Juan Carlos Castillo-Chacón of Aguilar Castillo Love assesses the regulatory landscape for mergers and acquisitions in Guatemala
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A activity is regulated by the Securities Market Law (Ley del Mercado de Valores) of 1996, and it is governed by the Securities Market Registry (Registro del Mercado de Valores) and the stock exchange as a self-regulating entity.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The regulation of acquisitions in the Securities Market Law is scarce and does not provide a specific enforcement mechanism. The Securities Market Registry is the body charged with enforcing the law, and it is empowered to suspend the trading of a particular security and impose fines. However, the fines are extremely low and the Registry lacks the resources needed for adequate enforcement.
2. STRUCTURAL CONSIDERATION
2.1 What are the basic structures for friendly and hostile acquisition?
The basic structure for friendly acquisitions is approaching the target with an indicative offer. Such offer is considered by the board of directors of the target company and, if they deem it interesting, a shareholders meeting is convened. The indicative offer is usually subject to due diligence.
In the case of hostile takeovers, if it seeks control of the target, the law mandates notifying the intent to acquire to: (i) the board of directors of the target company; (ii) the Securities Market Registry; and (iii) the stock exchange where the target is listed.
The stock exchange involved must then determine the best way to make the offer, including all its details, known to the public.
The target must also publish the offer, but only if it is received within 15 days of the date when shareholders meetings must be convened according to the law.
2.2 What determines the choice for structure, including in the case of a cross-border deal?
All acquisitions in Guatemala are private, and most are friendly. There are no listed (public) companies in Guatemala and therefore the law has never been tried. Therefore, the structure is always the same (indicative offer). If it is hostile, instead of going to the target, the buyer goes directly to the shareholders individually.
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: (i) the willingness of the partners; (ii) the availability of information; and (iii) the experience of the parties and their advisors. Having said that, three to six months is typical.
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?
Such aspects are not regulated. Therefore, it would be case specific, and would be ruled by the laws of the notice of intent to acquire and by the by-laws of the target company
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 do not receive any legal protection, except in the currently untested scenario of a hostile acquisition of a listed company, in which all details of the acquisition must be made public. Other than that, whatever protection they may have would have to come from the company's statues. We have seen that practice starting in companies with a broad shareholder base.
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?
Buyers are not legally limited in the conditions they subject their offers to. Usual ones are due diligence, absence of material adverse change. Bank guaranties are not legally required.
3.1 What are the basic tax considerations and trade-offs?
There are three basic tax considerations: (i) the trading of shares is tax free; (ii) there is a capital gains tax of 10%; and (iii) dividends are subject to five percent tax. In the past, it was usual for offshore holding companies to carry out the deals in order to avoid the capital gains. However, recent changes to the tax laws seek to impose the capital gains tax even in those cases. It is not clear how that amendment is going to be enforced, but the law provides that the buyer is forced to withhold the tax.
3.2 Are there special considerations in cross-border deals?
There are no special considerations in cross-border deals, except for the fact that even though the buyer is responsible for withholding and delivering the capital gains tax, there is no mechanism in the law for a non-resident alien to do so.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
There is no anti-takeover defence at a legal or regulatory level.
4.2 Is a target required to provide due diligence information to a potential bidder?
In the case of listed companies, the only information available would be the information associated with the listing. There is no obligation for the target to provide due diligence information.
4.3 How do bidders overcome anti-takeover defences?
4.4 Are there many examples of successful hostile acquisitions?
Not that we are aware of.
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?
It is fairly common for a friendly bidder to request and obtain exclusivity, usually for a six-month period.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
It is fairly common for prospective buyers to include restrictions to prevent competing bids. Such restrictions would only apply to private acquisitions and not to listed companies.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
As mentioned above, Guatemala has no antitrust regulation yet. Therefore, there is no need to notify any authority or to obtain any authorisation. However, an antitrust law is expected to be approved soon (within the year).
6.2 When will transactions falling below those thresholds be investigated?
6.3 Is an antitrust notification filing mandatory or voluntary?
6.4 What are the deadlines for filing, and what are the penalties for not filing?
6.5 How long are the antitrust review periods?
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?
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?
Guatemala has no antitrust legislation, no national security or protected industries, no foreign ownership restrictions and no employment regulation that could affect an acquisition. Whatever defence there is would need to be at a corporate level.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The following anti-corruption legislation applies in Guatemala:
7.2 What are the potential sanctions and how stringently have they been enforced?
Potential sanctions to the crimes and offences that relate to anti-corruption legislation range from fines, the confiscation of assets, suspension from work, jail sentences and, for foreign persons, extradition.
Although legislative measures have been made to prevent corruption, the enforcement rate of these measures has not been successful. Corruption persists on a grand scale. According to the Corruption Perception Index 2013 by Transparency International, Guatemala is listed as 115 out of 175 countries worldwide.
SECTION 8: OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
We would offer three main pieces of advice when considering an M&A transaction in Guatemala. First, choose carefully: most local firms perform a purely mechanical due diligence process without understanding the business. If you do not understand the business, you will not be able to pose the relevant questions or to identify the critical issues. Second, have a good local partner. If you are investing in politically sensitive areas, it is necessary to have a local partner that understands the culture and is better equipped to navigate the waters. Having said that, you have to perform some due diligence on your partner to make sure you know who you are dealing with, to avoid future problems. Third, think outside the box. In sensitive sectors, your problems and contingencies will not come from what is written in the law, so a purely legal and technical due diligence will not be enough. You have to truly understand the country, the region where the target is doing business and social and political issues that could affect it, and the sector.
8.2 What are the key recent M&A developments in your jurisdiction?
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Juan Carlos Castillo-Chacón
Aguilar Castillo Love
About the author
Juan Carlos Castillo-Chacón graduated from the universidad Francisco Marroquin magna cum laude in 1991. He has a masters from Harvard University Law School, graduating in 1991. He is the author of Judicial Independence in Guatemala, A Critical Analysis. and was president of the Guatemalan stock exchange from 1999 until 2007. He was professor of public international law at the universidad Francisco Marroquin in 1993; legal advisor to the Guatemalan government on the privatisation of electric generation and distribution Ccmpanies in 1996; and advised the government on the privatisation of Guatemala's ports and airports in 1998. He is a member of the Colegio de Abogados de Guatemala. He speaks English and Spanish.