Corporate M&A 2024 Comparisons

The mergers and acquisitions (M&A) market in Costa Rica is increasing, and in 2024 showed a rebound compared to the previous year. However, it has not returned to how it was before the COVID-19 pandemic.

Most M&A transactions were seen in the tourism, services and retail sectors.

The crisis caused by the pandemic meant that companies that were for sale could not finally be sold due to a lack of interested buyers. Some companies that were looking for buyers have been unable to get offers for the prices they had determined before the pandemic.

While there is no publicly available data on this matter, not many high-value transactions have been seen in the market. The majority of transactions (by volume) have been acquisitions of local companies.

In the last 12 months, M&A have occurred mainly in the tourism, services and retail sectors.

In Costa Rica, a company can be acquired through a stock purchase, an asset purchase or a merger.

The purchase of company shares must be previously approved by the Commission to Promote Competition, provided the transaction meets the thresholds determined by law (see 2.4 Antitrust Regulations).

In the case of a company that lists its shares on the stock market, the purchase of shares (in addition to complying with the prior approval of the Commission to Promote Competition) must comply with the public tender offer procedure and be previously approved by the General Superintendence of Securities.

In some cases, sellers have set up foreign holding company structures and require the acquirer to purchase the shares of one of those foreign holding companies.

Stock purchases tend to be the most frequent acquisition mechanism, for different reasons. From a legal and regulatory point of view, where the shares of a company are acquired, it is not necessary (in general) to process permits, municipal patents or other authorisations again. From a tax point of view, the capital gain that is generated for the seller has a slightly more favourable treatment.

Where the seller offers the shares of an inactive holding company abroad, this can generate a series of problems for the buyer – for example, having to dismantle a structure that does not make business sense. It can also generate problems as regards applying tax treaty benefits in the country of origin, or cause problems with applying income tax credits due to the excessive number of layers.

In all cases of purchase of shares where there is a change of control of the company, in principle the transfer tax must be paid on the real estate owned by that company.

Conversely, the purchase of assets must be carried out through a specific procedure included in the Code of Commerce (essentially notifying the public of the transaction and in principle depositing the consideration before a notary public in escrow) and likewise must comply with the prior approval of the Commission to Promote Competition.

The tax treatment of asset purchase deals is arguably the most penalised, as capital gains on assets used in the business are typically taxed as ordinary income, and the seller must then pay tax on the distribution of dividends to receive the consideration. In this case, the tax on the (indirect) transfer of real estate or vehicles is also generated.

In the case of a merger, share capitals are combined with one of the merged companies prevailing or creating a new one. In the case of a merger where there is a change of control of the company, in principle the transfer tax must be paid on the real estate owned by that company.

Finally, regarding cross-border mergers, it is important to indicate that mergers between Costa Rican companies and foreign companies are currently regulated on guidelines issued by the National Registry, requesting the appearance of the legal representative of the foreign company. In a cross-border merger by absorption where the foreign entity is prevailed, it is mandatory to appoint an empowered agent to represent the foreign entity in Costa Rica.

The Commission to Promote Competition is the primary regulator for the purchase of companies through the purchase of assets, shares and mergers.

The General Superintendence of Securities is the primary regulator for the purchase of shares of companies whose shares are listed on the stock market.

The Superintendence of Telecommunications is the primary regulator for the purchase of companies that operate in the telecommunications sector.

The General Insurance Superintendence is in charge of authorising the total or partial transfer of an insurance portfolio.

The National Council for the Supervision of the Financial System and the General Superintendence of Financial Entities authorise those transactions that may imply a prudential risk to the financial system.

In general, in Costa Rica there are no restrictions on foreigners from participating as shareholders in the capital stock of Costa Rican legal entities. A notable exception is the Law on the Maritime Terrestrial Zone, which prohibits granting concessions to:

• foreigners who have not resided in the country for at least five years;
• entities incorporated in the country by foreigners; and
• entities whose shares, quotas or capital correspond more than 50% to foreigners.

Similarly, the Law Authorising Autonomous or Parallel Electricity Generation requires that companies dedicated to private electricity generation must have Costa Rican partners that own at least 35% of the company’s capital stock.

The Law for Strengthening the Competition Authorities of Costa Rica, through the Commission to Promote Competition, encourages and promotes the improvement of the competition process and free competition in the market, and eliminates and avoids distortions or entry barriers.

Economic concentration is defined quite broadly and includes the merger, acquisition and sale of a commercial establishment, strategic alliance, or any other act or contract, by virtue of which the relevant companies, associations, shares and capital are concentrated. This also includes securities, trusts, management powers or assets in general that are carried out between competitors, suppliers, clients or other economic agents, which have been independent of each other and which result in the lasting acquisition of economic control by one of them over the other(s) or in the formation of a new economic agent under the joint control of two or more economic agents, as well as any transaction through which any natural or legal person, public or private, acquires control of two or more independent economic agents among themselves.

The Commission to Promote Competition must be previously notified of those concentrations that, in addition to complying with the elements indicated in the previous paragraph, meet all the following criteria.

• At least two economic agents who carry out or have carried out activities with an incidence in Costa Rica at any time during the two fiscal periods prior to the transaction are parties to the transaction. An incidence is defined as having or having had sales or assets in the country.
• Either the sum of the gross sales or the sum of the productive assets in Costa Rica, of the economic agents involved in the transaction, have reached, during the previous fiscal period, amounts equal to or greater than 30,000 base salaries (approximately USD27 million, though this will vary depending on the exchange rate).
• Individually, at least two of the economic agents involved in the transaction have generated gross sales or have productive assets in Costa Rica during the previous fiscal year, for amounts equal to or greater than 1,500 base salaries (approximately USD1.3 million, depending on the exchange rate).

The foregoing also applies to successive transactions that are perfected within a period of two years and that in total exceed the thresholds established in the second and third point above.

Acquiring a company involves two scenarios for the personnel of the company, as follows.

• Employment substitution – in accordance with the Costa Rican Labour Code, it is feasible that the acquiring company maintains the employees through a change of employer but with the same employment contract. This implies that the acquiring company must keep all the original employment conditions of such employees and will also have a joint liability – for six months – in the event of termination of the employment relationships.
• Termination of the employment relationships of the employees, with employer’s responsibility. This involves the payment of prior notice, severance indemnities, vacation days and Christmas bonuses. Eventually, it would also involve rehiring such employees, or hiring new ones, though these personnel can agree to new and different conditions (ie, salaries, shifts, among others).

On the other hand, in some acquisitions the acquirers request as part of the agreement to keep some key employees (in some cases the former shareholders) of the company for several years, because they are deemed important for the operation of the company or to avoid competition.

There is no national security review process for acquisitions in Costa Rica.

As a consequence of Costa Rica’s adherence to the Free Trade Agreement with the United States, in 2008 a series of reforms was implemented to allow the opening of the telecommunications and insurance markets, which were previously in the hands of the state.

Likewise, as part of the country’s adherence to the Organisation for Economic Co-operation and Development (OECD), in 2019 the Law for Strengthening the Competition Authorities of Costa Rica was approved, aimed at strengthening the functions of the Commission to Promote Competition with:

• the control, sanctioning and regulation of competition;
• the obligation to obtain prior authorisation for any transaction that meets the thresholds established in the law (prior to the reform, notification could be made after the transaction);
• the protection of the market from anti-competitive practices; and
• the promotion of competition.

Likewise, the amounts of penalties for non-compliance with the law were increased.

In 2016, the Minority Investor Protection Law was enacted, which reformed the Commercial Code to include the obligation of prior approval by the board of directors or the assembly of partners for those transactions carried out by a company which acquires, sells, mortgages or pledges assets of the company representing 10% or more of the total assets.

There has been no change in this regard, and no changes in the future are contemplated.

It is not customary for a bidder to build a stake in the target prior to launching an offer. In M&A transactions of companies whose shares are not subject to public offering, there is a practice by some advisers of buying a stake (and sometimes even all of the company’s shares) and then sprucing it up and finding a buyer for it.

In general, there is no obligation to disclose shareholder interests, except for the obligation in the ultimate beneficial ownership statement that is submitted to the Central Bank of Costa Rica. In addition, the company would have to reveal who its shareholders are if requested to do so by a judge or a competent authority.

There are no significant hurdles to stakebulding in Costa Rica. The disclosure duties and applicable thresholds are determined by law or regulation and cannot be modified by company by-laws or shareholder agreements.

In Costa Rica, trading in derivatives is permitted, but is not a common practice in the market.

There are no specific reporting obligations for derivatives under securities or competition laws. However, where a shareholder has derivatives that give the right to the acquisition of shares or to the subscription of shares, or that are convertible into shares, these derivatives must be considered to determine the participation that this shareholder has in the company.

Disclosure of the purpose of shareholders’ acquisition and their intention regarding control of the company is not required.

In the case of companies that list their shares on the stock market, the General Superintendence of Securities’ regulations apply. According to the Regulations on Public Offering of Securities, the offeror must submit its request for a public offer of acquisition to the General Superintendence of Securities. Where the Superintendence authorises the offer, the temporary suspension of the negotiation of securities affected by the offer will be ordered immediately, indicating that it is due to the presentation and processing of a takeover bid.

The Superintendence will communicate the suspension as a relevant fact to the respective stock market, which will disseminate it to the market participants and the affected company.

The suspension will be lifted the day after the publication of the announcements of the public offer.

The board of directors of the affected company must notify the shareholders of the existence of the authorised takeover bid, within a maximum period of three business days from the date on which the Superintendence notifies the relevant event.

Companies that do not list their shares on the stock market are not obliged to make public announcements; however, for a transaction to be perfected, they must normally obtain approval from the antitrust authority.

Market practice does not differ from the legal requirements. Usually, the relevant parties do not make a transaction public before having a firm agreement, so as not to generate uncertainty for the collaborators of the target company.

Normally, financial/accounting, tax, labour, real estate and legal diligence is carried out. Less frequently, operational and technological aspects are included. The scope of due diligence has not been impacted by the COVID-19 pandemic. In any case, identifying relevant aspects for a purchase decision are key, with emphasis on identifying and evaluating factors that affect the purchase price or the purchase decision.

These types of clauses are commonly included in the terms sheet or in the letters of intent for the purchase and sale of shares of a company. This seeks to prevent information on the purchase and sale of shares from being made public through the inclusion of confidentiality clauses, and to temporarily prevent the sellers from looking for other buyers interested in purchasing their participation.

Definitive agreements are not common. Normally a non-binding letter of intent is signed, due diligence is subsequently carried out, and later a negotiation phase is entered into, in which the final key aspects of the sale-purchase agreement are defined and agreed on.

The length of the process for acquiring or selling a business in Costa Rica will vary depending on the number of authorisations required. If the acquisition requires approval from the antitrust agency, the process may take up to a year. If the business is publicly listed and the approval is made through a takeover bid, such procedures could take up to six months. In general, for a transaction that does not require approval from the Commission to Promote Competition or a regulator, the term is four months.

There were no delays or impediments to the closing processes due to the COVID-19 pandemic. Government offices continued to provide services virtually and most have already returned to face-to-face work.

In Costa Rica, there are mandatory offer thresholds for companies whose shares are admitted to public offering. These thresholds depend on the participation percentage that the offeror wishes to achieve:

• if the offeror wishes to achieve a participation equal to or greater than 25% but less than (or equal to) 50%, the offer must be made on a quantity of securities that is at least 10% of the capital stock of the target company; and
• if the offeror wishes to achieve a participation of more than 50%, the offer must be made on a quantity of securities that allows the offeror to reach at least 75% of the target company’s capital stock.

In the case of private companies, there is no threshold determined by law that obliges them to make an offer for a certain number of shares.

The most frequent form of consideration in Costa Rica for the shares or assets of acquired businesses is cash, often obtained through financing. There have also been transactions where a stock swap has occurred, but that is certainly not the most common mechanism.

The most common way to determine the price in Costa Rica is to apply a multiplier to the company’s EBITDA. Holdbacks or escrow accounts are often used to guarantee the buyer in case events occur that could mean a significant outflow of cash from the company, especially tax contingencies. Legally, it is possible to establish earn-out mechanisms where the purchaser pays a lower price at the beginning and can establish metrics with sellers, which, if they are met, could increase the price payable to sellers.

The legislation contains a fairly detailed description of the conditions that must be included in a takeover offer from a publicly traded company. The main conditions are the following:

• participation which the offeror owns directly or indirectly in the target company;
• participation in the shares with voting rights of the offeror company that the target company owns;
• disclosure of the agreements between the offeror and the board of directors of the target company, and specific advantages that the offeror has offered to the members of the board of directors of the target company;
• information on the activity and economic-financial situation of the offeror company;
• indication of the values to which the offer extends;
• consideration offered – where shares are offered, an independent valuation of the offering company must be included;
• maximum number of securities to which the offer is extended, and, where applicable, the minimum number of securities on whose acquisition the effectiveness of the offer is conditional; and
• guarantees constituted by the offeror for the settlement of the offer.

The public offer for the acquisition of securities must be previously authorised by the General Superintendence of Securities.

In acquisitions of companies whose shares are not listed on the stock market, it is common to find that the buyer makes it a condition that some key management positions of the acquired company remain in their position for at least a transition period. Also common are agreements where it is permitted to use brands or emblems of the selling company, also during a transition period. In addition, non-compete clauses are usually established.

The Commission to Promote Competition has, on occasion, intervened to reduce the scope of non-compete agreements.

The takeover bids that have taken place in Costa Rica have typically been conditioned on acquiring a controlling stake in the target company.

In the acquisition of private companies, it is possible to make the combination conditional on the acquirer obtaining the necessary financing for the payment of the shares. There are some cases in which the seller finances the buyer and liens the shares sold or the assets of the company itself.

It is not possible to make a business combination conditional on the bidder obtaining financing in the case of listed companies. Anyone who issues a public tender offer is required to deposit the consideration (be it cash or stock) being offered to the public.

Generally speaking, there are no limitations on the type of business security measures the buyer may request, including break-up fees, match rights, force-the-vote provisions and non-solicitation provisions.

Notwithstanding the foregoing, there is a legal limitation on the maximum penalty clause, which cannot exceed a quarter of the amount of the principal obligation. There are no new contractual considerations or changes to the regulatory environment for managing pandemic risks in the interim periods.

For acquisitions of companies whose shares are not admitted to a public offer, the bidders usually sign shareholder agreements with the minority shareholders where the bidders are granted the right to choose certain members of the board of directors of the company as well as positions of the administration of the company.

Another measure that may be taken is to eliminate from the by-laws of the company the cumulative voting system contained in the Commercial Code for the election of the members of the board of directors. According to the Commercial Code, each shareholder has the number of votes corresponding to their shares multiplied by the number of members of the board of directors that must be elected. A shareholder can distribute their votes in the way they want among the members of the board of directors that are going to be chosen. This mechanism is designed to allow minority shareholders a greater possibility of appointing members of the board of directors. In principle, the Commercial Code prohibits the board of directors from being renewed partially or in a staggered fashion if, in this way, the exercise of cumulative voting is prevented.

In Costa Rica, in cases of companies whose shares were admitted to public offering, the acquirers have generally acquired a supermajority of votes, which allowed them to take control of the company and its governing bodies.

The representation of partners in the assembly can be carried out through power of attorney, granted to any person, whether a member or not. The authentication or apostille of the power of attorney is not mandatory for it to be valid in Costa Rica. The Commercial Code regulates the figure of representation by means of a power of attorney, and it can also be regulated under the by-laws of the company.

In limited liability companies, the law requires that when a partner wants to transfer their participation to a third party, they must obtain the prior unanimous and express consent of the partners. Where the consent is not granted, the other partners have a right of first refusal. Where none of the partners exert their right of first refusal, the seller will be free to transfer their participation to another party.

For corporations, the articles of incorporation may state that the transfer of shares can only be done with the authorisation of the board of directors. This clause is not commonly included in articles of incorporation.

Costa Rican legislation allows dissident partners from merger agreements that generate an increase in liability the right to withdraw from the company and obtain the reimbursement of their shares, according to the average price of the last quarter, if they are listed on the stock market, or in proportion to the social capital resulting from an expert estimate. The declaration of withdrawal must be communicated to the company by means of a certified letter or by another means of easy verification, by the partners that intervened in the assembly, within five days following the registration of the agreement in the Mercantile Registry.

The rights of “tag along” or accompaniment agreements and “drag along” or drag agreements are not regulated in Costa Rican legislation, though they can be agreed upon by the partners in the social agreement or through shareholder agreements. The National Registry is not registering drag agreements due to the constitutional principle of inviolability of private property.

It is possible to negotiate these types of commitments, but this is not common. Where the buyer wishes to be part of the shareholders’ meeting of the target company, the shareholders can grant them a power of attorney so that they may participate directly.

In the letters of intent or term sheets, irrevocable commitments can be included, as throughout the negotiation process.

For public tender offers, the declarations of acceptance are irrevocable, and where the acceptance is subject to a condition, this will be invalid.

In a private offer, it is not mandatory to make the purchase of shares public. Usually, the parties make the purchase public when it has been authorised by the Commission to Promote Competition. When assets are acquired, the sale of a commercial establishment must be published in the Official Gazette (La Gaceta) three consecutive times, in order to summon creditors and interested parties wishing to assert their rights within the 15 days from the first publication. Conversely, for a merger, an extract of the merger deed must be published once in the Official Gazette.

In a public offer to purchase shares, the offeror must publicly and generally disseminate the offer, within a period of five business days from the communication of the authorisation by the General Superintendence of Securities.

Advertisements must be published in two national circulation newspapers, twice during the term of the offer with the periodicity indicated in the authorisation agreement. Likewise, the sending of the offer prospectus must be notified to the stock exchanges in which the securities are admitted to trading. In addition, copies of the explanatory brochure of the offer must be made available to interested parties, depositing them at least in the stock exchanges in which the securities are traded, at the domicile of the offeror and in the stock exchange positions acting on behalf of the offeror.

The only disclosure requirement for the issuance of shares in a merger is a publication in the Official Gazette for the purpose of registering the document in the National Registry. Likewise, when a merger takes place, an edict must be published once in the Official Gazette. In addition, when a merger meets the thresholds of the Commission to Promote Competition, the request for prior authorisation must be submitted, which will be publicised by the Commission:

• indicating a brief description of the concentration;
• identifying the economic agents involved and the markets affected by the concentration; and
• with an express indication to interested third parties that, within a period of ten business days, they may present the relevant information and evidence for the purposes of the analysis of the concentration by the Commission.

For a company that lists its shares, capital increases must be registered in the National Registry of Securities and Intermediaries, fulfilling a series of requirements. Likewise, a merger that leads to the disappearance of a company that is the issuer of publicly offered shares, or that is the issuer of publicly offered securities that directly or indirectly give the right to the acquisition of shares of said company, will require the presentation of an offer. Public acquisition by exclusion, addressed to owners who disagree with the merger, must be previously approved by the Superintendence of Securities.

Disclosed financial information comes from the company that is the object of the transaction. Accounting in Costa Rica must be carried out according to the International Financial Reporting Standards (IFRS), since these are the rules based on which the auditor of the financial statements must give an opinion. For financial entities supervised by the Superintendencia General de Entidades Financieras (SUGEF), the regulator establishes specific accounting regulations that may differ from the IFRS.

During the process of obtaining the prior approval of the transaction by the Commission to Promote Competition, presentation of the certified copy of the closing contract of the transaction with authenticated signatures is sometimes requested, excluding or modifying clauses considered not applicable by the Commission.

The main responsibilities or duties of the directors in a merger are determined by the Commercial Code, which indicates that the legal representatives of the entities that intend to merge must prepare a merger project, indicating:

• the terms and conditions of the merger;
• how to carry it out; and
• any other facts and circumstances that are necessary in accordance with their respective corporate deeds.

Likewise, notably the merger agreement must be approved by an extraordinary assembly, which must be called by the directors.

However, the liability of the directors and officers, and the rights and actions against them, will not be affected by the merger.

The Law for Strengthening the Competition Authorities of Costa Rica obliges the legal representatives of the merging companies to request prior approval of the merger when it meets the requirements of the law.

For companies that list their shares on the stock market, when there is a merger, and once the agreements have been reached by the companies, the legal representative must submit to the General Superintendence of Securities a notarial or registry certification of the merger agreement approved by the extraordinary shareholders’ meeting. Where a new company is created, a certification of the corporate deed of the prevailing entity registered by the National Registry must be presented. Likewise, the documentation required for the modification of emissions must be presented.

It is not common to establish special or ad hoc committees on mergers. Where a director has a conflict of interest, Costa Rican legislation prohibits said director from exercising a vote.

Costa Rican courts only differ from the criteria of the board of directors when the decision has been made by a manager who has a conflict of interest, who by law must abstain from voting.

The directors and other administrators are obliged to comply with the duty of diligence and loyalty, taking into account the best interest of the company and of the shareholders, and will be jointly and severally liable to the company for damages derived from the non-observance of such duties imposed by law and statute, unless attributed specifically to one or more directors or administrators.

The directors or administrators will also be jointly and severally liable where they have not monitored the general progress of the management or where, being aware of harmful acts, they have not done everything possible to prevent them from being carried out or to eliminate or mitigate their consequences.

However, there will be no responsibility where the director or administrator has proceeded in execution of agreements of the shareholders’ meeting, as long as they are not notoriously illegal or contrary to the statutory or regulatory norms of the company.

Responsibility for the acts or actions of directors or administrators does not extend to those who, being immune from guilt, have had a dissent recorded in writing without delay and gave immediate notice of it, also in writing, to the prosecutor; nor will a director who has been absent in the act of deliberation be responsible.

The directors and other administrators will be jointly and severally responsible, together with their immediate predecessors, for irregularities which they have incurred in management, if at the time of knowing of them they do not report them in writing to the prosecutor.

For public acquisition offers, the administrative body has information duties towards the shareholders; in the case of failure to comply with said duties, the directors will be criminally, administratively and of any other nature responsible.

Usually, the opinions of external auditors are used, and they render reports and certifications that are kept within the transaction documents. These external auditors attend shareholders’ meetings to render their criteria, with voice but no vote. Auditors must refrain from rendering advice when they have conflicts of interest or independence.

There is no jurisprudence on conflicts of interest for administrators, managers, shareholders or advisers; however, Costa Rican legislation regulating conflicts of interest for administrators and the prohibition on voting in such cases is firmly established.

Hostile tender offers are permitted but have not yet occurred in Costa Rica.

There is no rule that expressly prohibits directors from using defensive measures, but these must be considered on a case-by-case basis. The use of poison pills or shareholder rights plans may be illegal in Costa Rica.

Due to the limited number of companies whose shares are admitted to public offering in Costa Rica, it is very unlikely that there will be cases of hostile takeovers between Costa Rican companies, and therefore of defensive measures in Costa Rica.

Hostile takeovers have not been seen in Costa Rica, so it is not possible to discuss common defensive measures. Furthermore, the regulations specifically state that company directors must refrain from taking any action whose goal is to hinder the development of tender offers. It is specifically forbidden to:

• issue debt;
• deal with securities that are the object of a tender offer; or
• transfer, lease or lien corporate assets when such actions may affect the tender offer.

The directors are personally responsible before the shareholders for their actions, and these must be oriented towards seeking the well-being of the shareholders and of the company. If directors take defensive actions that shareholders may not consider to be in their best interests, they may be sued by the shareholders. In addition, directors must at all times avoid using inside information for their own benefit.

According to Costa Rican law, it is the responsibility of the legal representatives of each company that intends to merge to prepare a draft agreement that is notified to the shareholders. Directors could in principle give direct instructions to legal representatives not to negotiate merger agreements and not to present them to shareholders. The directors are personally responsible before the shareholders for their actions, and these must be oriented towards seeking the well-being of the shareholders and of the company. If the shareholders consider that a measure was not taken in their benefit, they may sue the directors or administrators.

Litigation is not common in connection with M&A deals in Costa Rica. A couple of decades ago, there were some misgivings between companies after failed acquisitions as the targets felt that the relevant bidding company had used sensitive commercial or other information gained during the due diligence proper against them, though this did not result in litigation.

Litigation is not common in connection with M&A deals in Costa Rica.

Litigation is not common in connection with M&A deals in Costa Rica, so it is not possible to say that there were lessons learned from “broken-deal” disputes.

Shareholder activism is not common in Costa Rica.

Shareholder activism is not common in Costa Rica, and it is therefore not possible to discuss the main agendas or focuses of activist groups.

As previously stated, shareholder activism is not common in Costa Rica, and it is therefore not possible to discuss the main agendas or focuses of activist groups.