Guest Post: Argentina Right to exclude shareholders in closely held corporations

Contributed by Estudio Garrido Abogados

The Commercial Court of Appeals of the City of Buenos Aires, the most active tribunal for corporate law in Argentina, recently passed a ruling (in In re Microomnibus Ciudad de Buenos Aires SATCI v Martinez) regarding the right to exclude shareholders in closely held corporations in the event of ‘just cause’. The court stated that although the Business Association Law 19,550 does not specifically include corporations among the type of legal entities where any equityholder (whatever its stake) may be excluded for ‘just cause’, such exclusion is valid if the bylaws of the corporation expressly contemplate it.

New ruling

Closely held corporations amount for more than 90% of legal entities in Argentina, employ more than 70% of the workforce and amount for more than 50% of economic activity. The ruling is significant because it will:

  • reduce litigation;
  • make the Argentine closely held corporation a more attractive investment instrument, thus reducing the use of foreign vehicles (which contain squeeze-out provisions and would enforce a call option against a shareholder that has engaged in illegal conduct); and
  • by analogy, eliminate uncertainty in the enforceability of shareholder agreements, in particular in respect of puts and calls, deadlock resolution mechanisms and drag-along rights (all instances where a shareholder leaves a corporation).

However, the ruling does not define:

  • ‘just cause’;
  • the price at which the shareholder is to be excluded;
  • who (the corporation or its shareholders) is entitled to the rights; or
  • the majority required to amend the bylaws of an existing corporation to include the exclusion right.

Interpretation

The above matters can be interpreted as follows.

Just cause
The bylaws could leave the matter for judicial interpretation or specify what would constitute ‘just cause’ (eg, wilful misconduct or gross negligence that results in damages to the corporation, diversion of corporate funds, utilisation of the corporation for an illegal purpose or voting under a conflict of interest).

Price
Any reference to fair market value should withstand scrutiny. In addition, references to net worth, even if lower than fair market value in a particular circumstance, should also withstand scrutiny since this is the price at which appraisal rights are exercised.

Entitlement to the rights
The bylaws could provide that the rights belong to the corporation or to the other shareholders. If exercised by the corporation, the stated capital of the corporation will be reduced, unless the corporation has accumulated profits or free reserves.

Required majority
An absolute majority of shares entitled for a vote, with only one vote for shares with multiple votes, would be be required to amend the bylaws of an existing corporation to include the exclusion rights.

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