John Aguilar-Quesada and Marco Solano Gómez of Aguilar Castillo Love assess the regulatory landscape for mergers and acquisitions in Costa Rica
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Commerce Code regulates corporations and limited liability companies.
The acquisition of ongoing businesses is regulated in chapter 3 (title 1) of the second book of the Commerce Code (articles 478 to 489).
Regarding mergers, chapter 10 of the first book of the Commerce Code: Mergers and Transformations, contains very basic regulations regarding the legal nature of a merger and the formal requirements to complete it.
1.2 How, by who, and by what measures, are takeover regulations (or equivalent) enforced?
The acquisition of ongoing businesses is regulated in chapter 3 (title 1) of the second book of the Code of Commerce (articles 478 to 489). This chapter establishes requirements for the transfer of ongoing businesses, which involve a publication (during three consecutive days) in the official newspaper and giving notice to the enterprise's creditors so they have an opportunity to oppose the acquisition or exercise their rights during a period of 15 days. Payment of the purchase price, according to article 480, is not to be made before the 15 day period expires and until liquidation of accounts payable is made.
The Commission for the Promotion of Competition (Coprocom) is the main authority in charge of the competition and antitrust review of takeover procedures.
If the formalities established in chapter 3 are not met, the transaction will be absolutely void, and payments made to the seller will be considered valid. Civil courts, the Mercantile Registry and Coprocom can enforced takeover regulations by means of claim, non-registration and administrative procedure respectively.
2. STRUCTURAL CONSIDERATION
2.1 What are the basic structures for friendly and hostile acquisition?
Most of the transactions carried out in Costa Rica are of a friendly nature and structured as a share sale under a stock purchase agreement. In most cases, the deal is executed abroad in order to avoid any tax implications and to preserve the confidentiality of the deal. However, one also sees transactions executed in the form of other business combinations, mainly merger agreements in the form of a reverse merger, merger cash-out or a triangular merger. Although possible, asset acquisitions and bulk business acquisitions are not often seen.
A typical M&A transaction involves each of the following steps: (i) execution of a letter of intent, memorandum of understanding, or term sheet; (ii) legal and financial due diligence by the purchaser aimed at detecting any contingency affecting the target company; and (iii) execution of the master agreement, in the form of a stock purchase agreement or a merger agreement, according to the characteristics of the requirements and goals of the parties. It is a general rule that the definitive agreement is executed with several ancillary documents (such as a non-compete, and escrow or trust agreement) or side letters, as the case may be.
Hostile acquisitions are not common in Costa Rica.
2.2 What determines the choice for structure, including in the case of a cross-border deal?
Share purchases are the most common way to acquire a company and are more common than asset purchases. The specific transaction and nature of the company (for example, a free trade zone company) might require an asset purchase. (A free trade zone company is an entity that receives certain tax incentives if it complies with certain statutory requirements).
2.3 How quickly can a bidder complete an acquisition? How long is the deal open the competing bids?
The speed for completing an acquisition depends on the willingness of the parties, the availability of information and the experience of the parties and their advisers.
There is no statutory provision covering how long an offer is open to competing bids.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
There are no restrictions.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily out or otherwise eliminate minority shareholders?
There are no effective mechanisms in Costa Rica allowing the squeeze-out or elimination of minority shareholders.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Minority shareholders can achieve protection through shareholder agreements or the creation of preferred shares with different voting rights and rights to nominate directors. Therefore, a majority of common shareholders can control the corporate affairs, even if they have not contributed the majority of the corporate capital.
Statutorily, under article 29 of the Commerce Code, minority shareholders can obtain protection against increase payments beyond its existing participation in the company. Article 32 bis of the Commerce Code also protects minority shareholders against mergers that might increase their responsibility.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
For publically-listed companies, offers cannot be subject to the condition of the buyer obtaining financing.
For privately held companies, no legal provisions prohibit an offer from being conditional on the buyer obtaining financing, or the absence of material adverse changes or truth of representations.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
The tax principle that applies in Costa Rica is the principle of territoriality, which means that only the income of a Costa Rican source is taxable. The taxable base is the net income, which is the total income produced by the enterprise, less all costs and expenses that are necessary to produce taxable income, as well as depreciations of assets.
Applicable taxes include income tax, sales tax (13%), and, at a local or municipal level, lucrative activities are subject to a tax associated with a permit granted by the corresponding municipality for proper operation in the county.
3.2 Are there special considerations in cross-border deals?
Cross-border deals and payments abroad may be subject to withholding tax. The Income Tax Law establishes a rate of withholding tax on dividends and interests and similar distributions of earnings and interests or other financial payments of 15%. Royalties are subject to a 25% withholding tax. Other rates, generally higher, apply to certain types of revenues depending on the activity from which they derive. The tariff varies from five percent to 50%.
In 1990, Costa Rica approved the Tax Information Exchange Treaty with the US. In August 2010, the Costa Rica parliament ratified a double-taxation treaty with Spain.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Participation of the board of directors of the target company is not legally mandatory. No anti-hostile takeover statutes exist.
The participation of the board of directors of the target company is mandatory only in a tender offer and is limited to advising the shareholders whether to approve or reject the transaction. In this context, it is common, as a deal protection device, to execute an inducement letter under which the majority shareholders commit to approve the transaction at a shareholders' meeting of the target company.
4.2 Is a target required to provide due diligence information to a potential bidder?
The target is not legally required to provide due diligence; this is a matter of consent among the parties. The bidder is nonetheless entitled to full disclosure of information
4.3 How do bidders overcome anti-takeover defences?
When overcome, particularly in golden parachute provisions, this may be normally handled through negotiation strategies to lessen or distribute the impact on director compensations.
4.4 Are there many examples of successful hostile acquisitions?
Hostile acquisitions are not common in Costa Rica.
SECTION 5: DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal form a hostile interloper?
The execution of a letter of intent is the general rule in the local business environment. It is used to set out the basic terms of the transaction and, depending on the complexity of the transaction and the sophistication of the parties, it may have more or less content. The general rule of a letter of intent is that it is non-binding, with some exceptions depending on the nature of the deal.
The letter of intent with a friendly bidder can include from the target company a contractual exclusivity (such as non-solicitation provisions) and agree on break-up fees. However, hostile takeovers are not common in the jurisdiction.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
There are no legal limitations on deal protection measures, although their proportionality or reasonability can be subject to review.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
Article 16 bis of the Law for the Promotion of Competition and Effective Consumer Protection (Coprocom Law) establishes the following thresholds:
On October 5 2012, Costa Rica put in force a substantial amendment to its Competition Law. This new merger control system applies for the following transactions:
6.2 When will transactions falling below those thresholds be investigated?
Regardless of applicable thresholds, transactions that imply a substantial market power that is acquired through the merger or acquisition must be investigated.
6.3 Is an antitrust notification filing mandatory or voluntary?
Antitrust notification filing is mandatory if it falls under the conditions set out by article 16 bis of the Coprocom Law (see 6.1)
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Filing must be made to Coprocom no more than five working days following execution of the M&A agreement.
Coprocom can sanction with up to 410 minimum salaries for not filing an M&A when it was so required by law, regardless of the sanctions and actions that might be so ordered by Coprocom to eliminate or mitigate the anti-competitive nature of the actions taken (article 28 of the Coprocom Law).
Coprocom can also sanction with up to 680 minimum salaries the non-compliance with any of the conditions for authorisation of an M&A (article 28 of the Coprocom Law).
6.5 How long are the antitrust review periods?
Coprocom must review and render a decision in the term of 30 days, but for complex cases Coprocom has the possibility of extending this period by 60 additional days. If the decision is not rendered within those time frames, the merger is automatically approved.
6.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
Proceedings before Coprocom that might result in the imposition of a sanction are initiated ex-officio (and must be justified by Coprocom) or by a complaint.
Cases initiated by a filed complaint must be presented in writing before Coprocom's technical unit, and must be signed by the complainant.
When a complaint is received, the technical unit must prepare a report to Coprocom that includes an analysis of the standing of the case and parties, compliance with the minimum requirements established by the General Administration Law and the evidence presented.
Once the complaint is determined as admissible, Coprocom may initiate a preliminary investigation, before deciding whether to initiate an administrative proceeding or not.
Based on the preliminary report presented by the technical unit, and only in those cases where it is considered that there is a possibility that the investigation may result in the application of one of the sanctions contained in article 28 of Coprocom's Law, Coprocom may initiate a merger control proceeding.
Once the proceedings contained in the Coprocom Law and its regulations are finished, including any necessary hearings, the technical unit will send Coprocom a recommendation for it to prepare its final decision.
The final decision may include the application of one of the sanctions included in Coprocom's Law, if a merger is deemed unlawful in any way.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Costa Rica has a very open economy, with only some minor obstacles.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The country's main anti-corruption legislation is the Law Against Corruption and Illicit Enrichment in Public Function, which entered into law in October 2004.
7.2 What are the potential sanctions and how stringently have they been enforced?
Influencing peddling receives two to five years of prison; entering into law or signing contracts for personal benefit receives one to eight years of prison; and, bribery payments receives one to three years.
The country's controller can order the opening of bank accounts of public officials under suspicion. All public officials must declare their assets at the beginning and the end of service.
In recent years, several high-ranking government officers have been prosecuted and sentenced based on this body of law.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Other than recent antitrust-related provisions, regulations and case law that may have some further impact on local and cross-border transactions, there are no other material issues in place that might affect a deal.
8.2 What are the key recent M&A developments in your jurisdiction?
Recent years have seen a very active M&A market between Costa Rica and Colombia with targets and acquirers in both jurisdictions. Also of note are regional deals in Central America, particularly in the financial and consumer good sectors.
There were some purely domestic deals during 2014, mostly in the financial sector, where the consolidation of groups was the trend. We anticipate this will continue in 2015, especially given Citibank's decision to leave the local retail market and the likely interest of already established banks to acquire its client portfolio.
First published by our sister publication IFLR magazine. Take your free trial today.
Aguilar Castillo Love
About the author
John Aguilar-Quesada attended the Autonomous University of Central America where he graduated with Summa Cum Laude. He also attended Tulane University, studying a course in Legal English Course, and Harvard University, Law School, where he received his LLM. He is the author of numerous works including, Foreign Investment and Development in Costa Rica; Foreign Investment: A new proposal for Costa Rica; and Intellectual Property, Economic Development and Costa Rica. He is a member of the Costa Rican Bar Association and the International Bar Association. He speaks Spanish and English.
Marco Solano Gómez
Aguilar Castillo Love
About the author
Marco Solano Gómez graduated from Georgetown University Law Center with an LLM in 2006. He also attended Tulane University to study the Legal System of the US and the University of Costa Rica to gain his licentiate in law. He has previously worked at Sidley Austin in Washington D.C. and New York (2006-2007), and Greenberg Traurig in New York (2007-2008). He is a member of the Costa Rican Bar Association and the Costa Rican Foreign Service (2001-2004). He speaks English and Spanish.