Leonine clauses: void agreements among members (LGS art. 13)
Section 13 of the General Companies Law declares so-called leonine clauses void: arrangements that break the essential balance of a company, such as excluding a member from profits or losses, guaranteeing the member's capital regardless of results, or fixing in advance a price for that member's interest that materially departs from its actual value.
What article 13
Section 13 lists the void provisions of the company agreement: clauses which, because they distort participation in profits and losses, are void by operation of law even if the members agreed to them.
The following provisions are void:
1) Any provision whereby one or more members receive all profits or are excluded from them, or are released from contributing to losses;
2) Any provision whereby the capital-contributing member or members are repaid their contributions with a specified premium or the fruits thereof, or with an additional amount, whether or not profits exist;
3) Any provision guaranteeing a member's capital or possible profits;
4) Any provision whereby all profits, and even the benefits owed to the company, belong to the surviving member or members;
5) Any provision allowing a price to be determined for the acquisition by one member of another member's interest that materially departs from its actual value at the time the acquisition is carried out.
Source: Law 19,550, art. 13 - InfoLEG (updated official text)
Commentary
They are called leonine after the fable of the lion that keeps the entire prey: these clauses give one member all the advantages or free that member from all risk. The law invalidates them because they contradict the essential element in article 1 - sharing in profits and bearing losses.
The invalidity affects the clause, not necessarily the entire agreement: as a rule, the company survives without the defective provision. Subsection 5 is particularly important in practice for buyout clauses concerning a member's interest (for example, in a shareholders' agreement): the price may not materially depart from actual value when the clause is implemented.
Distinctions often confused
Practical impact
When drafting shareholders' agreements and exit or buyout clauses, article 13 must be taken into account: a pricing formula that disregards actual value at the time of implementation may be declared void.
Frequently asked questions
Can the members agree that one member will bear no losses?
Can the price of a member's interest be fixed in advance?
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