This country-specific Q&A provides an overview to M&A laws and regulations that may occur in Ecuador.
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?
The relevant legislation for M & A is contained in the Law of Regulation and Control of Market Power (Ley de Regulación y Control del Poder de Mercado) and its implementing regulations.
In matters of mergers and or spin-off´s, it is also relevant the Companies Law (Ley de Compañías).
It is also important to consider legislation in other legal bodies such as the following
- Civil Code (Código Civil);
- Tax Code and Law of Internal Tax Regime (Código Tributario y Ley de Regimen Tributario Interno)
- Monetary and Finance Organic Code (Código Orgánico Monetario y Financiero) in regards to financial/insurance companies that may be involved in M&A operations; also because this law regulates trust and other fiduciary agreements that may be involved in M&A operations;
- Commerce Code (Código de Comercio);
The competent authority in the matter is the Superintendence of Market Power Control (Superintendencia de Control del Poder de Mercado) which is the Ecuadorian Antritrust Authority;
- Superintendence of Banks;
- Superintendence of Companies, Securities and Insurance;
- Other public entities: In case that the target company has entered into public procurement contracts with public entities in Ecuador; the vast majority of such contracts will include provisions by which the transfer or assignment of Target shares require prior approval from the public entity.
What is the current state of the market?
Active and with tendencies to improve.
Which market sectors have been particularly active recently?
Insurance, snacks, pharmacy business, convenience stores, solid waste management, plastics, pharmaceutical, cargo handling at the airport, sale of consumer products.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
- Opening of the economy and signing of international trade agreements
- Flexibility of labor legislation
- Monetary stability
What are the key means of effecting the acquisition of a publicly traded company?
- The limited number of companies listed on the stock market in our country is a limitation, in addition to the low liquidity of the listed companies´ shares.
- The securities market legislation establishes the regular mechanisms for the acquisition of shares of listed companies, particularly those mechanisms referred to the public offering of shares (OPA´s).
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?
The information of the companies that is publicly available are the financial statements; of tax compliance and of compliance with the control bodies; amount of income tax paid; information about lawsuits in which the company is a prosecutor or defendant.
There are no specific law provisions as to the obligation of the Target Company or shareholders to provide diligence-related information to a potential acquirer.
To what level of detail is due diligence customarily undertaken?
Share deal: ordinarily deep in aspects related with labor, taxes, commercial contracts and environmental issues. Compliance in certain industries.
Asset deal: DD is more restricted but would include labor matters or environmental matters, or certain regulatory matters depending on the asset involved in the deal.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
Share deal: only the shareholders considered individually have the right to resolve the sale of their shares. Unless a binding Shareholders Agreement exits, no need to obtain consent from non-selling shareholders.
Asset deal: depending on the bylaws of the company, the Shareholders or Board of Directors (if applicable) could have to approve the deal.
What are the duties of the directors and controlling shareholders of a target company?
It will always depend on what the company's bylaws establish, regarding the responsibility and duties of the directors. Normally they have the duty of diligence, not competition, confidentiality and dedication.
Do employees/other stakeholders have any specific approval, consultation or other rights?
No, unless the M&A is about acquiring a part of a going concern without buying the legal entity. In this case, workers have the right to decide whether to continue or withdraw and if they decide to leave, they have the right to financial compensation equivalent to untimely dismissal, compensation that is established in the labor law.
To what degree is conditionality an accepted market feature on acquisitions?
Establishing precedent conditions is an accepted market feature. There may be different types of conditionalities. This is a case by case issue, there are no standards.
What steps can an acquirer of a target company take to secure deal exclusivity?
By means of an agreement to that effect.
Making binding offers that allow signing exclusivity agreements with very high penalties for non-compliance.
It is common to agree an exclusivity during due diligence and for a certain period of time during the negotiation.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Escrow mechanisms, fiduciary mechanisms and establishment of penalties before events of default or appearance of material events.
Which forms of consideration are most commonly used?
The most commonly used for of consideration is payment in cash.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
There is no a common rule. It will always depend on different factors such as: the level of sophistication or complexity of the acquiror (for example if the acquiror is a company listed on a stock exchange). If it is a public offering of shares, it must be disclosed up to the first level of ownership. If the Target is a company in the financial sector, there are particular rules that must be applied.
At what stage of negotiation is public disclosure required or customary?
If the Target it is private, usually at closing.
If the Target it is public, at the time of the public offering.
Is there any maximum time period for negotiations or due diligence?
There is no standard. It is always subject to the agreement of the parties. However, it is usually expected that a DD does not take more than 60 days.
Are there any circumstances where a minimum price may be set for the shares in a target company?
If the shares are issued by public companies, the price ranges established by the stock exchange in which the transaction takes place must be applied.
If the shares are issued by private companies, there is no rule.
Is it possible for target companies to provide financial assistance?
No. It is not common, mainly because the management of the Target company can be held responsible and because a conflict of interest may arise.
Which governing law is customarily used on acquisitions?
- Among nationals, Ecuadorian law.
- Cross-border transactions: the acquiror usually propose its native law. New York law is the most common, English law follows.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
A Notice and a circular of public offering, defined in the Law and in the provisions issued by the Monetary and Financial Policy and Regulation Board.
According to the law, acquisitions of shares that allow taking control of a company, in a single act or in successive acts, or that allow a person or group of persons to acquire directly or indirectly a significant participation of the shares with the right to vote in a certain company, must be subject to the public offering procedure.
Significant participation is one that allows decision-making in the company's administration on its own.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
If the transaction is one of those that previously requires the authorization of the Superintendency of Control of the Market Power, in accordance with the LORCPM, prior to the closing of the transaction, the authorization procedure must be carried out.
In the case of shares issued by a listed company, the requirements of the stock exchange in which the company is listed should be observed.
In all cases, it is necessary to observe the following:
- The registration of the acquisition must be made in the Shares and Shareholdings Book of the Target company;
- The transfer of ownership of the shares must be notified to the Superintendency of Companies;
- The Ecuadorian Internal Revenue Service must be notified of the new capital structure of the Target company.
If the acquiror is a foreigner, the investment must be registered at the Central Bank of Ecuador, as a direct foreign investment.
The Ecuadorian law establishes the capital gain tax that must be paid by the seller of the shares. This tax has a maximum rate of 10% calculated on the profit made by the seller.
Are hostile acquisitions a common feature?
Hostile acquisitions are not common feature.
What protections do directors of a target company have against a hostile approach?
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Not in our market.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Minority shareholders enjoy the rights established in the Companies Law, those established in the company's bylaws and those set forth in a shareholder agreement.
Is a mechanism available to compulsorily acquire minority stakes?
Only those that are contemplated in a shareholders agreement.