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.

UK Government Modern Workplaces Consultation

In the United Kingdom, when government departments change or make policy, they listen to public views via a consultation. For those of us in the United States, this is similar to the our government's request for public comment on a matter. You can read the consultation paper about what government wants to do or change and then send your thoughts back. For those with clients in the UK, this can have an effect on the administration of people in those offices.

 

The UK Government has just published consultation (Found Here) on its plans for flexible, family-friendly employment practices. There are four key elements:

 

1. System of flexible parental leave,
   
2. A right for all employees to request flexible working,
   
3. Changes to the interaction of annual leave and sick leave, and
   
4. Measures to encourage equal pay for equal work between men and women.
   

 

The changes to maternity, paternity and parental leave are likely to be of most immediate interest to employers, who have only just got used to the new rules on paternity leave and pay. The key proposal is that maternity leave and pay, reserved exclusively for mothers, will effectively be reduced to 18 weeks. There will then be an entitlement of 30 weeks flexible parental leave which can be shared between the parents in whichever way they wish, subject to their employers' agreement. 17 weeks of this leave will be paid and 13 weeks will be unpaid. Payment will be on the same basis as now with reference to the same eligibility criteria and set financial limits. Parental leave can be taken by both the mother and father concurrently so that parents can be together. An additional period of 4 weeks paid leave will be reserved for each of the father and the mother. The father will also retain a right to the current 2 week paid paternity leave period available around the time of the baby's birth. Employers will be concerned that the changes will have financial and administrative consequences and that it will be more difficult to plan for absences. The consultation seeks to minimize administration and states that the default position where the parties cannot agree when leave is taken is for parents to take leave in a continuous block.

 

The consultation also proposes extending the statutory right to request flexible working to all employees. However to reduce the administrative burden the current statutory process for considering requests will be replaced with a new duty on employers simply to consider requests reasonably. A statutory code of practice would be created to demonstrate a reasonable process. An interesting proposal is that employers will be allowed to take account of any factors they consider relevant in the event that they have to choose between multiple requests. The consultation makes it clear that employers would still have to show that all the requests could not be accommodated for purely business reasons and wider principles of discrimination would still need to be respected.

 

The Government also takes this opportunity to consult on changes concerning the carryover and rescheduling of annual leave in the light of recent European cases. The consultation proposes amending the Working Time Regulations so that where a worker has not been able to take his annual leave (due to sickness absence) in the current leave year he can carry it over to the next holiday year, provided he does not exceed a four week limit. The consultation recognizes that employers would still need to be aware of other contractual or statutory obligations such as the disability discrimination provisions of the Equality Act 2010.

 

The equal pay proposals would require tribunals (which have found an employer to have discriminated because of gender in relation to contractual terms or non contractual pay matters) to order that employer to conduct a pay audit. The pay audit would involve comparing the pay of women and men doing equal work and investigating the causes of any potential discrepancies.

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

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.