Contributed By Rebaza, Alcázar & De Las Casas (Lima - HQ)
M&A market activity in 2017 decreased in comparison to 2016, surrounded by the political noise experienced in the country, and highlighting a lower activity in traditional sectors such as mining and industrial. According to one set of statistics, the total value of publicly announced M&A transactions in 2017 reached USD4,001 million, representing the largest contraction in the last eight years.
In 2018, Peru’s M&A market started on the right foot, with big-ticket deals in non-traditional sectors in the local market such as pharmaceutical retail and educational services.
A moderate upward trend in the M&A market activity is expected for the rest of 2018, driven mainly by the increasing presence of private equity funds in the local scene. The slowdown of the Peruvian economy in 2017 had a negative impact on the valuation of the local companies, generating opportunities for private equity firms to diversify their portfolios foreseeing attractive returns or seeking synergies with other companies in their own portfolios, at the same time that the market became more of a buyer’s market rather than a seller’s market (which had been the scenario in the past few years). Furthermore, some of those private equity funds are already at the exit stage, which should also boost M&A activity.
The increasing prices of commodities and the projection for this to continue in 2018 had a positive impact on the mining sector, which resulted in some of the most relevant M&A transactions in 2017. In addition, we expect an increase in M&A deals involving infrastructure projects in which the current sponsors will be replaced by newcomers through an M&A transaction as a consequence of the “Lava Jato” case.
On the other hand, there has been an influx of venture capital funds into the region and an increasing number of M&A transactions related to such industry. In Peru, those transactions are mainly focused on start-ups developing apps.
With the exception of certain relevant transactions in the mining and energy sector, 2017 has been characterised by medium to small deals – the average amount involved being USD100 million or less – mostly involving technological start-ups.
Industries such as energy (ie sale of Chaglla Hydroelectric for USD1.39 billion, sale of Inkia Energy S.A. Latam for USD1.177 billion), mining (acquisition by Glencore of Volcan Compañía Minera S.A. for USD732.4 million) and infrastructure (sale of Línea Amarilla for USD1.71 billion, sale of Rutas de Lima for USD450 million).
Share transactions remain the primary means of acquiring a company in Peru.
The Peruvian Superintendence of Securities Markets (Superintendencia de Mercado de Valores) is the primary regulator for M&A activity in the case of listed companies, whereas the Peruvian Superintendence of Banking, Insurance and Private Pension Funds (Superintendencia de Banca, Seguros y AFP) is the primary regulator for M&A activity in the case of financial institutions.
There are no restrictions on foreign investment in Peru. On the contrary, the Peruvian legal framework provides for general guarantees for private investment as set forth in (i) Article 63° of the Constitution, which establishes that foreign and local investors shall have equal rights and receive equal treatment by the Government; and (ii) the General Law for the Growth of Private Investment (Legislative Decree No 757 and its corresponding amendments), which establishes that there shall be no discrimination regarding foreign or local investment. As a result, the basic rights guaranteed to foreign investors are:
Unlike other countries in the region, Peruvian antitrust law has not established previous control procedures for the approval of mergers and/or acquisitions, or any other form of corporate grouping or business concentration. However, only for mergers and/or acquisitions in the electricity sector, an ex ante merger control procedure has been adopted as an exception (Law No 26876 – Law against Monopolies and Oligopolies in the Electric Sector).
Furthermore, it is important to note that Congress has been passing several bills in connection with antitrust regulation proposals. It is very likely that this year, or the next, Congress will approve an antitrust regulation similar to other countries in the region.
In Peru, acquirers should be primarily concerned about regulations regarding: (i) employment contracts; (ii) legal benefits; (iii) labour unions and collective bargaining; and (iv) health and safety at the workplace.
According to Peruvian law, indefinite-term employment agreements are the regulatory provision for hiring in Peru, although as an exception, fixed-term employment agreements and part-time agreements can also be signed. Peruvian companies may hire foreign personnel up to a limit of 20% of the total number of employees. Also, their salary may not exceed 30% of the total amount of salaries determined in the company’s payroll.
It is important to note that employers must grant the following legal benefits:
Finally, the employer is entitled to terminate the labour relationship with its employee if the latter's actions have given rise to a termination cause set forth by law. In the event that the termination of the employment relationship is unjustified, the employee may sue the employer in order to demand: (i) a severance payment for unjustified dismissal (equivalent to 1.5 monthly salaries per year of service, with a maximum of 12 salaries); or alternatively, (ii) the reinstatement of the employee to his or her work. Additionally, due to current judicial criteria, any employee is entitled to request payment for moral damages in the case of an unjustified dismissal.
The only national security review of acquisitions in Peru is made by the Antitrust Authority and only regarding business combinations in the electricity industry.
Please refer to 8.5 Conflicts of Interest. Also, it is worth mentioning the enactment of Law 30424, which provides criminal responsibility for companies involved in corruption and bribery actions. This law is pending further regulation but establishes a new compliance era for corporate governance and an important matter to be reviewed in M&A deals.
Additionally, the recent enactment of Law 30737, which replaces Urgent Decree 03 (sale or assets transfer prohibition for company related to the Odebrecht business group), establishes new provisions to guarantee the timely fulfilment of payment obligations in favour of the government, retention and remedies trust mechanisms, among other provisions meant to overcome the infrastructure crisis derived from the Odebrecht corruption scandal.
There have not been any significant changes in takeover law in 2017 or during 2018 to date.
Under Peruvian law, the duty to launch a formal takeover bid (a “Comminatory Tender Offer”), which must meet all the requirements and disclosure formalities set out by the Peruvian Securities Market Act and the Comminatory Tender Offers and Purchase Regulations (Reglamento de Oferta Pública de Adquisición y Compra de Valores por Exclusión), arises when a person or financial group directly or indirectly acquires, in one or various successive acts, a percentage considered significant, of shares with voting rights in a company with at least one class of shares with voting rights listed in the Peruvian Stock exchange of the Superintendence of Securities Markets. Therefore, the answers to the following questions only apply to the aforementioned type of public takeover bids, which are the only ones regulated under Peruvian law.
As a general rule, under Peruvian law, Comminatory Tender Offers need to be launched prior to an increase in a significant participation and with respect to the amount of shares that are intended to be acquired. Significant participation is determined based on the percentage of capital stock represented by the shares held by the bidder as well as the number of shares to be acquired. An acquisition of shares is considered significant when the bidder will as a result hold over 25%, 50% or 60% of the target company’s capital stock after the share purchase.
Notwithstanding the above, the Comminatory Tender Offers and Purchase Regulations provide the possibility for the bidder to launch the tender offer after the significant participation has been acquired when, for instance, among other scenarios, the significant participation has been acquired indirectly, or during four or fewer successive transactions during a period of three years. However, it is not common for a bidder to build a stake in a public target company prior to launching an offer based on the aforementioned exceptions. It is customary for a bidder to acquire significant participations all at once to avoid the risk related to controlling interest.
All Comminatory Tender Offers need to be notified to the target company, the Peruvian Superintendence of Securities Markets and the stock exchange on which the shares to be acquired are listed. The term for which a Comminatory Tender Offer is in force begins on the day following this notification. The notification must include the filing, among other documents, of a prospectus, which must contain all information relevant to the transaction, the bidder, the shares and the offer itself. If the bidder is a corporation, a relevant fact that needs to be disclosed is the name of all shareholders that hold at least a 4% interest in the capital stock of the bidder. Furthermore, if the bidder is part of a financial group it has to disclose the information required by the Indirect Property and Financial Group Regulations. Likewise, financial information regarding the bidder and its financial group, if any, also needs to be disclosed.
The purpose of the prospectus is to provide the bidders with sufficient information to make an informed decision regarding whether to stay or not as shareholders of the target company.
Under the Peruvian Securities Market Act and the applicable mandatory reporting regulations, a company with shares listed in the Securities Public Registry of the Peruvian Superintendence of Securities Markets is required to report to the aforementioned authority all “relevant facts” (“Hechos de Importancia”) (which are publicly disclosed on the Superintendence of Securities Markets’ website) and a list with the names of its shareholders holding an interest of more than 4% in the capital stock of the company. Lower reporting thresholds may be considered a violation of security exchange secrecy by the competent governmental authority.
Dealings in derivatives are allowed. In the last few years there have not been any changes.
Under the Peruvian Securities Market Act and the applicable mandatory reporting regulations, investments in derivatives shall be reported to the Peruvian Superintendence of Securities Markets as a “relevant fact”.
The “relevant facts”, as mentioned above, shall be reported to the Peruvian Superintendence of Securities Markets, describing the type of derivative, size, maturity date set forth in the respective agreements, and risk exposures, among other information.
In the case of non-listed companies, there is no obligation for shareholders to disclose the purpose of their acquisition and their intention regarding control of the company.
On the other hand, in Comminatory Tender Offers, the prospectus required to be filed before the Peruvian Superintendence of Securities Markets must include, among other information: (i) the number and description of the target company’s shares and securities acquired by the bidder either directly or indirectly during the last 12 months as well as the maximum amount of shares to be acquired under a Comminatory Tender Offer; (ii) the purpose of the acquisition; and (iii) the future plans of the bidder in connection with the target company (eg a corporate reorganisation, disposition of assets, management reorganisation, etc).
Furthermore, in the case of acquisitions of an interest which represents more than 10% of the capital stock of a Peruvian financial entity, the transaction shall be subject to the granting of a governmental authorisation by the Peruvian Superintendence of Banking, Insurance and Private Pension Funds. An obligation to disclose information regarding the purpose of the acquisition and the intention of the acquirer regarding control of the company may be applicable.
In the case of companies with securities listed in the Securities Public Registry of the Peruvian Superintendence of Securities Markets, a potential deal should be disclosed at the start of the negotiation phase. Such negotiations should be reported by the company to the Peruvian Superintendence of Securities Markets as a “relevant fact”.
Historically, companies have always tried to delay as much as possible the disclosure of sensitive information. Notwithstanding, if the Peruvian Superintendence of Securities Markets considers they have exceeded the legal deadlines for filing such information, the companies may be subject to economic penalties between PEN41,500 and PEN83,000 (equivalent approximately to USD12,930 and USD25,860), among other sanctions.
Also, companies usually avoid public disclosure by submitting a request to maintain information under reservation by the Peruvian Superintendence of Securities Markets and complying with all its requirements.
In Peru, the due diligence performed upon the target companies usually includes the following fields: (i) corporate (review and analysis of all relevant corporate information, including by-laws, charter documents, stock ledger, and the minutes of the shareholders’ meetings, board of directors or internal committees); (ii) labour (review of any applicable collective bargaining agreements and other relevant arrangements with labour unions and employees, as applicable, human resources and recruitment strategy, contractual framework structure with employees (and compliance with applicable labour laws), outsourcing agreements, compensation policies, workforce reduction, among other issues); (iii) tax (review and analysis of all relevant tax filings, proceedings and audits from the Peruvian tax administration (Superintendencia Nacional de Administración Tributaria – SUNAT), as well as any relevant precedent or declaration issued by the Fiscal Tribunal (Tribunal Fiscal) in connection with the target company, its assets or its business); (iv) proceedings and litigation (identifying all significant administrative or judicial proceedings of a civil, tax and labour nature, in addition to the main arbitrations involving the target company); (v) material agreements (review and analysis of the main agreements, the financial agreements, the main insurance policies and other material agreements or engagements executed or secured by the target company); (vi) real estate and main assets (review and analysis of the legal information concerning the real estate and main assets owned, leased, used or subject to the exercise of other relevant rights by the target company); (vii) regulatory (analysing the licences, permits and registrations of the target company, and any other relevant licences necessary for the conduct of the business of the target company); and (viii) data protection (analysing the policies and treatment of the target company’s database in order to verify compliance with the data protection legislation), among others.
Standstill obligations are usually demanded considering most current deals have differing execution and closing dates (conditions precedent prior to closing). On the other hand, it is not usual to obtain exclusivity agreements from the sellers, since a significant number of share transactions in Peru are being structured as competitive private bidding processes.
It is permissible but not common for the parties involved in a Comminatory Tender Offer to document the terms and conditions in definitive agreements.
Under the Peruvian Securities Market Act and the Comminatory Tender Offers and Purchase Regulations in case of a Comminatory Tender Offer, a prospectus must be drafted, which shall contain all information relevant to the transaction, the bidder, the shares and the offer itself, and shall be filed by the bidder before the Peruvian Superintendence of Securities Markets. Moreover, it is permitted to execute a Comminatory Tender Offer as a result of multiple previous share purchases.
The process of acquiring or selling a business can take between three months and one year. It varies depending on the time spent undertaking due diligence, whether some conditions need to be complied with prior to closing the deal, the number of parties and jurisdictions involved, among other factors.
An acquisition of shares is considered significant when the bidder will as a result hold over 25%, 50% or 60% of the capital stock of a listed company.
Cash is the usual type of consideration. Consideration in shares is not common in Peru. Nevertheless, both kinds of consideration (including a combination of both) are permitted under the applicable law and regulations. Transactions where the consideration is paid in securities are called Public Offers of Exchange (Ofertas Públicas de Intercambio).
Comminatory Tender Offers may be subject to conditions to enforce the binding effect of the offer, such as a minimum number of shares. This prerogative is commonly used by bidders. However, regulators restrict the use of other kinds of offer conditions.
A Comminatory Tender Offer may be subject to a minimum acceptance threshold of the specific offer by the shareholders. As detailed before, the control thresholds (the acquisition of which gives rise to the Comminatory Tender Offer) are of 25%, 50% and 60% of the target company’s capital stock.
Regardless of the above, the usual minimum acceptance condition is such percentage that grants effective control to the purchaser in the target (ie 50% plus one share).
Once the public tender offer is launched, the acquisition of shares as a result of the bid cannot be conditioned on the bidder obtaining financing. Moreover, the prospectus must include, if applicable, a description of the terms and conditions of the financing that will be used to fund the acquisition of shares, including the timing conditions and guarantees of said financing.
Furthermore, to launch a Comminatory Tender Offer a bidder must grant a guarantee in cash or securities to ensure fulfilment of the obligations arising from its bid.
A bidder can seek different types of deal security measures, the most commonly used in Peru being the following: break-up fees, non-solicitation provisions and the grant of irrevocable buy/sale orders which are kept in trust until the closing of the transaction.
Usually the bidders seek the following governance rights and/or restrictions to the transfer of shares: non-compete obligations, deadlock solutions, drag-along rights, tag-along rights, rights of first refusal, rights to appoint independent auditors for the target company, financial reporting obligations in their favour by the target company, and the designation of independent directors on the target company’s board.
As established in the Peruvian Companies Act, all shareholders may be represented by another person at shareholders’ meetings. The proxy for such purposes shall be granted in writing and specifically for each meeting, except when it has been granted by public deed, and shall be registered before the company no less than 24 hours prior to the time established for the shareholders’ meeting to be held.
The attendance of the shareholder at the meeting revokes the proxy granted in favour of the representative and suspends the proxy granted by public deed, except in the case of irrevocable powers of attorney.
The company’s by-laws may limit such right in order that shareholders can be represented only by another shareholder, a director or manager.
In the last three years there have not been any legislative changes on this matter. There are no legal mechanisms similar to a squeeze-out mechanism and short-form mergers in order to buy out minority shareholders that have not tendered following a successful Comminatory Tender Offer applicable to listed companies.
Furthermore, Peruvian legislation does not allow minority shareholders to prevent a successful bid from taking place. Nevertheless, a Comminatory Tender Offer may trigger separation rights for shareholders that did not tender their shares within the offer period. Such separation rights are exercisable after the takeover is completed.
It is common to obtain irrevocable commitments to tender from principal shareholders of the target company in a Comminatory Tender Offer. These irrevocable commitments are private agreements usually undertaken during the negotiation stage, prior to the launch of a Comminatory Tender Offer. Furthermore these irrevocable commitments do not usually provide an exit for the principal shareholder if a better offer by a competitor is made (“oferta competidora”). On the contrary, the purpose of said irrevocable commitments is to force the principal shareholder to tender its shares in favour of the initial bidder even if a competing offer is made.
Nevertheless, any agreement entered into among the bidder and shareholders of the target company needs to be disclosed and filed by the bidder with the Peruvian Superintendence of Securities Markets.
In the last three years there have not been any legislative changes on this matter. Each Comminatory Tender Offer needs to be notified to the target company, the Peruvian Superintendence of Securities Markets and the stock exchange on which the shares to be acquired are listed. The term for which a Comminatory Tender Offer is in force begins on the day following this notification. This notification must also be published in the Official Gazette “El Peruano”, in another national newspaper and on the corresponding stock exchange during the term in which the Comminatory Tender Offer is in force.
In the last three years there have not been any legislative changes on this matter. The notification of the Comminatory Tender Offer must include the filing, among other documents, of a prospectus, which shall contain all information relevant to the transaction, the bidder, the shares and the offer itself, and shall be filed by the bidder with the Peruvian Superintendence of Securities Markets.
In the last three years there have not been any legislative changes on this matter. The prospectus to be filed by the bidder before the Peruvian Superintendence of Securities Markets must include, among other information, the audited financial statements of the bidder for the last fiscal year and its last quarterly non-audited financial statements. Such financial statements must be drafted in accordance with the IFRS’s required forms.
Any agreement entered into between the bidder and the shareholders of the target company needs to be disclosed in full and filed by the bidder before the Peruvian Superintendence of Securities Markets.
In the last three years there have not been any legislative changes on this matter. In accordance with the Peruvian Companies Act (Ley General de Sociedades), the directors of a company shall fulfil their duties with diligence and loyalty towards their company. Directors are severally and jointly liable to the company, its shareholders, stakeholders and third parties for any damages caused as a result of approving motions that violate any applicable laws or the company’s by-laws, as well as for damages caused by wilful misconduct. The aforementioned liability is not enforceable against any such director who expressly stated his or her disapproval of such resolutions.
Moreover, when a Comminatory Tender Offer has been launched, the board of directors of the target company has the duty to remain neutral (deber de neutralidad) with regard to the initial Comminatory Tender Offer and other competing bids, if any. Likewise, the board of directors is prevented from engaging in any acts or using any defensive measures that may disturb the Comminatory Tender Offer process (issuance of shares, granting option rights, transfer of assets, among others).
Notwithstanding, either the board of directors or the applicable administrative officer (CEO) from the target company has to prepare a report stating the advantages and disadvantages of accepting the proposed Comminatory Tender Offer, which has to be delivered both to the Peruvian Superintendence of Securities Markets and to the stock exchange where the shares are listed. Nevertheless, this report is not binding for the shareholders of the target company, who will finally decide whether or not to tender their shares personally.
It is not common for boards of directors of Peruvian companies to establish special or ad hoc committees in business combinations. In the case of a conflict of interests, the Peruvian Companies Act sets out that the board member must abstain from participating in any resolution which entails a conflict of interest.
Either the board of directors or the applicable highest administrative officer (CEO) from the target company has to prepare a report stating the advantages and disadvantages of accepting the proposed public tender offer. This report is not binding for the shareholders of the target company, who will finally decide whether or not to tender their shares personally. Nevertheless, this report has to be prepared by the board in compliance with its duty of care, duty of loyalty and duty of neutrality owed to the company during the Comminatory Tender Offer process.
In Peru, the governmental authorities and courts do apply the business judgement rule in takeover situations (by presuming that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and to their best knowledge that the action taken was in the best interests of the company). Notwithstanding, the party challenging any resolution of the board in takeover situations not only must prove that the decision by the board was uninformed (to rebut the aforementioned business judgement presumption) but also has to prove that any violation of the duties was a result of wilful misconduct or gross negligence by the directors.
Independent advice from external lawyers and financial advisers (eg for the valuation of the company) is commonly given to directors in a business combination.
Conflicts of interest of directors, managers, shareholders or advisers are most likely to be analysed before a private arbitral tribunal due the judiciary’s lack of efficiency and quick decisions. Therefore, it is very difficult to obtain legal precedents or statistics in this regard on account of the confidential characteristics of arbitration.
In the last three years there have not been any legislative changes on this matter. Hostile tender offers are permitted in Peru. Nevertheless, this kind of tender offer is not launched often.
Only two major hostile takeovers were launched in recent years: the hostile takeover launched by Compañía Minera Milpo for 100% of the shareholding in Compañía Minera Atacocha (both mining companies) and the hostile takeover launched by Mexican company Industrias Peñoles (major producer of refined silver) for up to 51% of the shareholding of the shares of Compañía Minera Milpo.
Directors are not allowed to use defensive measures (eg seeking a white knight or white squire) at this stage. However, before a tender offer is launched, directors may implement preventive measures such as amending the company’s by-laws accordingly.
As mentioned in 9.2 Directors' Use of Defensive Measures, defensive measures after a Comminatory Tender Offer has been launched are not permitted under Peruvian law. Nevertheless, the implementation of preventive measures before a Comminatory Tender Offer is launched is permitted (eg the inclusion of poison pills in the company’s by-laws, golden parachutes, among others). However, the inclusion and implementation of those preventive measures is not common because most listed companies have a concentrated ownership structure, which makes remote the possibility of success of a hostile takeover, and therefore preventive measures against hostile takeovers are not usually performed.
The board of directors cannot prevent a business combination, rather they merely inform the shareholders of the advantages and disadvantages of the transaction.
M&A litigation is not common compared to the number of M&A deals closed every year.
In connection with M&A litigation practice, most of the M&A agreements are submitted to Peruvian arbitration chambers (eg AmCham Peru and Peruvian Chambers of Commerce) instead of Peruvian courts.
On the other hand, cases relating to disputes regarding purchase prices (eg price adjustments) are submitted by the parties to internationally recognised firms of independent accountants, which act as arbitrators and whose awards are usually final, non-appealable and binding for the parties.
If any, litigation takes place at any time within the applicable statutes of limitations.
Recently, we have experienced some development regarding shareholder activism. However, in listed companies this is not a common practice under the Peruvian legislation because most Peruvian listed companies have a concentrated ownership structure.