Andrey Dorado and Tracy Varela of Arias & Muñoz in San José consider the ten things you need to know about M&A in Costa Rica
1. What are the most common ways of acquiring a private company?
The most common ways of acquiring a company in Costa Rica are:
a) Purchasing all or part of the company’s shares;
b) Purchasing all or a majority of the company’s assets; and
c) Merging by absorbing the acquired company or by creating a new company.
Costa Rican law both establishes and permits the public acquisition of public companies’ shares; but, because of the small size of Costa Rica’s stock market, these transactions are not common.
2. What type of entities are typically involved in an M&A process?
Costa Rican legal entities typically involved in M&A processes are both Corporations (“sociedades anónimas”) and Limited Liability Companies (“sociedades de responsabilidad limitada”). Costa Rican law also establishes other types of commercial entities.
Local regulations allow foreign companies to both acquire and be acquired by Costa Rican entities.
3. What is an M&A process typical timeline?
The M&A process usually starts by negotiating a Letter of Intent, Memorandum of Understanding, or similar document that is executed approximately within two weeks of beginning the negotiation process. After this, the parties initiate the due diligence by executing a non-disclosure agreement; this due diligence process lasts from between four to six weeks, depending on when both the information and documents required to conduct the corresponding review were delivered. It is very common that the parties begin negotiating both the purchase agreement and the other relevant transaction documents during the due diligence stage; the negotiation is finalised when the transaction documents have been signed: usually about 30 days after concluding the due diligence.
The purchase agreement can either establish a simultaneous transaction signing and closing or a deferred closing that gives the seller time to comply with the relevant conditions precedent (certain actions that the purchaser considers essential for completing the shares or assets’ acquisition). The term for complying with the conditions precedent varies depending on the seller’s actions, but it is usually about thirty days.
4. What are the typical deal-breakers?
Environmental matters are typical deal-breakers for Costa Rican M&A transactions because these matters are not always covered by the seller’s guarantee (such as escrow funds). The statute of limitations for environmental issues are very difficult to determine because actions that violate environmental law tend to be continuing actions.
Fiscal and labour matters are other common deal-breakers in transactions with a Costa Rican component. Often, government concessions may be granted in regulated industries and these need to be renewed periodically. Therefore, there is an inherent political risk that cannot be legally or technically quantified.
5. When structuring a transaction, what matters need be taken into consideration?
When establishing a transaction’s structure so that the structure is both cost and time effective, parties should take into consideration the following matters:
a) Fiscal efficiencies arising from any international treaties that the Republic of Costa Rica has entered into.
b) Fiscal treatment of those Costa Rican entities under foreign tax regimes.
c) The purchaser’s reasons for acquiring the company (for resale in either the short or long term, or as an ongoing business, etc.).
d) Assets that the purchaser is acquiring.
e) Seller’s ongoing company business.
f) Required regulatory approvals.
g) Term for the transaction’s closing.
6. What are the differences between the sale of assets and sale of shares?
The differences between the sale of assets and shares are that:
a. In an asset sale’s due diligence process, the seller does not provide the purchaser any financial and corporate information. (Otherwise, the Due Diligence of both types of acquisitions are very similar because, under Costa Rican law, fiscal and labor contingencies are not exempted through an asset purchase.)
b. The asset purchase acquisition agreement must outline all assets (agreements, permits, intellectual property, list of clients, accounts payables, account receivable, etc.) that the purchaser is acquiring.
c. The share purchase agreement only lists the shares being sold. (Otherwise, both structures - the representations and warranties, as well as conditions precedent - are again very similar.)
d. In an asset sale, a purchaser acquiring either all or a majority of the company’s assets or ongoing business must comply with the bulk sale proceeding under Costa Rican law. (The law requires that the purchase price must be deposited with an escrow agent or public notary so that third parties can file any claims against the sale. This process delays the transaction’s closing by approximately two months and only exempts the purchaser from commercial contingencies.)
7. What is the shareholders’ influence on deals?
A Costa Rican company’s shareholders must always authorise the company’s merger with any other legal entity.
However, in a sale of either all or a majority of the companies’ assets, shareholders need not authorise the sale unless the company’s articles of incorporation require it. Nevertheless, even if the company’s articles of incorporation do not require authorisation, it is highly recommended to obtain it.
The sale of shares does not require shareholders’ authorisation through a formal meeting; however, Costa Rican regulations allow for the purchaser’s law of incorporation or the purchase agreement’s governing law to require this formal authorisation.
However, in a local entity’s purchase of either an ongoing business or a company, shareholders need not authorise the sale unless the company’s articles of incorporation require it. Nevertheless, even if the company’s articles of incorporation do not require authorisation, it is highly recommended to obtain it.
8. What are the typical documents involved in an M&A deal?
Typical documents involved in an M&A deal are:
a) Letter of intent, memorandum of understanding, or similar document that lays down the transaction’s general terms and conditions.
b) Non-disclosure agreement to initiate the due diligence.
c) Asset or stock purchase agreement: requiring this agreement depends on the transaction’s structure.
d) Shareholders’ meeting minutes authorising the transaction.
e) Escrow agreement that lays down the terms and conditions for the guarantee fund’s management.
f) Shareholders’ agreement: only required when the purchaser acquires part of the company’s shares.
g) Assignment and assumption agreements for certain assets.
h) Employment and consulting agreements between key executives and employees (typically prepared by the purchaser).
i) Change of control consents (if applicable).
j) Release of security documentation (if applicable).
k) Resignation letters from the company’s Board of Directors.
9. Is stamp duty payable on a merger or acquisition?
Yes, a stamp duty is payable in relation to the purchase agreement. This stamp duty is 0.5% of the purchase price and payable when the purchase agreement is executed.
Who is liable for paying this stamp duty?
10. What authorisations are required for an M&A deal?
The Costa Rican Antitrust Authority must be notified of and approve all transactions that both involve a permanent change of control and comply with applicable thresholds.
Additionally, depending on the company’s business, any sale of shares or assets may require other regulatory approvals (such as, companies that undertake activities related to financial, pensions, insurance, or securities markets; and public tender-awarded entities).
Andrey Dorado and Tracy Varela
Arias & Muñoz