New regulation on Irrevocable Contributions

For some time now the use of irrevocable contributions for future capital increases, as a financial tool at times of crisis in the corporate life, has been developed to a large scale.

However, said growth has not been reflected in the positive law. Hence its main treatment, conditions and precautions to be adopted have been mainly developed in doctrine and case law.

This circumstance has undoubtedly resulted in different scenarios of abusive use of this element inflicting repeated damage upon the interests of minority shareholders and creditors.

Thus based on this experience on 18 June, 2004, the Argentine Comisión Nacional de Valor [Securities and Exchange Commission] issued General Resolution No. 466/04 that regulates, among other things, the conditions and precautions to be adopted in the event of irrevocable contributions on account of future capitalisation.

This rule, applicable to corporations that hold initial public offerings, sets forth special precautions in connection with IPOs to be placed by underwriting where the price is to be paid up by the capitalisation of irrevocable contributions or credits against the issuer, in order to ensure transparency in the relevant processes.

With this new regimen, corporations may receive irrevocable contributions on account of future stock issuances provided that there are emergency events that prevent the relevant dealings for a capital increase.

Said extreme cases should be justified in detail before the Commission in the same way as the corporation should have to prove that the relevant shareholders? meeting was held ?said meeting shall be held in a term no later than SIX (6) months from the acceptance of the irrevocable contribution by the board. The record of that meeting should detail the use of proceeds from those contributions by the issuer and it should be attached to a report issued by a CPA certifying the entry of said contributions.

Another aspect to underscore is that relating to the return or reimbursement of the irrevocable contribution. This reimbursement should be approved by the special meeting and subject to the regimen of creditor?s opposition announcements according to the procedure of section 83, subsection 3, Law No. 19,550, i.e., by their publication for 3 days in the Official Gazette and in one of the highest circulation newspapers of the country; and the creditors should have a term of 15 days from the last publication to oppose in case it is timely deemed.

Now, in connection with the accounting treatment of an irrevocable contribution, in the event of reimbursement, or in the event the shareholders' meeting for the capital increase has not been timely held, said irrevocable contribution should be considered as subordinate indebtedness thereafter. This is so in view of their importance to creditors, third parties who intend to hire the issuer, and the shareholders.

Finally and further to this issue, the rule also refers to a very controversial subject, i.e., the participation of the contribution in the company?s loss. The rule justifies its existence since the contribution pay-in is with the purpose of its capitalisation. Regarding this aspect, the resolution sets forth the possibility of, prior to any mandatory capital reduction (section 206, Law No. 19550), capitalising the items that might be capitalised. In this way, both shareholders and contributors would bear the loss equitably on a pro rata with their contributions.