More than a decade after the Argentine government took control of the country’s largest oil and gas company, YPF S.A., last month U.S. District Court Judge Loretta Preska held the Argentine Republic liable for claims by two minority shareholders. Judge Preska determined YPF itself was not liable, holding the company did not violate its bylaws in not requiring the Argentine government to purchase shares from the minority shareholders via a tender offer at the time of expropriation.
Global and national interest in the case has remained high for many reasons. At the time of its nationalization in 2012, YPF, one of the largest companies in Argentina, stood to profit enormously from the shale oil deposits in Argentina’s Vaca Muerta geological formation. Then-president Cristina Fernández de Kirchner’s takeover of the company was both popular and deeply divisive. Supporters hailed the move as a step toward national energy self-sufficiency, while critics called it “an illegal and unjustifiable act”[1] that would further and perhaps irrevocably damage Argentina’s credibility with foreign investors.
Given the importance of this highly contentious case and the ripple effects that are sure to continue, we offer this explanation of events.[2]
YPF and the Eskenazis
To understand the case, it helps to know that the minority shareholders involved were the Eskenazi brothers, who had a long history of business relations with the Kirchners. The brothers acquired 25% of YPF through an unconventional transaction: to finance the purchase, the Eskenazis received $1.685 billion in loans from Repsol (the Spanish oil company that owned YPF) and $1.688 billion from different international banks. These loans were made to Petersen Energía and Petersen Energía Inversora, two Spanish companies the Eskenazis owned. The Petersen companies thus acquired their 25% stake in YPF without putting in cash.
Repsol and the banks (the lenders) agreed that repayment of the loans would be funded by future dividends from YPF. Then-president Néstor Kirchner “persuaded” Repsol to accept the arrangement, arguing that the entry of local capital into the Argentine oil industry would benefit both the Spanish company and the Argentine economy.[3]
Nationalization of YPF and the Petersen Bankruptcies
Even though it had acquired a 25% stake in YPF through the Petersen companies, the Argentine government went for more.
In 2012, the Kirchner administration expropriated 51% of the YPF shares owned by Repsol. This move—a pivotal event resoundingly approved by the national Congress—was combined with the new majority shareholder (Argentina) halting all further dividend payments, declaring a policy to channel the company’s earnings toward investment in future energy production and away from shareholder value.[4]
With the halting of dividends, the Petersen companies were unable to service their outstanding acquisition loans. This prompted them to file for insolvency protection in Spain. The insolvencies led to an enforcement of the loan collateral, resulting in 6% of YPF’s shares reverting to Repsol and the remaining 19% being awarded to the financial creditors.
Burford Capital and Eton Park’s Lawsuit against YPF and Argentina
After the renationalization of YPF in 2012 and the bankruptcy of the Petersen companies, the English fund Burford Capital Ltd. and the U.S. fund Eton Park acquired the claims against YPF and Argentina from companies that were minority shareholders of the oil company, including Petersen.
Who Were these New Players?
Burford Capital is a finance and investment management firm that provides capital and financing to the legal sector. Its primary focus is on funding litigation and arbitration cases and its shares are listed on the New York and London Stock Exchanges.
Eton Park Capital Management was a hedge fund that focused on public and private equity markets, which closed in 2017 due to poor performance and investor withdrawals.
By providing the capital to underwrite the case, Burford stands to receive a large portion of any damages recovered. The complaints do not specify the monetary damages, but the ultimate payout for the litigation funder could be in the billions of dollars. Apparently, the market shared optimism for a large payout and Burford’s stock price jumped 66% on the day of Judge Preska’s ruling.[5]
The Foundations of the Claims against YPF and Argentina
The claims against YPF and Argentina were based on the way in which the nationalization of the oil company was carried out. Plaintiffs argued that Argentina’s expropriation required a tender offer to all shareholders in a manner consistent with YPF’s bylaws. Argentina’s expropriation of Repsol’s shares should have given the remaining shareholders the opportunity to increase their stakes pro rata. They argued that the bylaws were disregarded and that YPF should be held liable for failing to enforce the bylaws in the forced sale.
Because YPF lists its shares on the New York Stock Exchange, the plaintiffs were able to file their claims in the Southern District Court of New York and did so in April 2015. Several press reports hinted that Repsol, the Eskenazi family, and even officials from the Argentine government were behind Burford’s claim, but all of them denied involvement.
The Ruling and its Consequences
In her March 2023 ruling, Judge Preska held the Argentine government liable for failing to offer to purchase shares from the other shareholders at the time of the expropriation in 2012. She reasoned that YPF’s bylaws did not obligate the company to enforce the tender offer, and that it was the acquiring shareholder (Argentina) that was liable for failing to do so.
Judge Preska’s ruling deferred quantifying damages because of a lack of evidence as to when Argentina actually took control of the YPF shares. Nonetheless, the ruling does include a formula to calculate damages once the effective date of control is determined. Whatever the finding, YPF’s market cap is currently $8.576 billion, and the damages payout will be significant. While the final outcome remains undetermined, the potential liability creates serious concerns for a country already suffering macroeconomic turmoil.
Footnotes
[1] https://www.nytimes.com/2012/04/18/business/global/spain-weighs-response-to-nationalization-of-ypf.html
[2] WSC Legal, together with Jones Day, advised a creditor to the minority shareholders, which were subject to involuntary bankruptcy proceedings in Spain.
[3] The Petersen companies were closely tied to the government through public works contracts and mutually beneficial banking arrangements, from the time of Néstor Kirchner’s governorship of the province of Santa Cruz (1991–2003) through his and Cristina Fernandez de Kirchner’s presidencies. See https://www.lanacion.com.ar/economia/eskenazi-un-constructor-y-banquero-amigo-de-kirchner-nid973367/ and https://www.revistaei.cl/2012/04/21/familia-eskenazi-los-socios-argentinos-que-cristina-fernandez-dejo-en-ypf/#.
[4] Privatized in 1993, YPF had been a state-owned company for most of its history. President Fernández de Kirchner argued that renationalization was a way for the country to recover sovereignty over its natural resources and she and her allies saw Petrobras, the Brazilian state-owned oil giant, as a model for Argentina. They argued that Repsol paid excessive dividends and, by underinvesting in production, failed to meet the country’s energy needs. The YPF expropriation came soon after the discovery of vast shale oil and gas deposits at Vaca Muerta—a formation in the Neuquén basin—another factor which drove its timing.
[5] https://www.reuters.com/legal/litigation/column-this-billion-dollar-case-against-argentinas-ypf-wouldnt-exist-without-2023-04-03/ The article notes that Burford’s April 2 press release “said that before adding prejudgment interest, Petersen’s claims could be as high as $7.5 billion, with Burford slated to recover 35%. Eton Park damages, before interest, could be $900 million, of which Burford will get 70%.”
