Last week Argentina’s President Cristina Fernandez de Kirchner proposed legislation regarding the government takeover of YPF, a major Argentine oil producer, by expropriating REPSOL’s majority stake in YPF. A copy of the proposed Law No. 529/12 (the “Law”) and the address to congress can be found here (in Spanish).
We previously wrote about the amended insolvency law in Argentina which permitted employees of a bankruptcy company to petition the court for authority to take over a company and suspend payments to creditors for up to two years (see Creditors Beware: In Argentine Bankruptcies, Employees Now Call the Shots posted on August 15, 2011). We predicted that this would have an adverse effect on foreign investment, as such a provision only added more uncertainty to a historically unpredictable insolvency regime. Now with the nationalization of REPSOL’s majority stake in YPF, Argentina has likely taken another step further in discouraging foreign investment. As the song goes “[Cristina’s] pretty hands reached out and they reached wide.” The question is how far and how many companies will be affected.
YPF was privatized in the late 1990s and REPSOL, a major Spanish energy company, subsequently acquired a 57% majority stake. The Law proposes to expropriate almost all of REPSOL’s shares, transferring majority control to the Argentine Government. The Law does not affect the holders of the remaining 43%, a significant portion of which is held by Argentine investors. The address to congress prefacing the Law claims that under REPSOL’s majority control YPF, a once vibrant company, was systematically dismantled, principally by REPSOL’s decision to decrease YPF’s oil production. The address asserts that such a “predatory strategy” resulted in Argentina having to import oil, among other energy sources, and ultimately hampered Argentina’s growth as a nation. While we take no position on the accuracy of the claims, disagreement with corporate strategy hardly seems like grounds for nationalization.
REPSOL may have various claims against the Argentine government under international treaties and other applicable laws. Additionally, the Law does provide for a price of the expropriated property to be determined in conformity with existing law. However, there is no telling how long this will take. Even if a timely compensation payment is made, the damage has likely been done, certainly in the case of Argentina’s prospects for any significant future foreign investment. While the Law only specifically addresses REPSOL’s interest in YPF, it broadly declares that Argentina’s national interest and priority is to be self-sufficient in all aspects of energy in order to promote and achieve economic development. Thus, there is no guarantee that Argentina’s nationalization efforts will be limited to YPF, or even the energy industry. Foreign corporations frequently access the US markets for capital. US investors now much focus not only on credit quality, but also on the risk of future nationalization. As discussed in a previous blog, the nationalization of an issuer can create significant impediments to an investor’s enforcement of contractual rights (see A Private Foreign Issuer Who Issues US Notes Shielded by Sovereign Immunity?? Posted on March 13, 2012).
Some political policy sins can be forgiven, or at least forgotten with the passage of time. Investors returned to Australia after Sons of Gwalia (even before the legislative reversal) and even to Italy after Parmalat. Investors were even returning to Argentina after the 2001/2002 debt crisis that followed Argentina’s default on its sovereign debt. While Argentina might not yet have been on the “adored” list, recently even OPIC (Overseas Private Investment Corporation) and the Ex-Im Bank were starting to entertain supporting activities in Argentina. The nationalization of YPF—a solvent company—is likely to change all of this. The nationalization policy may be “surprisingly good” for this “new Argentina” and its goal of energy self- sufficiency, but such a choice will not come without consequences and maybe a good cry for Argentina.