1. Introduction

As a result of various inquiries from our clients, in recent months we have found that most of the clients we advise on labor, tax, civil, and contract matters operate through a corporation (sociedad anónima) and are in a situation of non-compliance with the current regulations applicable to such entities.

In most cases, these violations are formal in nature and are not given the significance they deserve, but they can give rise to the following consequences:

• Administrative fines, essentially imposed by the Internal Audit Authority (Auditoría Interna de la Nación, hereinafter “AIN”), which is the state body responsible for overseeing corporations.
• Excessive delays when adopting certain resolutions, or when seeking approval for amendments or modifications to the share capital that must be implemented urgently.
• Complications in the company’s position during inspections by the Tax Authority (Dirección General Impositiva, “DGI”). We have acted in cases where certain line items that the company had recorded as part of its equity were treated by the DGI as liabilities due to lack of adequate documentation (board or shareholder resolutions), leading the DGI to conclude that different tax treatment applied and seeking payment of taxes, penalties, and surcharges.
• Discovery of regulatory violations during a due diligence audit or audits requested by a parent company, majority shareholders, or external auditors.

Below we briefly outline the various aspects to be considered in order to comply with the current regulations governing corporations.

2. Articles of Association (Estatutos)

Every corporation (except free-trade zone users) must have its articles of association approved by the AIN, registered with the National Commercial Registry (Registro Nacional de Comercio), and published in the Official Gazette and in another publication at its registered address.

Amendments to the articles of association must comply with the same formalities described above, except for increases to the authorized share capital, which are not approved by the AIN but must be notified to that office. Every amendment to the articles of association must be approved by a shareholders’ meeting, except for mandatory capital increases, which may be approved by the board of directors.

The above documentation is required to carry out the changes reviewed by the AIN. If such documentation is not available, we can assist with its reconstruction or with the completion of any outstanding procedures.

3. Shares

The total par value of the shares must equal the paid-in capital of the company. Share certificates must contain the requirements set out in the Companies Law 16,060 (hereinafter “LSC”) and must be signed by the company’s representatives. Certificates may represent more than one share, and existing certificates may be cancelled and new ones issued if shares need to be redistributed or if there has been a change of name, a capital increase, or a need to update the share certificates.

If the shares are registered or book-entry shares, a Register of Registered or Book-Entry Shares must be maintained, recording the number of shares issued, the holders of such shares, share transfers, and all transactions relating to the shares. In the event of loss or theft of share certificates, a complex procedure is required to have the certificates reissued.

It is common — and incorrect — practice to issue provisional certificates in connection with irrevocable capital contributions or contributions on account of future subscriptions. This does not comply with current regulations and provisional certificates should not be issued in such cases; instead, a share subscription agreement should be executed.

Pursuant to Laws 18,092 and 18,172, corporations that own rural real estate with agricultural operations must necessarily have registered shares. If they currently have bearer shares, they must amend their articles of association and issue new registered shares.

4. Corporate Books

Every corporation must maintain the following books:

• Shareholders’ Meeting Minutes: Minutes of meetings held must be recorded in chronological order and signed by the chairperson of the meeting and the designated shareholders.
• Board of Directors’ Meeting Minutes: Board meeting minutes must be recorded and signed by all directors who attended each meeting.
• Shareholders’ Register: The register and attendance record of shareholders at the meeting must be completed, signed by each attending shareholder or their representative, and closed in the book by the company’s representative.
• General Journal: All of the company’s transactions must be recorded in chronological order.
• Inventory Book: Financial statements must be transcribed in chronological order.

The books must be certified by the National Commercial Registry and maintained in chronological order, without corrections or deletions. The General Journal and Inventory Book may be replaced by loose sheets, which must subsequently be certified by the National Commercial Registry when the one-thousand-sheet mark is reached.

Books properly maintained serve as evidence in favor of the company. If any of the books are missing, they may be submitted for certification at the Commercial Registry. In the event of loss or theft of any of the books, a summary judicial proceeding must be carried out to obtain certification of the new book.

5. Shareholders’ Meetings

Within 180 days of the close of the financial year, an ordinary shareholders’ meeting must be held to: approve the financial statements, the management report, and the proposed profit distribution; designate the board of directors and its remuneration; and appoint the members of the internal oversight body, where applicable.

When approving the proposed profit distribution, it must be taken into account that accumulated losses must first be absorbed, then the statutory reserve must be constituted, and only thereafter may profits be distributed. A minimum cash dividend of 20% of profits is mandatory, unless shareholders representing more than 75% of the paid-in capital resolve by reasoned resolution not to distribute it.

If profits are to be capitalized, the corresponding shares must be issued and the paid-in capital increased accordingly.

If the company benefits from tax exemptions or incentives requiring the capitalization of profits or the creation of reserves, failure to comply with these requirements could lead the DGI to conclude that the conditions for the exemption or tax benefit were not met, and to seek taxation of the amounts previously considered exempt.

Extraordinary shareholders’ meetings shall be convened when necessary due to the existence of matters within their competence (amendments to articles of association, capital increases, reductions and restatements, mergers, transformations, etc.) or when a matter within the competence of the ordinary meeting must be resolved urgently (for example, a change in the composition of the board of directors).

It is important that when a meeting is held, the minutes be correctly drafted — designating a chairperson, signed by the chairperson and the designated shareholders, and recorded in chronological order in the Shareholders’ Meeting Minutes book. Every meeting must be called by the board of directors in advance. Shareholders attending the meeting must sign the Shareholders’ Register.

6. Capital

The paid-in capital must reflect the sum of the par value of the shares issued, which may in no case exceed the authorized share capital.

Increases, reductions, and restatements of paid-in capital must be approved by an extraordinary shareholders’ meeting and notified to the AIN. They generally also entail changes in the number of shares and the issuance of new share certificates.

It is possible to increase the paid-in capital by resolution of the board of directors when there is sufficient authorized share capital to do so.

Any increase of paid-in capital through new contributions must be preceded by the preparation of a special balance sheet and the capitalization of equity line items, unless the contributions are made by shareholders in proportion to their shareholdings or unless there are no items subject to mandatory capitalization. To the extent that the company has more than one shareholder, the publications required in connection with shareholders’ withdrawal rights and pre-emptive rights must also be made.

6.1 Mandatory Capital Increase

Article 288 of the LSC requires a mandatory increase of paid-in capital when, upon approval of the company’s annual financial statements, the paid-in capital represents less than 50% of the sum of paid-in capital plus reserves. The formula to determine whether a capital increase is required is: KI / (KI + Reserves) < 0.5. Pursuant to Article 288(2), the management body (board of directors or administrator) must order the increase of authorized share capital within 30 days of approval of the financial statements, without requiring administrative approval — meaning the AIN does not approve the increase but must merely be notified.

6.2 Mandatory Capital Reduction

The mandatory capital reduction provided for in Article 293 of the LSC is a nominal capital reduction, and it is mandatory when accumulated losses have absorbed the reserves and 50% of the paid-in capital. The applicable formula is: Accumulated Losses > Reserves + 50% KI.

6.3 Dissolution Due to Losses

The LSC establishes as a ground for dissolution under Article 159(6) the existence of losses that reduce the company’s equity to less than one-quarter of the paid-in share capital. Accumulated losses must have caused such a reduction in net worth that the equity is less than 25% of the paid-in share capital. The applicable formula is: Net Worth < 25% KI. In these cases, dissolution does not occur automatically — only the ground for dissolution arises. Dissolution could be judicially sought by a shareholder or a third party.

7. Equity

Any modification to the equity accounts of the company generally requires a shareholders’ or board resolution, except for the recording of equity adjustments.

Capital changes were analyzed in the preceding section. The creation of reserves and the distribution of profits will depend on what the ordinary shareholders’ meeting resolves when approving the proposed profit distribution. In the case of interim profit distributions, these must be approved during the course of the financial year and a special balance sheet prepared.

Under the current regulatory framework, it is not possible to record irrevocable contributions or contributions on account of future subscriptions as equity — they must be recorded as liabilities. For them to be genuinely treated as equity, the necessary corporate resolutions must be adopted to increase the paid-in and/or authorized share capital as required.

8. Registration of Financial Statements

Law 17,243 published in the Official Gazette on July 6, 2000 (First Urgency Law) incorporated Article 97bis into the LSC, making it mandatory for commercial companies to register their financial statements with the state oversight body. Decree 253/001, published in the Official Gazette on July 10, 2001, regulated the various aspects of the registration of financial statements.

Corporations whose total assets at the close of each financial year exceed 30,000 UR (thirty thousand reajustable units), or that record net operating revenues during the same period exceeding 100,000 UR (one hundred thousand reajustable units), must register their financial statements with the AIN within 180 days of the close of their financial year.

A company may not distribute profits resulting from its operations without having previously registered the financial statements corresponding to its last closed financial year.

9. Registration with the National Commercial Registry

The composition of the board of directors and all subsequent changes must be registered with the National Commercial Registry; otherwise, the acts performed by its members will not be enforceable against third parties.

To the extent that shareholders’ agreements exist and it is desired that they be effective against third parties, they must also be registered with the National Commercial Registry, in addition to a copy being delivered to the company and a note of the existence of the agreement being made on the share certificates.

10. How We Can Assist You

If you consider that you are not complying with any of the aspects described above, we can assist you in resolving the situation.

The existence of irrevocable contributions, missing or incomplete entries in the books, discrepancies between the shares issued and the company’s capital, capital increases or reductions not notified to the AIN, issuance of provisional certificates, failure to hold an annual ordinary shareholders’ meeting, the occurrence of grounds requiring a mandatory capital increase or reduction, or grounds for dissolution would all warrant an analysis of the situation and the taking of some decision to resolve it.

We are also in a position to carry out a corporate compliance audit to determine whether any irregularities or violations exist with respect to the regulations described above.

We remain at your disposal for any clarification or further information you may require.