This country-specific Q&A gives an overview of mergers and acquisition law, the transaction environment and process as well as any special situations that may occur in Colombia.
It also covers market sectors, regulatory authorities, due diligence, deal protection, public disclosure, governing law, director duties and key influencing factors influencing M&A activity over the next two years.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Mergers & Acquisitions Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/mergers-acquisitions/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
There is no specific unified or single legal statute that regulates all aspects of mergers and acquisitions of companies in Colombia, but rather a combination of rules that must be considered when entering into a transaction.
The application of the specific rules will depend to a major extent on the specific structure of the transaction (i.e. share purchase, asset purchase, merger or spin off) and on the characteristics of the target company.
Some of the most relevant rules include:
- The Code of Commerce (Código de Comercio), which contains specific rules on pre-contractual liability, commercial offers and formation of commercial contracts, as well as the commercial regime applicable to the different type of companies (including but not limited to the corporate requirements for the transfer of shares or assignment of certain assets and contracts);
- Law 222 of 1995, which contains relevant rules concerning spin-offs, appraisal remedies and D&O liability.
- The Civil Code (Código Civil), which contains general rules on contracts and serves as a secondary source to interpret commercial agreements;
- Law 1258 of 2008, which regulates the so-called simplified stock corporations (sociedad por acciones simplifcada), the most common type of company incorporated in Colombia;
- The Tax Code (Estatuto Tributario), which provides the tax implications arising from the sale of share or assets or a corporate reorganization;
- Securities law provisions, mainly the Organic Statute of the Financial System (Estatuto Orgánico del Sistema Financiero), Law 964 of 2005and Decree 2555 of 2010, which must be considered in transactions involving financial entities and listed or publicly held companies;
- Law 1340 of 2009, which provides the rules for antitrust control over company integrations and mergers and acquisitions; and
- Foreign exchange provisions, mainly Law 9 of 1991, Decree 1069 of 2015, External Resolution 8 of 2000 and External Regulatory Circular Letter DCIN-83 issued by the Colombian Central Bank (Banco de la República).
- Law 226 of 1995 regarding privatization of state owned entities.
As to the key regulatory authorities, it is worth to mention that, as a general rule, a merger or acquisition requires the approval of the competent corporate bodies of the entities participating in the respective transaction but does not require any general regulatory approval. Notwithstanding the above, there are some exceptions which will depend greatly on the nature of the target company and if it is a privately or publicly held company, including:
- In specific cases laid out in External Memorandum n.º 100-5 of 2015, the Superintendence of Corporations (Superintendencia de Sociedades) must approve the merger of companies under its supervision;
- A clearance from the antitrust authority, the Superintendence of Industry and Commerce (Superintendencia de Industria y Comercio), is necessary for deals exceeding certain thresholds (i.e., combined gross assets and/or operational turnover of the undertakings during the previous year) and (ii) engage in the same economic activity or participate in the same value chain;
- The Superintendence of Finance (Superintendencia Financiera de Colombia- SFC) must approve (i) any acquisition or transfer of more than 10% of the equity of a financial institution; (ii) the transactions involving the transfer of substantially all of the assets and liabilities of such companies; (iii) the assignment of assets, liabilities and agreements of such companies; (iv) and the launching of a tender offer (Oferta Pública de Adquisición - OPA) in case of acquisition of a publicly traded company;
- Finally, depending on the relevant industry, some other regulatory authorities must provide its authorization to the corresponding transactions. For example, the authorization from the Superintendence of Health (Superintendencia Nacional de Salud) might be required for the acquisition of a shareholding interest in a health provider.
What is the current state of the market?
According to Transactional Track Record (TTR), during 2017 there were 168 transactions in Colombia, but only in 68 of such cases the deal value was disclosed. Those 68 transactions had a combined value of USD3.28bn, meaning that the number of transactions remained stable compared to 2016 and that there was an important decrease in the value of the transactions in comparison to the same year.
However, there are lofty expectations as to the behavior of the Colombian market for 2018, considering that the local economy is expected to continue its recovery and that the uncertainty atmosphere created by the recent tax reform and the peace agreements entered with the FARC guerrilla is commencing to terminate. Unfortunately, the projections may be affected by the uncertainty during the first quarter of the results of the 2018 presidential election, that may change the political and economic environment in Colombia.
Which market sectors have been particularly active recently?
During the past years, the market sector with most deals has been the financial and insurance sector. Recently, the distribution and retail sector also had an important activity, as well as the infrastructure (roads and highways), telecommunications and energy (power and generation plants) sectors. We have recently seen increasing interest in the health industry.
In our opinion the market of acquisition finance will support the M&A activity in the coming years considering that the existing legal framework does not restrict this activity as it happened in the past.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
In our opinion, the three most significant factors influencing M&A activity over the next two years will be:
- The continuing growth in the attraction of foreign investors for Colombian companies and assets, triggered by the expected recovery of the economy, pulled in turn by the rapid growth of the middle class and the technologic evolution of the local industries.
- New trade and investment treaties entered into by Colombia, mainly the Pacific Alliance Free Trade Agreement (Mexico, Chile, Peru and Colombia) that significantly reduced the tariffs and duties on trade and integrated such countries´ securities markets.
- The stabilization of the political climate that will depend on the successful implementation of the peace agreements entered with the FARC guerrilla and the upcoming presidential election.
What are the key means of effecting the acquisition of a publicly traded company?
Most M&A transactions involving the acquisition of a publicly traded company are stock deals, considering the mechanisms established in the relevant laws for this purpose. Asset deals are less common, since they trigger some burdensome formalities (registration of the transfer of the property of certain type of assets, assignment of agreements, etc.).
As to the procedure to implement the acquisition of a publicly traded company, the buyer may have to launch a tender offer (Oferta Pública de Adquisición - OPA), by means of which any person or group of persons which can be considered as one single beneficiary can only become beneficiary of an interest exceeding 25% in the voting capital of a listed company by means of a tender offer (Oferta Pública de Adquisición - OPA).
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?
This will depend on whether the target company is a private company or a publicly traded company.
In the first case, basic information will be available at the commercial registry held by the Chamber of Commerce of the target company’s domicile, such as the company’s bylaws, information on the appointed legal representatives and directors, amount of the company’s share capital, certain minutes of the meetings of the corporate bodies, financial statements (although not all companies comply with the obligation to deposit their financial statements in the Chamber of Commerce). In the second case, the strict rules governing the disclosure of information by Colombian publicly traded companies will allow the potential acquirer to have access to more information regarding the target entity, such as the securities listed, the management reports, financial statements and material operations and transactions (información relevante), among others.
There are no specific law provisions as to the obligation of the target company or its shareholders to provide diligence-related information to a potential acquirer. However, recent arbitral decisions have recognized the existence of certain “secondary duties of conduct” arising from the principle of good faith that includes the duty of information, according to which the seller and/or the target company should provide the potential acquirer with all the reasonable information necessary to undertake a due diligence process over the target company and to adopt an informed decision regarding the deal.
To what level of detail is due diligence customarily undertaken?
Transactions in Colombia usually require a reasonable level of scrutiny over the company’s operations and assets. The most important information requested is normally related to tax, litigation, regulatory and labor issues and, depending on the type of operations of the target company, other areas may become relevant, such as environmental and data protection matters. Compliance is also becoming a key area to be analyzed in certain industries.
In an asset deal the due diligence is more restricted than in a share deal, except for labor, tax and environmental matters as certain liabilities related to such areas may be transferred by operation of law to the acquirer.
Considering the above, negotiations usually commence with the execution of a non-disclosure agreement, letter of intent or memorandum of understanding and the access to a virtual or physical data room.
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 target company in Colombia are the shareholders general assembly and the board of directors, depending on the type of entities participating in the transaction, the structure applicable to the transaction and the provisions set forth in the applicable by-laws.
In a stock deal, usually non-selling shareholders will need to waive their right of first refusal or right of first offer, if applicable. In asset deals, depending on the corporate authorization rules included in the target company’s bylaws, the shareholders general assembly (and sometimes board of directors) would have to approve the transfer of the relevant assets. It is worth setting forth that in Colombia, there are two principal ways to undertake a transfer of assets: (1) By the transfer of a commercial unit or ongoing concern (a “Commercial Establishment”), which consists of a group of assets that are destined by an entity to form a separate commercial unit, registered as such before the Chamber of Commerce; certain special procedures and rules will apply to this kind of transfer (including rules regarding liability between the transferee and transferor); and (2) By transfer of the individual assets, not organized nor registered as a Commercial Establishment before the Chamber of Commerce.
Finally, in case of mergers, the approval by the shareholders general assembly is mandatory.
What are the duties of the directors and controlling shareholders of a target company?
Pursuant to Colombian law, the directors of a company must act in good faith, with loyalty and with the diligence of a “good businessman”. Their actions must be carried out in the best interest of the company and considering the interests of the shareholders. This means that directors must (i) make their reasonable efforts seeking the proper development of the company’s corporate activities and (ii) ensure the strict compliance with legal and statutory provisions.
In the same line, the controlling shareholders (and all shareholders in general) of a target company cannot exercise their vote abusively. If the vote is exercised seeking to cause harm to the company or to other shareholders or to obtain an unjustified advantage, such vote would be deemed to be an abusive vote and may be declared void by a judge or arbitration panel.
Both directors and shareholders are liable before the company, other shareholders and third parties for their negligent or fraudulent actions. Directors may also be liable before third parties due to the breach of their fiduciary duties.
Do employees/other stakeholders have any specific approval, consultation or other rights?
As mentioned in answer 8 above, shareholders and directors’ approvals will depend on the type of M&A transaction being undertaken.
In the performance of their duties, relevant employees and directors may be required to provide advice regarding the execution of an M&A agreement by the company, but except for the abovementioned approval rights, consulting the relevant employees/directors is voluntary.
Finally, potential acquirers should bear in mind that although in most cases there are visible controlling shareholders that would expedite the corporate approval processes, Colombian law and competent authorities are prone to protect minority shareholders’ rights in case of abusive actions undertaken by controlling shareholders.
In an asset deal, employers’ substitution must be considered. According to Colombian labor laws, an employer’s substitution takes place whenever (i) there is a change of employer, (ii) the enterprise continues and (iii) the employee remains under the same labor agreement. The effect of the employer’s substitution is the continuity of the existing labor agreements, since these are not extinguished, discontinued or modified.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is a standard market feature on acquisitions. It is common to agree on conditions precedent for the closing of the transaction, such as the obtention of mandatory regulatory approvals, the non-occurrence of a material adverse effect between signing and closing, that all representations and warranties as of the closing date are true and correct in all respects (or material respects), the delivery of certain documents and such other conditions as the nature of the deal may demand.
In the case of acquisition of publicly traded companies, the completion of the acquisition is conditioned to the obtaining of the applicable regulatory approvals if a tender offer is required.
What steps can an acquirer of a target company take to secure deal exclusivity?
The only means by which a potential acquirer may secure deal exclusivity is through the execution of an agreement that grants exclusivity to the potential acquirer. Except for competitive or auction M&A transactions, it is usual for the potential acquirer to request the seller to enter into an exclusivity agreement, at least for the term of the due diligence process and a limited term for the negotiation of the transaction documents. However, obtaining exclusivity entirely depends on the leverage of the buyer during the acquisition process.
Once the agreement is executed, it is common practice to include a “no-shop” provision to prevent the seller from soliciting or encouraging third-party proposals.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
Compensatory fines, break-up fees, other costs coverage mechanisms as well as no-shop, and non-solicitation provisions in M&A transactions between local parties (or with foreign investors) is becoming increasingly common.
If a cost coverage mechanism is obtained, it is usually in the form of a liquidated damages provision to ensure an expedite enforceability process. Potential acquirers that actually obtain this type of costs coverage mechanisms will demand that the value of the covered costs is considerable to avoid sellers to “trade” on the exclusivity.
Which forms of consideration are most commonly used?
The most common form of consideration is cash. M&A deals involving consideration in the form of stock or other form of securities is less common.
At what ownership levels by an acquirer is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
There are no public disclosure requirements in the case of the acquisition of shares in private companies.
A person acquiring or disposing shares in a listed company or in a financial institution (such as, banks, financial corporations, stock brokers, trust companies), must notify the issuer or the financial institution, as the case may be, the Colombian Superintendence of Finance (Superintendencia Financiera de Colombia - SFC), and the Colombian Stock Exchange (Bolsa de Valores de Colombia - BVC) if the number of shares to be acquired or disposed reaches or exceeds the thresholds of 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.
Pursuant to the above, the acquisition or disposing of 10% or more of the shares in a listed company or in a financial entity is subject to the prior authorization of the Superintendence of Finance.
At what stage of negotiation is public disclosure required or customary?
In private M&A transactions, public disclosure occurs customarily after the signing or at the closing of the transaction. On the other hand, in M&A transactions involving a listed company, once the binding transaction agreements are executed by the parties, the publicly held company must disclose to the market such situation, if the transactions agreements met the requirements set forth in the applicable law to be publicly disclosed. This is completed by a relevant information report (reporte de información relevante) submitted by the company to the Superintendence of Finance (Superintendencia Financiera - SFC).
In public M&A transactions of a listed company, the decision and obligation to make a public tender for the acquisition of 25% or more of the capital stock of such company or the acquisition of 5% of more of the shareholding interest if the acquirer is already the beneficial owner of more than 25% of the company’s voting capital of that company, must be prior communicated to the SFC and to the Colombian stock exchange (Bolsa de Valores de Colombia).
Is there any maximum time period for negotiations or due diligence?
There is no minimum or maximum period for negotiations or due diligence under Colombia law. However, it is customary that a due diligence process takes from 45 to 60 calendar days and that negotiations aiming to finalize transaction documents range from 30 to 90 days, but it will depend on the specific features of the transaction.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In public M&As the following rules apply regarding the price of the shares of listed companies, that must be acquired by means of a tender offer (Oferta Pública de Adquisición - OPA):
- 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 (Superintendencia Financiera de Colombia - SFC), 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 offer 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?
Target companies generally do not provide financial assistance, as such activity can entail negative consequences to the management of the company (board of directors and legal representatives), especially if there are minority shareholders. The above considering that the shareholders and the management of the company may be held personally liable for acts that are not in the best interest of the company or that represent a conflict of interest. Nevertheless, there are not express rules restricting financial assistance as it happens in other jurisdictions. In leveraged acquisitions it is frequent that the financial entities provide the funding to the acquisition vehicle, and some months after the closing the acquisition vehicle and the target company are merged, so the debt and the underlying acquired business are held by the same entity.
Which governing law is customarily used on acquisitions?
Contracting parties may choose a different law governing the share purchase agreement or the specific agreement by means of which the shares or assets are being transferred, if there is an international element in the agreement (for instance a foreign party is a party to the agreement and one of the principal obligations is performed abroad). In cases where Colombian law is not chosen as the governing law, the parties tend to agree on New York law.
Notwithstanding the above, Colombian law will always govern the corporate formalities to legally transfer shares or transfer certain assets (such as real estate).
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
With respect to the acquisition of a listed company, buyer will have to file a letter with the (Superintendencia Financiera de Colombia- SFC) (for regulatory authorization), that contains some details of the transaction such as the number of shares purchased, their value, price paid for them and the origin of the resources for the payment or financing. Additionally, buyer will have to submit corporate and financial documents such as the certificates of incorporation and good standing, the capital structure, the financial statements, among others. Buyer will also have to submit the information regarding the structure of its corporate governance and the modifications that it intends to do to the management system to prevent money laundry and terrorism financing (SARLAFT).
For an anti-trust notice or authorization, a buyer will usually need to file the information regarding the markets in which it is involved, the activities that it carries out in Colombia and other relevant financial information. For this purpose, it is usually necessary to submit the financial statements, market studies, description of the geographical areas in which the services are provided, the competitors, details of the products and services, details of the total sales in Colombia, insurance brokers, list of services providers and information related to the market dynamics.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
The formalities required to legally document a transfer of shares, depends on the type of company.
In corporations (sociedades anónimas) and simplified corporations (sociedades por acciones simplificadas), the transfer of shares must be registered in the stock ledger of the company. This registration is performed by the company's legal representative pursuant to an instruction of transfer issued by the seller or the due endorsement of the relevant share certificates.
In limited liability companies (sociedades de resposabilidad limitada) the transfer of quotas is formalized by amending the company´s by-laws, which requires (i) board of partners' minutes authorizing the by-laws amendment; and (ii) granting of a public deed before a notary public whereby the amendment of the by-laws is contained. The amendment of the by-laws must be registered with the Chamber of Commerce of the main domicile of the target company.
With respect to taxes, no transfer taxes arise if the sale of shares is made through a private document, for example in cases of corporations and simplified corporations. If a public deed is issued for the sale of quotas, the transfer taxes are:
- Registration tax: 0.7% over the total purchase price.
- Notary rights: 0.3% over the total value of the transfer plus the rights of drafting the public deed (which vary depending on the number of pages and documents), plus VAT at a 19% rate.
Are hostile acquisitions a common feature?
Hostile acquisitions are not common in Colombia, as there are usually controlling shareholders in both closely-held and listed companies.
What protections do directors of a target company have against a hostile approach?
Article 18.104.22.168.19 of Decree 2555 of 2010 provides that, if pursuant to Colombian securities law a public tender (Oferta Pública de Adquisición – OPA) must be launched to acquire a listed company, after the public tender is effectively launched, the negotiation of the affected shares is suspended and certain obligations must be borne by the publicly held company target of the hostile acquisition, as follows:
From the publication of the suspension of the shares´ negotiation object of the public tender until the publication of the results of the public tender, the listed company must refrain from performing the following activities, except if they correspond to the execution of decisions previously made by the competent corporate bodies:
- The issuance of shares or convertible securities.
- Directly or indirectly carry out operations on the shares if they may disturb the public tender.
- Dispose of, encumber or undertake any transaction that implies a final disposition of any asset or group of assets that represent a percentage equal to or greater than 5% of the total assets of the listed company, as well as lease real estate or other assets that may disturb the normal development of the public offer.
- Carry out operations with the purpose or effect of generating a substantial variation in the price of the shares.
- Any other action outside the ordinary course of business of the listed company or undertaken with the purpose or effect of disturbing the public tender.
The target company’s affiliates must refrain from carrying out, directly or indirectly, operations that may disturb the public tender.
In accordance with the above provision, the directors of the listed company affected by a hostile takeover will not be able to carry out any of the defensive measures listed above, unless the directors are executing decisions that have been previously approved by the competent corporate bodies. Thus, in Colombia, unless it exits a prior authorization for such purpose, directors cannot defend the listed company from hostile takeovers.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
As provided above, under the securities applicable law, any person or group of persons which can be considered as one single beneficiary can only become beneficiary of a participation of more than 25% in the voting capital of a listed company by means of a tender offer (Oferta Pública de Adquisición - OPA).
Beneficiaries of listed companies which already hold more than 25% of the company’s voting capital can only increase their participation in a percentage exceeding 5% by means of an OPA.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
Under the applicable Colombian law, minority shareholders have the following general rights:
- The distribution of profits in corporations shall be approved with the affirmative vote of at least 78% of the issued and outstanding shares present in the shareholders’ general assembly meeting when the proposal seeks to distribute less than 50% of the distributable profits, or less than 70% of the distributable profits if the company’s reserves are equal or higher than the subscribed capital.
- The payment of dividends with shares in corporations must be approved with the affirmative vote of at least 80% of the issued and outstanding shares present in the shareholders’ general assembly meeting and if no such majority is reached, shares will only be issued in favor to those shareholders that accept them.
- In an event of a spin-off in which the shareholders of the original company will not have the same percentage in the equity of the new companies, such decision shall be approved with the unanimous vote of the shareholders represented at the shareholders’ general assembly meeting.
- The transformation of a simplified corporation into a different type of company or vice versa, requires the unanimous vote of the shareholders of the company.
- In corporations, the issuance of shares not subject to a right of first offer (derecho de preferencia en la suscripción de acciones), must be approved with the favorable vote of at least 70% of the shares represented in the shareholders’ general assembly meeting.
- As set forth in article 41 of Law 1258 of 2008, in simplified corporations the decision to modify certain statutory provisions shall be approved with the unanimous vote of all shareholders.
- In the event of a merger, conversion into another type of company, spin-off, or delisting of the shares from the national registry of securities (Registro Nacional de Valores y Emisores), absent or dissenting shareholders or partners, subject to certain requirements, have the right to withdraw from the company, by offering their shares to the other shareholders. If the offer is not accepted, by the other shareholders, the company will have to repurchase the shares.
- Pursuant to Article 43 of Law 1258 of 2008, any vote issued in the meetings of the shareholders general assembly with the purpose of harming other shareholders or the company itself, or on behalf of an unjustified personal advantage, may be declared void (nulo) by the Superintendence of Companies, and the shareholder shall be responsible for the damages caused with the harming vote.
- Minority shareholders can also be protected through the inclusion of provisions in the company´s by-laws stating the requirement to have a qualified majority in some key decisions.
- In addition to the above, minority shareholders representing 10% of the subscribed and outstanding shares of the company can request the Superintendence of Companies to adopt administrative measures, such as: (i) to order to amend provisions in the company’s bylaws which do not comply with the applicable law; (ii) to summon the mandatory meetings of the shareholders’ general assembly which have not been summoned by the legal representative of the company and (iii) to carry out administrative investigations against the directors, legal representatives or officers of the company with respect to violations of the applicable law or the company’s bylaws.
The rights of minority shareholders were significantly enhanced in 2012, after the creation of a new specialized court, akin to Delaware’s Court of Chancery, exclusively to deal with the adjudication of company law disputes. The court has become the main forum for the private enforcement of corporate law in Colombia, issuing relevant precedents on matters such as related party transactions, specific performance of shareholders’ agreements, oppression remedies, etc.
Is a mechanism available to compulsorily acquire minority stakes?
Pursuant to Decree 2555 of 2010, if the same beneficiary acquires more than 90% of the voting capital of a listed company, one or more shareholders who hold voting capital that represent 1% or more of such capital can demand that the acquirer carries out a tender offer (Oferta Pública de Adquisición – OPA) for the outstanding voting capital. Such OPA must be made within three months following the date on which more than 90% of the voting capital was acquired. Nevertheless, our legal framework does not provide a squeeze-out right in favour of majority shareholders to force the minority shareholders to transfer their shares after a tender offer is completed.