On June 13, 2014, an amendment to a series of commercial laws was published in the Federal Official Gazette. This Reform seeks to improve company management and operation as well as to modernize the legal provisions that regulate companies (commercial entities). Within those that we find are the most significant reforms are those related to: (i) security interests over personal property (non-possessory pledge and guaranty trusts over personal and real property); (ii) publications to be made in accordance with commercial laws; (iii) legal provisions related to the incorporation and bylaws of commercial companies, as well as the formalization of their minutes and of shareholders' agreements for corporations (sociedades anónimas) (“SA”); (iv) legal provisions related to the obligations of directors and statutory auditors of the SA; (v) reduction of the equity percentages required to exercise minority rights in a SA; y (vi) legal acknowledgment of electronic evidence in commercial legal proceedings.
Six laws were amended; the Commercial Code (the “Code”), the General Law for Commercial Companies (“GLCC”), the Investment Funds Law (“IFL”), the General Law for Credit Instruments and Transactions (“GLCIT”), the Federal Duties Law (“FDL”) and the Federal Public Administration Organic Law (“FPAOL”).
Below is a summary of the most relevant aspects of the Reform:
Security interests over personal property (non-possessory pledge and guaranty trusts over personal and real property).
Various legal provisions from the Code and the GLCIT were amended concerning the registration, modification, and cancellation of documents, minutes, contracts and agreements in the Public Registry of Commerce (the “PRC”) as well as in special registries. These reforms include subjecting additional transactions to registration requirements, including guaranty trusts over personal property, financial leasing and factoring agreements. The assignment of non-negotiable credits, however, will not require registration to become effective before third parties.
Some provisions related to the creation, modification, and cancellation of security interests over personal property were also amended.
Among the relevant amendments to the non- possessory pledge are the following:
- The pledgee may become the owner of the pledged assets or credits with the written consent of the pledgor. The main change is that it is no longer required to obtain such consent after the creation of the security interest (it may be obtained simultaneously).
- The possibility of granting a non- possessory pledge over categories of assets, without any need to individually identify each secured asset, is established, facilitating the creation of floating liens.
- The assets or rights attached, received from, or obtained by the debtor as a result or product of the pledged assets will automatically be included as part of the pledged assets, unless otherwise agreed.
- The secured credit will be reduced in an amount equal to the payment made by the insurance companies as indemnification for the loss of the pledged assets.
- An expert must be appointed, or the bases for this appointment must be agreed to, who will rule on the inspection of the pledged assets; if the parties fail in this obligation, a competent judge will appoint such an expert at the request of any interested party.
- Provisions related to the enforcement of pledges over temporally imported assets are included, allowing the pledgee to proceed with the definitive importation of such assets.
- The pledgee’s rights over the pledged assets are expanded against potential buyers where: (1) the buyer was, by any means, aware of the security interest over such assets; and (2) the sale is out of the ordinary course of business of the predominant activity of the debtor (i.e. shares or partnership interests in other entities).
Among the relevant amendments related to guaranty trusts are the following:
- The functions of the executor or instructor of the trust must be stated within the agreement whenever the executor or instructor is appointed.
- The executor or instructor of the trust may be a trustee institution or any third party.
- The rules and applicable priorities regarding the guarantees over different obligations must be stated within the agreement. In such cases, the settlor will be obligated, among other things, to notify the trustee when the obligation in his or her favor has been extinguished.
- Also incorporated were provisions related to the use of the trust assets by settlors and the receipt and use of the products of the trust assets by settlors.
- The parties are free to agree the form in which the trustee proceeds to extra-judicially dispose of the trust assets or rights.
- Formalities regarding security trusts are established regarding what must be stated in writing and what must be ratified before a public notary whenever the trust assets are personal property assets and when their value is equal to or higher than the amount equivalent to 2,500 UDIS.
Publications to be made in accordance with commercial laws.
The Reform creates an electronic system which will publicize certain legal actions and transactions that require publication in newspapers or registries, to be released by the Ministry of Economy (Secretaría de Economía) within one year after the Reform was published.
For instance, this Electronic System will serve to publish documents related to capital stock reductions of commercial entities, calls for shareholders’ meetings and other publications required in accordance to GLCC.
Legal provisions related to the incorporation and bylaws of commercial companies, as well as the formalization of their minutes and of shareholders’ agreements for corporations (sociedades anónimas).
Although in practice the incorporation and notarization of certain minutes were already being made by commercial notaries (corredores públicos), the Reform has incorporated their authority into the GLCC.
The charter and bylaws of a corporation may now include, if the parties so agree, restrictions to share transfers, special series of shares with special rights (e.g., non-voting shares), dead- lock mechanisms, shareholders’ rights of first refusal and liability limitations of directors and officers. Shareholders’ rights must be specified in the stock certificates that are issued for such effects. It is important to highlight that with this Reform, the possibility is now contemplated of issuing shares that exclusively grant voting rights to their holders.
It is now possible for shareholders in SA to agree to the following: (1) rights and obligations of purchase and sale options (2) stock sales and all other acts related to rights of first refusal; agreements for exercising voting rights; and agreements for the sale of their shares in a public offer. Notwithstanding the foregoing, the provisions regarding minority rights must always be taken into consideration.
Registration before the PRC of minutes of extraordinary shareholder meetings held in a corporation is now mandatory (and not only those that relate to the legal acts set forth in Section V of Article 21 of the Code).
Legal provisions related to the obligations of the directors and statutory auditors of the SA.
Directors (whether a sole director or the members of the board of directors) are now expressly required to keep the information of their principals as confidential during their term and for one year thereafter.
Regarding the statutory auditors of an SA, their oversight duties are limited to the performance, conduct, and execution of the business of the company and to the financial report presented by the corporation’s management when submitted to the shareholders. Additionally, in the event of a conflict of interest between the statutory auditors and the corporation, the auditors must notify management as such in accordance with the terms of the GLCC.
Reduction to minority percentages in the SA with respect to certain rights.
The Reform reduces to 25% the equity percentage required to exercise certain minority rights such as:
- exercise of civil liability actions against the directors as provided by law;
- the deferment of shareholders’ meetings; and
- judicial opposition to the resolutions of shareholder’s meetings as provided by law.
Legal acknowledgment of electronic evidence in commercial legal proceedings.
The Reform to the Code expressly acknowledges that digital information generated or communicated by electronic means may be used as evidence in commercial proceedings if certain requirements are met.