Argentina: Having Your Cake And Eating It Too: Why Public Companies Are Opting Out Of The Mandatory Tender Offer Regime

This edition of Argentine Business Law Watch¹ reports on aspects of Decree 677/01 that have discouraged certain Argentine reporting companies from registering under revised transparency rules.

Released in 2001, Decree 677 augured a new era in reporting requirements and transparency rules for Argentine companies accessing the public debt and equity markets. The comprehensive decree touched upon issues of corporate governance and ethics, beefed-up reporting standards and tender offer rules favoring the small investor. In April 2002, the Comisión Nacional de Valores (the National Securities Commission or "CNV") published long-anticipated implementing rules and regulations to fill in the gaps.

The CNV, apparently recognizing that the enhanced requirements would represent a hardship on many companies with no further ambition of returning to the capital markets, allowed companies to opt out of the revised reporting regime. Companies making this election were required to amend their by laws, adding a specific provision to clarify that the company does not "adhere" to the statutory provisions applicable to public or tender offers.

This opt-out period ended on the first anniversary of the CNV rules (April 5 th of this year) or the date of the first 2003 company shareholders’ meeting.

Decree 677 imposes several additional requirements on reporting companies, including the creation of an audit committee comprised of at least two independent directors. These burdens tend to discourage companies with little near-term hope of returning to the capital markets from registering under the revised regime. An even more compelling reason to avoid registration relates, however, to the tender offer provisions of the decree.

Under the decree, an acquirer of a reporting company’s stock must extend a tender offer to all holders of the company’s publicly-traded shares, once surpassing the "significant interest" threshold— defined under CNV rules as 35%. In an economy in which publicly-traded equity rarely, if ever, removes control from the hands of a few shareholders, controlling shareholders have grown accustomed to selling their interest at a control premium that is not shared with the small investor. Decree 677 changes that by requiring the offeror to tender the offer to the public at the same price per share.

A company opting out of the regime imposed by Decree 677 would not give rise to the mandatory tender offer requirements. The controlling shareholder would be free to negotiate the sale of its shares directly with the offeror, reserving the control premium for itself.

Contrary to its intent, Decree 677 may work against the small investor’s interest by lowering the acquisition costs of companies opting out of its regime. Inexplicably, the decree fails to feature an express disincentive to opt out, as the CNV rules do not preclude a company from continuing to offer its securities to the public even if not registered under the revised regime nor do they prevent a company that has opted out from later amending its by-laws to register under the regime. This may be a statutory gap that CNV regulators will need to eventually fill.