Caught in a Company Hostage Situation? You May Own the Company, But Not the Keys

Corporate hostage-taking in Argentina is more common than you might think. It’s a story we’ve seen far too often with foreign investors in Argentina. To set up a local company, a client making its first landing in Argentina engages a local firm (often accountants or civil law notaries, but sometimes attorneys) or asks a local partner or future employee to navigate the bureaucracy. With Argentina currently ranking 126th in the World Bank Ease of Doing Business index, the need for a local sherpa is essential.

Because Argentine Corporate Law requires:

• Foreign shareholder registration before they can directly hold equity (a months-long process);
• Local legal representatives with a domicile in Argentina; and
• A majority of resident directors on the board, foreign companies often allow local professionals or senior employees to temporarily fill these roles.

But these roles carry the controls:

• Legal representatives of foreign shareholders hold proxies and the exclusive authority to act on behalf of the shareholder.
• As nominees, they have custody of corporate books and documents.
• Often, they provide the company’s legal address, meaning official correspondence and government notices are delivered to their offices and allowing them to control the flow of information (sometimes relayed to the owners in Spanish or in unclear English).
• If serving as managers or directors of the entity, they: 1) control all tax filings and government infractions; and 2) have bank signature authority—sometimes exclusively.

The local assistance is great and everything works smoothly, until it doesn´t.

Usually, the client becomes aware of a problem when looking to part ways or to change the governance structure. Most common triggers are:

• The client has decided to replace the local firm.
• The client disagrees with its local partner/employee over fees, strategy, or priorities.
• The client has become frustrated by a lack of clarity, detects dubious practices, or receives unsatisfactory explanations to its questions.

Suddenly, the client realizes it is no longer the owner and caught in a company hostage situation.

The once trusted advisor, partner, or employee quickly signals a willingness to weaponize control of the Argentine company and the client discovers it lacks the tools to respond. Ownership of the company—often bearing the corporate name—is registered to the local party. The board is controlled by the local party.

The client is a company hostage, often forced to pay a “ransom” in the form of exorbitant compensation to recover what should have been theirs to begin with.

In Argentina, the hostage-taker may be prosecuted for violations of:

• Professional ethics codes (g., the Colegio Público de Abogados de la Capital Federal or City of Buenos Aires Bar Association; the Consejo Profesional de Ciencias Económicas or the City of Buenos Aires Council of Chartered Accountants).
• Provisions of the Argentine Criminal Code for extortion and fraudulent retention.

But even with the law on your side, enforcement is often slow and costly. By the time an investigation or court order is issued, your company may already be paralyzed and valuable business opportunities lost. This is why prevention is critical—and why companies should always consider the potential compliance risks in Argentina when defining their structuring here.

Our experience proves time and again that prevention and caution are far more effective than litigating. Here are some things you can do to prevent being taken hostage:

1. Vet your external advisers thoroughly. Use trusted business connections or ask your local attorney for a recommendation. They might not know anyone in Argentina but chances are they will know someone who does. Word-of-mouth referrals continue to be a great—if not the best—source for finding qualified assistance. Avoid relying solely on internet searches or advertisements or blithely accepting the recommendation of your local business partner, as the external adviser will be beholden to that person and not to you.
2. Avoid appointing local employees to governance positions. Instead, consider appointing nominee directors who act upon your instructions pursuant to a nominee agreement.
3. If you charter a company with natural persons, have those persons be trusted individuals from the home office. They can manage the charter process through revocable powers of attorney.
4. Establish document custody protocols that ensure access and maintain a digital archive of all the original corporate books and documents.
5. Retain control over banking platforms. Require dual signature safeguard for transactions, with at least one signatory being from the home office. Remote online banking allows greater flexibility and control.
6. Conduct regular corporate governance reviews to confirm access and control over all critical points and to monitor reporting and compliance.

Act fast and forcefully:

• Engage experienced local counsel who can combine legal action with skilled negotiation tactics.
• Document every interaction—emails, messages, calls.
• Alert professional associations to breaches of ethical obligations.
• Evaluate criminal complaints if there are signs of extortion or wrongful retention.

Argentina offers huge opportunities for investment, but the wrong corporate governance structure can turn a profitable venture into a company hostage situation.

Trust your advisors and local employees—but design your corporate governance as if one day they might become your adversaries. The cost of prevention is small compared to the price of buying back or losing your own company—and it’s the best way to minimize compliance risk in Argentina.