Typical due diligence issues
In Argentina, regulatory non-compliance is very common. For example, in the context of labor, the underpayment of social security for employees, the violation of overtime policies, and the misclassification or improper registration of employees may involve penalties from tax and social security authorities. Breaches of environmental laws are also common. Often, such non-compliance will mean additional costs for rectification and operations post-closing. These issues may erode deal value and, in some situations, may cause the buyer to walk away from the deal.
Pricing and payment
In some jurisdictions, asking the seller to clean up/rectify the issues (that have been identified during due diligence) before closing will be the norm. However, this is not necessarily the case for every situation in Argentina. Coming up with an appropriate solution requires detailed due diligence and a deep understanding of the local practice and practical risks involved. It may be advisable to seek protection through a reduction in the purchase price, extended warranty periods, special indemnities or retention of the purchase price and/or retained purchase price deduction to face contingencies.
Signing/closing
A deposit is not required. Transactions may be structured with simultaneous signing and closing. However, parties may agree to certain conditions precedent, or the transaction may be subject to certain mandatory approvals that may require a gap between signing and closing.
Asset sales
The purchase of all, or a substantial part, of a company's assets is considered a transfer of a going concern (transferencia de fondo de comercio) or a bulk transfer. When the sale of assets implies the transfer of a going concern, all liabilities of the going concern will be transferred with it unless the specific procedure outlined in the Argentine Bulk Transfer Law Number 11,867 is followed. The application of the provisions of this law is not mandatory, but can be voluntarily opted into where the buyer wants assurance that the liabilities transferred to it do not exceed those declared by the seller. In that case, the buyer can mitigate the assumption of certain, but not all, liabilities of the seller. The main purpose of this legal procedure is to protect the buyer from any hidden and contingent liabilities and protect the seller's creditors in cases where the seller is transferring a substantial part of its assets. Nevertheless, the buyer will be jointly and severally liable with the seller with respect to assessed tax and social security liabilities and assessed and non-assessed labor contingencies. There are certain formalities that need to be followed as part of this procedure:: (i) entry into the asset transfer agreement; (ii) the publication of notices in the Official Gazette (to allow creditors an opportunity to object to the asset transfer), and (iii) registration of the asset transfer with the Public Registry (PR). Registration with the PR is required in order for the asset transfer to be effective with respect to third parties.
Subject to certain exceptions as indicated below, no prior governmental approval is necessary other than the authorizations needed for any domestic or foreign investor engaged in a particular business activity. Specific authorizations are common in the banking, insurance and pharmaceutical industries.
Foreign investment restrictions
There is no national foreign investment screening procedure in Argentina. There are sector-specific foreign investment legislation/licensing regimes for the acquisition of real estate, more specifically rural land or real estate located within a security area, which may need prior approval.
Antitrust/merger control
Argentina has a mandatory filing obligation, notification is triggered upon a change of control, and meet the threshold requirements. However, Argentina does not have a suspensory merger control regime which means that transactions which meet the relevant criteria need not be notified to the competition authority and cleared before they can be completed. Instead, the filing of the transaction, notification, must take place within seven calendar days after closing of the transaction. For further information, see the more detailed section on "Antitrust/merger control".
Other regulatory or government approvals
In specific industries, such as oil and gas, prior approval from regulatory authorities may be required prior to closing in relation to asset deals.
Acquisition of shares: If the buyer acquires a company through an acquisition of shares and the target continues as the same legal entity, the buyer's liabilities or duties will be the same as those of the target. In addition, the Employment Contract Law (ECL) establishes that the seller and buyer will be jointly and severally liable for all labor obligations existing on the date of the transfer of any entity to another company. The ECL does not require the provision of notice to employees or unions.
Transfer of assets in bulk (transferencia de fondo de comercio): Where the assets and the employees transfer together contemporaneously from one company to another, there is no legal obligation to provide notice to employees regarding the transfer, or to obtain employees' consent. The employees transfer automatically.
A change of employment terms and conditions at or after transfer — if it implies material and/or non-material (in the form of pain and suffering) detriment — may serve as grounds for a constructive dismissal claim. Such a claim could be made against the buyer and seller jointly and severally if the change occurs at the time of or immediately after the transfer, or against the acquiring company if the change occurs once the relationship with such company is consolidated.
Transfer of assets on a sequential basis: Where the assets and the employees do not transfer together contemporaneously from one company to another, but rather at different stages, notice must be provided to employees regarding the assignment of their contracts, and their consent must be obtained. The employees do not transfer to the buyer automatically.
Employees may refuse to have their contracts assigned to the buyer without providing specific reasons. In such an event, an employee would be entitled to severance for termination, for which, in principle, the seller would be liable; it is irrelevant whether there are changes to employment terms and conditions upon assignment.
Share purchase agreements with effect within the jurisdiction of the City of Buenos Aires are subject to stamp tax at the rate of 1% on the economic value of the transaction. Share purchase agreements with effect in other provinces are subject to a stamp tax of approximately 1.5%, although the rate varies depending on each jurisdiction.
Executing the agreement by means of an offer/acceptance mechanism is a valid and widely accepted method of avoiding this stamp tax. This mechanism makes the agreement non-taxable for stamp tax purposes and enforceable. It consists of one party sending an offer to enter into a share purchase agreement with all the terms and conditions and the other party accepting such offer by a separate acceptance letter (without reproducing the essential terms of the offers) or by the performance of a positive act (e.g., payment of a symbolic amount).
This mechanism has been validated by Argentina's Supreme Court, but there are certain provinces with a more aggressive approach that may request payment of the stamp tax when the agreement produces effects in their jurisdiction.
In addition, the transfer of shares in an Argentine entity held by non-Argentine shareholders will, in principle, be subject — at the sellers' choice — to a 13.5% withholding tax on the sale price of the shares or a 15% tax on the net gain (i.e., sale price less tax cost of the shares) obtained by the seller.
According to domestic law, when both the seller and the buyer are foreign, the tax must be withheld and paid to the Argentine tax authorities. However, from a practical standpoint, the withholding tax is currently not applicable due to the fact that the payment procedure for the foreign buyer to pay the tax has not been implemented. Thus, the tax is currently not payable in this scenario and will not become payable unless such a payment procedure is put in place before the transfer becomes time-barred.
If an Argentine individual holds the shares, the applicable withholding tax is 15%. When the seller is a local entity, the applicable income tax will be 25%, 30%, or 35% (depending on the net cumulative taxable income of the local entity).
From a procedural standpoint, the Argentine entity whose shares are being transferred will have to inform the Argentine tax authorities of the transfer of its shares within 10 business days as of the closing date. Such transfer takes place through the tax authorities' website.
Stamp tax will also apply in the case of an asset transfer. In addition, notary fees and costs are payable on transfers of real estate at variable, negotiable rates, capped at approximately 2.3% of the value of the land.
OECD's Two Pillar Solution
The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.
Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.
For information on post-acquisition integration matters, please see our Post-Acquisition Integration Handbook.