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

24 May, 2011

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.


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).

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.


Small U.S. Businesses Need to Consider Their Global Exposures

3 May, 2011

Last week I attended a seminar here in Atlanta designed for small businesses to improve their sales. The attendees were a wide range of business types from heavy equipment sales to document security. I had the pleasure to talk with some of these business owners who were quick to dismiss their ‘global’ exposures because they are not Coca-Cola, UPS or some other multi-national firm – they are ‘Main Street USA’. To their credit, they were willing to spend 3 minutes with me and learn that many of them do have global exposures, and they have no plans for this risk, yet.


What I reminded them of, in a globalized economy all linked by overnight delivery, advanced telecommunications and the internet, even today’s small companies increasingly do business with foreign suppliers and customers. For these businesses, conducting business outside of the U.S. has never been easier, but doing so leads to a wide array of risk management and insurance issues.


Like them, it is obvious to most people that companies with foreign subsidiaries, branches or joint ventures need to be aware of their exposure to loss in the various countries in which they do business. They need to be certain that their insurance programs are appropriate to the exposures and in compliance with local regulations. Failure to do so may leave a company without insurance coverage – which may not become apparent until after a loss has occurred – and potentially subject to fines and penalties.


Managing a multinational insurance program can be enormously complicated. Some countries require policies to be purchased locally, meaning that the buyer needs access to distant insurance markets and must be able to manage language issues, especially since the policies are often issued in the local language. One solution is to delegate local insurance purchases to local employees, but this can lead to other issues concerning the quality and consistency of coverages. These ‘multi-national’ companies oftentimes simplify the insurance process by working with brokers experienced in international insurance programs and multinational insurers that can provide substantially one-stop service, even when local insurance policies are required.


However, a point I made with these small business owners is that most, if not all of them, have a company website, and there is where they are potentially exposed to liability from foreign sources. Even if they do little or no business in a foreign country, since the Internet is borderless, the company could potentially run afoul of various libel, intellectual property infringement and privacy laws. Companies that sell products to foreign buyers have even more opportunities to incur liability, such as product liability lawsuits and enforcement of consumer protection laws. Companies with physical locations outside the U.S. face the full range of property and liability exposures in each country in which they have facilities and people.


Understanding the exposures presented by each country in which a company operates can be daunting. Liability exposures are especially challenging since laws and legal systems vary widely.


Even if not required by law, local policies may be a good idea in many cases. Local policies are more likely to be tailored to local laws and practices, and ready access to local claims personnel may be essential following a loss. Additionally, buying local policies may avoid certain complex tax issues associated with multinational policies.


Globalization is a business and economic reality, but insurance still is regulated locally. A well-structured insurance program with an insurance broker that understands these exposures is critical. Businesses should expect their broker to choose an insurance company that can minimize the friction that can be caused by the myriad of insurance regulation around the world, and allow management of the businesses to focus on growth and profitability without liability and insurance issues being an impediment.

Australia Climate Change and D&O Implications

17 October, 2009

(Note:    This post first appeared on my ‘Comprehensive Multinational Post blog on 30 July 2009.)


The legislation in Australia for the Carbon Pollution Reduction Scheme highlights the need to consider carefully the scope of D&O insurance policies.

The Bills introduced into Australian Parliament to implement the Carbon Pollution Reduction Scheme will impact directly a large number of entities and their directors and officers. There will also be a broad, indirect impact when emissions trading starts. The CPRS Bills draw attention to key areas of D&O insurance policies.

Liability of executive officers and insurance for pecuniary penalties Under Part 20 of the Carbon Pollution Reduction Scheme Bill 2009, ‘an executive officer will contravene a civil penalty provision if they are involved in a contravention by their company’. This makes executive officers personally liable for misconduct of the company if they have been reckless or negligent. The result may be significant pecuniary penalties imposed on the executive officer.

The Consequential Amendments Bill also extends the liability regime under the National Greenhouse and Energy Reporting Act 2007. Part 4 of the NGER Act will no longer be limited to liability of chief executive officers. It will, like the CPRS Bill, soon apply to a director, the chief executive officer, the chief financial officer and the secretary of a company. This would appear to include non-executive directors.

Traditionally insurers in the Australian D&O market have excluded liability for fines and penalties under D&O policies. Recently however there has been a move by some insurers to provide cover for civil penalties in some circumstances. It may be against public policy to cover officers for civil penalties where there has been a willful or deliberate breach of duty. On the other hand, vital cover may be available for officers who have only been negligent. It is recommended that companies and their directors may wish to consider whether their D&O policy provides cover for pecuniary penalties and whether that cover will extend to potential liability under the CPRS and NGER Act.

The new regulator and insurance for investigation costs

The Australian Climate Change Regulatory Authority Bill 2009 establishes the Australian Climate Change Regulatory Authority, which will be responsible for administering the CPRS, the Renewable Energy Target and the National Greenhouse and Energy Reporting System. Since climate change is one of the Federal Government’s key priorities, it may well become a powerful regulator.

When ASIC launches an investigation, the company and its directors can incur significant costs. The market for D&O insurance covering investigation costs has grown in recent years. Some policies will now cover directors for their costs in responding to an ASIC notice or attending an examination by ASIC, even if they have not been accused of any wrongful act. A more extensive policy may even provide cover when no formal notice has been served but the director is nevertheless required by the regulator to co-operate in some manner. When the Climate Change Authority exercises its powers, directors may need to look to their insurer to cover investigation costs.

Liability linked to the company and insurance for outside directorships and JVs

In its current form the CPRS Bill allows for transfer of liabilities and the nomination of a joint venture company to be the responsible entity. It is possible that a company may be liable for the control of a facility by an entity which is not a member of the company’s group. An executive officer can be personally liable for their company’s contravention of a civil penalty provision in the CPRS. That liability is linked to the company and not the operating entity.

The Government is continuing to consult with key stakeholders about controlling corporation liability and mechanisms to transfer that liability within corporate groups. For directors who hold outside directorships and responsibility in relation to unincorporated joint ventures, however, it may be time to consider carefully the scope of their D&O policy as it applies to these issues. Some policies do not provide cover for outside directorships unless specifically requested. Others may automatically cover directors nominated to the boards of other companies but may exclude joint ventures.

Pollution exclusions

Finally, many insurance policies contain an exclusion relating to liability arising from the release, discharge or escape of pollutants. These are generally broadly worded exclusions. They could go so far as to impact cover which may otherwise have been available for liability under the CPRS.

Directors may wish to have frank discussions with their insurer about cover in relation to the CPRS. At a minimum, directors may want to consider a D&O policy which provides cover for “pollution defense costs”. They may also consider seeking that cover without a sub-limit of liability. A more extensive policy may even cover shareholder claims arising from pollution issues.


Subject to their passage through Parliament, the Bills establishing the CPRS will herald a new era in corporate responsibility. It is yet another reminder of the importance of considering D&O insurance in the context of the company’s broad risk management framework.

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.

Today We Launch for New World

17 September, 2009

In the U.S. we observe Columbus Day in October as the day set aside to recognize the landing in the ‘New World’ by Christopher Columbus in 1492. Today with the launching of this blog, I am hoping to help others discover that far too many businesses in the U.S. have risks beyond the borders, and do nothing to address these exposures.

This is not a new phenomenon. For many years, sellers of insurance products in the U.S. only recognized the obvious, domestic exposures. In fact, in discussions I have had will businesses over the years, they would tell me that only companies like Coca-Cola, UPS, Microsoft and other Fortune 500 companies need to address international insurance. The fact is that in a 2006 survey of businesses conducted by Grant Thornton, 56% of businesses viewed Globalization as an opportunity; 46% admitted to already selling product internationally; and another 3% have plans to sell product internationally. (For complete survey, Click Here) Unfortunately, many businesses, when assessing their exposures to risks, they do not even stop and ask themselves the simple questions that would uncover their ‘international’ exposures.

The main purpose of this blog is to foster a discussion on issues from around the world that may, or may not impact your business. I want this site to evolve into a dynamic conversation on a wide range of risk exposures, including but not limited to, Product Liability, Professional Liability, Property exposures, Insurance Premium Taxes, Kidnap & Extortion, and their possible solutions. Some will be addressed by insurance products available in the marketplace, and other solutions will describe actions businesses can take to avoid or control their risks.

There are many well-informed professionals in this business of working closely with multinational firms who are friends and colleagues of mine. I know they share my passion in seeing a tipping point reached where the discussions on the exposures facing a company traveling to Mexico are as commonplace as the discussions about a company’s Workers Compensation. It is from that passion this blog was created.