Bill to Reform the Capital Markets Law

November 30, 2016

On November 16, 2016, the Argentine Executive Power sent a bill to Congress  to reform the current Capital Markets Law No. 26,831, which seeks to modernize the entire regulatory framework applicable to the Argentine capital market, incorporating current international practices to contribute to its development.

The Bill to reform the current Capital Markets Law No. 26,831 (hereinafter, the "Capital Markets 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. 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. 24,083 of Common Investment Funds and its amendments;
  3. Law No. 23,576 of Negotiable Obligations and its amendments;
  4. Law No. 20,643 on the Tax Relief Regime for Private Securities and its amendments regarding Caja de Valores;
  5. Law No. 27,264 of Productivity Recovery Program and its amendments regarding the regulation of the promissory note;
  6. Law No. 25,246 and its amendments regarding persons obliged to provide information to the Financial Information Unit; and
  7. Adequacy of tax provisions and incorporation of regulations regarding derivatives’ transactions and the promotion of a program of financial inclusion.

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

Regulation of the figure of investment managers

The Capital Markets Bill incorporates "investment managers", who are defined as those who provide regular financial advice and investment management services authorized by the Comisión Nacional de Valores ("CNV") in accordance with the regulations to be issued by the CNV.

This incorporation allows for the return of  private banking activity to Argentina, by regulating its activity and promoting to place it under the control and audit of the CNV.

Changes in the powers of the CNV

With the purpose of attenuating the prerogatives granted to the CNV, the Capital Markets 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 proposes the derogation of the powers set forth in subsection a), sections I and II of section 20, 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. This has been decided on the understanding that the current text grants extraordinary rights to the CNV.

On the other hand, the Capital Markets Bill includes the CNV’s power to initiate administrative proceedings and impose sanctions under the terms of the CML. Correlatively, the amendment of section 19 (i) is proposed, by eliminating the power of the CNV to declare, without initiating prior administrative proceedings, irregular and ineffective for administrative purposes the 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. Under the proposed text, such declarations must be reasoned and require initiating prior administrative proceedings.

CNV’s sources of funding

The Capital Markets Bill modifies the sources of funding and the origin of the resources of the CNV. On the one hand, 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.

On the other hand, 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 National 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 Capital Markets 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. This is 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 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.

Likewise, the Capital Markets Bill establishes that the extraordinary shareholders' meeting may decide that the pre-emptive right must not be applicable, in which case the shareholders wishing to participate in the capital increase will not have such preference, and conditions set forth in section 197 of the Argentine Corporate Law No. 19,550 will not be required.

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 Capital Markets 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 Capital Markets Bill 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 Capital Markets 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.

Supervisory over external auditors

Within the CNV's regular supervisory powers on the external auditors of such entities subject to the public offering regime, the Capital Markets Bill establishes new and main powers of this entity. Among them, it is worth mentioning the following: (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 Capital Markets 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 Capital Markets Bill turned back the amendment introduced by the LMC by the year 2012. It establishes the jurisdiction of the 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 Capital Markets Bill extends the term for filing a direct appeal against the CNV, from five (5) business days to fifteen (15) 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, the Capital Markets Bill 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 Capital Markets 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 Capital Markets Bill reformulates the FCI definition in broadly similar terms from those used by the regulations of the CNV, as the estate owned by several persons, who have the right of co-ownership represented by quotas. On the other hand, the Capital Markets 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 Capital Markets 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 Capital Markets Bill, Open FCIs are those composed by: (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 Central Bank of Argentina; (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 Capital Markets Bill regarding Open FCIs, Closed FCIs must be constituted with a maximum number of quotas, which must not be rescued .

The Capital Markets Bill provides that the quotaholders, 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 Capital Markets Bill, constitutes a separate estate from the assets of the Management Company, the Depositary Company and the quotaholders.

With regard to the Closed FCI, the Capital Markets Bill establishes that the quotaholders’ 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 Capital Markets 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 Capital Markets Bill, the unlimited joint and several liability of the Management Company or the Depositary Company regarding damages to the quotaholders 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. In order to avoid potential conflicts of interest, the Capital Markets 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 Capital Markets 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 Capital Markets 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 of Negotiable Obligations

The Capital Markets 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 Capital Markets 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.

Moreover, the Capital Markets Bill introduces an exception with regard to readjustment clauses (“cláusulas de reajuste”) or stabilization clauses (“cláusulas de estabilización”): it exempts from the regime imposed by the Convertibility Law No. 23,928 the negotiable obligations issued by financial entities and legal entities that carry out activities related to construction, commercialization and financing of real estate, infrastructure works and real estate developments, as long as the negotiable obligations are publicly offered as authorized by the CNV.

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

Another of the main points of the Capital Markets Bill aims at the expeditiousness of the issuance and use of the negotiable obligations. The Capital Markets Bill in new section 9 establishes that the issuance may be approved by the management board of the issuer, as long as it was provided in the by-laws, while the entering in the public offering regime must necessarily be approved by a shareholders’ meeting.

Regarding bondholders’ meetings, the Capital Markets 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 of a bondholders’ meeting, by a demonstrable means that ensures the due prior information and the right to demonstrate.

Collateral Agents for syndicated loans

Considering the absence of a specific regulation on syndicated loans, the Capital Markets 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 accessority (principio de accesoriedad) provided for in section 2,186 of the Civil and Commercial Code would not be applicable. In this way, 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.

As of the date hereof, the Capital Markets Bill is being considered by the Finance, General Legislation and Budget and Finance Commissions of the House of Representatives.

For more information regarding (i) amendments to the tax relief regime for private securities and adequacy of other tax provisions please see “Bill to Amend the Capital Markets’ Law - Tax Aspects”, and (ii) the incorporation of regulations of derivatives transactions please see Repos and Derivatives Transactions in the Capital Markets Reform Bill”, in this edition of Marval News.