Contributed By Tobar ZVS Spingarn
In 2018, the M&A market in Ecuador suffered a significant decrease from that of 2017. According to figures published by the Superintendent of Market Power Control as of the end of September 2018, the M&A market in 2018 decreased substantially if compared to that of 2017. Although only certain M&A transactions need undergo merger control by the Superintendent of Market Power Control, the figures obtained from the regulatory body provide some perspective of the M&A market in Ecuador in 2018.
In 2018, the Government approved tax laws to attract private investment in Ecuador and it is anticipated that in 2019 new laws with the same intention will be approved.
The Government of Ecuador has been unsparingly seeking to attract new foreign direct investment to develop the local economy. In 2018, the it began to develop public projects in infrastructure, energy, mining and public services by encouraging private investors. It is expected that these sectors will be the top trends in Ecuador for 2019.
As stated in 1.2 Key Trends, above, M&A transactions are expected to grow in Ecuador in 2019 in the mining, infrastructure, public services and energy sectors.
The primary techniques an investor has for the acquisition of a company in Ecuador are through:
The Ecuadorian Stock Exchange experiences limited activity. Thus, almost all M&A transactions are related to non-public listed companies.
The primary regulators of M&A activity in Ecuador are:
Depending on the area, other authorities may have regulation functions, eg, for finance institutions, the Superintendent of Banks and for telecommunications, the Superintendent of Telecommunications.
Generally, there are no restrictions on foreign investment in Ecuador. However, there are some exceptions. Foreign investors are given the same treatment as local investors; the Production Code guarantees foreign investors’ rights and expressly states that there is to be equal treatment for both local and foreign investors, plus property rights over their investment. Moreover, the Production Code expressly allows both local and foreign investors to enter into direct investment protection agreements with the Ecuadorian state. This ensures that the state will grant new investments and that tax incentive schemes will remain in place for the duration of their development.
The anti-trust regulations that apply to mergers in Ecuador are found in the Organic Law for the Regulation and Control of Market Power. The following transactions are considered ‘concentration operations’:
The ‘concentration operations’ require prior approval from the Superintendent of Market Control Power if one of the following thresholds is met:
The transaction must be notified to the Superintendent within eight days following the date of entry into the agreement, and the Superintendent must issue its Resolution within 60 working days of the notification. The Superintendent may approve, condition or refuse the merger.
The labour and social security regulations in Ecuador are to be found in the Labour Code and in social security law. During an M&A operation, an investor should be aware of the following issues:
There is no national security review of acquisitions in Ecuador.
The Organic Law for the Regulation and Control of Market Power was enacted in 2011. This law implemented a competition regime in Ecuador and affected the M&A transactions by including a merger notification procedure to be followed before the Superintendence of Market Power Control.
One of the most important administrative decisions during a M&A process was issued by the Superintendent of Market Power in application of the Organic Law for the Regulation and Control of Market Power. In July 2016, the Superintendent issued a resolution during the merger process between Anheuser-Bush InBev and SABMiller. The Superintendent delayed the merger until the compliance of certain conditions was effected, including the following:
M&A activity in Ecuador is mainly regulated by company and stock market law, and the Organic Law for the Regulation and Control of Market Power. These laws did not undergo any significant changes in the last two years and no change in legal regulations is expected in 2019.
In Ecuador is it not customary for a bidder to build a stake in the target company prior to launching an offer.
Where publicly traded companies are involved, any transaction of shares (buying or selling) carried out by a shareholder with 10% or more of the company shares must be notified to the stock exchange and the Superintendent of Companies at least five working days before the transfer of shares.
In special cases where advance notice is not possible (eg, acquisition by inheritance), the shareholder is required to notify the stock exchange and the Superintendent of Companies within 24 hours of the acquisition.
Where the transaction is between private companies, there is an obligation to notify the Superintendent of Companies of any changes in its shareholders’ structure within eight working days from the registration of the share transfer of in the company's corporate books.
Publicly traded companies cannot introduce higher reporting thresholds, but according to the bylaws, shareholders may establish lower thresholds. Private companies are not permitted to introduce different rules.
Dealings in derivatives are not prohibited in Ecuador.
The Superintendent of Companies must authorise the issue of securities, based on a prior report by the Superintendent of Market Power Control.
If the amount of securities to be acquired by an individual can be converted into a number of shares representing the establishment of control of the company, the acquisition of securities must receive the approval of the Superintendent of Companies prior to the favourable opinion of the Superintendent of Market Power Control.
There is no legal obligation for the shareholders to make public the purpose of their acquisition or their intention regarding control of the company.
During a public offering, the target is required to disclose the acceptance of the offer within the three working days following the acceptance term detailed in the offering document.
In a private deal, the target must notify the Superintendent of Companies about the transfer of shares and the price paid by the buyer within eight working days from the registry of the transfer of shares in the company's corporate books.
In private M&A deals it is usual to disclose the deal to the Superintendent of Companies during the period granted by company law.
It is usual to conduct a full-scale due diligence review during an M&A process in a negotiated business merger. This full-scale due diligence review includes corporate, labour, tax, regulatory, financial, material contracts, environmental, intellectual property and competition matters and is usually conducted by teams of specialised lawyers in each area.
In privately held transactions it is usual for an investor to require exclusivity for the limited period of the negotiations.
It is permissible and common for tender offer terms and conditions to be documented in a definitive agreement.
In Ecuador these processes take between three and 12 months, depending on the complexity of the transaction and due to the time it will take to issue the approval.
The mandatory threshold is applicable when the offer would imply taking over the control of the company.
In public transactions it is mandatory for the parties to use cash as consideration. In privately held transactions, there is no restriction on the use of cash or shares, but it is common for cash to be used rather than shares.
There are rarely transactions of this kind, although the following factors will be taken into consideration:
The Superintendent of Companies is the regulator of the offer and needs to approve it in the first instance.
There are very few transactions of this kind on the local stock market, so it is hard to define minimum acceptance conditions for tender offers.
Since tender offers are irrevocable, setting conditions for obtaining financing for the transaction is not allowed, although it is permitted in private transactions.
Usually, when parties start the negotiation of the transaction, they have a Memorandum of Understanding, including securities measures such as non-solicitation provisions and confidentiality agreements.
A bidder may start negotiations with the rest of the shareholders for the celebration of a shareholder agreement, which may include governance rights such as ‘tag-along’ or ‘drag-along’, voting limitations and participation in the directory, among others.
As a rule, Ecuadorian company law expressly permits a shareholder to vote by proxy in a shareholder meeting. The proxy may be in letter form and it is not required to be legalised. The company's bylaws can modify the general rule and require the shareholders to vote personally and not via proxy, but it must be expressly stated so.
The company's administrators or its controllers cannot represent a shareholder in a shareholders meeting.
Squeeze-out mechanisms do not exist in Ecuadorian legislation. However, shareholders who have control of the company may increase the company’s capital by diluting the minority shareholders, in which case minority shareholders cannot afford to pay for the capital increase.
It is not common to obtain irrevocable commitments from principal shareholders to vote in a certain way, although it is possible to be done with a shareholder agreement.
A bid is made public when the public offer is published on online on the Superintendent of Companies’ website for three days.
The public offer of acquisition of shares needs to include:
The bid needs to include the financial statements of the past year, which must be prepared according to International Financial Reporting Standards regulations.
In private transactions, the only documents the Superintendent of Companies requires is the letter addressed to the legal representative of the company, notifying of the transfer of shares. Yet, as mentioned above, in public transactions the only documents that need to be disclosed are the ones required by the Superintendent of Companies.
The directors’ duties in a merger must be clearly defined in company bylaws, or assigned at a shareholders’ meeting.
The directors’ duties are owed only to company shareholders, to maximise the net profit value of the company.
Under Ecuadorian law it is not common to establish special or ad hoc committees in a merger.
There are no precedents for courts deferring to the judgement of boards of directors in Ecuador.
Usually, directors require advice on legal, tax and financial matters regarding a merger.
There are no precedents concerning conflicts of interest in Ecuador.
Hostile tender offers are not prohibited in Ecuador, but they are rare.
Since hostile takeovers are uncommon in Ecuador, neither national legislation nor company bylaws have measures regarding this type of takeover.
Although there are no specific measures, there are certain limits for shareholders who take control of a company, eg, for 12 months after the takeover transaction, shareholders who benefitted from the takeover may not acquire the company’s shares at a lower unit price than that which was paid at the time of the transaction.
The bylaws of the companies include the faculties of the board of directors. Therefore, directors' duties depend on an individual company’s rules and regulations. Due to a lack of hostile takeover cases, it is not customary for bylaws to include rules regarding these kinds of transactions.
Generally directors do not have this kind of authority, although, exceptionally, a company’s regulations could allow it.
Litigation is not usual in M&A deals in Ecuador. Nevertheless, the shareholders that represent at least one quarter of the share capital of the company may challenge the decision of the majority shareholders before a court, provided that some conditions are met.
However, regarding a buyer and seller, share purchase agreements usually include arbitration clauses. It is rare that M&A deals end in litigation; most transactions are agreed abroad, so where there is conflict, litigation does not take place in Ecuador.
M&A litigation usually occurs post-closing.
In Ecuador, shareholder activism is not an important force.
It is unusual in Ecuador for activists to seek or encourage companies to enter into M&A transactions, spin-offs or major divestitures. These kinds of corporate deals usually depend on commercial or legal interests.
In Ecuador, activists do not usually interfere with announced transactions.