Cesar Arbe Saldaña of Arbe Abogados assesses the M&A regulatory framework in Peru
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
In April 2012, the Commission of Consumer Protection of the Peruvian Congress filed a bill to establish the mandatory supervision of M&A transactions involving companies operating in different economic sectors in Peru.
Although Congress did not approve the bill, it is still open for discussion.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
We do not expect to see many public M&A transactions over the next 12 months. Because of the global economic situation, the market value of public companies has decreased. However, we expect to see public M&A deals in the mining sector.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Peruvian Companies Law governs public M&A. This is the main statute applicable to all mergers, whether in private or public companies. The Superintendence of Securities Market (SMV) supervises public M&A.
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The SMV enforces takeover regulations. The acquisition of control of a public company must be authorised by the SMV.
The takeover regulations apply if:
(i) the takeover involves a price;
(ii) the target company has at least a voting class of shares, or shares that are susceptible to granting voting rights, registered at the stock exchange;
(iii) the bidder acquires or exceeds the participation in 25%, 50% or 60% in the capital stock of the target, or acquires voting shares that allows the bidder to remove and appoint the majority of directors or modify the by-laws of the target.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
Hostile acquisitions are rare in Peru. Friendly acquisitions are more common. The basic structure for both is to extend a tender offer to acquire the shares of the target.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
This depends on the term established by the bidder in its prospectus. However the term cannot be less than 20 days. The deal is only open to competing bids for 10 days, after which the tender offer begins.
The length of time it takes to complete an acquisition will also depend on whether the acquisition requires regulatory approval. This is the case for companies operating in the electricity and financial sectors, among others.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
The offered price must be equal for all shareholders of the target company. It can be in cash, securities or a combination of both.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
Peru's takeover regulation does not stipulate a minimum level of acceptance or ownership. If at the end of the term of the offer, the number of acceptances is less than the minimum amount required by the bidder, the offer is ineffective. However, the bidder can decide to acquire the shares tendered during the offer below the minimum amount.
3.6 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?
The regulation's main purpose is to guarantee the payment of the control premium to all shareholders. In this sense, the same purchase price must be paid to all of the shareholders of the target company that accept the offer.
3.7 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?
Tender offers are irrevocable.
The bidder must guarantee that it will fulfil the obligations established in the offer. If the offer price is in cash, the guarantee must be for the total amount of the offer. If the price is in securities, the bidder must ensure that the securities are freely negotiable for the total amount of the offer.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
The tax consequences will vary depending on the structure of the transaction and the types of parties involved.
If the transaction is structured as a purchase of assets, the seller will have to consider the impact of market value rules for income tax purposes and the tax basis of the assets to determine the taxable gain. The taxable gain will be obtained by the company who owns the assets. Therefore, it will be subject to two levels of taxation: corporate income tax at 28%; and the tax on dividends at 6.8% (a combined tax rate of 32.9%).
If the transaction is structured as a purchase of shares, if the seller is an individual with a tax domicile in Peru, the taxable gain will be subject to income tax at five percent.
4.2 Are there special considerations in cross-border deals?
If the buyer is a non-domiciled individual or entity, they will have to ensure the tax administration obtains a certification of the tax cost of the assets/shares. This will allow the deduction of this cost from the sale price, in the event of a future sale.
If the acquirer is a domiciled entity, and the seller is non-domiciled, the buyer will have to withhold the income tax levied on the seller. Therefore, if the seller does not obtain the above-mentioned certification, the buyer will have to withhold the income tax on the full sale price.
It is also necessary to consider the possible application of any double taxation agreements (DTAs) signed by Peru.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Directors and managers of the target company cannot carry out any anti-takeover defence, from the day they discover the bidder's intention to execute the takeover until the last day of the offer. This is because Peruvian legislation establishes that directors and managers of the target company must act neutrally before the bidder or potential bidders, giving priority to the interest of the shareholders. Therefore, the directors cannot carry out any action that is outside the ordinary course of the business that could disturb the normal development of the offer.
The common anti-takeover defence for minority shareholders is the right of first offer.
5.2 How do targets use anti-takeover defences?
5.3 Is a target required to provide due diligence information to a potential bidder?
The target is not required to provide due diligence information to a potential bidder. However, all the information of target is disclosed in the Public Registry of Securities Market of the SMV.
5.4 How do bidders overcome anti-takeover defences?
The bidder can ask the SMV to initiate an administrative sanctioning process against the director or managers that tried to execute an anti-takeover defence.
5.5 Are there many examples of successful hostile acquisitions?
Successful hostile acquisitions are rare in Peru.
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
The only way to protect a friendly deal from a hostile interloper is to ask the friendly bidder to improve the conditions of the offer. This improvement can only be made for up to 10 days after the beginning of the first offer.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Peruvian law is silent on this matter.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
Except for in the electricity sector, Peruvian regulations do not establish antitrust notification thresholds.
7.2 When will transactions falling below those thresholds be investigated?
In the electricity sector, M&A transactions that fall within the relevant thresholds must be notified to the National Institute for the Defense of Competition and the Protection of Intellectual Property (Indecopi).
Either Indecopi or a complainant can instigate a disciplinary procedure for the investigation and punishment of anticompetitive behaviour.
7.3 Is an antitrust notification filing mandatory or voluntary?
It is only mandatory in the electricity sector and only when the transaction would result in a market share of 15% or more in acts of horizontal concentration, and five percent in acts of vertical concentration of any of the markets involved.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
In the electricity sector, notification must be filed before starting the M&A transaction. If notification is not filed, Indecopi may impose fines of up to 10% of sales or gross income received by the companies involved, directly or indirectly, in the concentration.
7.5 How long are the antitrust review periods?
For the electricity sector the review lasts for 30 working days.
7.6 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?
In the electricity sector it comprises those acts of concentration which, even if undertaken abroad, involve companies that develop activities of generation, transmission or distribution of electricity within the country.
7.7 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?
Supreme decree No. 006-2003 – PCM approved the regulations of three international agreements: the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994; the Agreement of Subsidies and Countervailing Measures; and; the Agreement about Agriculture. These regulations aim to prevent and correct distortions of competition in the market caused by dumping and subsidies.
The Radio and Television Act states that only Peruvian persons or companies constituted and domiciled in Peru can hold authorisations and licenses for this sector. A foreign person, either directly or through sole ownership, cannot hold an authorisation or license.
The transfer of ownership of a company cannot affect existing employment contracts, agreements or labor conditions.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
According to article 393 of the Peruvian Criminal Code (PCC), the public officials or public servants that requested, accepted or put a condition in order to receive, directly or indirectly, a donation, promise or any other advantage or benefit to perform or omit an act in violation of its obligations or in the fulfilment of it, shall be punished with deprivation of liberty. The PPC penalises: corruption or attempted corruption; extortion; passive and active bribery; money laundering; and bribing a foreign official.
In addition, Peru ratified the United Nations Convention against Corruption (UNCAC) in 2004 and the Inter-American Convention against Corruption in 1997.
8.2 What are the potential sanctions and how stringently have they been enforced?
In the PCC, corruption is punished through imprisonment and fines. In cases involving public officials or public servants, the sanction for corruption is disqualification from working for the government for a specific period of time, depending of the type of misconduct. Imprisonment is for a minimum of four years and a maximum of 10 years. However, servants of justice (judges, referees or similar) can be sentenced with up to 15 years in prison.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
First published by our sister publication IFLR magazine. Take your free trial today.
Cesar Arbe Saldaña
About the author
Cesar Arbe Saldaña specialises in corporate, financial and civil law, M&A, project financing, international financing, investments funds, public and private offerings and securitisations.
He has vast experience in financial transactions such as syndicated loans, public bond issues, initial public offerings, legal structuring of financings, legal due diligence, incorporation of collateral – asset and cash flow- trusts, pledges, mortgages, as well as drafting and negotiation of commercial agreements.