Shareholder right to information

1. Introductory notes

In a recent case (in re “Farallon Telco Inversora LLC vs. Nortel Inversora S.A. et al”, May 28, 2002), the Commercial Court of Appeals has set an important precedent regarding limitations to shareholder information rights contemplated by Argentine Companies Law No 19,550 (the “ACL”).

The aforementioned Court has held that access by shareholders to corporate information is in principle limited to the review of annual financial statements and supplementary information thereof.

It was also held that the right to information does not entitle shareholders to gain access to information on the management of the company, as shareholders cannot become supervisors of the company’s management policies.

2. Applicable regulations

The ACL grants partners the right to review the company’s books and commercial records as well as the right to request any information or reports from the management that they may deem convenient. This right is not applicable to partners of limited liability companies (sociedades de responsabilidad limitada), except as otherwise provided for by the by-laws, and stock corporations (sociedades anónimas) with the exception of those companies which do not have a statutory auditor (síndico) (section 55, ACL). In summary, save for the above referred exception, direct access by shareholders to corporate information and supervision of the company’s management is not allowed.

There are certain cases however (sections 67, and 83, 2nd paragraph of ACL) where directors are obliged to provide shareholders with copies of annual financial statements, the preliminary merger agreement and the merger special balance sheets in advance so that they may be considered before the shareholders’ meetings.

Furthermore, the ACL provides for other unrestricted ways of shareholder access to information. Such is the case of section 249 which grants shareholders the right to request, at their own expense, signed copies of the minutes of shareholders’ meetings or the case contemplated by section 294, paragraph 6 of the ACL which provides that the statutory auditor or the Supervisory Committee must “provide when so requested by shareholders holding an interest of no less than 2% of the capital stock, with information on matters subject to their scope of competence”.

The above referred provision contains several limitations. First, the request must be submitted by shareholders representing not less than 2% of the capital stock. Second, the statutory auditor or Supervisory Committee must provide information on matters that are under their scope of competence. Statutory auditors are in charge of the control of legality on the other corporate bodies as opposed to the Consejo de Vigilancia (a supervisory committee composed of shareholders), which has the right to oversee the management’s performance (section 281, ACL).

In turn, the rules of the Comisión Nacional de Valores (“CNV”) and the Buenos Aires Stock Exchange impose several disclosure obligations (on both a permanent and a case by case basis) as well as confidentiality obligations to directors and statutory auditors of companies whose debt or equity securities are traded publicly.

In those cases where the rights of shareholders may be affected and following a request made by shareholders representing no less than 5% of the capital stock, section 14, paragraph e) of Decree No 677/2001 authorizes the CNV, to require listed companies to appoint an external auditor to perform specific auditing tasks for a limited period of time, at the expense of the requesting shareholders. Prior to granting its authorization, the CNV shall request the opinion of the statutory auditors and of the audit committee. Requesting shareholders must comply with the conditions set forth in section 23 of CNV Resolution No 400/2002.

3. Summary

Companies, through their management bodies, deal with commercially sensitive information (such as industrial secrets, forward-looking strategies, technology innovations, etc.). The disclosure of such information may damage, or have an adverse impact on the image of the relevant companies, or allow third parties to obtain undue profits by using such information. If the best interest of the company so requires, certain information must not be disclosed to shareholders.

Consequently, shareholder right to corporate information is limited and may not be exercised unreasonably or in an abusive fashion.

Shareholders have the right to request such information and documents as may be necessary to participate in shareholders’ meetings. Information requests made to the statutory auditors must concern only those matters which are under the scope of their competence and do not include information on management actions.

The right to access information must be exercised by shareholders in good faith and for specific purposes such as participating in shareholders’ meetings with the proper information.

In summary, the precedent commented here has set adequate limitations to shareholders right to access information and the obligation of the company to provide such information to shareholders.