Franchising in Argentina: limits on share ownership

When franchising a business, a tempting proposal may arise: investing capital in the first franchisee’s company to help it open. However, sharing an investment is not the same as granting a franchise. Argentina has a specific legal restriction worth reviewing before committing money or negotiating shareholder rights. A franchise network needs common standards, but also a clear separation between the businesses within it.

What the Civil and Commercial Code prohibits

Franchising is governed by Articles 1512 to 1524 of Argentina’s Civil and Commercial Code. Article 1512 expressly states that the franchisor may not hold a controlling equity interest, directly or indirectly, in the franchisee’s business.

It is therefore not enough for the parties to have separate companies or sign separate documents. If the franchisor controls the franchisee’s business through share ownership, the structure conflicts with that prohibition.

The provision does not impose an outright ban on all minority shareholdings. Nevertheless, holding less than half the share capital should not be treated as automatic permission. Assessing an investment requires examining voting rights, share classes, shareholder agreements and holdings through other companies.

Article 1520 also establishes that the parties to the contract are independent. That independence does not remove obligations relating to training, support or compliance with standards: it requires those obligations to be distinguished from the position of an owner who controls another company.

Review the structure before offering capital

Before proposing an equity investment, prepare an outline showing who the franchisee’s shareholders will be, how much each will contribute and what rights they will have. The aim is not simply to identify percentages, but to understand how decisions will be made.

The review should cover:

• Direct holdings: shares the franchisor would hold in the operating company.
• Indirect holdings: interests held through intermediary companies that could lead to control of the franchisee.
• Governance rights: voting rights, appointments to governing bodies and the majorities required for decisions.
• Shareholder agreements: voting commitments, special powers and mechanisms for resolving deadlock.
• Planned changes: purchase options, capital increases or debt conversions that could alter the structure.

For example, an initially minority holding could change if other shareholders do not participate in a capital increase. A purchase option could also create a future problem even if it has not yet been exercised.

Give this outline to the professional reviewing the transaction and ask for a combined assessment of the franchise agreement, the company’s constitution and the shareholder agreements. Reviewing each document separately may conceal effects that arise when they operate together.

Separate brand standards from corporate governance

The franchisor needs to protect its business system. It can establish operating guidelines and monitoring arrangements consistent with the contract and applicable law. That does not, in itself, amount to a controlling equity interest.

The practical distinction is between how the franchised business format must operate and how the company running it is governed.

For example, requiring a standardised recipe, a consistent presentation or training in the use of the system falls within franchise operations. By contrast, rights to appoint directors or determine corporate decisions require a different analysis when linked to an investment by the franchisor.

Prepare a simple table with three columns: decision, responsible party and governing document. Set out operating standards in the contract and manuals, and shareholder rights in the relevant corporate documents. Then check that the documents do not contradict one another.

Do not use corporate provisions to compensate for poorly defined support arrangements. If the issue is ensuring quality, develop training, monitoring and corrective procedures rather than assuming you need to become a shareholder.

Compare alternatives and monitor changes

Before investing, ask yourself what difficulty you are trying to resolve. If capital is lacking, review the financing arrangements and the prospective franchisee’s financial capacity. If experience is lacking, the answer may lie in preparing the operator. If you want to direct every decision, you may need to consider a company-owned outlet rather than a franchise.

Financing without an equity stake should not automatically be regarded as risk-free either: its security arrangements, terms and rights of intervention require legal review.

If an equity investment is ultimately considered permissible under the applicable rules, establish a procedure for reviewing future transfers, changes to voting rights and capital increases. A structure that is compliant at the outset may cease to be so later.

Practical conclusion: before investing in your franchisee, map out the ownership and decision-making structure. Review it alongside all the contracts and preserve the distinction between supporting an independent business and controlling it.