Estudio Cavallaro

ABOGADOS

MEMORANDUM

Re:New rules of the City of Buenos Aires Corporations Authority with respect to the information that must be included in the Board’s Report (“Memoria del Ejercicio”) of the Financial Statement of Corporations

Date:07 August 2006

On July 28, 2006, the non-public companies watchdog of the City of Buenos Aires, the Inspección General de Justicia, issued a resolution (the “Resolution”) adopting certain minimum requirements that must be fulfilled by certain limited liability companies and corporations under its jurisdiction, when issuing their annual Board’s Report (“Memoria del Ejercicio”) as part of the company’s financial statements (the “Report”).

Under Argentina’s Companies Law (the “ACL”), certain limited liability companies and joint-stock companies must issue, together with their annual financial statements, a Report under which the administrators of the company must inform about the then current state of the company in the different activities in which it has operated, their judgement about operations projections and other aspects that may be considered necessary to inform about the present and future situation of the company[1].

The generalCompanies Law regime applies to those companies that fall under the levels or categories established by Section 299 of the ACL, which includes companies whose capital is at least equal to ten million Argentine pesos and companies admitted to the public offering of securities regime.

However, those companies admitted to the public offering of securities are regulated by the local securities commission (the “Comisión Nacional de Valores”), and have special rules related to the issuing of their Reports under Decree 677/2001.

The Resolution therefore mainly affects non-public, medium to large-sized companies. Such companies make up a substantial share of Argentina’s private economy, which is characterized by a prevalence of small and medium size, closed family-owned businesses. From that perspective, the Resolution is expected to have positive implications with respect to the adoption by Argentine companies of international corporate governance standards and best practices.

Under the Resolution, all such companies must include in their Reports, at least the following information:

  1. The main aspects of the company’s policyand/or corporate market strategy.
  1. The goals pursued by means of such policies and strategies, detailing the rationale of their formulation, both in terms of the company’s concrete situation at the beginning of the relevant fiscal year, and with respect to the general and industrial economic context.
  1. The company’s strategic goals actually fulfilled during the past fiscal year, and a critical evaluation of the differences between such goals and those originally foreseen and their causes, also mentioning the main measures adopted during the fiscal yearthat lead to the modification or correction of the company’s strategies and their rationale.
  1. The contractual or factual ties with other companies that are consideredessential to the company’s activities, including details as to how such ties affect the company’s autonomy and concrete information of the terms and conditions of material joint businesses.
  1. The following ratios, both for the then current and the previous fiscal year, and explaining the formula used in each case:
  1. Solvency;
  2. Indebtedness;
  3. Current Ratio or Liquidity Ratio
  4. Quick ratio or Acid test ratio;
  5. Equity to assets;
  6. Fixed assets to total assets;
  7. Total shareholders return;
  8. Financial leverage;
  9. Asset turnover;
  10. Inventory turnover.

Those ratios should be exposed compared with those of the relevant industry, if available, or otherwise with those of companies of similar industry and size. Controlling companies must also describe those ratios on a consolidated basis.

  1. The strategic goals for the new fiscal year, detailing the basis of their formulation, both in terms of the company’s concrete situation, and the general and industrial economic context.
  2. An estimation of the amount that, if necessary, would have to reach the contributions of shareholders or other means of financing during the incoming fiscal year.
  1. A detailed account of the relationship of the company with its controlling and controlled companies, including:
  1. In the case of controlling companies, (i) the main contents of the plans for the management of controlled companies during the past fiscal year – including the concrete application of such plans and their results– and for the following fiscal year, regardless of whether such plans are designed by the same company or by its direct or indirect controllers; and (ii) the transactions with controlled companies which have significantly gravitated over the results of the company, indicating whether they were carried out on arms-length basis and if they were not, the measures taken to prevent any prejudices caused to shareholders and creditors of the company.
  1. In the case of controlled companies, (i) all aspects of management plans designed by its controlling company that have been effectively carried out during a given fiscal year; and (ii) the transactions with controlling companies which were not carried out on arms-length basis and the measures taken or to be taken to prevent any prejudices caused to shareholders and creditors of the company.
  1. Events or transactions occurred between the closing date of the company’s financial statements and the date of the Report, which may materially affect the financial situation of the company, indicating their effects over the future situation of the company.

The resolution will become effective for all Reports to be published on the fiscal years which begin after January 1, 2007.

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The preceding summary does not purport to be a complete analysis of the legal implications of the Resolution. Furthermore, the foregoing information is not intended to be legal advice. If you are interested in asking questions on the matters discussed herein please contact Pablo L. Cavallaro ().

1

[1]See Section 66 of the ACL. Although Section 66 of the ACL includes detailed instructions as to the mandatory contents of Reports, in practice Reports are often prepared on very general and vague terms and omitting much of the information that should be included therein under Section 66.