Another setback for leveraged buy-out in Argentina (Comment on decision in re: “Giraudi, Pascual c/ Marofa S.A. y otros)

Pursuant to the version of the facts provided in said decision, in 1997 certain shareholders of Marofa S.A. sold their shareholdings to the remaining shareholders for the amount of US$ 400,000. Some days later, Marofa S.A. granted the selling shareholders a mortgage on its only real property for the same amount, in order to secure a loan received from said sellers. It was proved that the company never received the loan and that the sole purpose of the mortgage security was to secure the payment of the price balance.

In view of a motion to declare it void filed by an unsecured creditor, Room A of the National Court of Appeals in Commercial Matters ruled that having the company undertake an obligation arising from a loan secured with a mortgage allegedly assumed by the company with the sole purpose of securing a transaction performed for the shareholders’ personal benefit (in this case, sale and purchase of shares) should be deemed an unlawfully simulated transaction. 

Although the aforesaid would have sufficed to define the thema decidendum, the Court made further considerations regarding the nature of leveraged buy-outs (or LBOs), thereby suggesting that said mechanism of acquisition is neither lawful or unlawful per se, and that it is necessary to determine its legal validity or status based on a case by case basis but making it clear that it will not be held valid whenever it adversely affects creditors.

Usually, the validity and standing of an LBO is discussed within the context of the target’s insolvency, when the target’s remaining creditors negotiate the repayment conditions of their claims. Nowadays, it is difficult to foresee a “safe haven” for the lawfulness of leveraged buy-outs since, when the target’s debt is incurred in for the purpose of financing the acquisition by the buyer (including the initial buyer which subsequently absorbs the target or vice versa), most judges will probably opt to rule that the LBO is invalid almost automatically, even in those cases where a substantial portion of the claims belong to post-LBO creditors. Due to the aforesaid, and bearing in mind that the tax authority has raised repeated objections to the target’s tax deduction of the interest arising from an LBO debt, the convenience of acquiring Argentine companies through LBOs is at the very least, doubtful.