CROSS-BORDER HANDBOOKS 15

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1 Corporate Governance and Directors Duties 2006 Argentina Argentina John O'Farrell and Ignacio Sammartino, JP O'Farrell Abogados S.A. CORPORATE ENTITIES The corporate entities most commonly used for business enterprises in Argentina are the: Stock corporation (Sociedad Anónima) (SA), in which the capital is divided into shares. Stock corporations can also publicly offer their shares and be listed on the stock exchange (listed companies). Limited liability company (Sociedad de Responsabilidad Limitada) (SRL), in which the capital is divided into quotas. LEGAL FRAMEWORK APPOINTMENT AND REMUNERATION OF DIRECTORS 2. What is the management/board structure of a company? In particular: Is there a unitary or two-tiered board structure? Who manages a company and what name is given to these managers? Who sits on the board(s)? Do employees have a right to board representation? 1. What is the regulatory framework for corporate governance and directors' duties? Please distinguish, where relevant, between the different types of companies and the mandatory rules of law and non-binding guidance/best practice which apply to them. Corporate governance and directors' duties are mainly regulated by the Argentine Companies Act No (ACA). The principles and provisions of the Act apply, in general, to both private and public companies. Besides the ACA, other mandatory statutory regulations are: Resolutions issued by the Superintendence of Corporations (Inspección General de Justicia) (IGJ). These apply to private companies incorporated in the City of Buenos Aires. The Public Offering of Securities Act No , which applies to public companies. Is there a minimum or maximum number of directors or members of the managerial and supervisory bodies? Structure. Generally there is a unitary management/board structure. However, in some situations, there is a two-tiered structure (see below, Management). Management. The managers of an SA are referred to as the board of directors while the managers of an SRL are referred to as the board of managers. The company's bye-laws can allow the board of directors to form an executive committee to manage the day-to-day business of the company, so forming a two-tiered board structure. The bye-laws can also provide for a supervisory body (Síndico o Comisión Fiscalizadora) to be set up. This is mandatory in certain companies (for example, public companies, companies with a minimum capital of US$700,000 (about EUR592,320) and companies that provide public services). The Transparency Decree (Decree 677/2001), which applies to public companies. Regulations issued by the National Securities Commission (Comisión Nacional de Valores) (CNV), which apply to public companies. Stock Exchange Regulations, which apply to listed companies. The articles of association (articles) of each entity. Under the ACA, a surveillance council (Consejo de Vigilancia) (a body formed by shareholders the constitution of which is determined by the shareholders) can also be established. The surveillance council has supervisory powers over the board and can appoint directors, but is rarely used. In addition, the board of directors can appoint general or special managers (who may or may not be directors), to whom they can delegate executive administrative functions. In the case of SRLs, the distribution of management powers can be distributed among the individual members of the board of managers (ACA). CROSS-BORDER HANDBOOKS 15

2 Argentina Corporate Governance and Directors Duties 2006 Board members. Only directors sit on the board. It is not necessary to be a shareholder or partner to be a director of an SA or a manager of an SRL. Employees' representation. Employees are not represented on the board and cannot elect directors unless they are shareholders. Employees of most companies that were privatised during the 1990s acquired a percentage in the company (normally 10%) which granted them the power to appoint one director. Number of directors or members. Companies must have at least one director (ACA). Companies subject to permanent government supervision (for example, public companies, companies with a relevant capital and companies that provide public services) must have at least three directors. There is no maximum limit on the number of directors, unless the company's articles state otherwise. Companies subject to permanent government supervision because they have a relevant capital must have at least one syndic (a syndic is comparable to a corporate controller or supervisory officer, the main duty of which is to ensure that the company formally complies with the law) as well as one alternate syndic. Other companies subject to permanent government supervision (for example, public companies and companies that provide public services) must have at least three syndics that form the supervisory committee. 3. Are there any age or nationality restrictions on the identity of directors? them. Only regulations applicable to public companies recognise the existence of independent directors. Board composition. The ACA does not provide for a minimum of non-executive directors to be appointed to the board. Public companies must have at least two non-executive and independent directors who should also make up the majority of the members of their auditing committee. Independence. There is no requirement that non-executive directors be independent in private companies. In the case of public companies, at least two directors must be independent and non-executive (see above, Board composition). Duties and liabilities. Non-executive directors are generally subject to the same duties and potential liabilities as executive directors. Their duties include the management of the company, the approval of the annual balance sheet and the calling of shareholders' meetings. Their liabilities are referred to in Question Are the roles of individual board members restricted? For example, can one person be the chairman and chief executive? There are no restrictions on the roles of individual board members. As a result, the chairman or president of the board can also be the chief executive. 6. How are directors appointed? Is shareholder approval required? Age restrictions There are no statutory provisions imposing age limits on directors. Nationality restrictions No nationality requirements apply to directors, although the majority of directors must reside in Argentina (ACA). Appointment of directors Directors are usually appointed by an ordinary shareholders' meeting (the annual general meeting (AGM)), unless the company's articles state otherwise. The articles can authorise the surveillance council to appoint directors, but this body is not commonly used (see Question 2, Management). Directors can also be appointed by the supervisory body if a vacancy arises before the next general meeting. 4. In relation to non-executive, supervisory or independent directors: Are they recognised? Does a part of the board have to consist of them? If so, what proportion? Do non-executive or supervisory directors have to be independent of the company? If so, what is the test for independence or what will make a director not independent? What is the scope of their duties and potential liability to the company, shareholders and third parties? Shareholder approval As mentioned above, usually shareholders at an AGM appoint the directors. 7. Are there any restrictions on a director's term of appointment? The company's articles regulate a director's term of appointment. Directors cannot be appointed for more than three financial years but can be reappointed indefinitely, unless otherwise stated in the articles. Recognition. The ACA allows the appointment of non-executive directors but does not provide for a specific role for 16 CROSS-BORDER HANDBOOKS

3 Corporate Governance and Directors Duties 2006 Argentina 8. Do directors have to be employees of the company? Can shareholders view directors' service contracts? Directors employed by the company Directors need not be employees of, and do not normally enter into service contracts with, the company. Shareholders' inspection Generally, shareholders are not entitled to view directors' service contracts, unless the company is a public company. However, information connected to directors' remuneration should be available at the AGM, as their remuneration must usually be approved by the shareholders (see Question 10). 9. Are directors allowed or required to own shares in the company? Directors are not required to hold shares in the company, but are allowed to do so. 10. How is directors' remuneration determined? Does it need to be disclosed? Is shareholder approval required? Shareholder approval Directors' remuneration is determined and approved by the majority of the shareholders present at the AGM. REMOVAL OF DIRECTORS 11. How are directors removed? Can shareholders remove a director and, if so, what is the process and voting requirements? Directors can be removed by a simple majority vote of the general meeting, unless they have been appointed by shareholders holding a special class of shares (in which case they can be removed by a majority of those shareholders). However, even when a director is appointed by shareholders holding a special class of shares, a general meeting can remove that director if: He is unable to perform his duties (for example, he is bankrupt or has been found guilty of specific criminal activities). A resolution to begin a legal action against him, based on wilful misconduct, fraud or gross negligence in violation of the law or directors' duties, is approved at that general meeting. Directors' remuneration If directors' remuneration is not determined in the bye-laws, it is set by the AGM. The maximum remuneration that the board of directors can collect from the company, including wages and other remuneration, cannot exceed 25% of the company's earnings (profit after tax, interest, depreciation and amortisation). This percentage is limited to 5% if no dividend is distributed and is increased in proportion to the percentage distributed. When one or more directors perform special commissions or technical administrative functions and the small amount or nonexistence of earnings make it necessary to exceed the percentage established, the company can only pay such sums if expressly approved by the AGM. MANAGEMENT RULES AND AUTHORITY 12. How is a company's internal management regulated? For example, what is the length of notice and quorum for board meetings, and the voting requirements to pass resolutions at them? A company's internal management is regulated by the articles and, where the articles are silent on a particular matter, the relevant provisions of the ACA. The board must: Take decisions by a simple majority of the directors present at the relevant meeting, with a quorum of an absolute majority of the total number of directors, unless the company's articles provide for a higher quorum and majority. Disclosure There is no requirement to disclose directors' remuneration in private companies. However, when a director's total remuneration is more than 25% of earnings, or 5% if no dividend is distributed, then shareholders' approval must be sought at an AGM to exceed that percentage (section 261, ACA). In the case of closed companies, shareholders are notified of directors' remuneration at the time of publication of the notice calling the shareholders to the AGM. In the case of public companies, in addition to the publication, the CNV needs to be notified at least ten days before the AGM. Meet at least quarterly, unless the company's articles provide for a shorter term. Meet whenever a director requests a meeting, in which case the meeting must be: called by the chairman stating its agenda; held within five days of being requested. CROSS-BORDER HANDBOOKS 17

4 Argentina Corporate Governance and Directors Duties Can directors exercise all the powers of the company or are some powers reserved to the supervisory board (if any) or a general meeting? Can the powers of directors be restricted and are such restrictions enforceable against third parties? Directors' powers Directors' powers can be regulated and restricted by the company's articles and can also be subject to shareholder approval under the ACA. Third parties The board's powers as regulated and restricted by the articles are enforceable against third parties. However, certain actions by the chairman of the board (as legal representative of the company), for example, the execution of letters of credit and promissory notes or agreements between parties located in different places, bind the company (even if they are in violation of internal regulations) against third parties acting in good faith, unless the chairman's action is clearly beyond the company's purpose. Providing an opinion on any proposed directors' fees. DUTIES AND LIABILITIES OF DIRECTORS 15. What is the scope of a director's duties and personal liability to the company, shareholders and third parties? Please distinguish between civil and criminal liability under each of the following (if relevant): General duties. Theft and fraud. Securities law. Insolvency law. Health and safety. Environment. Anti-trust. 14. Can the board delegate responsibility for specific issues to individual directors or a committee of directors? Is the board required to delegate some responsibilities, for example for audit, appointment or directors' remuneration? The board can delegate specific responsibilities in certain matters to individual members of the board or to a number of members that form an executive committee. This does not release the board from its legal duties and liabilities, as it remains ultimately responsible for the company's actions. The board is not required to delegate any responsibilities but the appointment of directors and directors' remuneration is a matter that must be decided at the AGM. In the case of public companies, the auditing committee (Comité de Auditoría), which is formed by at least three directors, has certain auditing duties in order to assure the transparency of the administration of the company and information to the market. The auditing committee is in charge of, among other things: Issuing an annual report to be attached to the annual balance sheet. Issuing an opinion on any transactions undertaken by the company with related parties. Reviewing the plans of the external and internal auditors and assessing their performance. Informing the shareholders of the external auditors' fees. Other. General duties. Directors must act honestly and in good faith with a view to the best interests of the company. Directors can be held personally liable to the company, shareholders and third parties if they fail to comply with their general legal duties or the specific duties contained in the ACA. Theft and fraud. Directors can be held civilly and criminally liable for theft or fraud. Securities law. In addition to the duties and liabilities in the ACA, directors of public companies can be held personally liable for, for example: failing to disclose relevant events that are likely to have a substantial impact on the company's share price; using privileged information for their own or a third party's benefit. Insolvency law. Directors can be personally liable if they knowingly contribute to, promote, permit or worsen the insolvency of the company. They can also be criminally liable for certain wilful acts that damage creditors of the company. Health and safety. Under national and provincial health and safety regulations, directors and managers are liable for any health and safety violations. Providing an opinion when the appointment of an external auditor is proposed. Supervising the internal control of business risks. Environment. Under national and provincial environmental regulations, directors and managers are liable for any violations of environmental law. Certain violations of environmental law are also criminal offences. 18 CROSS-BORDER HANDBOOKS

5 Corporate Governance and Directors Duties 2006 Argentina Anti-trust. The Defence Competition Law (National Act No. 25,156) fines directors, managers, corporate supervisors and agents in general, who contribute to, encourage or allow a breach of this law. Other. Directors can be held jointly and severally liable for the tax liabilities of the company in certain cases where they wilfully impede the payment of tax. Criminal penalties can also be imposed on directors if certain tax obligations are not complied with and their conduct amounts to tax evasion. Directors can also be held jointly and severally liable if certain labour or social security regulations are violated. 18. Can a third party (such as a parent company or controlling shareholder) be liable as a director for the issues identified in Question 15 (even though such person has not been formally appointed as a director)? In principle, a third party (such as a parent company or controlling shareholder) cannot be held liable as a director for any of the issues identified in Question 15. However, a third party can be held liable in certain circumstances. For example, if shareholders or controlling entities vote that the company undertakes a particular course of action for their benefit, they will be jointly and severally liable for any damage caused to the company (ACA). 16. Can a director's liability be restricted or limited? Is it possible for the company to indemnify a director against liabilities? TRANSACTIONS WITH DIRECTORS AND CONFLICTS 19. Are there restrictions on transactions between a company and its directors? Directors' liability cannot be restricted. However, directors cannot be held liable for any resolution in which they abstained from voting or voted against, if the resolution damaged the company, as long as they notified their opposition to the syndic or corporate supervisor, shareholders or any administrative or judicial authority (via the relevant court procedure). In general, directors and managers' liability to the company can be discharged if approved by the shareholders at a general meeting (unless shareholders representing 5% or more of the company's share capital oppose the resolution) and the liability is not related to a breach of the law or the articles (ACA). The company cannot indemnify a director against liabilities but the controlling shareholder can. In the case of SRLs, when the articles allow a distribution of management powers among the individual members of the board of managers, the board's liability depends on the individual performance of each manager. 17. Can a director obtain insurance against personal liability? If so, can the company pay the insurance premium? There is no specific provision in the ACA relating to directors' insurance. Directors can, therefore, obtain insurance. If the company pays the insurance premium, that payment is considered part of the director's remuneration. The IGJ has issued regulations requiring directors to deposit a minimum amount of ARS10,000 (about US$3,365) to cover potential liabilities arising from their performance of services as director or to obtain insurance for this amount on behalf of the company. Public companies can obtain civil liability insurance for directors, unless otherwise provided for in the articles (Decree 677/2001). Transactions between the company and its directors are allowed if they are executed within the ordinary course of business of the company and on an arm's length basis (ACA). If this is not the case, the transactions must be approved by the board or supervisory body and disclosed to shareholders in the relevant general meeting. If shareholders' approval is not obtained, the directors and the supervisory body are jointly and personally liable for any damage caused to the company. In the case of public companies, any agreements with a director that meet specific thresholds (the amount of the agreement must be equivalent to 1% of the net worth of the company if it is more than ARS300,000 (about US$100,962)) must be approved by the auditing committee (who must specify that the agreement meets market conditions), or the board of directors must request two reports from independent firms. If these conditions are not met, shareholder approval must be obtained. 20. Are there general rules relating to conflicts of interest between a director and the company? A director must disclose any conflict of interest to the board and the supervisory body and must not participate in any decisions relating to that matter. In the case of public companies, if the board of directors is considering the execution of a contract with a related party, involving an amount over 1% of the net worth of the company and if the amount exceeds ARS300,000 (about US$100,962), the auditing committee must issue an opinion stating whether the transaction is on arm's length basis. 21. Are there restrictions on the purchase or sale by a director of the shares and other securities of the company he is a director of? There are no statutory restrictions on the purchase or sale by a director of a company's shares and other securities. However, in CROSS-BORDER HANDBOOKS 19

6 Argentina Corporate Governance and Directors Duties 2006 public companies, directors must publicly disclose to the CNV the amount of shares they hold in the company and that they intend to purchase or sell. DISCLOSURE OF INFORMATION 22. Do directors have to disclose information about the company to shareholders, the public or a regulatory body, particularly under securities laws? For example, if offering securities to the public, or where there is inside information which is likely to have a significant effect on the company's share price. The agenda for the AGM can include other matters, but they will be subject to different quorum and majority requirements, as under the ACA other matters must be considered in an extraordinary meeting of shareholders (extraordinary meeting). An extraordinary meeting requires the presence of shareholders representing 60% of the voting shares, unless the articles provide for a higher quorum. If quorum is not reached, the meeting can be held at a second call, in which case the meeting is duly constituted with the presence of shareholders representing 30% of the voting shares, unless the articles provide otherwise. Decisions at extraordinary meetings are adopted in both cases by absolute majority of votes present, unless the articles provide for a higher majority. In general, in the case of companies with supervisory bodies, shareholders representing at least 2% of the company's share capital can make an information request to that body. The supervisory body must comply with the request, if it considers it a reasonable request having regard to all the circumstances. If the company does not have a supervisory body, shareholders have a right of access to the company's corporate and accounting books and can make an information request to the board, which must disclose the information if it considers it a reasonable request having regard to all the circumstances. Normally, general information about the company is included in the balance sheet and the board report that is considered at the AGM. At the meeting, shareholders can ask the directors questions about the information provided. However, in certain circumstances, directors can disclose other information at the shareholders' request. 24. Can shareholders call a meeting or propose a specific resolution for a meeting? If so, what level of shareholding is required to do this? Shareholders that hold at least 5% of the company's share capital (unless otherwise provided by the articles) can request that the board call a general meeting. At the general meeting, shareholders can discuss and propose resolutions relating to the specific agenda of the meeting. MINORITY SHAREHOLDER ACTION 25. What action, if any, can a minority shareholder take if it believes the company is being mismanaged and what level of shareholding is required to do this? In the case of public companies, directors must disclose to the CNV and the respective stock exchange any relevant event that is likely to have a substantial impact on the company's share price. COMPANY MEETINGS 23. Does a company have to hold an annual shareholder meeting? If so, when? What issues have to be discussed and approved? All public and private companies are required to hold, within the first five months after the closing of the financial year, an AGM to discuss and approve: The company's annual accounts. The following statutory remedies are potentially available to minority shareholders: A corporate action against the directors and managers can be taken by shareholders holding no less than 5% of the share capital of the company, who opposed the shareholder resolution approving the directors' performance. A derivative action can be taken where the board does not initiate a corporate action agreed at a shareholder meeting within three months of that meeting. An individual action against directors for breach of fiduciary duties can be taken for damage caused to shareholders (section 279, ACA). The appointment (at least once every three years) and remuneration of directors and, if applicable, the supervisory body. The directors' and, if applicable, the supervisory body's performance. The required quorum for an AGM is shareholders representing the majority of the voting shares. If quorum is not reached, the meeting can be held at a second call, in which case the meeting is duly constituted with whatever number of shareholders may be present. Resolutions are adopted by absolute majority of votes present. (A shareholder cannot vote when he has a conflict of interest.) INTERNAL CONTROLS, ACCOUNTS AND AUDIT 26. Are there any formal requirements or guidelines relating to the internal control of business risks? The ACA does not regulate the internal control of business risks, other than providing for the appointment of a supervisory body in certain companies. In public companies, an auditing committee must be appointed to supervise, among other matters, the internal control of business risks (see Question 14). 20 CROSS-BORDER HANDBOOKS

7 Corporate Governance and Directors Duties 2006 Argentina 27. What are the responsibilities and potential liabilities of directors in relation to the company's accounts? Directors must approve the annual accounts of the company and prepare a board report for shareholders, which must include a fair review of the business. Directors are primarily responsible for the accuracy of the accounts and the board report. If the directors fail to comply with this obligation, they can be held jointly and severally liable to the company, shareholders and third parties for any damage caused to the company. 28. Do a company's accounts have to be audited? SAs and certain SRLs subject to permanent government supervision (for example, public companies, companies with a relevant capital, companies that provide public services), must audit their annual accounts. The IGJ requires the annual accounts to be filed together with the professional opinion of a certified public accountant. The annual accounts of public companies must be audited. 29. How are the company's auditors appointed? Is there a limit on the length of their appointment? 31. Are there restrictions on non-audit work that auditors can do for the company that they audit accounts for? For example, are there certain types of work that auditors can and cannot do for the company? In public companies, auditors are not allowed to undertake nonaudit work when it involves managerial duties or any task connected to the business of the company or its controlling entities. The audit committee must give shareholders a report on their fees, breaking down audit related services from those related to other activities (such as the implementation of information systems methods) on an annual basis (CNV regulations). The types of work that the auditors can perform in private companies is not regulated by the ACA. 32. What is the potential liability of auditors to the company, its shareholders and third parties if the audited accounts are inaccurate? Can their liability be limited or excluded? Auditors can be liable to the company (contractual liability), its shareholders or third parties (extra-contractual liability) if the audited accounts are inaccurate. Auditors' liability cannot be limited or excluded. The appointment of auditors in private companies is not regulated by the ACA. Normally, auditors are appointed by the board and ratified at the AGM. In the case of public companies, an AGM must appoint the auditors (Decree 677/2001). There is no statutory limit on the duration of the auditors' appointment, but they are normally appointed on an annual basis. 30. Are there restrictions on who can be the company's auditors? For example, do they have to be registered with a regulatory body or meet other professional requirements? Do they have to be independent of the company they audit accounts for? Are certain persons not allowed to be the company's auditors? External auditors of public companies must be independent, licensed accountants (Decree 677/2001). Regulations issued by the CNV (which applies to public companies) and the Economic Science Council Federation (which applies to all companies) set out the criteria of independence with which all auditors must comply. In the case of public companies, before any appointment, an auditor must submit a formal statement of his record to date to the CNV that must include any criminal, administrative or professional penalty or sanction imposed on him. CORPORATE SOCIAL RESPONSIBILITY 33. Is it common for companies to report on social, environmental and ethical issues? Please highlight, where relevant, any legal requirements or non-binding guidance/best practice on corporate social responsibility. Private companies (mainly subsidiaries of multinational companies) are starting to report on social, environmental and ethical issues. This type of report is not regulated by the ACA. Several companies are issuing reports on social responsibility in line with the Global Pact launched by the UN in ROLE OF GENERAL COUNSEL 34. Is it common for the general counsel to be on the company's board or to have a formal role in corporate governance? There is no statutory restriction on the general counsel being on the company's board or having a formal role in its corporate governance. Small and medium sized companies often elect to have the general counsel on the company's board. In the case of big companies (particularly public companies), practice varies. CROSS-BORDER HANDBOOKS 21

8 Argentina Corporate Governance and Directors Duties 2006 WHISTLEBLOWING 35. Is there statutory protection for whistleblowers (a person who discloses criminal activity or other serious malpractice within a company)? Allows SAs and SRLs to be incorporated by one shareholder or quota holder. Extends certain regulations of Decree 677/2001 (which currently apply to public companies) to private companies. For example, it: There is no statutory protection for whistleblowers. REFORM 36. Please summarise any impending developments or proposals for reform. allows certain valid economic group interests to be favoured (even against the company's interest) if certain conditions are met; formally allows a legal entity to be a director; regulates shareholders' agreements. A commission appointed by the Ministry of Justice and Human Rights recently drafted a bill amending the ACA. The Bill: In the field of directors' duties, the Bill extends certain duties that are currently applicable to directors to the management of commercial entities in general (for example, the prohibition on competing with the company or performing acts that may conflict with the company's interests). 22 CROSS-BORDER HANDBOOKS