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The Sole Shareholder Corporation According To Argentine Law

Enrique del Carril's picture
Published: 05/04/17 - Country: Argentina

The possibility of limiting liability by allocating just a part of the estate to a particular business was one of the major successes of the legal development in the tradition of Roman law.

There was a long way from the rigidity that prevailed in the early days of the Old City, where estate was an attribute of the person and could not be divided, to the praetorian solutions imposed by the commercial customs resulting from the development of the commercial life. This is how the limitation of liability allowed the development of businesses, but at the same time, it appeared as an instrument to defraud creditors so limits and controls were imposed.

The individual traders and the limitation of their liability.

Traditionally, according to the legislation in Western countries, the only way to allocate part of the estate to a business, limiting thereby the liability, was the incorporation of companies where the law expressly allowed liability limitation, that is, Corporations, Limited Liability Companies, etc. The drawback of this solution is that a company is conceived as a plurilateral organization where more than one shareholder is required. This limitation led to the adoption of practical solutions involving the inclusion in the company of front men with insignificant number of shares or stock within the company. Undoubtedly, this solution was not the best for the development of trade and industry because it entailed risks arising from the involvement of third parties in businesses owned by a sole company. This is how, in the second half of the 20th century, European case-law and legislation began to include the sole shareholder corporation among the legal structures aimed at limiting liability[1]. In Europe this structure was consolidated through the Directive 12 89/667 of December 21, 1989 of the EEC.

Background in Argentina.

Our country was no unaware of this debate. The Companies Act (N 19550), enacted in 1972 (today the General Companies Act), adopted the classic position of considering the Company as a contract that requires the consensus ad idem of two or more people.

As in other countries, the reality of commercial traffic surpassed legal theory and a considerable number of corporations and limited liability companies were established by allocating a very small number of shares to persons who were just agents or representatives of the real owner of the business. This practice was altered about five years ago, when the Control Body (The General Inspection of Justice) began to demand that the Companies actually comply with the requirement of plurality of shareholders, rejecting the registration of those where a just a person held almost all the shares representing the share capital and the other(s) just held an insignificant number of shares[2].

But, as in other countries, the case-law and commercial practice supported the appropriateness of adopting new structures that would allow the individual limitation of liability in a particular business, a solution that was definitively adopted with the reforms to the General Companies Act, LGS that came into force in August 2014[3].

The regulation of Sole Shareholder.

The reform of the General Companies Act, introduced the solution of the "sole shareholder company", eliminating from the definition of “company” the requirement of plurality of shareholders (Article 1 of the General Companies Act). Besides, a second paragraph was added to this rule establishing the following limitations: a) the only type of company allowing a single shareholder was the Corporation[4]; b) a sole shareholder corporation cannot be, in turn, the sole shareholder of another Sole Shareholder Corporation.

The first of the limitations, without any reason, leaves out the Limited Liability Companies (LLC), a type of company simpler than the Corporation. The cause alleged was that the commercial practice of our country prefers the Corporation instead of the LLC because the latter has just a residual application[5]. In our opinion, this limitation is an error since it is necessary to promote the use of the LLCs as a simpler legal support that avoids bureaucratic and instrumentation costs.

The second limitation raises the question of what would happen with the sole shareholder companies incorporated abroad. Our legislation establishes that the foreign company is governed in its existence, forms and capacity by the law of the place where it was incorporated (art. 118 of the General Companies Act and art. 147 CCC[6]). The limitation imposed by art. 1 of the General Companies Act establishes an incapacity of law whereby a sole shareholder company incorporated in a country that allows it to be part of a company of a similar nature, could be part of a sole shareholder company in Argentina.

In line with the adoption of the sole shareholder company, the reduction of the number of shareholders to one was removed from the grounds for dissolution by reforming Art 94 of the General Companies Act. In turn, article 94bis was included, which states as follows: "The reduction of the number of shareholders to one is not a cause for dissolution, so that all limited partnerships or limited joint-stock partnerships, both labor and capital partnerships, will be transformed, within full rights, into sole shareholder corporations, if no other solution was decided within the term of THREE (3) MONTHS." This provision is important since it clearly states that the Sole Shareholder Corporation is not a new type of corporation; but just another variation of corporation. Therefore, when any of the companies including shareholders with limited liability becomes a sole shareholder partnership, it is not necessary to resort to the cumbersome process of transformation regulated in arts. 74-81 of the General Companies Act.

The foreign company, whether single or multi-person, to be part of or to participate in a Sole Shareholder Corporation must be registered in the Control Body of the corresponding jurisdiction (art. 123 of the General Companies Act)[7]. If it is an individual who wishes to be part of a Sole Shareholder Corporation, no special requirements are needed, only what is explained in section below regarding the management and control should must be taken into account.

Regarding the structure and control of the Sole Shareholder Corporation the following requirements must be met: a) the management body will be a board composed of one or more directors (articles 255 of the General Companies Act). The absolute majority of the directors must be a resident of the Argentine Republic (article 256 of the Corporations Act) therefore if it were decided to constitute a single-member board, the one who holds the office must be a resident of Argentina; b) a private control body must be designated and managed by a lawyer or an accountant whose registered office is in the country (art. 284 and 285, section 2 of the General Companies Act) c) the Sole Shareholder Corporations are included among the companies included in the State Audit (Article 299, paragraph 7 of the General Companies Act) which implies that they are subject to the control of the State Control Body. In practice, such control implies the possibility that a representative of this state body attends the meetings with no voting rights for the sole purpose of carrying out a formal control and supervise the presentation of the Financial Statements of each year and the registration of the capital increases and/or any modifications of the by-laws.

Conclusion.

We consider that the Sole Shareholder Corporations are an easy and simple vehicle for channeling investments in our country that can be used by small or medium-sized foreign companies as well as by large groups, either to handle an individual and specific business or to set up a company for staying and exercising trade in Argentina.

 

[1] This subject and its evolution in different countries have been fully developed in the publication : “Unipersonalidad y Sociedad con un Socio; alcances de su reconocimiento en la estructura dogmática del derecho chileno” by Eduardo Jequier Lehuede, Magazine  Ius et Praxis, year 17, 2011, University of Talca, Chile and “Sociedades de un solo Socio, Estudio de la doctrina y el Derecho Comprado, Análisis crítico del Proyecto de Unificación del Derecho Privado” by Rodrigo S. Luchinsky and Vanesa Mordoj, in Lecciones y Ensayos, Faculty of Law of the National University.

[2] These provisions caused many disadvantages because the percentage of share capital of the minority shareholders considered suitable to certify the plurality of shareholders was not defined either in the law or in the regulations dictated by the competent authority and, therefore, it depended on the criterion of each official. In general, it was considered necessary for the minority shareholders to have at least 5% of the share capital to certify that the company was composed of more than one shareholder.

[3] Prior to that date, the law regulating the trust as a system to allocate a certain estate to a special business (contract included in the new Civil and Commercial Code) had been already enacted, but it was an instrument adaptable to certain businesses and not to the general exercise of all activities of the company or individual trader.

[4] It should be clarified that in Argentina the shares can only be nominative or book-entry.

[5]“Las Sociedades Unipersonales en el Código Civil y Comercial”, by Pablo Carlos Barbieri, March 15, 2015 www.infojus.gov.ar ; id SAIJ DACF 150286.

[6] CCC: Código Civil y Comercial de la Nación (Argentina) – Civil and Commercial Code of the Nation (Argentina)

[7]Since Argentina is a federal country, each province has its control body. In the city of Buenos Aires is the General Inspection of Justice (IGJ).

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Enrique del Carril's picture

Born in Buenos Aires City, on April 19, 1947. He graduated in law at Universidad Católica Argentina (School of Law and Political Sciences), Buenos Aires, 1970. 

He is a member of Colegio Público de Abogados de la Capital Federal (Federal Capital Bar Association). He held the position of President of the Colegio de Abogados de la Ciudad de Buenos Aires (Buenos Aires Bar Association) (2006-2010), having previously held the position of Director and Member of the Advisory Council of the Board of Directors. He was founding partner of FORES (Foro de Estudios sobre Administración de Justicia), member of its Executive Committee (1976 – 2004) and President (1995 – 2001).

He is currently president of the Justice Committee, Colegio de Abogados de la Ciudad de Buenos Aires (Buenos Aires Bar Association).

He practiced law at Beccar Varela Law Firm and then became founding partner of Fornieles & del Carril Law Firm until its dissolution. He was also founding partner of del Carril, Colombres, Vayo & Zavalía Lagos Law Firm. 

He was Advisor of the Asociación de Fabricantes de Cemento Pórtland (Portland Cement Manufacturers) and member of the Labor Policy and Industrial Security Committee of Unión Industrial Argentina (Argentine Industrial Union)