This country-specific Q&A provides an overview to M&A laws and regulations that may occur in Colombia.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
There is no single rule or law that governs mergers and acquisitions but rather a set of rules that will apply depending on the nature of the target company and on the structure to be undertaken for the transaction. Some rules that govern M&A transactions include:
(i) Commercial Code, Law 222 of 1995 and Law 1258 of 2008, which are the set of rules that govern an M&A transaction from a corporate perspective;
(ii) Financial Statute and Decree 2555 of 2010, which govern the acquisition of financial institutions (including banks, insurance companies, insurance brokers and broker / dealers, among others);
(iii) Law 964 of 2005 and Decree 2555 of 2010, which govern the acquisition of publicly traded companies (including by means of a public tender offer); and
(iv) Law 1340 of 2009 and Resolution No. 88920 of 2017 issued by the Superintendence of Industry and Commerce, which governs the merger control regime.
In addition, the main regulatory authorities are the following:
(i) Superintendency of Companies (Superintendencia de Sociedades), which is the governmental entity that undertakes the surveillance of companies from a corporate and foreign exchange perspective;
(ii) Superintendency of Finance (Superintendencia Financiera), which is the governmental entity that undertakes the surveillance of financial entities (including banks, insurance companies, insurance brokers and broker / dealers, among others) and authorizes transactions related to publicly traded companies; and
(iii) Superintendency of Industry and Commerce (Superintendencia de Industria y Comercio), which is the governmental entity that undertakes the surveillance related to antitrust matters.
What is the current state of the market?
Although there was a reduction of approximately 8% in the amount of transactions closed in 2018 compared to 2017 according to Transactional Track Record (TTR), there continued to be a steady amount of M&A transactions that closed compared to the most recent years. In this regard, there were 166 reported transactions for an amount of approximately US 6.7 billion (non-confidential transactions), which represents an increase in the value of deals closed compared to 2017.
In addition, it is worth mentioning that there was an increase in the amount of transactions in the last quarter of 2018, which evidences an increase of confidence by investors. Some factors that continue to contribute to the increase in confidence as to the future performance of the Colombian economy, include (i) increase of the prices of oil, raw materials and other commodities, (ii) investment in major infrastructure projects, (iii) increase of the middle class, (iv) reduction of the interest rates, (v) control of inflation,(vi) entrance of Colombia to the OECD, among others.
Multi-jurisdictional and cross-border deals will continue to steadily grow in Colombia, as it continues to be an attractive market to multinational companies with the interest of growing in sectors such as technology, consumer, financial services and agroindustry. Likewise, Colombian companies will continue to foster acquisitions abroad, principally in Central America and member states of the Pacific Alliance. Indeed, an increase in cross-border deals in Peru in 2018 was evidenced arising namely to the synergies in both markets.
Which market sectors have been particularly active recently?
The principal industries that have evidenced M&A transactions are the financial and insurance sectors (according to TTR, 25 of the 166 operations were undertaken in these sectors) followed by the health and retail sector. M&A transactions are also expected to significantly increase in other key industries such as logistics, technology, real estate, infrastructure and agroindustry.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Some of the most significant factors influencing M&A transactions in Colombia over the next two (2) years will include:
(i) The consolidation and outcome of the Colombian peace process. Although international and domestic investors have, in their majority, applauded the entering into a peace process with the FARC (left-wing guerrilla), positive results of the process and a confirmation of the reduction in violence (specially in certain rural areas of Colombia) will influence the manner in which the Country is perceived;
(ii) The results of corruption cases and the effectiveness of the Colombian justice prosecuting such cases will also influence the M&A activity; it will also most probably influence a greater demand for more stringent corruption due diligence and anti-corruption strategies, as they will become key in the undertaking of M&A transactions; and
(iii) Continuance of a positive macroeconomic trend which envisions economic growth during 2019 and 2020.
What are the key means of effecting the acquisition of a publicly traded company?
Although M&A transactions are significantly higher for private companies rather than for publicly traded companies, the most common way to undertake an acquisition of a publicly traded company is by means of a public tender offer (oferta pública de adquisición). The public tender offer will be required to be directed to all shareholders in the event a person, directly or indirectly, either (i) proposes to become the beneficial owner of 25% or more of the total outstanding voting shares of a publicly traded company or (ii) is already the beneficial owner of 25% or more of the outstanding voting shares of such a company and intends to increase its ownership by more than 5%.
In addition, and although hostile bids are really not applicable in Colombia considering that there is usually a controlling shareholder and that the management of a company does not have a significant role in an acquisition, third parties unrelated to the transaction will be given the opportunity to interfere with a public tender offer and file competing bids.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
Publicly available information will depend if the target company is a publicly traded company or a privately held company. In this regard (i) for the first case (publicly traded companies), periodic information required to be revealed (including annual audited financial statements) together with other material information will be available to the public, and (ii) for the second types of companies (privately held companies), basic corporate information will be available to the public (including name of directors and officers, amount of capital, name of quotaholders (if the type of company is a limited liability company) and audited financial statements (depending on certain types of companies).
In addition, in a public tender offer the offeror will need to disclose specific information related to the transaction, such as the minimum and maximum shares the acquirer is willing to acquire, the price, information on the methodology used to valuate the shares, among others. However, no material information will be required to be disclosed on the target company, other than specific facts of such entity such as the name and principal place of business of the Company. In privately held companies, no disclosure is required.
To what level of detail is due diligence customarily undertaken?
Although the level of due diligence may vary depending on several factors, such as if the target company is a publicly traded company or privately held company, the industry in which the target company operates, the statutory auditor of the target company, sophistication of the management of the target company, among others, due diligence will normally be made in two stages (i) an initial due diligence, conceived as a “red flags report” that corresponds to a high level analysis and highlight of the most relevant legal issues, and (ii) a confirmatory due diligence, with a more detailed report and description of the business and main issues of the target company.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Although the key decision-making organs will vary depending on the type of company, the principal corporate organs of a target company are:
(i) In a corporation, there is a shareholder´s assembly and a board of directors; the principal power of the shareholders assembly will be to amend the by-laws of the company (therefore approving a spin-off or merger) and decide on the main corporate decisions of a company. The board of directors will normally approve the entering into material agreements by the company, including the sale of assets of the target company, and in general undertake the managing of the company; and
(ii) In a simplified stock corporation, the corporate organs will be similar to the ones provided for the corporation, but in this type of company the board of directors is optional.
What are the duties of the directors and controlling shareholders of a target company?
The directors are subject to certain fiduciary duties under Colombian law, including acting without conflict of interest, in good faith, with diligence and in the best interests of the target company, including fostering compliance with the law and the by-laws of the target company, granting equitable treatment to all shareholders and abstaining from using privileged information.
Do employees/other stakeholders have any specific approval, consultation or other rights?
There is no approval, consultation or other special rights granted to employees or other stakeholders.
To what degree is conditionality an accepted market feature on acquisitions?
It is customary to include conditions precedents in acquisition agreements related to third parties consents or approvals (for instance obtaining a consent or waiver arising from a change of control provision of a material agreement or an authorization of a governmental authority). Other types of conditionality, for instance “agreeing to agree” on contracts of a transaction, are normally not accepted.
While, as a general rule, offers for publicly traded companies must be unconditional; takeover offers for privately held companies may be subject to some common conditions, such as minimum acceptance, no occurrence of a material adverse change and obtention of all necessary regulatory or third-party approvals (e.g. authorization from the antitrust authority);
What steps can an acquirer of a target company take to secure deal exclusivity?
An acquirer will normally request exclusivity in letters of intents, memoranda of understanding and other preliminary agreements whereby an “in-principle” figure of the principal commercial terms of the transactions is provided. Exclusivity obligations in Colombia are valid and remedies available in case of a default will comprise monetary damages (penalties and the right to claim additional damages) arising from the contractual breach.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Although not frequent, “break up fees” have been starting to be more commonly used in deals as a protection of potential acquirers if a transaction does not close for reasons not attributable to the acquirer.
Which forms of consideration are most commonly used?
The form of consideration most commonly used is payment in cash. In direct mergers shares of the resulting company are offered to the shareholders of the merged entities. Other forms of consideration are uncommon.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Although it depends on the nature of the company, in privately held companies a “control” situation (having 51% or more of the shareholding interest) will be required to be registered before the Chamber of Commerce within a month after it has occurred and therefore publicly available.
A person acquiring or disposing shares in a listed company or in a financial institution must notify (i) the issuer or the financial institution, as the case may be, (ii) the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia), and (iii) the Colombian Stock Exchange (Bolsa de Valores de Colombia - BVC) if the number of shares to be acquired or disposed reaches or exceeds 10% of the capital stock of such company. Such notification shall be accompanied with the corporate and financial documents set forth in the applicable law.
At what stage of negotiation is public disclosure required or customary?
The negotiation phase is normally not publicly disclosed, unless the transaction is structured as an open auction.
Is there any maximum time period for negotiations or due diligence?
There is no maximum time period for negotiations or due diligence, although it is customary that the period to finalize the due diligence is between 30 and 60 days and the negotiation phase takes around 30 to 45 days.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In publicly traded companies the acquisition of shares by means of a public tender offer must comply with the following rules regarding the price of the shares:
- If buyer has acquired shares in the listed company within the 3 previous months to the date on which the tender offer is informed to the Superintendency of Finance (Superintendencia Financiera de Colombia), the acquisition price of the shares included in the tender offer shall not be less than the higher price paid by the buyer in such previous acquisition.
- If there is a pre-agreement (pre-acuerdo) in place between buyer and seller regarding the shares, the purchase price shall not be less than the higher price set forth in such pre-agreement.
- In the event of competing offers over a listed company, the purchase price offered in the competing offer cannot be inferior than the purchase price included in the initial tender offer.
Is it possible for target companies to provide financial assistance?
Although there is no express rule in Colombia according to which a target company could not provide financial assistance, it is not a common practice nor advisable for companies with minority shareholders due to the risks that such decision may trigger for the management of the company and even for the shareholders. The foregoing considering that the management members and shareholders may be held personally liable for acts that are not in the best interest of the company or that represent a conflict of interest.
In the acquisition of privately-owned companies by private equity funds, it is becoming common that the target company at closing guarantees the acquisition finance obligations and that a merger between the acquisition vehicle and the target company is completed 6 to 12 months after the completion of the deal.
Which governing law is customarily used on acquisitions?
The governing law typically used in acquisitions is Colombian law. In larger deals or mega-deals, if there is an international element in the transaction (for instance, one of the parties is a foreign entity), New York law is commonly agreed. In this case, an international arbitration tribunal to protect the application of New York law in case of a claim is also frequently included.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
In order to request the previous authorization from the Superintendence of Finance to carry out a public tender offer (oferta pública de adquisición), buyer must provide the following documentation: 1) the bid booklet; 2) the bid announcement project; 3) the authorizations from the competent bodies of the bidder (as the case may be); 4) the certificate of incorporation and good standing of the target company; 5) a copy of the filings before other competent authorities, when required; and 6) a bidder’s representation regarding the inexistence of other preliminary agreements different from those included in the bid booklet.
Particularly, the bid booklet shall include detailed information regarding the bidder and the bid, such as: any preliminary agreements between the parties, information regarding the bidder’s business and financial situation (including its audited financial statements), among others. In addition, the bid announcement project must contain, among other information: the bidder’s identification, the minimum and maximum shares the bidder is willing to acquire and the form of consideration.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Transfer of shares in a corporation or a simplified stock corporation is undertaken by means of a letter sent by the transferor to the company informing the legal representative of the transfer and requesting the formalization of the transfer or endorsement of the shares of the company to the transferee, registration of the transferee and the transfer in the shareholders registry book and cancellation of the former shares and issuance of new share certificates.
Are hostile acquisitions a common feature?
Hostile takeovers are uncommon considering that the companies usually have controlling shareholders and the limited power of the management of the Company.
What protections do directors of a target company have against a hostile approach?
There is no special protection to directors of a target company in a hostile takeover. Our tender offers regulation includes a duty of neutrality and passivity similar to the one set forth by the EU Takeover Directive. Directors in Colombian listed companies do not hold the right to block a takeover transaction, and as a general rule do not play any active role in a given transaction. Therefore, defensive measures taken by directors are almost non-existent. The best and probably only defensive measure used in public markets is a competing offer.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Yes, please refer to the answer set forth in question number 5 related to public tender offers.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders will have, in principle and unless in the case of issuance of special types of shares, the same economic and politic rights granted to the majority shareholder, including to inspect the books and records of the company for an ordinary meeting. In addition, for corporations (S.A) the following decisions are required to be taken with a special majority in accordance with law:
(i) The approval of profits distribution for an amount which is lesser than 50% of those obtained in the corresponding fiscal year, require the favorable vote of 78% of the shares present in the meeting. If this majority is not obtained, the shareholders must distribute at least 50% of (i) the net profits or (ii) of the outstanding profits after compensating the losses of the corresponding fiscal year. In the event that the legal, statutory and/or occasional reserves exceed the subscribed capital of the Company in an amount equivalent to 100%, then the above-mentioned distribution percentage shall increase to 70%.
(ii) The issuance of shares which are not subject to the right of first refusal, will require the favorable vote of 70% of the shares present or duly represented in the corresponding shareholders meeting.
(iii) Dividends paid in kind by means of the issuance of shares in the Company, will require the favorable vote of 80% of the shares present or duly represented in the corresponding shareholders meeting.
(iv) The transformation of the company to a simplified stock corporation, which will require the unanimous consent of the shareholders.
Is a mechanism available to compulsorily acquire minority stakes?
Our tender offers regulation does not include a squeeze-out mechanism. Therefore, squeeze-out mechanisms are uncommon in Colombia.
Nevertheless, once the company becomes private, it may be registered as a simplified stock corporation, a type of company that allows equivalent mechanisms to the squeeze-out.
Previous to Law 1258 of 2008, forcing a shareholder out of a company was particularly complicated. However, Law 1258 included certain provisions to able buy out shareholders. Such mechanisms, though, are exclusive for simplified stock corporations and are essentially two: (i) exclusion, and (ii) cash consideration in a merger or spin-off transactions.Through exclusion, a majority of the shareholders can vote a shareholder out of a company, if the exclusion events and procedures are expressly stated in the by-laws. Following the exclusion, the company shall buy out the participation of the excluded shareholder.
The other mechanism that may be explored allows a majority of shareholders to approve a merger or a spin off, and to exclude minority shareholders from participating in the resulting entity. Instead of receiving stock, the company can distribute cash to such shareholders as consideration, achieving thus the buy out of such minority shareholders. These two alternatives are available only for simplified stock corporations.
Additionally, Law 1258/2008 instituted a short-form merger applicable to companies owning 90 per cent of the shares of a simplified stock corporation. In this event, the decision of the legal representatives or the board, shall suffice to approve a merger. No shareholder vote is needed. The merger can be structure to provide for cash consideration for certain minority shareholders, as previously explained, and therefore achieving the buyout.