Argentina: What Do You Mean, "The Pledged Shares Aren’t Ready For Foreclosure?"

In today’s Argentina, where reorganizations and bankruptcies are forcing many creditors to accept centavos for each dollar lent, holding good and sufficient collateral means everything. While creditors are careful to perfect their security interests, too often they fail to consider issues that can hinder foreclosure. One recent experience, involving a creditor attempting to sell unlisted shares at a public foreclosure proceeding, is particularly worth sharing.

In a debtor-creditor proceeding involving a prominent Argentine specialty-food retailer, creditors holding a pledge of shares organized a non-judicial foreclosure sale. The sale was widely publicized by full page ads in the largest Argentine daily newspapers. Unfortunately for the creditors, one day before the foreclosure sale, the Comisión Nacional de Valores (the "CNV") halted the proceeding on the grounds that it constituted a "public offering" requiring compliance with Argentine securities laws.² Although the Argentine Commercial Code, which regulates generally foreclosure proceedings, allows flexible standards for the creation of pledges on personal property, the foreclosure on such collateral by public auction must comply with the Public Offering Act and its ancillary regulations. The failure to comply with the Public Offering Act proved embarrassing, as the creditors were forced to cancel costly advertisements and hotel space.

The CNV has made clear that all non-judicial sales of shares, whether publicly-traded or unlisted, must comply with the above-mentioned rules regulating sales to the public. These rules require sales to be (i) previously authorized by the stock exchange specified in the pledge agreement or otherwise chosen by the creditor³; (ii) publicly announced and (iii) made through a registered broker-dealer. When the foreclosure sale involves unlisted shares, the filing of various informational documents with the relevant stock exchange is also required.⁴ The public foreclosure sale does not, however, trigger a prospectus delivery requirement.

The risk of delay, cost and frustration caused by an improper foreclosure sale can be reduced by addressing the matter at the time of creating the pledge. The agreements creating the security interest should include an appointment of a neutral custodian to hold the corporate documents needed for filing, as well as specify a borrower’s covenant to periodically update the documents. Obtaining the willing cooperation of a debtor to provide documents and information related to the collateral after default is not likely to prove an easy task.