Public Companies Required to Allocate Earnings

Under General Resolution 593/2011 issued on November 1, 2011 (the “Resolution 593” 1 ) the Argentine Securities Commission (“Comisión Nacional de Valores” or “CNV”) provided that the earnings of the corresponding fiscal year and the earnings accumulated in the Retained Earnings account (“cuenta resultados no asignados”) of public companies must be allocated to a specific purpose.

Resolution 593 is similar to General Resolution 25/2004 passed by the Public Registry of Commerce of the City of Buenos Aires (“Inspección General de Justicia”) that regulates the treatment of profits and retained earnings of private companies under its supervision.

Resolution 593 provides that the shareholders’ meeting must resolve without exception the distribution of their Retained Earnings. Public companies may not continue to accumulate profits in a Retained Earnings account. The shareholders’ meeting may allocate such funds to (i) the payment of dividends, (ii) the capitalization of earnings and issuance of new shares, (iii) the constitution of reserves, or (iv) a combination of these.

Retained Earnings are profits or accumulated losses which do not have a specific allocation. Prior to the issuance of Resolution 593, public companies could accumulate their profits or earnings in the Retained Earnings account without making a specific allocation. Such earnings remained pending allocation for a long time and could be accumulated from one period to another until the shareholders’ meeting finally resolved a specific allocation for such funds.

The payment of dividends with earnings resulting from the corresponding fiscal year or with accumulated earnings may be approved by the ordinary shareholders’ meeting without any special majorities being required.

The amount of dividends paid may limit the amount of fees that may be paid to the board of directors. Argentine Corporate Law No. 19,550 (the “ACL”) provides that when dividends are not paid, the maximum amount of fees to be paid to the board of directors shall be limited to 5% of the earnings. Such percentage shall be increased proportionally up to a maximum of 25% of the earnings of the fiscal year if the earnings are fully distributed as dividends (Section 261 of the ACL). These limits may be exceeded in the event that one or more directors is required to be paid for activities related to special committees or for technical or administrative functions provided by them to the company.

The capitalization earnings and capital increase of public companies may be resolved by an ordinary shareholders’ meeting. Once the capitalization is approved, the shareholders will receive new shares (“acciones liberadas”) pro rata to the stock they hold in the company.

Resolution 593 also authorizes the allocation of earnings to special reserves.

The ACL requires companies to constitute a mandatory legal reserve to which at least 5% of the realized net profits of the fiscal year and up to 20% of the capital of the company must be allocated (Section 70 of the ACL).

Reserves other than the legal reserve may also be created, provided they are reasonable and in accordance with a prudent administration. Section 66 of the ACL provides that the directors must inform clearly and in detail in the Annual Report the grounds for the creation of special reserves, which must be justified (for example: for future payment of dividends upon an increase of liquidity of the company, to make future investments, to cover possible contingencies or expenses, or others).

When the amount of the special reserves exceeds the amount of capital and legal reserves of the company, the allocation of funds to a special reserve must be approved by an extraordinary shareholders’ meeting with the affirmative vote of the majority of voting stock without applying multiple votes of shares, if applicable (Sections 70 in fine and 244 in fine of the ACL).

Resolution 593 does not provide a solution in the event of lack of agreement with respect to the allocation of earnings of the fiscal year. An issue that must be considered is that the shareholders’ meeting may reach neither the ordinary majority required to approve the payment of dividends, nor the special majority required to approve the constitution of special reserves. Prior to the issuance of Resolution 593 in such case the earnings were allocated to the Retained Earnings account. That option is no longer available under the new regulations.

Likewise, if the allocation of the earnings that will be resolved by the shareholders is uncertain, the board may need to call an ordinary and extraordinary shareholders’ meeting in order to cover all the possible scenarios.

Resolution 593 also regulates certain matters related to the shareholders´ meeting agenda. The agenda must specifically provide the treatment of earnings, as well as the treatment of negative results that require the dissolution of the company or a mandatory capital reduction (in accordance to Section 94, paragraph 5 and Section 96 and 206 of the ACL).