Argentina: New Regime For Directors That Represent The Government

Last Updated: 4 September 2012
Article by Ricardo W. Beller and Maria De Los Milagros Abelenda

Decree No. 1278/2012 creates a new regime applicable to directors appointed by the National State in corporations in which it has equity participation.

1. Background

In 2008, by means of Law No. 26,425 enacted by the Argentine Congress the pension funds system (AFJPs) was terminated and a state-run integrated social security system was created. The equity held by the AFJPs was transferred to the Sustainability Guarantee Fund of the Public Social Security System (the "Fund") managed by Argentina's Social Security Agency ('ANSES').

As a result of the nationalization of the AFJPs the Fund acquired minority stock participations in several publicly traded corporations listed in the stock exchange. Such stock entitles the Fund to exercise political, social and economic shareholder rights, including the right to vote the appointment of directors and statutory auditors of such corporations. In some cases, the Fund has a sufficient majority of votes to appoint one or more directors and/or statutory auditors.

2. Decree 1278/2012

On July 25, 2012 the Executive Branch enacted Decree No. 1278/2012 (the "Decree") the main purpose of which is to organize the holdings of shares of these corporations and to create special rules applicable to the directors and legal representatives appointed by the National State in such corporations.

The Decree centralizes the administration of such stock participations in the Secretary of Economic Policy and Planning for Development of the Ministry of Economy and Public Finance ("Secretaría de Política Económica y Planificación del Desarrollo del Ministerio de Economía y Finanzas Públicas") currently in charge of Axel Kicillof (the "Secretary"). The Decree provides that the Secretary will determine the policies and actions that will be implemented regarding the stock held by the National State, including those held by the Fund.

The Decree provides that the Secretary should perform the following acts regarding the State owned stock:

  1. Communicate assistance to shareholders´ meetings and make any other communication required to exercise the shareholders' rights.
  2. Appoint representatives of the National State in the respective shareholders´ meetings.
  3. To give voting instructions to the representatives of the National State for the shareholders´ meetings.
  4. To exercise the information rights granted by the equity interests, and to make requests to the corporate bodies for the access and/or copy of books and documents of the corporations.
  5. To implement an information system that allows the control of the performance of the corporations.
  6. To give instructions and recommendations to the directors or administrators appointed by the National State with the aim of protecting the public interest.
  7. To carry out all the necessary actions to comply with the purpose of the Decree.

The Decree also approves the Rules of Representatives and Directors appointed or proposed by the National State (the "Rules"). The Rules create a special regime which differs from the legal regime applicable to the other directors and representatives under the Argentine Commercial Companies Law, as amended (the "Argentine Companies Law").

The representatives of the National State (the "Representatives") shall attend the shareholders' meetings and vote each point of the Agenda according to the instructions given by the Secretary, and request to leave on record the grounds of their vote. Furthermore, the Representatives shall deliver copies of the minutes to the Secretary informing the results and decisions adopted.

The Rules provide that the directors appointed or proposed by the National State (the "Directors") are public officers. The Directors shall assume the liabilities which apply to public officers, as well as those that apply to directors under the Argentine Companies Law. However, the Decree also provides that the Directors shall be indemnified by the National State whenever their performance obeys the Directives and Recommendations given by the Secretary.

The director's duties included in the Decree are the following:

  1. To inform immediately to the Secretary the summons to the meetings of these corporations, including the Agenda to be discussed.
  2. To ensure that all actions to be carried out should be according to the Directives and Recommendations made by the Secretary, with the aim that the corporate purpose be aligned with the public interest involved.
  3. To request monthly management reports of the corporation, to analyze the documentation in connection with the Agenda and to inform the Secretary about their opinion on the points that may be relevant or of interest to the business management or the economic development policies provided by the Secretary.
  4. To attend to the meetings called by the Secretary.
  5. To send to the Secretary copy of the Board of Directors´ minutes and the Shareholders´ minutes, financial statements, management reports, annual budgets and investments, etc.
  6. To inform to the Secretary the facts, acts, omissions and/or behaviors capable of producing damages to the public property or to the public interest or that may configure omissions and/or violations of tax, customs, social security matters or conducts liable to criminal claims.
  7. To provide prompt treatment to the requests for information and access to the documentation made by the Secretary.
  8. To send to the Secretary a report regarding the economic, financial and management performance of the corporation in which the director acts.

The Decree also provides that the provisions of Article 264, paragraph 4 of the Argentine Companies Law, which expressly prohibits the appointment of public officers as directors of corporations shall not apply in the case of the Directors.

The Rules provide that the Directors shall not be paid their fees directly by the corporations. Instead, the corporations will deposit the Directors´ fees in bank accounts of the Ministry of Economy, and the National State shall in turn pay the Directors a remuneration based on such fees but applying caps on a sliding scale.

3. Issues

The Decree modifies certain provisions of the Argentine Companies Law. The validity of the modification of a law by a decree could be questioned, as a law has a higher ranking.

Some of the provisions of the Decree that could be questioned are the following:

  1. The Argentine Companies Law requires that a director must act with the diligence of a good business man in view of the corporate interest of the corporation he/she is managing. The provision of the Decree that obliges the directors to act according to the instructions of the Secretary does not allow them to apply their own management criteria and may lead them to act in conflict of the interests of the corporation they manage.
  2. The Decree provides that directors must be indemnified for any acts they perform based on the Directives and Recommendations given by the Secretary, which differs from the liability regime provided by the Argentine Companies Law.
  3. The Decree provides that the Directors will be paid a remuneration by the National State instead of by the corporation.. This remuneration regime differs from the one provided in the Argentine Companies Law.

The Argentine Companies Law provides that: "public officers whose duties are related to the purpose of the company" cannot be appointed as directors or managers of companies (Section 264, paragraph 4 of the Argentine Companies Law). The Decree provides that (i) Directors appointed by the Secretary are public officers (Section 4 of the Rules), (ii) the provisions of Section 264, paragraph 4 of the Argentine Companies Law are not applicable to them (Section 12 of the Rules), and (iii) that "in the event of the discussion of a matter at the board meeting that relates to the competence of the director as a public officer, the director shall notify this to the board of directors and the statutory auditors and refrain from participating in the deliberation" (Section 12 of the Rules). Note that the Decree only refers to a prohibition on participating in the deliberation, but does not refer to a prohibition to vote such matter. As previously stated, the modification of a provision of the Argentine Companies Law by a decree may be questioned.

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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