Contributed By Alemán, Cordero, Galindo & Lee (Alcogal)
In Panama, the M&A market has been active during the last 12-month period, as compared to recent previous years.
Between 2010 and 2016, the Panamanian economy experienced unprecedent growth (constantly over 5% GDP growth), which in turn led to the establishment of many foreign business in Panama. Those years were a period of significant M&A activity, particularly in the financial and industrial sector. Starting in 2018, Panama’s economic growth has slowed to about 2% to 3% GDP growth per year.
Even though those numbers are much lower to the growth the country had become accustomed to, as they are still above the world median, Panamanian companies have remained attractive targets for foreign investors. Additionally, having a dollar economy and no exchange controls has made Panama an attractive target for multilatinas.
The M&A market was very active in 2019, particularly in the financial services industry (banking) and we expect this trend to continue into 2020. The market is primarily driven by private M&A. However, in 2018 the sale of Inmobiliaria Don Antonio (Grupo Rey) to Corporacion Favorita, an Ecuadorian group was structured by way of a Public Bid (OPA).
The last year two years have seen a merger between Banco Panama and Banco Aliado, and the acquisition of Banvivienda by Global Bank. There was also an M&A transaction announced involving the acquisition of the sixth largest bank in Panama. In recent years, the telecom sector has also been very active with the acquisition made by Milicom of Telefonica and Cable Onda, a dominant player in the Panamanian market for pay-TV, internet and telephone services.
Although there are no specific driving factors behind an increase in M&A activity for the coming year, it is certainly the case that Panama’s economic growth, compared to that of the region, makes local companies attractive targets. Additionally, local companies are incentivised to consolidate when they operate in competitive industries. It is worth noting that transactions, particularly in the Central American region, tend to be structured with Panamanian holding companies who have operations in the region (such is the case of most Central American financial institutions).
It is expected that most of the M&A activity will continue to take place in the financial industry (banks, investment advisors, and insurance companies). Given the slower economic growth registered in the past two to three years, an increase in activity in the distressed asset market is also anticipated.
This being said, the outbreak of COVID-19 provides a degree of unpredictability to the market.
The financial industry (mostly mid-size and smaller banks) has experienced significant M&A activity in the past 12 months. Additionally, an uptick in M&A has been seen in the energy sector.
There were significant acquisitions by international players in the energy market approximately five to seven years ago and now those international players themselves are being purchased, which has led to the indirect change of control of several Panamanian entities.
Cash offers and standard share purchase agreements and mergers are the most common means for acquiring a company in Panama. Acquisitions in the distressed asset market are typically structured as asset purchases.
However, asset purchases in Panama are more challenging to document as the transfer of certain assets require specific formalities (public deeds, registrations, etc). Mergers are also quite common.
Panama does not have an M&A regulator per se. The primary regulator for M&A activity in Panama will depend on the nature of the business undertaken by the target company. For example, in the case of banks, the primary regulator would be the Superintendence of Banks of Panama, and in the case of broker dealers or investment advisory firms, the primary regulator would be the Superintendence of the Securities Market (formerly known as the National Securities Commission). In all cases that may result in an economic concentration, the antitrust authority (known as ACODECO) could play an important role.
Please bear in mind that the relevant Panamanian laws governing M&A include Law No 32 of 1927, as amended (the “Corporations Law”), Law No 4 of 2009 (the “Limited Liability Company Law”), the Commercial Code and the Civil Code. Additionally, industry specific regulations (banking, securities, mining, energy, etc) may come into play. As M&A activity tends to lead to taxable events, the Tax Code and its regulations are also applicable.
There are no restrictions on foreign investment in Panama. To amplify, there are no restrictions on the amount of foreign investment permitted or the nationality of said investor. There are, however, restrictions on investments in certain specified areas, such as: investments in the retail sector by non-Panamanian nationals (subject to certain exceptions), water and sewage services, radio services and transmission of electricity, among others.
The applicable antitrust legislation in Panama that applies to business combinations is Law No 45 of 31 October 2007 (as amended).
The submission of a transaction for review to the Authority for Consumer Protection and Defense of Competition (ACODECO), the antitrust regulator in Panama, is not mandatory. The economic agents interested in a “prior review” of any particular transaction may submit any transaction to the review of ACODECO, requesting their favourable opinion.
ACODECO must issue a decision within 60 calendar days after it has received all the information requested. If it does not respond in that timeframe, the approval is deemed to have been granted. ACODECO may request additional information within 20 days of the initial filing. ACODECO usually issues a resolution indicating that no additional information is needed, which triggers the 60-day countdown.
A list of documents and information has to be submitted, such as: the transaction documents, market and industry studies of the respective parties to the transaction, corporate authorisations and the background of the parties to the transaction, among others. Every document that is produced abroad has to be legalised and translated into Spanish (if the documents are in a foreign language) by a licensed translator in Panama. A technical antitrust (economic/market based) analysis has to be attached as part of the filing.
ACODECO may impose certain conditions to be complied with by the transaction or order partial or total unwinding, termination of control or annulment of acts.
On the one hand, the law has a safe harbour provision and, if the transaction receives the “favourable concept” from ACODECO, the parties may carry out the economic concentration without the risk of the legality of the transaction being questioned. On the other hand, the economic concentrations that did not voluntarily submitted themselves to prior verification, may be challenged by ACODECO or third parties within the three subsequent years after the transaction is carried out. ACODECO has the authority to investigate and challenge economic concentrations which have not been submitted to prior verification.
Therefore, whether or not a concentration has the effect or potential effect of lessening, restricting, harming or impeding free competition and free access of the economic agents will be deemed to be legal or illegal depends on an analysis of its positive and negative effects on competition, production, competitiveness, among others, in each of the relevant markets.
In the case of Panama, acquirers should be aware that, as a general rule, under the Panama Labor Code, employment relationships may terminate in any of the following manners:
In the context of an M&A transaction structured as an asset sale, it is more likely that the employment relationships would terminate either by mutual consent of the parties, or unilaterally by the employer. In the event that an employee is fired for just cause, and contests the termination, the cause would have to be proven in a labour proceeding, or the company will be ordered to reinstate the employee, with any applicable fees and penalties associated with the unjustified termination; or payment of indemnisation, backpay, and surcharges if the company does not wish to reinstate them.
Our suggestion in a transaction of this type, and in relation to those employees that will not be assumed/transferred to the acquirer’s entity(ies), our suggestion would be for them to be terminated by mutual consent ("mutuo acuerdo") if there is no justified cause for termination. The likely components of the termination payment in this scenario would be:
An employee cannot waive payment of bullet points one to three above. Bullet point four is subject to negotiation. In all cases, termination will be subject to a case-by-case analysis based on the particulars of each employment relationship.
Additionally, it is becoming more common to see golden parachute arrangements (both by way of the issuance of shares or cash), which typically include a premium for the CEO and certain key employees, payable upon the completion of a business combination. These arrangements require careful review at the moment of a business combination because depending on how they are structured may lead to labour liabilities going forward.
Generally, there are no national security review of acquisitions in Panama. Having said this, there are certain specific industries that cannot be held by foreigners, as ownership is limited to the State (for example, energy transmission, water and sewage, among others).
There have been no significant court decisions or legal developments related to M&A transactions in Panama in the last three years.
There have been no significant changes to takeover law in the past 12 months, nor is takeover legislation under review, in current knowledge, in a way that could result in significant changes in the coming 12 months.
It is not customary for a bidder in Panama to build a stake in the target prior to launching an offer.
As a general rule, there are no material shareholding disclosure schedules. However, in the case of regulated entities, in general terms, material shareholding disclosure thresholds and filing obligations are triggered whenever “control” is affected. Control may be construed as the direct or indirect power that allows the exercise of a determining influence over the administration, direction and/or policies of an entity, whether by ownership of shares with voting rights, contractual rights or other means.
It is also considered “control” whenever a person, individually or by mutual agreement with other persons, is owner of exercise rights over no less than 25% of the outstanding social capital holding voting rights. It is understood to be "control" provided that a person(s) owning any other lower percentage of the social capital has a determining or decisive influence in the management of the entity, by itself or in agreement with others, whether directly or indirectly shareholders of the entity
Corporate law does not provide for specific hurdles to stakebuilding in Panama; such hurdles, if any, are more likely the result of provisions in the articles of incorporation or bylaws of the relevant company, but are not common in Panamanian corporations.
Dealing in derivatives are allowed in Panama, though they are not specifically regulated in a meaningful manner.
Filing/reporting obligations for derivatives under securities disclosure and competition laws are not specifically regulated in Panama.
Shareholders are not generally required to make known the purpose of their acquisition and their intention regarding control of the company in Panama, except in certain regulated industries (such as banking, insurance and financial services, among others) which require prior regulatory approvals.
A takeover offer of a public company must be made to all the shareholders, with equal terms and conditions and the purchase price must be paid to all shareholders who accept the offer.
If a bidder offers to purchase more than 25% of the shares of a public company, or offers to purchase any number of shares which, as a result of said purchase, would result in the bidder owning more than 50% of the issued and outstanding shares of the public company, the offer must be subject to the public tender offer rules under the securities laws.
If the tender offer will result in the bidder owning more than 75% of the issued and outstanding shares of the public company, the offer must be made for all shares of the target which are not owned by the bidder.
In the case of private targets, any disclosure will depend on the articles of incorporation or any applicable shareholder agreements.
Market practice on timing of disclosure does not materially differ from legal requirements.
The scope of due diligence usually conducted in Panama in a negotiated business combination is fairly standard, including tax, legal, financial, environmental, among others, depending on the nature and activities of the target entity.
Standstill and exclusivity arrangements are becoming more common in M&A transactions in Panama.
It is permissible for tender offer terms and conditions to be documented in a definitive agreement.
The duration of an M&A process in Panama will vary greatly, mostly depending on the complexity of the transaction and whether it is in a regulated industry. The average process for a regulated entity would generally take between four to six months between signing and closing.
In a public M&A structured through an OPA (Oferta Publica de Acciones), once a purchase is attempted of over 25% of the issued capital, or an amount of shares that would make the purchaser hold over 50% of the issued capital of a company, an OPA would be triggered, which would require that all shareholders are offered the opportunity to sell their respective shares. As soon as the OPA is launched, trading on the shares will be temporarily suspended.
Cash is more commonly used in Panama as consideration. Having said this, consideration can also be equity in a different entity or any other chattel property.
There is no specific M&A regulator, however, in regulated entities such as banks, broker dealers, insurance companies, etc, the regulator will analyse the conditions included in takeover offers as part of its analysis when deciding whether to approve the transaction or not. With respect to public tenders, the offer has to be open for at least 30 days.
Public tenders can be conditioned on a minimum amount as a condition for the offer to be effective.
A business combination can be conditional on the bidder obtaining financing. It is not typical to see transactions conditioned on the bidder obtaining the required financing. In fact, it has become common that sellers request assurances that the bidder will have the required funds at closing.
M&A financing in Panama is typically carried out by local or international banks. In Panama, there is no limitation on international lending. Less frequently, M&A transactions are financed by way of local or international securities issuances. The Panamanian securities market has grown substantially in the past few years and is able to accommodate larger transactions that would previously have taken place outside Panama.
It has become more common to see break-up fees included in M&A transactions. In a public tender offer, any person can launch a competing offer. Additionally, any holder of shares can revoke its acceptance at any time while the tender is open.
If a bidder does not seek 100% ownership of a target, then the bidder can seek any additional governance rights with respect to a target that would not result contrary to law of public policy, including voting arrangements, management provisions, special majority decisions at the board and shareholders level, among others.
It is possible for shareholders to vote by proxy in Panama.
Squeeze-out mechanisms, short-form mergers or other similar mechanisms are not commonly employed to buy shareholders that have not tendered following a successful tender offer. The viability of these mechanisms are unproven and may be questionable under Panama law.
It is not common to obtain irrevocable commitments to tender or vote by principal shareholders of the target company.
How and when is a bid made public? In a public company, a bid is made public once a purchase is attempted of over 25% of the issued capital or an amount of shares that would make the purchaser hold over 50% of the issued capital of a company. This would only apply to shares that are registered at the Superintendence of Capital Markets (the “Public Bid”).
As a general rule, applicable to corporations, pursuant to Article 13 of the corporation’s law of Panama, to the extent the articles of incorporation of the company do not provide otherwise, each shareholder has a first right of refusal to subscribe to new shares issued by virtue of a capital increase of the company. in the same proportion of shares said shareholders hold.
In light of this, if the company intends to increase its capital and issue new shares this must be disclosed to the existing shareholders of the company in order for them to be able to exercise their first right of refusal.
Moreover, in respect of companies whose shares are registered with the Superintendence of Capital Markets (SCM), pursuant to Accord No 3-2008 on “Relevant Events Communications” (Comunicados de Hecho de Importancia), whenever there are mergers or consolidations that involve the issuer of the shares registered with the SCM, said events shall be communicated to the SCM and to the public.
This communication shall include information on the form, means and times set forth in the aforementioned Accord, and provided on the working day following the approval of the merger or consolidation by the Board of Directors of the company that is a registered issuer with the SCM, and the workday following the approval by the shareholders of the companies that are part of the merger or consolidation.
If the companies involved in the merger or consolidation are subject to other regulations, these shall issue the Relevant Events Communications on the following workday, in accordance with the provisions set forth in the corresponding regulation.
Until the public communications have been made, all persons involved in the merger or consolidation process of a registered issuer with the SCM are subject to the privileged information provisions established in the Panama Securities Laws and to the criminal provisions that may apply.
Once the merger, consolidation or spin-off agreement has been recorded with the Public Registry of Panama, a copy of it must be sent to the SCM within the two business days its registration date.
Additionally, when a public bid is launched the SCM must be sent the following principal documents: prospectus or offering document, guarantee of the public bid, a draft of the announcement to be published, the contracts part of the offer, the corporate authorisation of the offeree and the financial statements for the previous three years of the offeree.
In a public bid, the bidder needs to provide audited financial statements for the previous three years. Listed companies and financial institutions are required to use IFRS or US Generally Accepted Accounting Principles (US GAAP), pursuant to regulations issued by the Superintendence of Banks and the Superintendence of Capital Markets. Insurance companies are required to apply IFRS.
If the bid in question is a public bid, then all transaction documents must be disclosed in full. All transaction documents need to be sent to the recipients of the offer as well as a document which summarises all aspects of the proposed transaction.
Panama’s Commercial Code, Article 444 (which applies generally to commercial legal entities, including Panamanian corporations), establishes that directors are, in general, not personally liable for the obligations of the corporation, but may incur personal liability for:
Directors duties are owed only to the company shareholders. However, if a dividend or distribution of assets is declared such that the value of the assets of the company is reduced to less than the amount of its debts, a director will be jointly and severally liable vis a vis the creditors of the company for any resulting harms, taking into account:
Depending on the size of a company and its board, it is common to have committees whose role it is to asses business combinations, as a strategic matter, prior to a transaction taking place and at a later time in order to successfully integrate or transition the business.
There is no similar concept in Panama except that directors must act with the prudence of a bonus pater familias, which is analogous to the standard of care of a reasonable person.
Typically, tax, legal and financial advice is typically given to directors in a business combination. It is fairly common for companies to have corporate governance consultants which are also, typically, asked for advice in the context on business combinations.
There is no awareness of any conflicts of interests of the directors, managers, shareholders of advisers and, as such, none are the subject of judicial or other scrutiny.
Typically, the bylaws of Panamanian companies expressly allow that directors enter into business with the respective company whose board they sit on. Nonetheless, recently it has become more common for Companies to include in their bylaws that, in the event that a director has a conflict of interest, they should abstain from participating in the decision being taken.
Hostile tender offers are permitted in Panama. However, public tender offers are possible only with respect to shares registered with the Superintendence of Capital Markets. Current knowledge provides that all public bids that have taken place (which have not been many) have not been hostile.
The Securities Laws do not permit that the issuer, or anyone else, purchase shares while a public bid is open.
There is a poison pill mechanism included in the Securities Laws of Panama but it is only applicable in a particular set of circumstances that would make public bids of those companies near to impossible. This would only apply to companies:
Local laws and regulations do not include any specific director duties when enacting defensive measures.
There is no provision for directors to be able to "just say no". In a public tender, the offer is made to each individual shareholder and, as such, the directors cannot control whether a shareholder decides to sell its shares.
Shareholder litigation is uncommon in connection with M&A deals and there has not, as yet, been any case in which a shareholder has intended to block a transaction. In certain transactions, litigation brought by a third party with the intention to cause a material adverse effect that would impede closing has been seen.
As mentioned in 10.1 Frequency of Litigation, litigation is fairly uncommon, but if it were to occur, this would typically be once the transaction is completed. If the plaintiff is able to prove irreparable harm, they may be able to obtain an injunction, which could, in theory, prevent a transaction from going forward until the merits of the litigation are passed upon.
Shareholder activism is not an important force in M&A in Panama.
This is not applicable in our jurisdiction.
As mentioned, shareholder activism is not common and, as such, we don’t see activists interfering in transactions prior to completion.