Legal and Tax Considerations of Asset Purchase Agreements

Argentina has specific legislation that covers the transfer of assets from one business to another and places various restrictions on the transfer. Both parties to the transfer are also subject to procedures designed to protect creditors. The goal is to prevent debtors from transferring assets from one person or company to another, thus depriving creditors from the assets they hold as a guarantee against the debtor.

Obviously as a purchaser, executing a properly prepared asset purchase agreement allows you to take ownership of a business without any of the hidden liabilities that can arise from a stock purchase agreement. The problem is in the execution of the asset purchase agreement, however. It takes longer than a stock purchase and there are various formalities to be followed.

Special Case For Labor-Related Liabilities
Argentine law provides for joint liability in the case of labor-related liabilities (i.e. employee wages, social security payments, severance, etc). There is no way to execute an asset purchase agreement and rid yourself of the seller's labor-related debts. Therefore, it is imperative that the buyer ensure that the seller has everything in order with regard to their employees. It is common in many Argentine companies to have employees classified as independent contractors, undeclared, or with an official salary lower than the real salary paid.

It is also important to note that employees cannot be obligated to change from one employer to another. Employees who do not wish to be transferred will need to be laid off and paid severance.

Executing the Transfer
To execute an asset purchase agreement, the transfer must be announced in the Official Bulletin and creditors of the seller will have the chance to oppose the transfer unless full payment is received for their debts. If this announcement is not made and creditors are not given a chance to respond, the buyer becomes liable for all debts of the business.

Tax Debts
When transferring a business, AFIP should be notified by the buyer. AFIP has three months from the date the transfer takes place (not the date of notification) to investigate and impose any unassessed taxes. After the three month window, the buyer is in the clear and is not liable for back taxes owed.

Again, this shows the importance of structring the purchase agreement with payments over a long period of time rather than a large upfront payment. In the asset purchase transaction I participated in, an upfront payment for half the purchase price was made with follow-up payments over a 6 month period. Undeclared tax liabilites were discovered and we retained one of the follow-up payments until proof of payment of the tax liability was presented.

Tax Consequences of Asset Purchases
The seller will be liable for payment of 21% VAT on the sale of all goods (included would be the business' inventory, machinery, etc., but not any real estate) and income tax on any profits that are generated as a result of the sale.

Due to all these condiserations, it is always much easier to to execute share purchase agreements rather than asset purchase agreements if the goal is to acquire an existing business. The seller will almost always wish to use the share purchase method. However, if there is a particular concern about hidden liabilities the buyer may want to consider the asset purchase method to ensure that their operations begins with a clean slate.

Legal and Tax Considerations of Asset Purchase Agreements

Legal and Tax Considerations of Stock Purchase Agreements

Risks
When purchasing the shares or units of an Argentine business, the single biggest risk to the buyer are hidden liabilities that do not show up on the company's balance sheet -- hidden tax liabilities being the principal risk. A comprehensive due diligence process is required before closing any transaction in order to determine what taxes and other liabilities are owed.

In many cases, sellers are exiting the business because they have faced losses, are not well capitalized and have been unable to turn a profit. I was involved in just such a transaction with a distressed seller and one of the first measures that businesses with cash flow issues can do to relieve some of that pressure is start to fall behind on social security tax payments (cargas sociales), which represent about 30% of a business' total labor expenses. This was the case in the operation I participated in.

Obviously all debt owed by the company must, at a minimum, be deducted from the agreed upon purchase price. This must be explicitly stated in the share purchase agreement because Argentine law does not hold the seller responsible for hidden debts if there is no clause obliging the seller to take responsibility for these debts in the share purchase agreement.

Moreover, I also recommend buyers to refrain from large upfront payments and structure the purchase agreement with multiple payments over a long period of time in order to give themselves time, even after the transaction has closed, to find hidden liabilities and deduct them from follow-up payments made to the seller.

It is much easier for the buyer to retain a payment to a seller after finding a hidden liability than asking for a seller for reimbursement for the hidden liability after it is uncovered. Remember that although you may request guarantees and the seller may sign a document certifying that they will pay for any hidden liabilities, it will be a long and drawn out process if you need to judicially force a seller to pay back any portion of the purchase price.

Benefits
The principal advantage of the stock purchase agreement is that the operation is straightforward in an operational, legal, tax, labor, and paperwork sense. Since the company continues to operate normally during and after the sale, the only issues that arise involve actors external to the company -- the buyer and the seller. The employees, assets, liabilities, etc., of the company are not affected by the share purchase.

The sellers of a company, if they are individuals, will no doubt want to structure the operation as a stock purchase agreement due to the fact that gains from the operation are not taxable to them and due to the fact that they are no longer responsible for liabilities after the sale has been completed (unless the share purchase agreement has provisions to the contrary, as I recommended above). Corporate sellers will be required to pay income tax on capital gains from a share sale.

Legal and Tax Considerations of Stock Purchase Agreements

Purchasing a Local Company

Foreign investors or expatriates looking to acquire a local company will need to decide how to structure the transaction. There are two basic ways to acquire a local company and I have participated in transactions that have utilized both methods:

1. Through a stock purchase agreement
2. Through an asset purchase agreement

There are risks and benefits to each option and knowing which option to choose depends on whether you are the buyer or seller. Naturally both the buyer and the seller will want to structure the transaction in the way the most benefits them. The form in which the transaction is to be structured must be a part of the negotiations.

The seller will most likely be familiar with Argentina law and will want to structure the agreement in a manner that is to their benefit, without consideration as to the buyer's situation. The foreign investor, as the buyer, must be aware of Argentine laws regarding each of the two forms in order to properly negotiate a transaction to their benefit.

I will analyze both the legal and tax considerations of each option in a posts over the next two days.

Purchasing a Local Company