This country-specific Q&A provides an overview to M&A laws and regulations that may occur in Peru.
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 main and complementary rules of Peruvian law relevant to mergers and acquisitions operations can be found in:
- Corporations Law approved by Law N° 26887, as amended (Ley General de Sociedades).
- Civil Code approved by Legislative Decree N° 295, as amended (Código Civil).
- Regulation of the Companies Register approved by Resolution N°200-2001-SUNARP-SN (Reglamento del Registro de Sociedades).
- The Peruvian Securities Market Law, approved by Supreme Decree N° 093-2002-EF, as amended (Texto Único Ordenado de la Ley de Mercado de Valores).
- Tender Offer Regulations approved by CONASEV Resolution N°009-2006-EF-94.10. as amended.
- Economic Group Regulations, approved by SMV Resolution N° 019-2015-SMV/01 (Reglamento de Propiedad Indirecta, Vinculación y Grupos Económicos).
- Market Abuse Regulations, approved by SMV Resolution N°005-2012-SMV-01, as amended (Reglamento contra Abuso de Mercado - Normas sobre Uso Indebido de Información Privilegiada y Manipulación de Mercado).
Likewise, the relevant regulatory authorities are the following:
- Superintendency of the Public Registries
- Superintendency of the Securities Market
- Superintendency of Customs and Tax Administration
Additional rules may apply if one of the participants of the M&A transaction is an entity regulated under a special legal framework, such as banks or other financial entities, which are supervised by the Peruvian Superintendency of Banks, Insurance and Pension Funds.
What is the current state of the market?
The Peruvian economy grew 5.3% in November 2018, the highest rate since May 2018, and higher than expected by the market consensus (5.0%). The Ministry of Economy and Finance ratified that de GDP of Peru would achieve an expansion rate around the 4% by the end of 2018. According to de International Monetary Fund the expectation of growth for this year is 3.8%
Similarly, the M&A market in Peru has shown significant growth during the last year. While the number of realized transactions only increased in three, in comparison to 2017, the amount of the transactions has increased in 85%. During 2018, 155 transactions for US$ 9,133’000,000.00 were recorded. In comparison to 2017, the total value of transactions the was US$ 4,937’000,000.00.
Which market sectors have been particularly active recently?
In the M&A market, the most active sectors during 2018 were the following: (i) the food industry, with thirteen transactions; (ii) the finance and insurance sector, with seventeen transactions; (iii) the mining sector with fourteen transactions; and (iv) the retail and distribution industry with twelve transactions.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
We believe that the investment of foreign companies in the agriculture and fishing sectors in Peru will increase the commercial activities in these economy sectors making them more dynamic and attractive to investors. In addition to this, the political factor will also be a significant actor for the M&A market. As the government is fighting to promote the mining and infrastructure projects that were put on hold due to the uncertainty economy and corruption scandals during 2018, we expect an increase in transactions on that sector. Likewise, local construction companies are under great financial stress due to the aforementioned factors, so some of their assets might be for sale during the year.
What are the key means of effecting the acquisition of a publicly traded company?
One of the key means is the use of information that publicly traded companies provide to the market, the regulatory entities and investors. This information contains data that could be of great interest to potential buyers. Additionally, the positive evolution of the Peruvian securities market and the current state of the economy sector to which the target company belongs, are key factors for potential buyers when making a buying decision or put on hold the whole operation. Finally, it should be taken into consideration that foreign investments are not restricted in Peru. Accordingly, the purchase of a controlling stake in a Peruvian public company would not trigger any requirement to obtain a government authorization (except for specific sectors, such as air transport or local tv channels).
On the other hand, under Peruvian law, if someone intends to buy a public company, the tender offer rules will apply if the potential buyer intends to acquire, or has acquired, substantial interest in a target company. The obligation to launch a tender offer will be triggered when the potential buyer reaches or surpasses any of the three thresholds: 25%, 50% and 60%. For instance, if the buyer already owns 26% of the target company and then acquires shares that increases its ownership to 51%, the obligation to launch a tender offer will be triggered.
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 traded companies are obligated by law to publish relevant information to the market under the supervision of the Superintendency of Securities Market. This information is publicly available and is mainly of two types: relevant events and financial information.
The relevant events are defined in the Regulation of Relevant Events and Reserved Information, approved by Resolution SMV N° 005-2014-SMV/01, as every act, decision, agreement, negotiation in progress or information related to the publicly traded company, its securities or its business operations, that can influence significantly in the decision of an investor to buy, sell or keep securities or could influence in the price of the securities issued.
The financial information is composed of the annual memory report and the audited financial statements, as well as the relevant information of the economic group of the listed company, as defined in the applicable legal framework.
In the case of non-public companies, the information will be disclosed as part of negotiations and due diligence process.
To what level of detail is due diligence customarily undertaken?
Peruvian regulations do not contain specific rules regarding the detail of the due diligence the potential buyers may conduct; however, it is undertaken in almost all transactions (even if the target is a public company). Usually, in a due diligence, the information is separated in corporate, labor, tax, real state, litigation and criminal procedures information, as well as other relevant data related to the business operations and economic core activities of the target company (depending on the sector, it can be trademarks, environmental permits, etc.) Taking this into consideration, it will depend of the potential buyers to what level of detail they want to conduct the due diligence or in which section they want to focus.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision-making organs of a company are the General Shareholders Meeting and the Board of Directors. These organs can oversee, discuss and decide on relevant agreements such as the selling of a part or the whole company as well as other relevant matters related to an M&A transaction. These organs must comply with the quorum to approve a proposal, according to the bylaws or the Corporations Law, otherwise the approved agreement could be void.
The principal approval rights that the shareholders have, regarding an M&A operation, are the following: (i) the removing of the directors from the board; (ii) amendment of the bylaws; (iii) agreeing on the disposal, in one only act, of assets whose book value exceed the fifty percent of the capital of the company. The second most important decision-making organ is the Board of Directors. The members of the board are designated by the shareholders and it’s their duty to advice and support the General Shareholders Meeting in decision-taking on matters related to the company common activities and other matters that the General Shareholders Meeting designate to them.
In certain cases, it is possible that the bylaws of the target company provides for an approval of the shareholders prior to transferring certain amount of shares, or even a preemptive right in favor of the target company.
It is important to know that in Peru, direct acquisition of shares -and not mergers- is the most common mean to take control of a corporation. Accordingly, in a direct negotiation with controlling shareholders, the participation of the board of the target company is secondary.
What are the duties of the directors and controlling shareholders of a target company?
The Board of Directors have a fiduciary duty with the company and their shareholders, they must act with diligence and loyalty, without favoring any shareholder or bidder. They can incur in civil responsibility if the board approves an agreement that causes any damage to the company and they cannot put their own interests or of third persons before the interests of the company. In consequence, the directors must always seek the benefit of the company during an M&A transaction.
Do employees/other stakeholders have any specific approval, consultation or other rights?
In accordance with the Peruvian Corporations Law, stakeholders, such as creditors, can oppose to the execution of a merger (or any other kind of reorganization) agreement taken by the company’s organs. On the other side, employees of the target company do not have any approval or consultation right that can affect the M&A negotiation. For a transfer of shares, stakeholders do not have additional rights other than those agreed on the corresponding agreement.
To what degree is conditionality an accepted market feature on acquisitions?
Conditioning M&A transactions is commonly accepted. Most common conditions are regulatory approvals, approvals from third parties, meeting budgetary targets, closing certain material agreements, among others.
What steps can an acquirer of a target company take to secure deal exclusivity?
Under Peruvian regulation, there is no instrument that can secure at a one hundred percent rate the possibility to obtain a deal exclusivity in an M&A negotiation. However, a potential acquirer should base its acts under two principles, act on a fast timeline and pay a reasonable price, in order to secure the deal before other potential buyers can approach the target company with a better offer.
In competitive processes, exclusivity is normally accepted once one bidder has been selected.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
The potential buyer could negotiate with the target company a break-up fee in which the parties can agree on high penalties if any of them retire from the transaction with no reasonable cause or causing a perjury to the other party. Peruvian regulations do not contain specific rules regarding exclusivity agreements or deal protection during an M&A negotiation. In consequence, these agreements are carried out and established in private documents and or a case-by-case basis.
Which forms of consideration are most commonly used?
The most common form of consideration in M&A transactions in our jurisdiction is cash consideration. In some situations we have worked on cash and securities considerations.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Public disclosure of shares ownership is only required by law in the case of a publicly traded company. Under the current Economic Groups Regulations, listed companies must inform to the Superintendency of Securities Market of the members of its economic group and a list of its holders of common shares that hold more than 4%, as well as any change to such structure. Consequently, if a person acquires 4% or more of the shares of a listed company or a company of its economic group, the listed company must inform of this event to the Superintendency of Securities Market.
In addition to this, Article 32 of the Securities Market Law establishes that listed companies must inform the Superintendency of Securities Market and the Lima Stock Market of any transfer of its shares made by any person or entity who directly or indirectly owns 10% or more of the company’s total share capital or of any person who becomes owner, or is no longer owner of, 10% or more of the total share capital of the listed company.
At what stage of negotiation is public disclosure required or customary?
Public disclosure is mandatory for public companies, and it is required if a prior agreement is executed (i.e. MoU or letter of intent). If, for example, a bidding process starts, no disclosure is required until a bidder’s offer is awarded and exclusive negotiations begin, and even at this point, the information can be communicated to the Superintendecy of Securities Market as reserved.
Is there any maximum time period for negotiations or due diligence?
Peruvian regulations do not contain specific rules regarding the period for the negotiations or to the conduct a proper due diligence. Usually, legal counsels determine this period by using their experience in similar past transactions. In addition to this, the legal counsels can suggest their clients a period in which, if there is no response from the potential buyer or seller to the offer, they can retire themselves from the transaction without any penalties at all. On the other hand, they can also suggest their clients to stablish penalties to the other party if they retire from the transaction when it is in the final stage or the client has spent considerable resources without any favorable response from the other party. These agreements are usually carried out and established in private documents and on a case-by-case basis.
Are there any circumstances where a minimum price may be set for the shares in a target company?
There is no special regulation regarding establishing a minimum price for the shares in an M&A transaction. However, the parties could agree on a private document that if the potential buyer finally decides to acquire the target company, no matter what the procedure to determine the price of the shares concludes, the price of the share could not be less than the agreed amount in the mentioned private agreement.
Is it possible for target companies to provide financial assistance?
Article 106 of the Corporations Law establishes that in no case, the company can grant loans or guaranties, with the guaranty of its own shares or for the acquisition of its own shares.
Which governing law is customarily used on acquisitions?
Peruvian Corporations Law and Civil Code are customarily used in acquisitions. If the target company is publicly available, Peruvian Securities Market Law is also used in addition to other regulations applicable to the securities market transactions.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
The main document to be prepared by the offeror during a tender offer is a prospectus. According to the Tender Offer Regulations the prospectus will included the information regarding the offeror such us identification data, domicile, information regarding its economic group and its economic activities, among other relevant information. In addition to this, the prospectus will also include all the information related to the tender offer, such us corporate information of the target company, consideration offered for the stocks, objective of the acquisition, among other relevant information specifically related to the acquisition process.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Transfer of shares is a private transaction; however, for publicly traded companies, the transfer should be registered in the registry of the corresponding settlement institution. In addition to this, the transfer needs to be communicated to the Tax Authority.
Are hostile acquisitions a common feature?
In our experience, hostile acquisitions are not common in the Peruvian M&A market. This is mainly a consequence that control of public companies is usually concentrated, so an acquisition needs approval of such controlling shareholders.
What protections do directors of a target company have against a hostile approach?
For the reasons mentioned above, anti-takeover mechanisms are unusual in Peru and there is no case law that addresses the legality or validity of them. However, the board has to remain neutral to all offers and protect always the interest of the shareholders.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Yes, under the context of the acquisition of voting shares of a publicly traded company, if a person intends to acquire a “substantial interest” in the target company it will be required by law to launch a Tender Offer. According to Peruvian Tender Offer Regulations, a substantial interest is acquired when a buyer purchases shares that (i) will result in such buyer beneficially owning at least 25% of the shares with voting rights of the target company, in one or a series of transactions, or surpasses the 50% or 60% ownership thresholds, or (ii) allows that buyer to appoint a majority of the directors or amend the bylaws of the target company.
Tender Offer Regulations allow the potential acquirer of the substantial interest to, instead of launching a tender offer beforehand, negotiate directly with the controlling shareholder and acquire the shares directly, agreeing specific terms with such shareholder. In these cases, the acquirer will be obliged to launch a Mandatory Tender Offer addressed to the minority shareholders for a price that will be the highest between the price paid to the controlling shareholder or the obtained after a valuation of the target company. This Mandatory Tender Offer shall occur within the following six (6) months after the acquisition of control took place.
On the other hand, a Voluntary Tender Offer is launched by a person who intends to acquire substantial interest in a target company. This tender offer is launched prior the acquisition of the shares and is directed to all the shareholders of the target company. Once the tender offer is launched, it acquires the condition of irrevocable and of mandatory fulfilment.
Regardless of whether there is a Mandatory or Voluntary Tender Offer, the offeror must notify the target company, the Superintendency of the Securities Market and the Lima Stock Exchange of the proposed tender offer.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Whether the target company is private or publicly traded, the minority shareholders, which own at least one share with right to vote, have the following rights:
- The separation right, according to the Article 338 of the Peruvian Corporations Law.
- The right to participate in the distribution of dividends and shareholder’s equity resulting from the liquidation of the company, taking into consideration that, in the case of non-public traded companies, the right to collect past-due dividends expires 3 years after the date on which the dividend payments was due.
- Attend and vote at a general shareholders’ meeting.
- Supervise the way in which the management conducts its business, according to the bylaws.
- To exercise redemption rights if the company changes its corporate purpose, the place of organization to a foreign country, or other cases contemplated in the bylaws or the applicable law.
- The right to judicially challenge decisions of the general shareholders’ meeting when it is contrary to the Peruvian Corporations Law, the company’s bylaws, the interests of the company as a whole and in benefit of one or more shareholders. The judicially challenge can only be interposed by those shareholders who, in the general meeting, had their opposition to the agreement recorded in the minute, as well as by those shareholders that were absent and by those who have unlawfully been deprived of casting their vote.
- Right to request a notary public or a judge to call the annual mandatory shareholders’ meeting, or any other ordered by the bylaws, when such meeting has not been summoned within the mandatory time.
- Additionally, with 5% or more of the existing share capital with right to vote, the shareholders can request information regarding the company’s operations.
- With 20% or more of the existing share capital with right to vote, the shareholders can request the attendance of a notary public in a shareholders’ meeting.
In addition to the rights described in in the paragraphs above, the minority shareholders of a publicly traded company have the right to collect past-due dividends up to 10 years after the date on which the dividend payment was due.
Likewise, if the target company is publicly traded, the shareholders with 5% or more of the shares with right to vote can request the board to convene the General Shareholders’ Meeting and, if the board fails to do so within 15 days, to request a public notary or a judge to call it.
Finally, whether the company is private or publicly traded, the group of shareholders with 20% or more of the share capital with right to vote has the right to request the distribution of dividends in a percentage that does not exceed 50% of the annual net profits.
Is a mechanism available to compulsorily acquire minority stakes?
The mechanism to compulsorily acquire minority stakes could involve a Drag Along clause, also known as “obligation of joint sale”. This clause enables a majority shareholder to force a minority shareholder to join in the sale of its shares in the acquisition of the target company. The Drag Along clause activates at the moment an offer of acquisition is received from a third person to the majority shareholder. If the offer involves more shares than the majority shareholders has, the Drag Along could be activated to force the minority shareholders to sale their own shares and the buyer would obtain all the shares of the target company.
In addition to the Drag Along mechanism, another mean to compulsorily acquire minority stakes is the Tag Along clause. This clause gives the minority shareholders the right to sell its shares when a majority shareholder decides to sell its participation in the company to a third party. Consequently, the Tag Along right allows the minority shareholders to join the transaction under the same terms and conditions offered to the majority shareholders that intends to sell its shares. This clause eases the way out of the target company of those minority shareholders that do not agree to the change of control.
However, the Drag Along and Tag Along rights will exist only if they are provided in a shareholders agreement, as they are not legally regulated.