CNV resolves that there is no obligation to disclose preliminary negotiations

1. The “Ediar” case[1]

Facts

In early 2008, a group of investors initiated a tender offer bid for the purchase of the common shares of Ediar S.A. This process in Argentina is known as an “OPA” or “Oferta Pública de Adquisición”. 

When the investors made the initial filing with the Argentine Securities Commission (Comisión Naciónal de Valores or “CNV”) requesting authorization for the tender offer bid, they informed the CNV that they had entered into an irrevocable commitment with certain shareholders of Ediar S.A. for the purchase of shares that represented the controlling stake of the company. 

Upon review of the file, the CNV learned that the sellers (who were the president and vice-president of Ediar S.A.) and the acquiring group had entered into a prior framework agreement in November 2007. This framework agreement was executed within the context of the preliminary negotiations which later resulted in the execution of the irrevocable commitment for the sale of the shares.

CNV summary proceedings

The CNV initiated a summary proceeding against the company, its directors and the acquiring group based on the alleged infringement to the requirements of disclosure of information provided by Decree No 677/01 (the “Transparency Decree”) and the CNV regulations. In addition, the statutory supervisors were also subject to summary proceedings based on the alleged infringement to Section 294, subsection 9 of the Argentine Commercial Companies Law No 19,550.

The main issue under discussion consisted in determining if the company, its directors and the members of the acquiring group should have informed the CNV the execution of the framework agreement in the context of preliminary negotiations. The CNV resolved to acquit the defendants because it considered that the framework agreement was part of the “preliminary negotiations”, which were non-binding and which therefore did not need to be disclosed to the market.

The CNV also based its resolution on the following arguments:

(i) The CNV regulations do not have any express provisions requiring disclosure of preliminary agreements.

(ii) The CNV tender offer regulations provide that in the event that the bidder has entered into an option or a preliminary agreement with certain shareholders to acquire shares of the target company, such agreement should be disclosed at the time of launching of the tender offer, and not before.[2] Therefore, if a firm commitment of the bidder to purchase shares need not be informed until the tender offer is launched; moreover, the preliminary negotiations need not be disclosed.

(iii) According to the CNV, the process of a transaction often comprises the following stages:

a. the “preliminary negotiations”, that consist of agreements which are usually non-binding;

b. the “preliminary agreement”, which is an agreement by which the parties commit to enter into a definitive agreement that, at such stage, they are not able or do not want to execute; and

c. the “definitive agreement”, the terms of which are often based on the terms of the  preliminary agreement.

Taking into account these three stages, the CNV considered that, in this case, the “Framework Agreement” comprised the preliminary negotiations (1^st stage) which conducted to the execution of the “Irrevocable Commitment for Sale” (2^nd stage or preliminary agreement), that finally concluded with the “Agreement for the Transfer of Shares” (3^rd stage or definitive agreement), which was entered into once the tender offer was launched.

(iv) In addition to the legal arguments, the CNV considered that there are also practical reasons to support the nondisclosure of the preliminary negotiations.  If the preliminary negotiations of a transaction which is not yet defined are disclosed, false expectations may be created in the market. In the event that these expectations do not materialize, or if the disclosed information differs from the final conditions offered, the damages suffered by the investors will be greater than the benefits. For instance, if the investors sold at a price which turned out to be lower than the tender offer price, or if the investors bought at a higher price than the tender offer price.

(v) Finally, the CNV specified that the defendants would have had the obligation to provide all the relevant information regarding any negotiations if at any moment prior to the launching of the tender offer there should any of the following events have occurred: (a) if there had been a request issued by the stock exchange authorities or by the CNV; or (b) if there had been a leak of information while the preliminary negotiations took place (for example, a rumor or news in the media regarding the transaction).

2. The requirement of disclosure of information under CNV regulations

The Transparency Decree and CNV regulations which apply to corporations that publicly offer their securities in Argentina provide disclosure obligations related to the occurrence of certain facts and circumstances.

These regulations provide guidelines regarding the conditions and the opportunity in which any sale of shares that represent more than 5% of the capital stock shall be disclosed to the market.

Sales of shares transactions generally go through three stages: i) non-binding preliminary negotiations, ii) execution of the stock purchase or other binding agreements, and iii) transfer of shares and payment of the price (closing).

The second and third stages very clearly state that they must be informed by specific regulations. For change of control transactions[3] as well as for those deals which result in a change in the stock ownership of 5% or more,[4] the obliged persons must inform the transaction to the CNV immediately after it takes place.

Additionally, these transactions need to be informed at such stages by application of the generic regulation that requires the immediate disclosure of any fact or situation which, for its importance, could substantially affect the placement of securities of the issuer, or the course of the securities' negotiation.[5] This information would be information considered “significant” under US standards.

The first stage, on the other hand, need not be disclosed if the preliminary negotiations and any documents related thereto are non-binding. This is the issue resolved in the “Ediar” case.

3. The requirement of clarification or rectification, as complimentary to the disclosure requirement

In the “Ediar” case the CNV reinforces the full disclosure criterion which was previously held in other precedents of such Commission. The CNV states that if there has been a leak of information at any stage prior to the launching of the tender offer, the defendants would have been obliged to disclose all the relevant information related to the transaction.

In re "Muñoz de Toro, Fernando on/ Complaint for alleged omission of disclosure requirement by Alpargatas S.A."[6] the CNV resolved that registered companies and their authorities are required to clarify or rectify any confusing, misleading or incomplete information disclosed by third parties to the public.  The issuer must strive to give the public equal access to correct information regarding its situation, which includes correcting any false or misleading information in the public domain.

The same criterion was further held by the CNV in re "Acindar on/ Disclosure requirement"[7], where the CNV supported its interpretation taking into account United States' precedents and United Kingdom regulations regarding transparency.

4. Conclusion

The “Ediar” case provides a safe harbor for nondisclosure of non-binding preliminary negotiations and agreements which specifically applies to a sale of shares but which could also be extended to other transactions with securities of registered companies.

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