Contributed By SFERA
The M&A market has reduced and modified its level of activity during the last 12 months, mainly because Guatemala had general elections in June 2019, which inevitably decreased the economic activity of the country due to the uncertainty of having new authorities and, with them, new processes. Inbound work has been reduced and intra-regional M&A activities had some increased level of activity. M&A activities have been used as means to resolve family disputes.
Inbound M&A activity remained important in the region, although regional acquisitions in the M&A market saw also some of activity. The top trends in Guatemala in the latter part of 2019 were financial services, telecommunications and real estate.
Major, publicly announced transactions were the acquisition of Banco Agromercantil Financial Group by Bancolombia, Sale of Loan Portfolios between Local Banks. The use of M&A models to resolve family business disputes is also an activity which has increased in the local M&A Market.
The industries that experienced significant M&A activity in the past 12 months in Guatemala are Mining, Energy, financial services, telecommunications and real estate. Recent Court Rulings stopping mining exploration work and Hydro project construction sparked a level of M&A Activity in the Mining Sector, as several mining licences have been suspended.
In the Financial Services, modifications of Financing Companies Licences to Bank Licences has been seen, and the acquisition of Bank Participation shares by players in the Region. Investment activities for Insurance companies have also suffered acquisition process, and the acquisition of Assets in the insurance and Finance Part of the Financial Services industries have been also seen activity.
In the Telecommunications Sector the Sale of Telefonica's operations in the Region has been the major attention holder for the M&A Scenario in the Region during 2019. The real estate market saw some level of activity at the commercial level.
In regulated and licence requiring entities, the primary legal means for acquiring a company in Guatemala is through the acquisition of shares or equity participations, in the licensed entity, depending on whether is a share-based company or not. The acquisition target holds the licence, which only in rare cases is transferable, except in the Financial Sector where banks and financial companies’ shares are transferable with approval from the authorities. In other instances, such as real estate, asset acquisition is a preferred method of acquisition.
In Guatemala, the M&A of financial institutions, insurance companies and other entities controlled by such regulator is subject to the prior approval of the Monetary Board and the Superintendency of Banks. In case there is an M&A transaction of private owned companies, no prior approval is required from any authority.
In the Telecommunications Sector, the regulator is the Superintendency of Telecommunications, although regulations are not competition related, but essential and limited resources related. In the Energy Sector, the main regulator is the National Electric Energy Commission, which oversees authorisations for rendering Distribution and Energy Transportation Services.
The Registry of the Securities Market is the regulator for Securities issuers under Decree 34-96 of Guatemalan Congress, and it is entrusted with the registry of issuance of Securities and Public Offerings of Securities.
Guatemala has not yet enacted a Competition Law and there is no competition authority. A competition authority is expected within the framework of a new Competition Law mandated by Guatemala's Trade Association Treaty with the European Union and the most recent treaty with Great Britain.
There are almost no restrictions on foreign investments in Guatemala, except for certain constitutionally mandated limitations. On the contrary, Guatemala’s legal dispositions try to enhance and increase investments.
The following restrictions or differentiations do remain for Foreign Investments:
All other restrictions have been removed.
Restrictions regarding ownership in areas of Guatemala's Coast and Frontiers continues to exist in Guatemala's Constitution.
Guatemala has not approved any antitrust legislation; however, there are certain disperse antitrust provisions amongst which is Article 130 of Guatemala's Political Constitution, which prohibits the existence of monopolies and privileges, and indicates that the government shall protect the market economy and impede the associations that tend to limit the market liberty or to negatively impact the consumers.
Article 360 of the Commerce Code, Decree 2-70, indicates that all companies are obliged to do business with anyone that requests their products or services, complying with the principles of equality in treatment amongst the different consumer categories. Thus, a technical ban on price discrimination activities is deemed to exist. Remedies are unclear but an affected party may sue for damages. Little or no judicial activity to that effect exists.
Furthermore, the Criminal Code, indicates in its Article 340 that anyone that acts or commits any detrimental acts for the national economy by taking over the production of one or more industries, or of the same commercial or agricultural activity, or takes advantages of such activities through any privilege or using any other means, will be sanctioned with a prison sentence of six months to five years and a fine from GTQ500 to GTQ1,000. Only two cases have been seen regarding complaints filed before the authorities over the last ten years, and there are no specific results from the authority’s investigations.
Three issues stand out regarding labour matters in M&A:
Labour rights (salary, benefits, bonuses, vacations, unionisation and strike, etc.) are considered Human Rights, they are recognised in the Constitution of the Republic of Guatemala. Also, the country is part of the World Labor Organization (ILO) and has ratified international agreements that protect workers' rights.
Workers' rights are minimum guarantees, that more favourable benefits enhance and cannot be waived at a later stage.
Some of the most important labour laws in Guatemala are:
There are no provisions for a national security review for foreign investments in Guatemala, for either acquisitions or mergers.
In the Guatemalan Congress, a specific initiative for the regulation of the topic has been discussed for more than two years, but there are still no laws enacted in this regard.
The Constitutional Court has suspended two mining licences and a hydropower license pertaining to Minera San Rafael, a Mining Project in Izabal and a Hydro Project in Huehuetenango, which continue under constitutional court suspension. The suspensions are generally based in non-compliance of consultations required under ILO Agreement 169, ratified by Guatemala in 1995. These have had an impact on investment and in prior M&As.
There have been no regulations enacted for the purpose of determining how the consultation mechanism should be applied. The court has found insufficient consultation methods in these cases. Absence of clarity has affected investment in these areas.
Notices of Intent to present Investment Arbitrations have been filed before the Ministry of the Economy in the following Cases:
Criminal corruption cases and irregular election financing criminal cases have had an impact in the manner in which transactions are structured providing for intra parties relief and warranties in such situations in which the target or their principals or agents are targets of investigation or criminal proceedings.
Changes in the tax authorities interpretation of the tax law, in which reverse merger activities have been subject to scrutiny from the authorities, has been significant during the last years in view of treatment given to goodwill and its non-recognition as deductible and the authorities aggressive pursuit of reverse mergers.
Guatemala does not have a takeover law or any official initiative to implement a takeover law, except on the financial and insurance Sectors. A New Securities issuance law is in discussion, with provisions regarding takeover legislation and notices for publicly traded entities.
Even though the Commercial Code was recently amended, no provisions regarding takeover were amended or enacted.
Is not customarily in Guatemala for a bidder to build a stake in the target prior to launching an offer, mainly because the acquisition strategies of a target usually entail the purchase of shares of a company.
In regulated industries stakebuilding has been used as a strategy for foreign acquisition of local entities. Note that there is no regulatory difference in stakebuilding.
In Guatemala there are not any applicable material shareholding disclosure thresholds, the only legal requirement related to the share-ownership is that any corporation or limited liability company shall have at least two shareholders or equity owners.
The proposal to acquire control of a securities issuance entity in Guatemala triggers the obligation to modify the public offer registration of the securities issuance of the target when securities have been issued by such entities under the Securities Law Decree 34-96. Control means a majority of the shares of the controlled entity.
The only applicable legal filing obligations related to share ownership is the requirement for any share-based company to file a notice at the Mercantile Registry every time new shares are issued, and the mandatory offering of shares via media publications of edicts for existing shareholders to exercise pre-emptive rights existing under the Code of Commerce for new share issuance within authorised capital of a target entity prior to a third-party offering.
Before Shareholder Meetings take place, the Board of Directors or sole directors have to place the information regarding such shareholder meetings with 15 days advanced notice in the Company's place of Business. The administration of the company has to place at the disposal of the shareholders the annual accounts, including financial statements, yearly balance, management discussion and analysis report, remunerations received by management and the projection for dividend distribution 15 days prior to the annual mandatory shareholder meeting, which must take place 90 days after expiration of the annual period of the company.
The Commerce Code, Decree 2-70, stipulates mandatory and minimum reporting standards for all types of companies, meaning, each company can introduce additional reporting requirements in their articles of incorporation as long as the minimum are complied with. There aren’t any other hurdles to stakebuilding in Guatemala. Information rights are minimum requirements of the law and cannot be waived in articles of incorporation.
There are no confidential statutory rules for reporting standards but certain entities have introduced articles of incorporation mandated confidentiality rules for company information.
In Guatemala dealing in derivatives are allowed. Some derivative regulation exists under the Laws of the Securities Market and its Amendments. The only regulated derivatives are conditional and term agreements under the current Securities Law of Guatemala, Decree 34-96 and its amendments, with very general provisions in the law and no contract specific type of registration requirements, except if such derivatives are subject to public offering.
Swaps agreements and other derivatives are unregulated and, usually, allowed under innominate agreements allowed under the Code of Commerce and the Securities Law.
In accordance with the Law of the Securities and Merchandise Market, filing/reporting obligations depend on the nature of the derivatives offer. When offered to 35 persons or more, it will be deemed a public offer and certain requirements (such as registration at a Stock Exchange Registry and for the issuer to obtain a risk qualification) shall apply.
When offered to 35 people or less, it will be deemed private and the offer should be made directly to each of them. Neither the law nor the regulations contain any derivative-specific registration requirements for public offerings of derivatives.
There is no competition laws mandating the registration of derivatives or filing obligations. Acquisition or intent to acquire control for more than
Derivative agreements remain unregulated as securities, no securities disclosure exists on such agreements and when existing they are usually dealt in extra market activities under the securities law.
There is no legal obligation for a shareholder to notify the purpose of the acquisition, the only legal requirement is to inform of the intention to issue shares of the company so that existing shareholders can exercise their pre-emptive right under Article 127 of the Commercial Code.
For issuers of shares which are registered securities for public offering purposes, notice of intent to acquire shares is a requirement under Article 39 of the Securities Law with its general conditions, to the company, the registry and the exchange in which the shares are traded, with such requirements as the exchange and registry requests in addition of the price, terms of payment and amount of shares to be transacted.
The acquisition of controlling voting trusts is also subject to notices to be provided to the regulator and in any public notice of a shareholders' meeting in which such rights will be exercised.
As a practical matter, no registered public offering of shares is currently in place in the Securities Registry of Guatemala.
Only if the target is a financial institution is required to disclose a deal, preferably when a negotiation commence, to the Superintendency of Banks for its approval prior to obtaining the Monetary Board's approval. If the target is a private company and only some of its equity holders or shareholders are negotiating, there is no requirement to disclose a deal unless the company will increase its share capital in order to complete the deal.
Share capital increases are subject to a right of first refusal by shareholders which must be waived or not exercised before a third party can participate in any shareholding arising from increases in share capital of a Guatemalan entity.
The company may have a right of first refusal on any sale of shares. If this is the case, disclosure and waiver is a requirement.
In publicly traded shares or shares with a public offering, registered intent to acquire is mandatory under Article 39 of the Securities Law before the negotiation can commence and is made public to the Securities Registrar, the Exchange and the Company. As a practical matter, no company shares are currently registered and active in the Securities Registry of Guatemala.
Since Guatemala doesn’t have any practical legal disclosure requirements, the market practice does not differ, on the contrary, the market practice in our jurisdiction is to disclose once the terms and conditions of the acquisition have been agreed between the parties and the public. Disclosure is not required.
Please note that there is no offering requirement to purchase the rest of shares under Guatemalan Law. Local entities are not publicly traded and, therefore, do not have any market practice at all.
The scope of the due diligence usually encompasses corporate, tax, labour, permitting or regulatory and litigation matters of the target, its shareholders and the ultimate beneficiaries.
In Guatemala, the exclusivity is what's usually demanded in M&A transactions.
In Guatemala is permissible for tender offer terms and conditions to be documented in definitive agreements. Due to the nature of local shareholding composition, most local entities are closely held, for that reason, and lacking a share securities exchange tenders are rare.
The length of the process to acquire or sell a business will depend on several matters and most of the times, such matters depend on the parties involved in the M&A transaction; for instance, the nature of the target, if it is a financial institution, the process can take up to approximately 12 months as the approval of the authority is required prior to closing the deal.
If the acquisition of sale of the business requires the transfer of real estate, then the transfer shall be registered at the General Property Registry, which can take approximately eight business days for wholly owned entities, and one month for majority shares acquisitions which require public notice of shareholder meetings.
In Guatemala there is no mandatory offer threshold; however, if an offer is made to more than 35 persons, the offer will be deemed as public and certain mandatory requirements will apply in accordance with the Law of the Securities and Merchandise Market. Offers between existing shareholders of Local entities, even if made to more than 35 persons is not deemed a public offer.
In Guatemala, it is more common to use cash as consideration, but is also common for the consideration to be mixed, part cash and part securities, not just shares, but bonds as well.
The common conditions for a takeover offer are:
The only restriction imposed by law and enforced by regulators, is the acquisition of a controlling interest in shares of a publicly traded entity, stated above and those applicable to financial institutions and is referred to obtaining prior approval from the Monetary Board to acquire more than 5% of the shares of any institution supervised and regulated by the Superintendency of Banks.
The minimum acceptance condition for tender offers in Guatemala are as follows:
In Guatemala, it is permissible for a business combination to be conditional on the bidder depending on the financing.
There are no statutory restrictions of deal security measures, which can be negotiated. Non-solicitation agreements for employees may have some issues related enforceability against the employees because of Constitutionally mandated freedom of employment provisions and labour code provisions limiting restrictions on work. However, it is enforceable against third parties based on unfair competition, and upon registration of non-solicitation.
In Guatemala, it is usually requested for the target to appoint independent directors and for certain board of directors’ meetings to exclude management. Information rights before shareholder meetings and rights to appoint a director are usual, although elections by cumulative voting allow directors to be elected by minority shareholders based on shareholding.
Shareholders voting by proxy is permissible in accordance with Article 1687 of Guatemala's Civil Code.
There are no squeeze-out mechanisms contemplated under the law, short form mergers or other mechanisms to buy shareholders, which have not tendered. Extensive litigation has existed when attempts to force squeeze-out mechanisms available under foreign legislation when mergers are attempted.
Share capital reductions are available. Rules to select shareholders subject to reduction are ample and open, however, not generally seen in practice.
It is not common to obtain irrevocable commitments. Voting Trusts are not commonly used for such purpose in Guatemala; they are allowed under Guatemalan Law, but not commonly used due to the shareholding structure of the majority of target companies in Guatemala.
Considering that, in Guatemala, most of the target companies are private, a bid is usually made public to the rest of the shareholders after the sellers and the buyers have agreed on the terms and conditions of the transaction to exercise their right of first refusal and to the public, after the deal has closed.
There aren’t any specific disclosure requirements for non-public issuers of securities, for the issuance of shares in a business combination, other than the usual, which include the effective payment of the shares to be issued and the subsequent notice to the Mercantile Registry indicating the amount of shares paid, issued and their nominative value.
Controlling entities need to disclose the following information if the target has registered securities in the Securities registrar. When control is acquired, information regarding the controlling entity needs to be recorded as part of the public offering registration stating the following information:
There is no legal requirement for bidders to produce financial statements in their disclosure documents. As of today, most of Guatemala's medium to big companies are preparing their financial statements using IFRS.
Under Guatemala's applicable rules and regulation there is no obligation to disclose any of the transaction documents in full for private or public transactions.
In accordance with Article 171 of Guatemala's Commerce Code, the administrator shall be held liable before the company, the shareholders and the creditors of the company, for any damage caused by him or her, wilfully or by negligence. If there were many administrators, they will all be held jointly liable, except when the administrators have expressly voted against the decision that caused the damage or upon approval of management's report by shareholders if such decision was reported to shareholders.
It is common for board of directors to establish special committees in business combinations, and such committees are used to internally facilitate the transition from the acquiree to the acquirer regardless of whether some of the directors might have a conflict of interest.
Under the Code of Commerce, the administration of a company cannot be delegated and thus decisions of the Committee must be ratified and adopted as decisions of the board to become mandatory.
In Guatemala, courts do not apply the business judgement rule. In criminal proceedings, courts have applied the standard that boards have a duty of due diligence, which is completely opposite to the business judgement rule.
Accounting, tax, legal and any other advice required and that might affect the combination can be given. However, acting upon advice does not waive board liability.
A board member has a duty to abstain from discussions and decisions when and if the decision carries a conflict of interest to him or her. The acting director is subject to liability and damages, but the operation is not voided unless directly acting on behalf of two contracting parties.
Mainly, these types of conflicts are solved through ADR procedures due to the arbitral and confidentiality clauses included in the transactional documents; hence, mainly all of the conflicts are privately resolved between the parties. Contracts have been voided by conflict of interest rules, but damages litigation has been rare in courts in Guatemala for this type of cause.
Hostile tender offers are permitted but not that common in our jurisdiction, they mainly occur in relation to big targets.
Boards in Guatemala do not hold powers to use defensive measures against acquisitions in general. Board compensation is not within the powers of the board, but a shareholder has, in such manner that boards to not have at its disposal, measures that allow them to adopt disruptive or defensive measures. Again, tenders are not usual in Guatemala.
See 9.2 Directors' Use of Defensive Measures.
The directors hold the same liability and duties when enacting defensive measures as when exercising their duties.
Directors' cannot "just say no". They are subject to the decision of the supreme authority of the company, the shareholders meeting or the equity partners meeting, and the director is obliged to complied with the resolution taken by such authority.
Litigation is not common in connection with M&A deals when the acquisition is for the totality in the shares or assets of the target. Minority rights litigation is more normal when minority shareholders' rights are not protected in the deal.
Because of the fact that the deal is not made public until finalised, litigation comes after acquisition in most cases in which it arises. Typically, litigation is brought due to causes related to the price or the condition of the target and its contingencies, which is found after acquisition.
Shareholder activism is a force upon infringement of minority rights as a root cause. Due to shareholding structure it is not an important force. Shareholding tends to behave in certain entities as a dividend provision scheme in cases of utilities and other entities, in some cases with employee share participation, and the driving force is when dividends are not distributed.
Social activism does exist in Guatemala especially in the mining and hydroelectric industries. The activism is mainly referred to the implementation of the International Labor Organization (ILO) 169 Convention.
Shareholder activism does not seek any of the above stated results. Social activism seeks major divestitures and even the close of operating businesses.
Activists do seek to interfere with the completion of announced transactions, especially in reference to the M&A transactions in the mining or hydroelectric industries.