Argentina: Decree 677/2001 On Transparency And Better Practices In The Capital Markets ®

Last Updated: 6 June 2001
Article by Mariano P. González

The Executive Power of Argentina passed on May 22, 2001, a decree related to the Transparency and Better Practices in the Capital Markets (the "Decree") which introduces certain changes to the public offering regime in Argentina.

The main purpose of the Decree is to protect investors, to reduce the cost of capital by strengthening the legal and institutional framework of the capital markets and to grant more flexibility to the corporate structures, particularly to the sociedad anónima ("corporation"), in order to update the corporate structures to the modern mechanisms used in some of the more developed corporate systems.

The main measures introduced by the Decree are as follow:

  1. New concept of "negotiable value". The new concept of negotiable value will include the concept of securities (promissory notes, debt and equity securities and obligations) together with new instruments such as "investment contracts" which can be issued in series and traded as such.
  2. This new concept, which is much closer to the term "security" as defined by the Securities Act of 1933 and the Exchange Act of 1934 of the U.S., will enable the Argentine issuers to identify new instruments within the financial markets.

  3. Transparency in the Public Offering Regime. This constitutes the main issue of the Decree and will enable the National Securities Commission (CNV) to enforce the market control mechanisms more efficiently. The Decree:
    1. defines inter alia, the concepts of "control", "privileged information" and "concerted actions";
    2. supports the concept of "freedom in the creation of securities";
    3. reinforce the disclosure information of the issuers;
    4. regulates the standard of secrecy of any person with access to corporate information;
    5. regulates the behavior of broker/dealers with respect to the allocation of securities and the obligations of the issuers;
    6. refers to the insufficient disclosure or misleading information of issuers and classifies the different conduct against the transparency of the markets.
  1. Reinforcement of Loyalty Duties. The Decree includes the concept of "social interest" and "common interest of all the shareholders" of public companies.
  2. Auditing Committee. The Decree creates the institution of Auditing Committee in order to guarantee the authenticity of the information disclosed. The majority of its members must be "independent", meaning that such members must not have any labor relationship with the company or the controlling shareholders.
  3. Tender Offers. The Decree amends the legislation regarding tender offers. In such regard, the Decree chooses for a mechanism of compulsory public offers, to be done previously to the take over. It establishes that 35% will be a significant participation, over which this new compulsory mechanism will apply. However, the Decree provides that the companies (whether currently in the public offering regime or those that decide to go into it) may choose not to adhere to this tender offer system created by the Decree.

As a consequence of the aforementioned, the tender offer will have to be performed by the acquirer previously to the take over. The intention of this rule is to allow the shareholders to participate in taking the decision of the transaction, and also, to let the minority shareholders liquidate their participation in the company by means of a fair procedure, should they intend to do so. Another important characteristic that this previous tender offer has, is that it is based in an intentional will, that is the will to acquire the control, and thus, excludes the unexpected take over (for example, the case in which one shareholder goes beyond the significant participation but does not acquire the control or the case of the acquisition of the control as a consequence of a corporate reorganization).

In addition, the Decree establishes a system of partial tender offers. The flexibility of the rule will contemplate that when certain margin is passed through, the tender offer must be done over all the capital stock of the company tendered.

  1. Residual Participations. The Decree establishes a system in which the minority shareholders can have the right to buy or sell at a fair price, after a tender offer takes place, in the case of a group of related shareholders hold an "almost total control" of the company. The estimated holding which is considered to be an "almost totally controlled" company has been set in 95% of the capital stock and voting rights.
  1. Delisting. The Decree guarantees for the minority shareholders which want to sell their holdings in case of delisting of the company, a "fair price" in according with market standards, which could be never less than the average price of the stock on the six months previous to the date in which the decision of delisting the stock is taken.
  2. Mandatory Arbitration. The Decree imposes to all self-regulated markets (stock exchanges and OTC markets) to create a permanent arbitration court. All actions derived from the Companies Law (Law 19,550) in respect of public companies shall be subject to the jurisdiction of such arbitration court.
  3. Sanctions. The Decree introduces more and new sanctions to the persons and institutions within the public offering regime, by amending the Public Offer Law 17,811 and Mutual Funds Law 24,083.
  4. Amendment to Public Offer Law 17,811("POL"). By amending the POL, the Decree introduces several changes as follow:
    1. increases the term for calling a shareholders' meeting;
    2. establishes the proxy public request;
    3. enables the CNV to regulate exchange offers;
    4. allows the shareholders and board meetings to be held through video conferences and other electronic devices;
    5. possibility, with certain limits, that a corporation purchases its own shares and to hold treasury stocks;
    6. regulates the transactions of a corporations with "related parties" and on an "arm's length" basis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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