Contributed By Estudio Muniz
The M&A market was very active in 2018. It had the greatest first trimester of any year as the accumulated deals surpassed USD3.5 billion.
M&A transactions included several sectors, eg, retail, education, agroindustry, health and the disinvestment of infrastructure companies. The market was highly diversified, contrary to previous years, which were centred on mining and fishing.
The M&A market in 2017 was a much less active compared to 2018, as the Peruvian market slowed down to its lowest level in eight years. However, the market also diversified and had projects in retail, education, healthcare and agroindustry.
One of the biggest trends of 2017 and 2018 was the considerable expansion of the Peruvian market. M&A transactions are no longer focused on primary sectors such as fishing and mining. Activity has expanded into retail, healthcare, education, construction, etc.
Furthermore, an important consolidation process of the agroindustry sector in Peru began in 2017. This process is similar to what occurred in the Peruvian fishing sector, which went from 40 companies to seven. This development can be attributed to the sophistication of the industry in 2017 and is expected to continue well into 2019. Currently, there are approximately 25 agroindustry companies with a selling profile that could be part of this consolidation process.
Likewise, the growing presence of investment funds in the region is also a noticeable trend. Sophisticated foreign investors are in some cases preferring to invest in countries like Peru and Colombia rather than the traditional countries such as Mexico and Brazil.
In 2017, the hydroelectricity sector saw the biggest M&A deals of the year and the agroindustrial sector became a more important and sophisticated field in the Peruvian market, with several surprising deals.
In 2018, the process of consolidating the agroindustrial market in Peru became more apparent. The energy, education, healthcare and retail sectors were also active in the region.
The primary mechanisms to acquire a company in Peru are through:
Acquisition through a private stock purchase agreement is the most common form of acquisition for a simple reason: the great majority of Peruvian companies are closely held, unlisted companies. Therefore, it is usually possible to acquire a majority stake privately from a single selling shareholder.
The next type of acquisition (although a distant second) is the acquisition of a significant participation in the target entity, followed by a tender offer (mandatory once a significant participation is acquired). This structure functions well in the majority of Peruvian listed companies because, even then, only a small number of shareholders typically own companies. Furthermore, this structure allows the buyer to obtain indemnity guarantees from the first acquisition associated with any pre-closing contingencies.
The main regulator for M&A activity in Peru is the Peruvian Securities Agency (Superintendencia del Mercado de Valores) for cases in which the target entity or the bidder is a listed company subject to its regulations. In addition to the Securities Agency, the main regulators of any M&A activity will vary depending on the economic sector, specifically for highly regulated industries such as mining, fishing or aerial and maritime transportation.
In comparison to other countries, Peru has few restrictions for foreign investors. Regulations state that they may invest in any economic sector except protected natural areas and the production of weapons of war. Aside from this, there are some limitations in aerial and maritime transport and private security, but foreign investors are generally unhindered.
Currently, there are no antitrust regulations applicable to business combinations in Peru. However, there is currently a bill, which, if passed, would set certain thresholds regarding the size and market share of the companies involved in the deal. If the thresholds are met, then the transaction will require previous approval from the antitrust authority. This has raised concerns regarding its effect on the fluidity of the market and whether the threshold will be high enough to justify such control prior to closing.
The main labour law regulations investors should review are those associated with contracts, third party services, payment and health and safety. It is important to determine whether contracts are true to the actual work or service the employee is providing and does not denaturalise the relationship.
Furthermore, any service agreements with third parties should be reviewed, as Peruvian labour law regulations set forth certain circumstances by which the employees that carry out the service may claim labour benefits and rights from the contracting party. It is also important to confirm that the minimum wage is being met and the necessary withholdings, such as social security, are within regulation.
Last, Peruvian law sets very strict health and safety conditions that must be met in the workplace and their breach carries some of the biggest fines associated within labour matters. This must also be carefully reviewed.
There are national security concerns in acquisitions in Peru when any of the fixed assets of the target entities (lands, mines, energy plants, etc) are located within 50 kilometres of the Peruvian border. Foreign persons may not directly or indirectly own any fixed assets that are located within this distance of the border, including through a Peruvian company.
Nonetheless, it is possible to obtain a permit by filing a request before the corresponding ministry (this will depend on the economic sector of the activity that will be carried out in the property). The approval of such request will hinge on two variables:
This authorisation is not transferable to a buyer of the Peruvian target company. Any time another foreign company or individual acquires the target entity’s shares, the new shareholder must request authorisation from the ministry.
The most significant legal development has been the current bill for antitrust control in Peru. The proposal, which is currently awaiting approval, would require transactions between companies that already hold a certain share of the market, to obtain previous approval from the consumer protection agency to ensure that the transaction would not negatively impact consumers. This type of regulation is part of an increasing trend in Latin America, which has been implemented in other countries in the region with active M&A markets, such as Colombia and Chile.
There have been no significant changes in takeover law in the last twelve months.
It is customary for the bidder to build stake prior to launching an offer. Nonetheless, acquiring or increasing any significant participation (this is generally defined as any stake above 25%) before launching a tender offer is prohibited except for a few exceptions where:
The principal stakebuilding strategy is to acquire a significant participation in the target company through a single act. This the most common strategy due to the typical shareholding structure of Peruvian companies, which are usually closely held and have at least one shareholder with a significant stake in the company that can be acquired in a single transaction.
When launching a tender offer, it must be notified to the target entity, the Peruvian Securities Agency and the stock market where the shares are listed, accompanied by the informative offer prospect, documents that credit the offer’s guarantee, applicable administrative authorisations, offer announcement and the representative’s Powers of Attorney.
The informative offer prospect must include the identity of the shareholders of the bidder that hold over 5% of the bidder’s shares; information to identify persons that may indirectly control the bidder through upstream structuring; a detailed revelation of any agreement between the bidder and the target entity’s administration or any of its shareholders, including details of any previous acquisition of the its shares; financial information, including, on assets, sales, debt, and consolidated audited financial statements. If the bidder was incorporated in the last year, financial information shall be provided regarding its shareholders.
Furthermore, the target entity is obliged to inform the Peruvian Securities Agency as soon as it becomes aware of any plans of change of control in the company as well as the transfer of 10% or more of the capital stock. When the initial significant participation is acquired in the target company (before the tender offer), the intention to transfer control of the company is usually disclosed as a reserved matter and is only made public once the transaction closes.
As a rule, companies do not introduce higher or lower reporting thresholds in the articles of incorporation or bylaws. In any case, such provision could be included in a shareholders’ agreement, but general market practice dictates that companies follow the thresholds set forth in the statutes. Any rules included in a shareholders’ agreement must always be be at least as strict as the applicable disclosure guidelines.
Dealings in derivatives are permitted under Peruvian legislation. Listed companies may invest in derivatives freely (some investors, eg, banks, require an authorisation to invest in derivatives).
Issuers are obliged to present monthly reports to the Peruvian Securities Agency on the state of their derivates if, in accordance with international financial information regulations the issuer holds ‘derivative negotiation instruments’ and if the sum of its derivate instruments is equal to or greater than 5% of its total debt or 3% of its total operational income for the previous three months.
If the aforementioned conditions are met, the issuer must file a report with the Peruvian Securities Agency within the first ten days of each month detailing each derivative instrument.
Bidders must reveal their intentions behind the acquisition and plans for the target, such as restructuring, changes in the administration, amendments to the bylaws, whether they plan to delist the target within 18 months following the acquisition and, generally, their intention regarding control of the company.
Listed companies are required to disclose matters of importance to the Peruvian Securities Agency as soon as they occur or as soon as and no later than they become aware of the circumstances. Connected to this, a company is presumed to have knowledge of circumstances when:
Among the matters they are obliged to inform are plans to acquire a majority or controlling stake in the company, as well as the initiation of a due diligence process. Therefore, as soon as the company becomes aware (taking into account the legal presumptions) it must notify the Peruvian Securities Agency. The timing of disclosure within negotiations will depend on how the deal is structured, considering that due diligence may be initiated before any document is signed and this would have to be reported to the Agency. Likewise, once the target becomes aware of any plan to undergo a change of control, it must also notify the Agency. When an initial significant participation in the target company is privately acquired (before the tender offer), the intention to transfer control of the company is usually disclosed as a reserved matter and it is only made public once the transaction closes.
Practice on timing of disclosure does not differ from legal requirements. Companies generally follow the legal guidelines.
The scope of due diligence conducted in Peru in a negotiated business combination will almost always include tax, labour, corporate and contractual matters. These four areas are crucial in the due diligence process, as tax and labour issues can generate large contingencies in the event of a purchase and corporate and contractual review allow the buyer to determine ownership and state of the shares, as well as any necessary contractual approvals required for the transaction.
Recently, a statute has entered into force that regulates corporate criminal liability and imposes heavy fines in money laundering and corruption charges. The statute requires that companies have an adequate prevention model that will exclude criminal liability, and as a result, it has become instrumental to review this matter.
Additionally, depending on the business, environmental, municipal, sanitary, intellectual property, commercial property, consumer protection and data privacy reviews will also be conducted.
Standstills and exclusivity agreements are commonly demanded in the first phase of acquisition, which is before the tender offer is launched. In Peru, the most common structure to acquire a listed target is to acquire a significant share of the target before launching a tender offer. In this first acquisition, it is common to demand a standstill or exclusivity agreement during the process of negotiation. In practice, the requested term of these agreements is two to five years”
The terms of the tender offer will be set out in the prospectus issued when the offer is launched. These terms will not be set out in a definitive agreement. Only the terms of the acquisition of a significant portion of shares before launching the offer will be set out in a definitive agreement.
The tender offer process generally takes at least three months. First, the bidder must request that the Securities Agency appoints a valuator to appraise the shares, which could take up to 20 days; then the valuation process lasts approximately one month and, finally, the tender offer must be available for a minimum of 20 days.
Tender offers in Peru may be launched before or after acquiring a significant stake in the target company (subject to certain terms and limitations). When the offer is launched before acquiring a significant stake in the target, there are no applicable offer thresholds. However, if the bidder acquires a significant stake in the target before launching the tender offer, then the offer must be made for a minimum number of shares, which are calculated by a formula that takes into account any participation in the target company acquired in the last three years, third-party participation before the acquisitions and the current third-party participation. (X/Y) x (1-Z)
Cash is the most commonly used form of consideration in Peru. It is important to consider that when the offered consideration is cash, the bidder must offer a guarantee for the total amount of the offer in the form of readily available cash held under custody, or an irrevocable and jointly and severally liable guarantee letter.
Offer conditions are usually limited to a minimum and maximum number of shares that must be acquired by the bidder. In the event the offer is launched after acquiring a significant number of shares, then the offer must be made for a minimum number of shares, which is calculated by taking into account any participation in the target company acquired in the last three years, third-party participation before the acquisitions and the current third-party participation. (See 6.2 Mandatory Offer Threshold, above for details)
Bidders usually set a minimum number of shares to proceed with the tender offer. Generally, this number must be associated with the minimum control participation required to control the target company. Under Peruvian corporate regulations, at least 60% of the shares are necessary to control the company. However, depending on the target entity’s bylaws or any shareholders’ agreements in force, this percentage could be lower.
Nonetheless, the minimum number of shares is calculated by the Peruvian Securities Agency where a significant participation was acquired before the tender offer is launched. Here, if the number is lower than that necessary to acquire control in the target company, it will likely be increased by the bidder.
A business combination can be conditional on the bidder obtaining financing. In this case, the bidder must disclose the main terms and conditions of the financing, including form, terms and guarantees.
Bidders are restricted on seeking deal security measures by the fact that tender offers are irrevocable, and, in any case, shareholders may revoke their acceptance of an offer at any time during the term of the offer.
If a bidder does not seek to acquire 100% of a target, the remaining shareholder(s) and the bidder will likely enter into a shareholders’ agreement outlining certain governance rights. The rights sought by the bidder will depend on the percentage of the target company it eventually acquires. Under the general applicable rule in Peruvian legislation, a shareholder has complete control of a company when he or she holds 60% of the stock. It is important to point out that under the Peruvian corporate law system, shareholders are usually involved in the majority of company approvals and hold almost absolute power over company decisions.
If the bidder acquires 60% or more of the company, any governance rights will likely be aimed at protecting the minority shareholders, such as veto rights, required majorities over 60% for certain decisions, the development of a business plan, the ability to name a set number of directors, tag along rights, put options, etc.
However, if the bidder acquires more than 50% but less than 60%, he or she will not have total control over the target company, which will require negotiating the existence of a lower threshold in the decision-making process or, in the event of a 50/50 split, set forth deadlock mechanisms.
Shareholders may vote by proxy in Peru as long as the company’s bylaws permit it. Therefore, in the case of a foreign investment, it is important to include this possibility in the company’s bylaws to ease the process of holding shareholders’ meetings.
Peruvian regulations have not regulated specific mechanisms such as the squeeze out to buy shareholders who have not tendered following a successful tender offer. In terms of control, this does not generate major problems for the bidder if he or she is able to acquire 60% or more of the target entity’s shares. Any percentage above this will grant the bidder total control of the company. However, as long as there are minority shareholders in the company, it will not be possible to voluntarily delist the shares.
It is not common to obtain irrevocable commitments to tender or vote by principal shareholders. First, it is contradictory with the traditional acquisition structure in Peru, which is to acquire a majority or significant stake prior to launching a tender offer. Therefore, the bidder will already acquire the majority shareholder’s stake before the tender is initiated. Second, Peruvian legislation states that acceptance of a tender offer may be revoked at any time during the process, which means that shareholders are generally entitled to revoke their acceptance regardless of an agreement.
Listed companies are required to disclose matters of importance to the Peruvian Securities Agency as soon as they occur or as soon as and no later than they become aware of the circumstances. A company is presumed to have knowledge of circumstances (see 5.1 Requirement to Disclose a Deal, above for details).
Among the matters they are obliged to inform, are plans to acquire a majority or controlling stake in the company, as well as the initiation of a due diligence process of the company. Therefore, as soon as the company becomes aware (taking into account the legal presumptions) it must notify the Peruvian Securities Agency.
When launching a tender offer, it must be notified to the target, the Peruvian Securities Agency and the stock market where the shares are listed accompanied by the informative offer prospect, documents that credit the offer’s guaranty, applicable administrative authorisations, offer announcement and the representatives’ Powers of Attorney.
The informative offer prospect must include, among other information, the prospect must identify the shareholders of the bidder that hold over 5% of the bidder’s shares; information to identify persons that may indirectly control the bidder through upstream structuring; a detailed revelation of any agreement between the bidder and the target’s administration or any shareholders of the target, including details of any previous acquisition of the target’s shares; financial information, including, on assets, sales, debt, and consolidated audited financial statements. If the bidder was incorporated in the last year, financial information shall be provided regarding their shareholders.
Furthermore, the target is obligated to inform the Peruvian Securities Agency of any plans of change of control in the company as well as the transfer of 10% or more of the capital stock. When an initial significant participation is privately acquired in the target (before the tender offer), the intention to transfer control of the company is usually disclosed as a reserved matter and it is only made public once the transaction closes.
Disclosure of an issue of shares must be made on the date the issue occurs and the disclosure must indicate the number and value of the shares, composition, rights and classes of shares.
Bidders must produce audited financial statements in the disclosure documents. Specifically, bidders must file such statements for the last year and non-audited financial statements for the last trimester (except when it coincides with the end of the year). Likewise, if the bidder was incorporated in the last year, he or she must provide audited financial statements from the shareholders and when he or she is part of an economic group, the financial information must be consolidated.
If the bidder is a foreign company, the financial information may be audited by an auditor of recognised financial prestige and may be presented in accordance with the generally accepted accounting principles of the country of origin, as long as a report from the auditor explaining the main differences with the Peruvian system is included with the information.
In an acquisition, transaction documents do not need to be disclosed in full. Only the fact that the transaction has occurred must be reported.
Within seven days of the presentation of the offer, directors must issue a report outlining the advantages and disadvantages of the offer as well as any relevant information, such as conflicts of interest and agreements between the target company and the bidder.
In any event, director’s duties are limited in a business combination. In general, directors are liable under Peruvian legislation against the company, shareholders and third parties for damages caused with intent or grave negligence, as well as any acts made outside the scope of the bylaws and the law.
It is not common for directors to establish special or ad hoc committees because directors’ roles in an acquisition are limited under Peruvian law. They are expected to remain neutral throughout the process and have little decision-making power within the company.
There is no jurisprudence on takeovers in Peru, particularly regarding the role of directors, since it has not been especially relevant in takeover dynamics in Peru.
Directors play a relatively small role in business combinations, which is why it is not customary for directors to receive outside advice during the process.
The Conflict of interests of directors, managers, shareholders or advisers have not been subject to judicial or other scrutiny in Peru.
The concept of hostile tender offers is not common in Peru and the most common way to acquire a company is to go directly to the shareholders. This is partly because shareholders hold the most power under Peruvian corporate governance regulations. Also, although directors issue a report outlining the advantages and disadvantages of an offer, they are expected to remain fairly neutral during the process.
Defensive measures are not commonly applied in Peru. It is possible for shareholders to establish such measures in a hostile takeover situation, eg, a poison pill or to agree to apply the crown jewel defence if a tender offer is launched.
In any case, the protagonist of any defence mechanism would be the majority shareholder who controls the company. Shareholders hold almost absolute control over companies, and directors, in practice, act as instructed by their appointing shareholders.
It is not possible to identify the ‘most common’ defensive measures, as they are extremely rare. Certainly, the most reasonable strategies would be to include a poison pill in a shareholders’ agreement or to employ the crowned jewel defence (which would need to be triggered by a majority shareholder).
Defensive measures have not been regulated or analysed in Peru’s legal system. However, when trying to determine the duties of directors when enacting defensive measures, it is important to consider that agency relationships in Peruvian corporate law do not function in the same manner as common law. In civil law systems, the main agency relationship is between a majority shareholder and minority shareholders because the true control of the company (including the possibility of enacting defensive measures) lies in the majority shareholder.
Directors are not empowered to prevent a business combination. They may only outline the disadvantages of an offer in the report they present to shareholders once a tender offer is launched.
Litigation is not common in connection with M&A deals in Peru because it is highly inefficient to initiate a lawsuit. Usually, the parties will attempt to negotiate before starting any judicial process, as these can extend for many years and create greater harm and uncertainty for the parties involved.
If litigation is brought, it is usually done when a tender offer is launched, and it typically refers to matters of price. However, since a legal requirement that price shall be determined by a valuer (and always be equal to or higher than the price of any previous acquisition of a significant share) was included, litigation has become scarcer because price determination is now totally objective.
Shareholder activism is not yet an important force in Peru, but it has increased in recent years with the growing presence of investment funds in the region. Activism is generally considered a form of soft activism , which is geared towards improving relationships between shareholders and general corporate governance.
Currently, activists generally do not seek to encourage companies to enter into M&A transactions, spin-offs or major divestitures. Shareholder activism is still in its early stages in Peru.
Activists will commonly try to obtain compensation after a transaction has completed if they believe that it breaches their rights as minority shareholders. However, this usually occurs in the case of spin offs, where minority shareholders are not granted equity in a new company. In these cases, the shareholders have requested that the company be delisted, and their shares bought by the majority shareholder.