Bill to Reform the Capital Markets Law

The Bill to reform the current Capital Markets Law No. 26,831 ("Bill”) aims to achieve the development of the Argentine capital market by increasing the number of investors and companies that are financed in the market, within the framework of a market with clear and transparent rules, to finally achieve a modern financial regulatory framework that contributes to the development of Argentina's economy. This Bill replaces an earlier quite similar bill sent by the Government to Congress last year and which never reached the floor.[1] The Bill follows the previous bill, with a few additions, but removing many of the most controversial tax reforms, while including certain provisions which aim to eliminate double taxation and promote investment in listed companies. In parallel, a tax overhaul has been outlined by the Government and may impact the taxation sections. In addition, the license for investment advisors which was included in the prior bill has already been introduced by the Argentine Securities Commission (“CNV”) regulations; therefore, was not included in the Capital Market Bill.[2] Finally, the Capital Markets Bill includes a chapter which aims to promote the financing of micro, small and medium-sized enterprises through capital markets and to improve mortgage financing.

The Bill was approved by the House of Representatives on November 22, 2017, with minor amendments and is expected to be considered by the Senate soon.

Through the reforms introduced by the Capital Markets Bill, the following laws will be modified and changes will be introduced in the subsequent regulations:

1. The Capital Markets Law No. 26,831 (hereinafter, the "CML");
2. Law No. 24,441 of Housing and Construction Financing and its amendments;
3. Law No. 20,091 of Insurance Companies and its amendments;
4. Law No. 24,083 of Common Investment Funds and its amendments;
5. Law No. 23,576 of Negotiable Obligations and its amendments;
6. Law No. 20,643 on the Tax Relief Regime for Private Securities and its amendments regarding Caja de Valores;
7. Law No. 27,264 of Productivity Recovery Program and its amendments regarding the regulation of the promissory note;
8. Law No. 25,246 and its amendments regarding persons obliged to provide information to the Financial Information Unit; and
9. Incorporation of regulations regarding derivatives’ transactions and the promotion of a program of financial inclusion.

The most important reforms and regulations introduced by the Bill are analyzed below.

Promotion of Micro, Small and Medium-Sized Enterprise instruments in the capital market

With the purpose of facilitating the access of Micro, Small and Medium-Sized Enterprises (“MSME”) to the capital markets, the Bill provides for new instruments such as the creation of “MSME Electronic Invoices,” which will constitute executory titles, provided that certain conditions be met, which may be negotiated in markets authorized by the CNV. Such MSME Electronic Invoices will replace electronic invoices issued by MSME to large enterprises.

Changes in the powers of the CNV

With the purpose of attenuating the prerogatives granted to the CNV, the Bill proposes several modifications to Section 20 of the CML, which was one of the most controversial sections when the last amendment of the CML was enacted. In effect, the new text abrogates the powers set forth in Section 20(a)(I) and (ii), which currently grants the CNV the power to designate “supervisors” with veto power over the resolutions adopted by the board of directors or managers of publicly traded companies and the separation of the board of directors or managers for a maximum term of one hundred and eighty (180) days.

Under the Bill,  the CNV retains the power to initiate administrative proceedings and impose sanctions under the terms of the CML. Section 19(i) which includes the power of the CNV to declare, without initiating prior administrative proceedings, irregular and ineffective for administrative purposes any acts subject to its control, when they are contrary to law, the regulations of the CNV, the bylaws or the rules issued by entities and approved by the CNV is eliminated. Under the proposed text, any declarations must be reasoned and require initiating prior administrative proceedings.

CNV’s sources of funding

The Bill modifies the sources of funding and the origin of the resources of the CNV. It proposes an increase in funding sources to optimize the functioning of the CNV, by incorporating the tariffs for authorization of the public offer of securities and registration of agents, markets, clearing houses and derivatives’ registration entities and those from the provision of other services, which must be fixed by the Ministry of Economy and Public Finance at the proposal of the CNV.

The resources derived from fines imposed by the CNV will no longer be considered as a source of financing and must be transferred to the Argentine Treasury. The new wording intends to avoid possible conflicts of interest between the CNV's sanctioning powers and its own resources.

Changes to the pre-emptive right in public offers

In line with the most modern comparative law, and with the objective of granting agility and improving public offerings of shares, the Bill incorporates Section 62 bis that modifies the regulation of pre-emptive rights in public offerings. According to the proposed text, in the case of capital increases of shares or negotiable obligations convertible into shares publicly offered, the pre-emptive right must be exercised through the placement procedure determined in the prospectus of the respective public offering;  provided that the following conditions are met: (i) that there is an express inclusion in the by-laws that authorizes it; and (ii) that it is approved by the shareholders' meeting, approving each issue of shares or negotiable obligations convertible into shares.

The mechanism grants the beneficiaries of the pre-emptive rights the priority in the allocation up to the amount corresponding to them by the percentage they hold, provided that the orders presented are: (i) at the price that results from the placement process or at a determined price that is equal to or higher than the subscription price determined in the public offering, or (ii) express their intention to subscribe the shares at the offering price resulting of the placement process.

Likewise, the Bill establishes that pre-emptive rights will not be applicable as a rule, unless the bylaws of the companies involved state otherwise. Furthermore, it provides that foreign entities may participate in shareholder’s meetings of listed companies by proxy, without need of any other registration requirement.

Private placement

The new text grants the CNV the power to issue rules establishing under which assumptions an offer of securities will not be considered a public offering, but a private placement. For such purposes the CNV may take into consideration means and mechanisms of publication, offering and distribution and the number and type of investors to whom the offer is addressed to.

Amendment of the regulatory framework for takeover bids

The Bill substantially modifies the regulatory framework for takeover bids ("OPA"), proposing amendments to Chapters II, III and IV of Title III (Public Offering) of the CML, with the objective of protecting the investor in the public offering regime and to correct certain conflictive situations.

The Bill also eliminates the mandatory takeover bid for those in cases where control of more than 50% of the voting shares of a listed company -either directly or indirectly- is not acquired. Consequently, the obligation to promote takeover bids is eliminated for cases in which there is no acquisition of controlling interest or partial OPA, or significant participation that does not represent control.

For the purposes of the regulation, it is established that a person will have, individually or together with other persons, a controlling interest when: (i) it directly or indirectly reaches a percentage of voting rights equal to or greater than 50% of the company, excluding from the calculation those shares that belong, directly or indirectly, to the affected company; or (ii) has obtained less than 50% of the voting rights of a company but acts as a controlling shareholder.

It is also clarified that the OPA procedure is ex-post, meaning that the obligation to promote the takeover bid is subsequent to the acquisition of control. The deadline for submitting the offer is one (1) month as from the date when the controlling interest is obtained.

The Bill also provides more precise parameters for the determination of the "fair price" and its calculation in the OPA in the event of change of control, delisting and squeeze-out. With regard to voluntary takeover bids, it is established that the offeror may set the price at their own discretion without the fair price guidelines being applied.

Supervision over external auditors

Within the CNV's regular supervisory powers on the external auditors of all entities subject to regulation of the CNV, the Bill establishes the new principal powers for this entity. They include: (i) the implementation of a registry in which such agents are registered; (ii) the organization of a supervisory system on the external audits, being empowered by the CNV to request information, carry out inspections and request clarifications; (iii) the applications of penalties, which may consist of warnings (with or without publication in the Official Gazette), fines, disqualification of up to five (5) years to perform their functions, among others.

In accordance with the fundamentals of the Bill, the mentioned proposals imply an increase of the supervisory power of CNV, granting greater protection to the investor, in line with the recommendations of specialized international organizations.

Competent courts - Administrative resources

The Bill turned back the amendment introduced by the LMC by the year 2012. It establishes the jurisdiction of the federal commercial courts to review the resolutions or penalties imposed by the CNV, in contrast to the regulations set forth by current LMC, which grants jurisdiction for this type of matters to the contentious-administrative courts. This amendment will ensure more predictability and legal certainty, according to the expertise of the commercial courts on capital markets matters.

Additionally, the Bill extends the term for filing a direct appeal against the CNV, from five (5) business days to ten (10) business days since the notification of the resolution appealed. This consolidates the principles of due process and the right of defense. Moreover, in the event of appeals against fines, it grants this resource with a suspensory effect (efecto suspensivo), which means that the effects of the fine is suspended until a final resolution is obtained, while in the current LMC the appeals, in all cases, are granted with devolutive effect (efecto devolutivo) which means that the appeal of a resolution does not suspend its effects.

Amendments to Law No. 24,083 of Mutual Funds

The Bill substantially modifies the legal regime applicable to the Mutual Funds (hereinafter referred as “FCI”, as per the Spanish acronym), by repealing certain provisions set forth by Law No. 24,083 and introducing new standards in line with the current dynamic and development of this vehicle of investments, according to the importance acquired by it in recent years.

First, the Bill reformulates the FCI definition in broadly similar terms from those used by the regulations of the CNV, such as the estate owned by several persons, who have the right of co-ownership represented by quotas. On the other hand, the Bill  makes a clear distinction between two types of FCI: the Open FCI (FCI Abiertos) and Closed FCI (FCI Cerrados). Both have an unequal development principally because tax matters affect the Closed FCI. For this reason, the Bill seeks to eliminate the existing regulatory asymmetries, promoting the development of the Closed FCI in order to highlight its aptitude for financing of productive activity.

According to the Bill, Open FCIs are those comprised of: (i) publicly traded securities and national, provincial, municipal or local public securities traded on markets authorized by the CNV; (ii) precious metals or their representative certificates; (iii) local and foreign currency; (iv) derivative financial instruments; (v) instruments issued by financial institutions authorized by the Argentine Central Bank; (vi) portfolio of assets that replicate stock or financial indexes; and (vii) all the assets, agreements and financial investments established by CNV. Closed FCIs are composed of: (i) the authorized assets of the Open FCIs; (ii) movable or immovable assets; (iii) non-publicly traded securities; (iv) creditors' rights; and (v) all the assets, agreements and financial investments established by the CNV. In contrast to the regulations set forth by the Bill regarding Open FCIs, Closed FCIs must be constituted with a maximum number of quotas, which must not be rescued.

The Bill authorizes the creation of Open and Closed FCIs formed with voluntary contributions for retirement benefits subject to the terms and conditions set forth by the CNV .

It also provides that the quota holders, the Management Company and the Depositary Company are not personally liable for the obligations of the FCI, nor may their creditors enforce their rights against the FCI’s estate. This is because the FCI’s estate, according to the Bill, constitutes a separate estate.

With regard to the Closed FCI, the Bill establishes that the quota holders’ offer will be made through a Public Offering Prospectus, which must comply with the content determined by CNV regulations; meanwhile the Open FCI has no obligation to use a Prospectus. Moreover, it provides that the FCI’s entities cannot act as such nor can they make efforts to place the quotas, until the Management Regulation (Reglamento de Gestión) has been approved by the supervisory agency, which eliminates the approval of the Management Regulation by the Public Registry of Commerce, as foreseen by the current LMC. In accordance with the provisions of the CNV’s regulations, the Bill establishes that the placement of the quotas can be made by the Management Company or by the Depositary Company, notwithstanding the appointment of other agents authorized by the CNV.

In line with the delimitation of the liability introduced by the Bill, the unlimited joint and several liability of the Management Company or the Depositary Company regarding damages to the quota holders for the breach of their obligations is overturned, stating that they are individually liable for such damages.  As both companies are independent from each other, each of them must be solely liable for their obligations. To avoid potential conflicts of interest, the Bill prohibits the Management Company from carrying out any kind of transaction with its controlled, controlling, affiliates and related companies and/or with the Depositary Company and its controlled, controlling, affiliates and related companies.

It could be argued that the Bill grants more powers to the CNV related to the FCI’s operations, when it includes the power of supervising the Management Company and the Depositary Company, and also other persons related to the FCI, as well as to all operations, transactions and any relationships of any kind on the same issues.

Finally, the Bill promotes the incorporation of a new type of FCI able to reproduce the behavior of a financial or stock exchange index of a basket of assets, the creation of FCI for Qualified Investors and introduces new guidelines on the settlement of the Opened FCI and functioning of the ordinary and extraordinary shareholders’ meetings of the Closed FCI.

Amendments to Law No. 23,576 on Negotiable Obligations

The Bill also makes certain amendments to the legal regime applicable to the negotiable obligations aiming primarily to modernize this regime to achieve a greater and more efficient use of this type of instruments.

One of the innovations introduced by the Bill in this matter is that the notification to assigned debtors in the event of constitution of a pledge over present and future receivables is not required, as long as this notification is replaced by the publication of the notice in the Official Gazette. In this case, the publication must be accredited prior to the beginning of the placement period. This procedure can also be used for pledges and trust assignments in guarantee of present or future credits which secure securities issued by the Republic of Argentina, the provinces, the City of Buenos Aires, municipalities and other de-centralized entities.

With regard to negotiable obligations denominated in foreign currency, the Bill provides for subscription in local or foreign currency or in pesos and in the event that the services and amortization are payable exclusively in foreign currency, payment in pesos provided in section 765 of the Argentine Civil and Commercial Code will not be applicable.

Another of the main points of the Bill aims at the expeditiousness of the issuance and use of the negotiable obligations. In Section 9 the Bill establishes that the issuance may be approved by the management board of the issuer, as long as it was provided in the bylaws, while entering into the public offering regime must necessarily be approved by a shareholders’ meeting.

Moreover, another of the developments incorporated by the Bill is the ability to issue negotiable obligations with limited recourse to certain assets of the issuer. In the event of default, the issuer would only be liable to bondholders with such assets.

Regarding bondholders’ meetings, the Bill establishes that, in the case of absence of a legal representative, they may be chaired by whoever is designated by the majority of bondholders present on the basis of the nominal value of the negotiable obligations represented therein. It also includes the possibility of implementing in the issuance terms and conditions a procedure to obtain the consent of the relevant majority of bondholders without the need for a bondholders’ meeting, by a demonstrable means that ensures the due prior information and the right to demonstrate.

Collateral Agents for collective financings

Considering the absence of specific regulation on syndicated loans and other collective financings, the Bill introduces a new regulation in this matter, establishing that, if there are two (2) or more creditors, the parties may agree on the creation of mortgage and pledged collaterals in favor of a Collateral Agent, who will act for the benefit of the creditors and, in this case, the secured credits may be transferred to third parties, who will benefit from the collateral on the same terms as the assignor. Therefore, the principle of participation (principio de accesoriedad) provided for in Section 2186 of the Argentine Civil and Commercial Code would not be applicable. Thus, the holder of the collateral dissociates from the holders of the secured credits, allowing for the transfer of credits without the need to modify the mortgage and pledged collaterals.

In these cases, the pledge on current and future credits resulting from the ordinary business of the debtor or the guarantor will be enforceable vis a vis third parties, if the pledgor publishes a notice informing the assignment to the collateral agent in the local Official Gazette of the domicile of the company and in a newspaper with national circulation, without the need for any specific notice to the assigned debtor. 

Repos and Derivatives Transactions

The Bill defines derivative agreement and repurchase transaction. While the definitions of derivate transactions and repurchase agreements have certain ambiguities, the Bill expressly provides that: (i) the definition of derivatives includes, but is not limited to forward, futures, options, swaps and credit default swaps and/or a combination of them or any of them; and (ii) the definition of repurchase agreement includes, but is not limited to, repurchase agreements. The name of the contracts included in the definition is also in English in the Spanish original version. Therefore, it is clear that the most widely used derivative transactions and repurchase agreements are covered by the definition.

The Bill provides that the term limits on preliminary agreements do not apply to derivatives and options on securities. Neither the maximum term on provisions allowing the seller, or buyer, of a good to repurchase, or sell, such good to the counterparty will apply to (i) repurchase agreements, or (ii) to preference rights, repurchase, or resale provisions related to securities.

It also includes insolvency regulations for derivative transactions and repurchase agreements that are:

1. executed and/or registered in a markets authorized by the  CNV if the settlement of those transactions is carried out through the market, clearing house or central counterparty;
2. executed and registered in a market authorized by the CNV, if the settlement of those transactions is not carried out through a market, clearinghouse or central counterparty; and
3. executed between local or foreign counterparties outside a market authorized by the CNV if registered according to the formalities to be set forth by the CNV.

A party to these derivative or repurchase transactions, in the event its counterparty enters into an insolvency procedure under the Bankruptcy Law, will be entitled to exercise its rights under the contract regarding early termination, liquidation,  set-off and the enforcement of margin for the net amount owed. Therefore, the close out netting provisions would be enforceable in insolvency scenarios for this derivative and repurchase agreements.

The Bill also includes certain provisions which would allow the counterparties of derivative and repurchase transactions with financial institutions to enforce their contractual rights, if certain conditions are met, in the event the financial institution is suspended or is subject to reorganization by the Argentine Central Bank.

The CNV will have the authority to regulate these provisions.

Tax provisions

The Bill includes exemptions on income tax for: (i) the proceeds derived from transaction with shares of companies listed in markets authorized by the CNV. However, if such shares are not listed, but the profits are derived from the public offering or a tender offer for such shares, and/or 25% of the shares of the company are traded in markets authorized by the CNV, the exemption will also apply; and (ii) trusts and mutual investment funds which are listed in markets authorized by the CNV which invest in Argentina. All proceeds distributed by such trusts and/or mutual investment funds to investors  must be declared by the beneficiaries in their tax statements.

In the event that the securities listed above are not publicly traded in markets authorized by the CNV, the exemptions on income tax provided by the Bill will not apply.

[1] Please see “Bill to Reform the Capital Markets Law” and “Repos and Derivatives Transactions in the Capital Markets Reform Bill” in Marval News No. 167.

[2] Please see ”The Argentine Securities Commission Creates License for Private Banking” in Marval News No. 176.