Contributed By Ferrere Abogados
The M&A market continued to be very active in Uruguay in 2018, with probably more deals compared to 2017, though the latter was a year with record-breaking values in the country’s history. Well-known international players continue to fuel the market at a steady pace with what has become regular activity in the country, in many cases fostered by a rooted economic, political and social stability, alongside a reputed legal and judicial system.
Investments from traditional sources – neighbouring countries such as Argentina and Brazil – continue to be at low levels due to difficult conditions in those markets. Asian power players (in particular China and Japan) and Western European and US companies represent a large portion of the deals, together with untraditional Latin American markets such as Colombia, Mexico and Peru.
One of the key trends of recent years has been the emergence of businesses belonging to Uruguayan entrepreneurs being of appeal to foreign investors, mainly in the technology sector.
The retail, agribusiness and technology industries experienced significant M&A activity in 2017/2018.
The two biggest transactions in 2017 were in the agribusiness sector: the sale of Weyerhaeuser's forests and industries in Uruguay to BTG Pactual for USD402.5 million and the sale of the largest, state-of-the-art slaughterhouse and meatpacking plant in Uruguay – Breeders & Packers Uruguay (BPU) – to Japanese NH Foods for USD135 million.
Major transactions in 2018 included the acquisition by Coca-Cola FEMSA (the largest Coca-Cola franchise bottler in the world by sales volume) of Montevideo Refrescos S.R.L. from The Coca-Cola Company for USD250.7 million.
The primary technique for acquiring a company in Uruguay is the purchase of shares or participations in the target company. In some cases, mainly where the buyer wants to acquire only a specific line of business of the target company, wants to limit its liability or does not want to keep two separate entities after the acquisition, the acquisition of the assets or business (called commercial establishment under Uruguayan law) is also used. There is a specific procedure foreseen by the law where the purchaser of a commercial establishment can limit its liability from the liabilities of the seller. Mergers are not commonly used as they involve a lengthy, expensive and bureaucratic procedure.
The antitrust authorities are among the primary regulators for M&A activity, with a key regulator being the Antitrust Commission, which is a body of the Ministry of Economy. In regulated sectors, antitrust matters are the charge of specialised regulators such as the Central Bank of Uruguay, the Regulator for Energy and Water Services and the Regulator for Telecommunication Services. Antitrust regulation imposes a legal duty of clearance of some covered transactions by the Antitrust Commission or a specific regulator, while other transactions with certain aspects require a prior notification.
In addition to antitrust regulations, in certain regulated sectors, companies that undergo an M&A process must obtain prior authorisation from the specific regulator – for example, the transfer of participations of a financial institution requires the authorisation of the Central Bank of Uruguay.
The Central Bank of Uruguay is a key regulator for publicly listed companies, as it regulates the securities market. However, publicly traded companies are scarce in Uruguay.
Uruguayan law ensures equal treatment for foreign and local investors, as well as the free transfer of foreign investment-related capital and profits.
In general, there are no restrictions in Uruguay with respect to the citizenship or domicile of the investors in companies, except for certain specific activities that are considered to be in the national interest. For instance, shareholders in radio transmitters and open television services must be Uruguayan citizens domiciled in Uruguay, and more than 50% of the stock and effective control in companies that are dedicated to the international transport of goods/passengers by highway must be held by Uruguayan citizens domiciled in Uruguay. Also, restrictions have recently been imposed on foreign states and sovereign funds regarding the acquisition of rural properties.
Prior authorisation from the Antitrust Commission or specialised regulator is required only for transactions that create a de facto monopoly (100% of the relevant market).
Transactions that may trigger antitrust prior notification requirements in Uruguay are acts of economic concentration that either take place in Uruguay, or whose effects unfold – totally or partially – in Uruguayan territory. Acts of economic concentration are defined by the law as those operations that entail a modification of the participating companies’ structure of control by way of merger, acquisition of shares, quotas or membership interests, acquisition of commercial, industrial or civil establishments, total or partial acquisition of business assets, and any other transaction whereby the effective control over the whole or part of the economic units or companies is transferred.
Transactions that involve economic concentrations should be notified to the Antitrust Commission or to the specific regulator only when any of the following thresholds are met:
Some exceptions are stipulated in the law, such as a 'first-landing' exception and the acquisition of companies in which the buyer already has at least 50% of the shares.
The notification needs to be filed at least ten days prior to the execution of the agreement or the effective delivery of the shares.
In the context of an M&A transaction, acquirers should be aware that employees who are terminated by the company have the right to receive compensation equal to one month's remuneration for each year (or fraction thereof) of service, up to a maximum of six months' remuneration. The employer is exempt from paying this compensation in the event of the employees' proven notorious misconduct. This amount increases in cases of dismissal during pregnancy, illness or occupational accident, for example.
If the target company is a free trade zone company, acquirers should bear in mind that, as a general rule, a minimum of 75% of the persons employed by such company must be native or naturalised Uruguayan citizens in order to maintain Free Trade Zone user status and the exemptions, benefits and rights granted by law. A recent law allows the reduction of this percentage upon Executive Branch authorisation, and also introduces certain flexibility for the services sector. Companies outside the free trade zone do not have such limitation.
The statute of limitations for labour claims is one year following the termination of employment, with five years retroactivity.
There is no national security review of acquisitions in Uruguay.
Law 19.484 was enacted in 2017, and modified the tax aspects of sales of offshore holding companies having assets in Uruguay. The sale of shares of offshore low or no tax jurisdiction companies (which are defined on a list prepared by the General Revenue Service) now carries taxation when more than 50% of its assets are, directly or indirectly, located in Uruguay. Therefore, companies doing M&A transactions through holding companies from low or no tax jurisdictions should assess potential tax impacts in this regard.
In recent years, with Law No 18.930 enacted in 2012 and Law No 19.484 enacted in 2017, with its regulations, Uruguay imposed the obligation for commercial companies and other entities based or operating through a permanent establishment in Uruguay to disclose certain information about the entity, its owners and its final beneficial owners to the Central Bank of Uruguay. Every change in the information that has been disclosed to the Central Bank has to be communicated within the timeframes established in the regulations. These disclosures to the Central Bank of Uruguay should be taken into consideration in the context of an M&A transaction. It is important to note that the information disclosed to the Central Bank pursuant to the aforementioned laws and regulations is not publicly available.
There is a draft law being discussed in Congress which, if approved, will amend the antitrust merger control system in Uruguay.
Currently, a prior authorisation from the Antitrust Commission or specific regulator is required only for transactions that create a de facto monopoly (100% of the relevant market), and transactions that involve economic concentrations should be notified to the Antitrust Commission or specific regulator only when any of the following thresholds are met:
The draft law eliminates the relevant market threshold for the purposes of obtaining authorisation or notifying the Antitrust Commission or specific regulator, but requires that all transactions that meet the gross sales threshold are authorised by, instead of communicated to, the Antitrust Commission or specific regulator. It is not yet clear whether the required gross sales amount will remain the same.
Publicly listed companies are scarce in Uruguay; basically, all M&A transactions involve privately held companies, where the terms of the transaction are negotiated between the parties. Therefore, it is not customary for a bidder to build a stake in the target prior to launching an offer.
Any person who directly or indirectly owns more than 10% of the capital of a publicly listed company, with a right to vote, must disclose such fact to the Central Bank of Uruguay and the stock exchange where the company is listed, within ten working days of obtaining such right. The same disclosure obligation applies to directors and administrators of issuers of publicly traded securities with respect to any participation they maintain in the issuer. Such disclosure must be made within ten working days of their appointment.
Also, companies that issue publicly listed securities must disclose the interests in the company held by directors or administrators, or by any person representing more than 10% of the capital with right to vote and any change of control in ownership. Such disclosure must be made to the Central Bank of Uruguay and to the stock exchange where the securities are traded.
Any change to the aforementioned information must be communicated to the Central Bank of Uruguay and the stock exchange within ten working days of its occurrence.
It is not possible for a company to introduce different rules (eg, higher or lower reporting thresholds to the Central Bank of Uruguay or to the stock exchange) in the articles of incorporation or bylaws.
However, a company could introduce different rules (eg, lower reporting thresholds) in the articles of incorporation or bylaws in order to report the stakebuilding to the company or to the other shareholders.
However, it should be noted that, due to the lack of development of the stock market, stakebuilding is not common in Uruguay.
Dealings in derivatives are allowed in Uruguay. They can be developed either in the stock exchange (publicly traded) or privately.
Under Uruguayan regulations, derivatives are considered securities and, as such, the general rules for disclosure in publicly traded securities apply. In general, securities can only be publicly traded when such securities and their issuer are registered in the Central Bank of Uruguay. Also, issuers of publicly traded securities have periodic reporting requirements with the Central Bank of Uruguay. There are no specific rules regarding filing or reporting obligations with respect to derivatives under securities disclosure or competition laws.
It is not necessary for shareholders to make known the purpose of their acquisition and their intention regarding control of the company. The only obligation a shareholder has in this regard is to disclose its ownership of more than 10% of the capital with right to vote in the case of publicly listed companies to the Central Bank of Uruguay and the stock exchange where the company is listed, within ten working days of obtaining such right.
In companies that are not publicly listed, targets are not required to disclose deals in which they are involved.
In publicly listed companies, targets are required to disclose the deal when there is an effective change of control of the target – ie, when the effective acquisition occurs. However, publicly listed companies are generally required to disclose any relevant fact that may have an impact on the price of the securities, on the decision of the investors to negotiate with such securities, or on the development of the activity carried out as a participant in the market. Therefore, if the deal or potential deal meets any of the aforementioned criteria before there is an effective change of control, the target may have to disclose it sooner.
Since there are very few publicly listed companies in Uruguay with trading activity, no statistics are available on this matter.
The scope of due diligence in Uruguay usually depends on the size of the transaction and the particular areas that may be of concern for the acquirer. However, in general, the areas reviewed in due diligence for a negotiated business combination in privately held companies relate to accounting and financial matters, contracts, corporate, data privacy, environmental, insurance, intellectual property, labour and social security, litigation, real estate and other material assets, regulatory and taxes.
Also, it is becoming more common to conduct due diligence regarding compliance with the Foreign Corrupt Practices Act (FCPA).
It is quite common in M&A transactions of privately held companies to agree on certain exclusivity periods for both parties (acquirer and seller), to prevent the parties from negotiating with third parties during such period. Such exclusivity periods are usually agreed on the binding provisions of a memorandum of understanding, letter of intent or similar, which is signed prior to commencing due diligence activities.
As there are very few publicly listed companies in Uruguay, standstills are not common.
It is not common for tender offer terms and conditions to be documented in a definitive agreement. Tender offers have to be submitted for prior approval to the Central Bank of Uruguay with certain required documentation, including a prospectus and documentation and information regarding the offeror. After the tender offer is approved, it has to be published in two newspapers containing certain relevant information. Upon the publication, the shareholders have a term to accept the offer, which is contained in the documents that have been submitted to the Central Bank and are available for the shareholders to review.
If the minority shareholders unanimously resolve to sell their shares to the acquirer that already possesses control of the listed company (when the shareholder directly or indirectly holds a percentage of shares that represents more than 50% of the necessary votes to adopt decisions in a shareholders' meeting), they can agree on the conditions for such sale in a definitive agreement and avoid the tender offer process.
In Uruguay, the typical process for acquiring/selling a business through a purchase and sale of shares or other participations is as follows:
Although this can vary widely in each case, this process can typically take from four months to one year.
In Uruguay, acquirers are mandatorily required to make a tender offer to all the shareholders of a publicly listed company in the following cases:
Cash is most commonly used as consideration in Uruguay. Consideration in shares is occasionally used in multinational deals that have portions in Uruguay.
Conditions are only allowed in voluntary takeover offers; mandatory tender offers cannot be subject to conditions. In voluntary takeover offers, the conditions allowed by the regulations are:
Tender offers are not common in Uruguay, so there are no minimum acceptance conditions that can be considered usual.
It is possible for the parties in a business combination to condition it on the bidder obtaining financing. However, a mandatory tender offer cannot be subject to the condition of the offeror obtaining financing.
The most common deal security measures used in M&A transactions in Uruguay (transactions in privately held companies) are break-up fees and non-solicitation or exclusivity provisions. It is usual to include in the preliminary agreements of the transaction that, for a certain period, neither the target company nor its shareholders will enter into any negotiations with any other party to sell, transfer or exchange any of the interests, stock or any material assets in the target. If the shareholders of the target company breach this provision and end up transferring the shares of the target to a third party, then they will have to pay the break-up fee.
A shareholder who does not own 100% of a company can generally seek representation in the Board of Directors with a certain number of directors, and veto rights over certain decisions.
In Uruguay, it is possible for shareholders to vote by granting a simple proxy to a third person. No specific formalities, such as the notarisation of signatures, are required when the proxy is granted for a specific meeting. Proxies cannot be granted in favour of administrators, directors, comptrollers and other employees of the company.
There are very few publicly traded companies in Uruguay with trading activity, and tender offers are not common in the Uruguayan market. Therefore, statistics are not available on the mechanisms employed to buy shareholders that have not tendered following a successful tender offer.
There are very few publicly traded companies in Uruguay and tender offers are not common in the Uruguayan market.
A bid is only made public in Uruguay in the context of a tender offer in a publicly listed company. The public announcement of a tender offer has to be made within two working days of the authorisation of the Central Bank of Uruguay being obtained, and is made for three days in two newspapers of wide circulation in Uruguay. The public announcement of the bid must contain certain basic information, such as the identity of the offeror and its domicile, the places where the prospectus and the documentation will be available for interested parties, the essential conditions of the tender offer, the guarantees offered in order to fulfil the offer, a description of the participation of the offeror, directly or indirectly, in the share capital of the target company and of the persons that maintain shareholders agreements with the offeror, and, if applicable, a declaration that the acquisition is an economic concentration act and may be subject to notification or authorisation from the Antitrust Commission.
In private companies, no disclosure is required for the issuance of shares in a business combination. In publicly listed companies, the securities must be registered with the Central Bank of Uruguay before they can be issued, so all information regarding the shares to be issued must be disclosed to the Central Bank of Uruguay.
In the context of a tender offer, bidders are required to produce financial statements within the disclosure documents, for the last two fiscal years, or from the date of the start of activities. The last financial statements have to be accompanied by an audit report. In Uruguay, financial statements need to be prepared according to the applicable adequate accounting standards, which are set forth in certain decrees.
In a tender offer, the transaction document that needs to be disclosed in full is the offering prospectus. There is no requirement to disclose any other transaction documents.
The principal duties of directors in a business combination are basically the same duties they have in general: the duty of loyalty and the duty of acting with the diligence of a good businessman. These duties are with respect to the company.
Also, directors have the general duty to negotiate in good faith with respect to all the stakeholders involved.
It is not common for boards of directors to establish special or ad hoc committees in business combinations.
Although there are not many judicial cases in Uruguay related to takeover situations, courts generally defer to the judgement of the board of directors for business decisions (known as the 'business judgement rule' in the US), except when there is a conflict of interest or when the board of directors acts against prohibitive or imperative rules.
Companies involved in a business combination in Uruguay usually rely on external counsel and external financial and tax consultants.
Conflicts of interest of directors and shareholders have been the subject of judicial scrutiny in Uruguay, mainly in cases where the directors or the shareholders compete with the company, or where the directors perform transactions with the company without the necessary disclosures or approvals from the rest of the directors or the shareholders.
Hostile tender offers are not forbidden in Uruguay, but are not common.
In Uruguay there are very few publicly listed companies, tender offers in general are not common, and there have been no tender offers where the directors have used defensive measures.
Taking the above into consideration, the Uruguayan Central Bank regulation on tender offers sets forth that, from the public announcement of the tender offer and until the publication of the results, the Board of Directors of the target must obtain prior authorisation from the shareholders' meeting before initiating any action that may prevent the success of the offer, except searching for other competing offers. In particular, the Board of Directors of the target cannot:
In Uruguay there are very few publicly listed companies, tender offers in general are not common and, as far as is known, there have been no tender offers where the directors have used defensive measures.
When enacting defensive measures, directors owe basically the same duties they have in general: the duty of loyalty and the duty of acting with the diligence of a good businessman. These duties are with respect to the company.
In the context of a tender offer, directors cannot 'just say no'. The board of directors of the target must obtain prior authorisation from the shareholders' meeting before initiating any action that may prevent the success of the offer, except searching for other competing offers.
Litigation is not common in connection with M&A deals in Uruguay.
See 10.1 for relevant information.
As there are very few publicly traded companies in Uruguay, shareholder activism is not an important force.
See 11.1 for relevant information.
See 11.1 for relevant information.