailing the gross salary paid to each employee and the date of commencement of the employment. However, because of high social security taxes, the provision of services by individuals who could be deemed as employees but are not registered with the tax authorities is a widespread issue that should be analysed in investments and M&A transactions in Argentina. This can give rise to significant liabilities, which, depending on the timing of a claim made by an individual, can amount to 25 per cent of all the amounts paid, or an increase, by several times, of severance payments.
Due to the economic crisis in Argentina and the covid-19 pandemic, termination without cause of employment relationships by employers has been suspended by the government (and severance payments have been doubled until 31 December 2021).
As noted above, one issue of relevance from an employment perspective is the granting of stock options to key employees. Depending on the specifics of a structure and its terms and conditions, stock options can give rise to negative employment, social security and income tax consequences for the Argentine company; thus, it is advisable to analyse the structure of stock options and potential consequences. Nevertheless, stocks options remain a normal feature of employment in technology companies.
As per Argentine copyright law, ownership rights over software developed by employees hired for such purpose correspond to the employer. Further, pursuant to patent law, inventions developed by an employee during the employment relationship that totally or partially relate to his or her job description are owned by the employer. If the contributions made by the employee to the development of an invention exceed his or her job description, the employee is entitled to a supplementary consideration. If one of the conditions listed above is missing, but the employee has used knowledge or assets of the employer, the employer can claim ownership of the invention or reserve the right to exploit it; in this case, the employee has the right to fair compensation and up to 50 per cent of the royalties derived from the invention.
Pursuant to Argentine law, employees have a non-competition obligation towards their employer during the term of the employment. To be enforceable, non-competition obligations extending after the end of an employment require an express agreement that they be limited to a certain territory, business and term, as well as the payment of a consideration that must be proportionate to the obligation undertaken by the employee.
Data protection in Argentina is governed by the Constitution and the Data Protection Law. The provisions of the law are mandatory and protect personal data registered in files, registries and databases that is used for providing reports. The Data Protection Law provides the owners of this information the right to control its use and to access it.
The Data Protection Law requires that all databases be registered with the Agency of Access to Information, and that the consent of the owners of the personal data be procured for purposes of gathering, assigning and transferring personal data.
The owners of private data have the right to access to their data, provided their requests to access the relevant database are made with a frequency of at least six months. Any request must be answered within 10 days of being made. Additionally, an owner of private data has the right to request that the data be rectified, updated, erased or kept confidential by the database. Requests of this nature must be complied with within five business days of being made.
Although the Data Protection Law does not prevent sharing information with potential buyers, it is strongly advised that confidentiality agreements be signed to protect said information.
On a national level, the knowledge economy regime provides for the promotion of activities with an intensive use of technology and that require highly qualified human capital, such as software development, biotech, export of professional services, nanotechnology, aerospace, AI and other technologically related activities. This regime provides for tax benefits for the target company.
On a local level, the City of Buenos Aires has created a technological district with tax benefits for the technological companies located within the district.
In 2017, the Entrepreneurs Law created the trust fund for the development of venture capital, which coinvests with venture capital incubators and accelerators in Argentine startups. In the case of incubators, the co-investment is made by way of financial assistance in the startup, which must be repaid by the startup upon the occurrence of a liquidation event. In the case of accelerators, the co-investment is channelled through the accelerator, and thus does not have a relevant impact for the target company.
For more than a decade, Buenos Aires has run the IncuBate programme which, among other activities, provides financial assistance to technology startups. This assistance is given through interest free loans that are to be repaid upon an exit or investment round.
Due diligence in investments and M&A deals regarding technology companies is usually focused on the ownership and proper registration (if applicable) of the company's IP. It is not unusual in the case of investments in startups that one or more IP assets have been registered in the name of the founders. Moreover, Argentine deals require special focus in three areas: tax, labour (especially with regard to employee benefits and unregistered employees) and foreign exchange regulations. Based on the characteristics of target companies (especially if they are new companies), it is not unusual that buyers choose to conduct a red flag due diligence report rather than a full-blown due diligence.
Parties usually agree on arbitration for dispute resolution. In cross-border transactions, International Chamber of Commerce arbitration is the most common choice, while the Buenos Aires Stock Exchange Arbitration Court is usually elected for local transactions.
Argentina allows the enforcement of foreign judgments and arbitrations awards through a procedure known as exequatur. If no international treaty applies, the procedural rules of each province will apply. The National Civil and Commercial Procedures Code recognises foreign judgments and awards subject to compliance with certain requirements:
- the judgment was issued by a competent court pursuant to Argentine conflicts of law provisions;
- the defendant has been duly served and granted due process;
- the judgment must be valid in the place where it was issued, and evidence of its authenticity must be provided;
- the judgment does not breach any principle of public policy of Argentine law; and
- the judgment or award does not conflict with a prior or simultaneous judgment in Argentina.
Although the covid-19 pandemic has had a significant impact on the Argentine economy, the technology sector has been coping quite well with the situation.
The pandemic has accelerated the adoption of many technologies and technology-based solutions, including communications, online marketplaces, logistics and fintech, as well as associated security and AI solutions. Another tech sector that can be very relevant given the importance of the agricultural sector in Argentina and Latin America is the AgTech industry.
All of the above can be expected to increase the demand and growth of the technology sector in Argentina and thus result in an increase in the participation of technology deals in the overall M&A market. As noted in Section I, one M&A transaction represented most of the amounts involved in M&A in the first quarter of 2021.
Private and venture capital investments in the tech sector have shown resilience during the 2020 pandemic (about the same amounts invested as in 2018), and it can be expected that after the return of normality, the industry will go back to the path of growth seen in previous years.
The current administration is moving forward with increased regulation affecting the general conduct of business (among other things, as noted above, foreign exchange regulations, labour regulations and simplified corporations) as well as in specific sectors (mainly in the fintech sector).
1 Juan Manuel Campos Alvarez is a partner at Salaberren & López Sansón.
2 Estudio de la Industria de Capital Privado, Emprendedor y Semilla en Argentina 2016-2020, published by the Argentine Private Capital Association (ARCAP).
3 First Quarter M&A Overview, March 2021, published by Orlando J Ferreres & Asociados SA.
4 Protection of Rural Lands Ownership Act (Act 26,737).
5 Frontier Securities Zone Act (Decree 15,385/44 as amended).
6 Cultural Assets Act (Act 25,750).
7 Audio-visual Communication Services Act (Act 26,522).