The Judiciary Sets Limits on Argentine Securities Commission

On March 26, 2014 the Federal Supreme Court of Justice (the “Supreme Court”) dismissed the extraordinary appeals filed by the Attorney General and the Argentine Securities Commission (“CNV”, according to its Spanish acronym) by a majority vote, in the “Comisión Nacional de Valores c/ Papel Prensa S.A. s/verificación” case.
These appeals were filed against a judgment rendered by Tribunal C of the National Court of Appeals in Commercial Matters (the “Commercial Court of Appeals”) annulling an order issued by the CNV which had declared certain corporate actions taken by Papel Prensa S.A. (“Papel Prensa”) to be “unlawful and ineffective”.

1. The case – The Declaration of “Unlawfulness and Ineffectiveness” Issued by the CNV and Its Review in Court
On November 19, 2009, the CNV issued Resolution No. 16,222, by means of which certain actions taken by the Board of Directors of Papel Prensa were declared “unlawful and ineffective for administrative purposes” based on alleged non-fulfillment of formal requirements.
The CNV invoked Decree No. 677/2001 (which amended Law No. 17,811), that vested the CNV with the power to “[d]eclare unlawful and ineffective for administrative purposes any actions subject to its control, if such actions are contrary to law, the rules issued by the Securities Regulatory Commission, the company’s by-laws or any regulations”.
According to precedents, an order declaring a corporate action “unlawful and ineffective” means in practice that the action is null for administrative purposes and that the breach of such order may result in administrative proceedings being initiated against the involved company, its directors and statutory auditors.
In this case, Papel Prensa challenged the CNV order before the Commercial Court of Appeals.
On appeal, the Commercial Court of Appeals declared CNV Resolution No. 16,222 void on grounds that the CNV had failed to fulfill the procedural requirements established by the Administrative Procedure Law No. 19,549 (the “LPA”, according to its Spanish acronym), deemed by the Commercial Court of Appeals as an applicable supplemental rule CNV proceedings.
The Commercial Court of Appeals concluded that the CNV should have given Papel Prensa the opportunity to file its defense and offer evidence, as provided for by the LPA, before declaring the relevant corporate actions unlawful and ineffective.
Both the Attorney General and the CNV filed extraordinary appeals against the ruling of the Commercial Court of Appeals, but these appeals were denied, as a result of which appellate proceedings were brought before the Supreme Court.
The Supreme Court dismissed the appeals filed by the Attorney General and the CNV by a majority vote.
Justices Lorenzetti, Petracchi, Fayt, Maqueda and Argibay voted for overruling the appeals on procedural grounds. They held that the ruling of the Commercial Court of Appeals was not a final judgment or an equivalent decision for purposes of certiorari review by the Supreme Court.
Justices Zaffaroni and Highton de Nolasco dissented and voted for upholding the appeals, on the grounds that the ruling of the Commercial Court of Appeals was final, and reversing such decision. In their opinion, the interpretation followed by the Commercial Court of Appeals unduly restricted the powers of the CNV.

2. Regulation of the matter in the new Capital Markets Law
A new Capital Markets Law No. 26,831 (the “CML”) has been in force since January 2013.
Section 19, subsection i, of the CML vests on the CNV the same power granted by Decree No. 677/2001 to declare any actions subject to its control unlawful and ineffective for administrative purposes, but provides that such declaration may be made without following the specific “sumario” procedure established for the penalties that the CNV is empowered to impose.
Furthermore, the CML expressly provides for judicial review of any such declaration and in the case of companies organized in the City of Buenos Aires it requires that appeals be filed with the Federal Court of Appeals in Administrative Law Matters (section 143, subsection a), thus depriving the Commercial Court of Appeals of jurisdiction to hear such appeals.

3. Preliminary comments
The Supreme Court left the interpretation followed by the Commercial Court of Appeals, pursuant to which the CNV is required to make the involved company a party to the relevant administrative proceedings and preserve its right to be heard prior to declaring “unlawful and ineffective” any corporate action, in place.
This interpretation is helpful in guaranteeing observance of the due process principle by the CNV when exercising this power, which is of great importance given the severe adverse effects that, as explained above, such declaration of “unlawfulness and ineffectiveness” may bring to the involved company, its directors and statutory auditors.
Further developments in the case law regarding this issue should be closely monitored in order to determine the precise impact of this precedent vis-à-vis the current legislation and, in particular, the change of the competent jurisdiction to review CNV actions.