Corporate M&A 2024 Comparisons

The past three years have seen an increase of M&A transactions in the energy and tourism sectors.

Foreign investment in the Dominican Republic continues to make the country one of the highest-performing and fastest-growing economies in the Caribbean and in Latin America in general. M&A transactions in the sectors of tourism, finance, fuel, telecommunications and mining have been in constant growth, powered by structural reforms in the areas of energy and public-private partnerships, and by efforts to improve foreign direct investment, free trade and regulatory policies.

The year 2023 was very dynamic regarding the enactment of significant regulatory instruments. Trends that are anticipated to continue in 2024 include:

• Expansion and diversification of the hospitality and tourism industry: Expectations are high due to an increased influx of tourists and greater economic activity within the sector. Likewise, an increase in the number of potential tourism destinations will have an impact on direct investment in some new tourism projects.
• Continued growth in the mining industry: With ongoing investments and favourable regulatory frameworks, the mining sector is projected to maintain its upward trajectory, contributing significantly to the country’s economic development. A landmark instance was the extensive expansion by Barrick Gold of the Pueblo Viejo mine with an investment of approximately USD billion. Continuing growth of other companies is expected due to the mining potential of the country.
• Streamlining of business registration and permit processes: Efforts to reduce bureaucracy will persist, making it easier for businesses to establish themselves and operate efficiently, thus fostering a more conducive business environment.
• Continued consolidation in the financial sector: The financial landscape is likely to witness further consolidation, driven by mergers, acquisitions and strategic partnerships, aimed at enhancing competitiveness and resilience. The financial sector will stay on the path of modernisation, with potential growth and investments in important fintech developed during 2023.
• Advancements in public-private partnership (APP, by its acronym in Spanish) structures: An evolution in APP frameworks is expected to facilitate the execution of public projects, with increased private sector involvement and innovative approaches to project financing and management.
• Energy sector: The renewables sector will maintain its growth after being declared as a priority market by Decree 3-24.
• Advances in the realm of public companies: In August 2023, the first public offering programme for shares in the Dominican Republic was launched by Cesar Iglesias, S.A., a long-standing Dominican company dedicated to the manufacturing and marketing of mass consumption products. This marked a significant milestone for the Dominican stock market, making investment democratisation possible. Following Cesar Iglesias, S.A., Banco Promerica, a bank that is part of the Promerica Financial Corporation group, with presence in Central America and the Caribbean, adapted to the securities landscape by offering non-ordinary preferred shares.
• Continued emphasis on transparency in M&A transactions: While maintaining transparency, there will be a focus on preserving creativity in the structuring of mergers and acquisitions, ensuring compliance with regulatory requirements while fostering a conducive environment for deal-making. Nevertheless, it must not be ignored that 2024 is an electoral year. Elections can create uncertainty about potential changes in government policies, regulations and fiscal policies, leading companies to be more cautious about major investments such as mergers and acquisitions. Furthermore, companies may postpone strategic decisions, including M&A activity, until the political and economic landscape becomes clearer post-election. This can slow down M&A activity during the electoral year. It must also be noted that market volatility tends to rise during electoral years due to uncertainty and speculation about election outcomes, influencing the attractiveness and feasibility of M&A transactions.

The industries that experienced significant M&A activity in the last 12 months were energy, fuel, banking, insurance, manufacturing, hospitality/tourism and technology. Likewise, media was an active industry during 2023, with the acquisition of one of the major newspapers, Diario Libre, by Grupo Punta Cana, a family company with major investments in tourism.

In the Dominican Republic, acquisitions are typically structured as a share deal or asset deal, or a combination of both. Mergers and contributions in kind are less frequent, especially in regard to mid-sized or small businesses.

The acquisition of a controlling interest by means of a share purchase remains common, although it is becoming customary to structure an acquisition by way of an asset purchase. As long as the target company or asset is located in the Dominican Republic, the operation will be governed by local law.

As for the financing of M&A transactions, in addition to the traditional sources, investment funds and asset managers have increased in importance due to the regulatory constraints placed upon traditional regulated lenders regarding highly leveraged transactions.

As in other jurisdictions, M&A in certain regulated sectors is subject to particular regulations, such as banking (as enforced by the Monetary Board and the Superintendence of Banks), telecommunications (Dominican Institute of Telecommunications – INDOTEL), mining (Ministry of Mines and Energy), securities (Superintendent of Securities), pension funds (Superintendence of Pension Funds), energy (Superintendent of Energy), insurance (Superintendent of Insurance), and assets under a concession regime.

Nevertheless, there is no centralised merger control entity in the Dominican Republic. The common regulator for all M&A activities is the Dirección General de Impuestos Internos(DGII), which is the tax administration or collection department. and even though the Chamber of Commerce/Mercantile Registry is not an M&A regulator established by law, it reviews these operations in its role of registry.

Furthermore, the National Commission for the Defence of Competition (Procompetencia) is in charge of preventing illegal economic practices. However, under the current legislation – unlike in other jurisdictions – it does not have the authority to veto a transaction or to provide prior consent. If at some point the acquirer (or the surviving entity) abuses a dominant position in the market, and such abuse is demonstrated, sanctions may be pursued.

Currently there are no restrictions on foreign investment, with the exception of the disposal and storage of toxic, hazardous or radioactive waste not produced in the country; activities negatively impacting public health and the environment; and the production of materials and equipment directly linked to national security, which require authorisation from the Executive Branch.

Furthermore, there are no limits on foreign ownership or control of local companies, except aviation, banking, insurance, fishing and agricultural companies, in which foreign ownership is limited.

It is important to note that in the field of public procurement, for a foreign natural or legal person to be able to participate and be contracted by the Dominican State, it must be associated with a Dominican natural or legal person or have a mixed capital.

General Law No 42-08 for the Defence of Competition (Competition Law) is the general legal framework for antitrust. It prohibits abuse of a dominant position, not the dominant position itself. Consequently, M&A that may result in a monopoly are not regarded as illegal, but rather the abuse that may result from such a position, eg, establishing predatory prices, imposition of prices and other actions, such as tying and refusal to deal.

Under the principle of unity of the legal system, the Competition Law only applies as a subsidiary to those economic agents regulated by sectorial regulation. Accordingly, special antitrust regulations for energy, telecommunications, insurance, pension funds and banking apply, which in some cases are stricter.

There are certain sectors subject to ex ante merger controls:

• in the energy sector, Law No 125-01 provides a merger control for economic agents that will generate or distribute energy in the country, supervised by the Superintendent of Electricity;
• in the financial sector, Law No 183-02 provides a merger control for market participants, subject to the approval of the Monetary Fund;
• in the insurance sector, Law No 146-02 provides a control of any transfer of shares, supervised by the Superintendence of Insurance; and

• the pension funds sector is subject to merger control by the Superintendent of Pensions (Law No 87-01).

Also, in the telecommunications sector, Law No 153-98 contains merger control provisions; likewise, the Rule for the Free Trade and Competition in the Telecommunications Sector contains antitrust provisions that apply to market participants.

In any case, foreign investors should ensure that representations, warranties and indemnities in the sale and purchase agreement or the shareholders’ agreement are sufficient.

During 2023, strong efforts were in motion for the modification of General Law No 42-08 in order to include merger control after the country was subject to a peer review by the OECD. The main conclusion of the study was that an important problem of the regulation is the lack of control of such type in the country.

Acquirers should be mindful that under local law, with the acquisition of a company, all labour liabilities, including lawsuits, contracts and employees, with their prerogatives and obligations (including tax obligations), are transferred to the acquirer. Although the acquisition and the transfer of the employees must be notified to the Ministry of Labour within 72 hours of its execution, failure to notify does not prevent the transfer.

Therefore, acquirers should conduct extensive prior due diligence to determine liabilities in order to negotiate the price reduction or to establish a contingency fund or indemnification clauses.

All employees benefit from acquired rights, as set forth in the Labour Code. No written agreement is necessary, but the company must notify all the employees of the transfer. A change of control does not give the new owner the right to alter existing working conditions, unless it is to improve them. Also, should the purchaser decide to terminate the contracts of all employees and then rehire them subsequently, without a three-month period between the two actions, the termination of the contracts will be deemed ineffective.

Finally, employees are considered privileged creditors vis-à-vis their employer for any unpaid wages or severance benefits.

Currently, there are no national security reviews of acquisitions in the Dominican Republic.

The most significant court decision in the past three years relating to M&A concerned the Munné company (a leading company in the local cocoa market). This involved the Civil and Commercial Chamber of the Court of First Instance of the National District in a case about the restructuring project of the Munné company through the acquisition of all the assets, intangibles and goods that relate to the operations involved in the purchase, sale and transformation of cocoa, including:

• trademarks, trade names, and in general all intellectual and industrial property and permits owned by Munné;
• Munné’s finances;
• Munné’s office equipment;
• Munné’s machinery and equipment;
• Munné’s working capital, including certain accounts receivable, inventories and accounts payable to Munné’s suppliers;
• Munné’s client portfolio;

• Munné’s real estate;

• Munné’s accounts payable with suppliers;

• Munné’s commercial contracts;
• submission of Munné’s labour liabilities, with the exception of the labour liabilities of Munné’s executives, who ceded for the benefit of the creditors, deducting said amounts from the amount to be paid; and
• the business in general of Munné, including the sale of non-essential properties for the business.

The decision of the court was to approve the implementation of the restructuring project and set a precedent for future cases of this type.

In another case regarding the sale of the main assets of a company, the Supreme Court of Justice decided that the sale of all the assets of a company will be void if the general assembly approving said transaction does not achieve the majority of votes required by the by-laws.

There have been no changes to the laws and regulations regarding takeovers in recent years, and at the moment there are no takeover regulations under review.

Currently it is not customary for the bidder to build a stake in the target company prior to launching an offer. Securities Law 249-17 limits stakebuilding strategies by requiring authorisation from the regulator prior to launching an offer to acquire shares in a publicly traded company.

It is common strategy for members of the target company or the target company director – who will continue to have a role in the target company, or the bidder if the offer is successful (the MBO team) – to have shares in the target company.

The shareholdings of the MBO team may affect the level of offer acceptances that the bidder can achieve, and consequently its ability to “squeeze out” dissenting target company shareholders. Nonetheless, this practice does not apply to publicly traded companies because of the prohibitions provided in Securities Law 249-17 on directors or board members of a company using confidential information to buy or sell shares or block a takeover.

Disclosure requirements are linked to the particular industry. For example, the transfer of shares in the banking, insurance, telecommunications, electricity and mining sectors is subject to disclosure requirements and, in some cases, the prior approval of the regulator of each sector. Likewise, companies trading securities in the Dominican stock market (BVRD) must inform bondholders of any such transaction by means of a disclosure (hecho relevante) made through the Superintendent of Securities.

Reporting thresholds provided by the law, if any, are generally considered to be the minimum, and companies may introduce higher thresholds in their articles of incorporation or by-laws.

Dealings in derivatives are permitted in the Dominican Republic. However, they are fairly uncommon.

Filing and reporting requirements for OTC transactions are established by the Superintendence of Banks. These are necessary to authorise the transaction to ensure compliance with the related parties’ transaction thresholds set forth in the law, among other things. Dealings with derivatives may be made through the Dominican stock market (BVRD) but are significantly low in volume. As for the filing/reporting obligations, they include daily registration in the financial entity’s accounting records and valuation of the product by it.

The amount of information required to be disclosed varies from company to company, according to the industry in which the target entity operates or the terms of its by-laws, which may effectively demand the disclosure of such information. Certain industries – finance and energy, for example – require special-purpose vehicles, and the broadening of commercial activities would not be consistent with the terms of the law.

The target entity is not required to disclose a deal until definitive agreements are signed. However, if the target is a highly regulated industry, such as banking, telecommunications, securities, insurance or aviation, disclosure to regulators will be required in advance for the purposes of obtaining prior approval or non-objection, usually after a non-binding letter or a memorandum of understanding is signed.

For practical purposes, and depending on the industry, the volume of the transaction and the structure of the deal, which may focus on the assets involved – ie, a material asset may be government-owned or subject to contractual restrictions – the target company would approach the authorities or the third party holding a material interest to disclose the deal on a confidential basis to start clearing that hurdle in the face of a potential deal.

If the target company is a public company or has securities trading in the stock market, when a non-binding letter is signed, it would have to report the occurrence of a relevant matter (hecho relevante).

Market practices on the timing of disclosure usually differ from legal requirements.

The scope of the due diligence may vary depending on the industry or sector of the target, but it generally covers financial information, taxes, labour, corporate, licences, human resources, key contracts, intellectual property, all types of assets, permits, and other aspects related to money laundering laws, as well as any active litigation or ongoing administrative procedures. It also covers the structure of the company being targeted for acquisition and the issues and risks they may face after the business combination.

Some information, such as corporate records, trademark registrations and land records, is available at different public registries. In other cases, the information must be requested directly from the target company or the public entity in charge of registration, with the written authorisation of the target company.

“No-shop” agreements are frequently demanded. Exclusivity is the most common form agreed by the parties, as standstill provisions are often included in the confidentiality agreement or non-disclosure agreements and, unless their wording is unequivocal, they may end up not having the desired effect.

Depending on the complexity of the transaction, an exclusivity period is usually granted for a reasonable amount of time (no less than six months) and may be extended with the mutual agreement of the parties.

The law permits tender terms and conditions to be documented in a definitive agreement.

There is no definite timeframe. The time of the process will vary depending on whether it is a private or public company, and on factors such as the timely completion of what is usually an extensive due diligence process and whether the parties involved are highly regulated, and also, whether the acquirer will rely on financing and the scope of the due diligence. Timing needs to be assessed on a case-by-case basis. The process may take a few months, or up to a year or more if prior governmental approval or authorisation is required.

Vendors are increasingly using private auctions to reduce the length of the process, but it will vary depending on the industry, the type of business (eg, family businesses tend to be more complex than initially thought) and consensus among the vendors. On average, for a transaction involving a regulated sector, it will take eight months.

The regulation on public offers provides that a person or group that intends to acquire or attain, directly or indirectly, ownership of 30% or more of the shares of a listed company or other securities may grant the right to its acquisition, through one or several operations of any nature, simultaneously or successively, and will be obliged to carry out said acquisition through a mandatory takeover bid.

Although Dominican shareholders or targets prefer cash deals, they are open to negotiating alternative structures of payment, especially if it will maximise tax efficiency. Consequently, transactions involving shares or cash are fairly common in the local market.

Conditions for a takeover offer of a publicly traded company have yet to be established by the pending regulation on takeovers, specified by Securities Law 249-17. A common condition for the acquisition of shares that represent a significant part of the capital or control of a private company is the execution of a shareholders’ agreement.

The relevant control threshold for acceptance of a tender offer provided by Securities Law 249-17 and the corresponding regulation is 30% or more of the shares.

Customarily, a business combination cannot be conditional on the acquirer obtaining financing. However, in the future, a new regulation on takeovers may refer to this option. Likewise, since a contract is the law between the parties, if they agree upon such a condition it is valid and may be upheld before the courts.

At the moment and from a general perspective, there are no limitations as to the type of deal security measures that a bidder may request, including break-up fees, matching rights, force-the-vote provisions and non-solicitation provisions. However, some of these measures may be limited by internal by-laws.

The bidder’s rights are directly proportionate to its shareholding ownership. If the bidder does not seek 100% ownership of a target company, it is common to request veto rights and positions on the board of directors and/or in the management of the company.

Subject to the by-laws of the company, shareholders may vote by proxy duly appointed by power of attorney.

The most common squeeze-out mechanisms are the retention of dividends and a pricing variation after an initial period has elapsed in which to tender shares at the same price that the majority shareholders sold them. The acquirer will frequently enter into future purchase agreements with the seller to acquire the shares tendered by the minority shareholder to the majority shareholder within a certain period.

Another common mechanism is first to negotiate with the key players in the target company, eg, members of its board of directors or its directors, with shares to squeeze out dissenting shareholders of the target company.

In large-scale transactions, it is common to obtain irrevocable commitments from principal shareholders of the target company to tender or vote, which do not usually provide a way out for the principal shareholder if a better offer is made.

Also, note that the concept of “irrevocable proxy” has been the subject of enduring discussion as, by definition, all proxies may be revocable by the grantor under local law, unless tied to consideration.

In accordance with current regulations, the issuer first submits to the regulator (the Superintendence of Securities) a request for authorisation of a public offering and to be able to entrust one or more securities intermediaries with a preliminary evaluation of the potential demand for the securities.

Furthermore, the issuer may request authorisation and registration in the registry of the previously issued shares of the Superintendence of Securities, in order to allow their direct admission to trading in the stock exchanges when the shares have a sufficient degree of distribution. It will be understood that there is a sufficient degree of prior distribution when at least 25% of the issuer’s capital is in the hands of investors that are not considered professional investors.

From the moment a company is admitted to trading, all new shares derived from future capital increases or exchanges by conversion into shares of any financial instrument must also be admitted.

Unless the combination concerns a public company, the requirements will vary on a case-by-case basis, subject to the acquirer and acquiree by-laws.

Securities Law No 249-17 indicates that all market participants must provide their financial statements in accordance with the accounting principles recognised by the Superintendence of Securities. The new law does not contain further indications regarding the possibility of drafting the statements in accordance with standards applicable in other jurisdictions. Notwithstanding this, the Rule of Application of Law No 19-00 and the Rule on the Registration of Public Offerings provide that financial statements must be presented in accordance with the International Financial Reporting Standards (IFRS).

Issuers must submit financial statements for the last three years of operations. The financial statement for the last operating year must be audited by a local firm registered at the Superintendence of Securities.

Depending on the sector or the assets involved, full disclosure of all documentation may be required. If the documents are in English, they must be translated into Spanish by a judicial interpreter. This requirement is likely to come from the Tax Administration, the Superintendence of Banks, the Central Bank of the Dominican Republic, the Dominican Institute of Telecommunications, the Superintendent of Securities (if a public company transaction is involved) or other sectorial regulatory bodies. In addition, any documents issued in other jurisdictions (such as the corporate documents) need to be duly apostilled.

The principal directors’ duties are a combination of the duties established in General Law 479-08 for Companies and Limited Liability Individual Enterprises, in the by-laws of each company and in the meetings of shareholders who agree on specific obligations. Directors’ duties are owed only to the company shareholders.

Ad hoc committees are increasingly common, but they are not used in cases of conflict of interest. In such event, the conflicted director would not take part in the deliberation and subsequent vote on the matter that gave rise to the conflict.

There is no case law on the subject of deferring to the judgement of the board of directors.

Subject to the scope of authority granted by the shareholders, directors may seek independent outside advice on legal, accounting and other specialised matters, particularly independent directors.

There are not many court decisions related to conflicts of interests of directors, managers, shareholders or advisers. However, there have been cases in which shareholders have taken action against the representatives/managers of the companies for carrying out acts outside their faculties or exceeding their power. In particular cases, judgments have been given in favour of the company (and its other shareholders) since the actions of the representatives/managers have proven malicious (see Ruling No. 11 of the Dominican Supreme Court of Justice, of 15 April 2014).

Hostile tender offers are not prohibited under current legislation.

Legislation does not prohibit directors from using defensive measures, but they must always act within the company’s by-laws.

Common defensive measures can be established in the by-laws, including clauses to prevent the acquisition of shares that grant direct or indirect control of the company to third parties or to the shareholders themselves. Also, another measure can be the search for a “white knight” with an alternative and more attractive offer.

Directors’ actions must be aligned with the interest of the company. That is, directors can be held accountable for the wrongful use of powers granted by the general shareholders’ meeting, by the by-laws or by current legislation.

Directors may vote against a business combination, exercising their fiduciary duties, but pursuant to the laws of the jurisdiction, the sovereign body of each company (acquirer and acquiree) is the general shareholders’ meeting. A decision by such a meeting to go against the recommendation of the board of directors would be valid, binding and enforceable. It is also important to note that Securities Law No 249-17 prohibits directors from taking actions to prevent or block a business combination.

Litigation is fairly uncommon regarding M&A transactions in the Dominican Republic.

In the unlikely event of litigation, a lawsuit would be initiated at the early stages of the transaction.

Even though disputes regarding pending M&A transactions are not very common in the Dominican Republic, from recent transactions the importance of establishing defence mechanisms and clear provisions on voting rights is apparent.

Shareholder activism remains a latent force. It is slowly increasing but is yet to be considered significant. Activism is generally weighed down by lengthy, bureaucratic and costly judicial processes, which are exacerbated by the lack of specialisation among the judges.

The main focus of activists in the Dominican Republic is the recognition of their rights to information and forcing changes on the board of directors or managers.

At the moment, activism has not been significant enough to encourage companies to enter into M&A transactions, spin-offs or other major transactions.

It is highly unlikely for activists in the Dominican Republic to interfere with the completion of announced transactions.