According to the 2020 fourth quarter report issued by Transactional Track Record, there was a 34.2% decrease in the number of M&A transactions completed in Colombia in 2020, compared to 2019. There were 152 reported transactions in 2020 with a total value of approximately USD4.75 billion (non-confidential transactions), which represents a 61.13% decrease in the value of deals compared to 2019.
This decrease is mainly attributable to the effects of the COVID-19 pandemic, the uncertainty of global markets and the application of lockdown measures and travel restrictions by governmental authorities that have led to an unprecedent economic crisis. However, as Colombia has started its vaccination plan and as cases and deaths attributable to the COVID-19 pandemic have steadily begun to drop, lockdown measures are becoming less frequent. This situation has allowed affected sectors to gradually reactivate their operations. Thus, 2021 will represent a year of opportunities in the M&A market as, hopefully, the global economy will progressively recover.
In terms of M&A transactions, despite the economic effects of the COVID-19 pandemic, new opportunities have arisen in industries such as technology, infrastructure and healthcare.
According to the 2020 fourth quarter report issued by Transactional Track Record, there was a 56% increase in deals related to the internet sector and a 13% increase in technology industry deals. Also, the healthcare and infrastructure sectors continue to be worth highlighting. Due to deregulation during the latter part of 2019, the substantial legal reforms in terms of financing, and the growth of telemedicine during the pandemic, the healthcare sector has high potential in terms of M&A transactions and has thus attracted the attention of private equity funds and strategic players in the industry.
Pharmaceutical, logistics and e-commerce are also sectors worth noting due to their high potential in terms of M&A deals considering their rapid expansion attributed to changes in consumption habits brought about by the COVID-19 pandemic.
Finally, in this post-pandemic scenario, companies and assets in distressed situations represent interesting investment opportunities and, therefore, we expect an increasing number of distressed M&A transactions.
The technology and internet sectors saw the most significant M&A activity in Colombia followed by the financial, insurance, and healthcare sectors. The energy and infrastructure sectors were also active. On the other hand, the hospitality sector has been particularly badly affected by the COVID-19 pandemic due to social distancing, lockdown measures and travel restrictions.
The primary techniques/legal means for acquiring a company in Colombia are:
The main regulators for M&A activity are:
Depending on the target company’s industry, other regulators may have authority over the transaction.
In general terms, foreign investment is allowed in all economic sectors and capital may be freely transferred to and from Colombia provided it is duly channelled and registered with the Colombian Central Bank, pursuant to the Colombian foreign investment regime.
Notwithstanding the above, foreign investment is restricted in the following economic sectors:
Law 1340 of 2009 regulates the definition of business integration, the administrative procedure that must be followed when facing a business integration, and the decisions that may result from the administrative procedure when a business combination has been subject to that procedure (ie, to object to the business combination or to impose conditions on its approval).
Accordingly, business integrations in which:
are subject to merger control by the Superintendence of Industry and Commerce.
Depending on the combined market share of the parties in the relevant market, a simple notification or a previous authorisation from the authority will be required.
According to Colombian labour laws, and especially for asset deals, it is important to note that an "employer’s substitution" takes place whenever:
The effect of an employer’s substitution is the continuity of existing labour agreements, since these are not extinguished, terminated or modified. It operates automatically, without any additional obligations on employees or third parties, to the extent that the three elements mentioned above are present (as in cases of asset deals, mergers and spin-offs).
The prohibition of collective dismissals is an issue to watch out for (unless prior authorisation from the Ministry of Labour has been obtained); likewise, the prohibition of the dismissal of employees in special situations, without previous authorisation from the Ministry of Labour. The general statute of limitations in labour matters is three years.
There are no laws or regulations that allow the Colombian government, for national security reasons, to block, restrain, limit, or in any other manner scrutinise acquisitions in Colombia.
Taxes on the Sale of Colombian Assets
The most significant recent legal development in Colombia relating to M&A was the enactment of a tax reform in December 2019, which maintained a set of rules which impose taxes on indirect sales of Colombian assets. This may affect M&A transactions involving the transfer of shares and interests or other rights in foreign entities, which imply the indirect transfer of Colombian assets (eg, shares in Colombian entities).
This regime will not apply if:
It is worth noting that tax incentives were introduced in 2019 for investments regarding non-conventional renewable energy and the agro-industry, therefore said sectors have high potential in terms of M&A transactions in the coming years.
Deregulation in the healthcare sector is also relevant. Pursuant to a Decree issued in October 2019, the acquisition of healthcare providers no longer requires prior authorisation by the Superintendence of Health which has contributed to the potential of the healthcare sector in terms of M&A.
In addition, on 31 December 2020, the government enacted Law 2068, which includes important tax benefits for the reactivation of the tourism sector. Those benefits include:
In addition, the government issued CONPES Document 4010 to declare the strategic importance of several infrastructure projects, the contracts for whose construction shall be awarded in 2021. Additionally, in October, the government adopted the Natural Gas Supply Plan, which includes the development of eight natural gas projects during 2021. Therefore, the infrastructure sector will have significant opportunities in terms of M&A transactions in the coming years.
COVID-Related Changes to Insolvency Procedure
Furthermore, it is important to mention that due to the COVID-19 pandemic, the government issued Decree 560/20 to adopt special measures in insolvency processes in order to protect the business continuity of affected companies and consequently to preserve employment. Those special measures include the following.
These tools will be available for two years and will have an important impact on distressed M&A transactions during 2021 and 2022.
Interest on Share-Acquisition Loans
Finally, it is worth noting that, in a recent judgment, the Council of State (Consejo de Estado) suspended a tax ruling (Concepto 100208221000521 dated 5 March 2019) from the Colombian Tax Authority (DIAN) which set forth that interest paid on loans obtained for the acquisition of shares was not deductible for income tax purposes, including cases in which a merger between the target company and the buyer occurs. Thus, according to the Council of State, as long as those interests comply with the general requirements of the Colombian Tax Code, that interest may be deducted for income tax purposes. Initially, the tax ruling negatively affected the acquisition activity, so we expect that the decision of the Council of State will reactivate this industry.
There were no significant changes to takeover law in 2020 and no significant changes are foreseen in the 12 months to come.
It is not customary for a bidder to build a stake in the target company prior to launching an offer, mainly because hostile takeovers are rare in Colombia.
There are no shareholding disclosure thresholds for privately held companies. However, whenever an individual or another company controls a company, either directly or indirectly, the controlling individual or entity must register the situation of control before the Chamber of Commerce of the domicile of the controlled company within 30 business days from the commencement of control. Note that "control" refers to the ownership of over 50% of the voting stock of a company or to any other situation in which an individual or entity gains the power to control the decisions of the controlled entity.
Publicly traded companies must disclose to the market any change in their shareholding composition equal to, or greater than, 5%.
Companies may introduce higher, but not lower, reporting standards than those set forth in the law, either by means of a provision in their bylaws or other private agreements.
As to other hurdles to stakebuilding, it is worth mentioning that under applicable securities laws, any person or group of persons that can be considered as one single beneficiary can only become the beneficiary of a stake of more than 25% in the voting capital of a listed company by means of a tender offer (oferta pública de adquisición). Also, beneficiaries of listed companies that already hold more than 25% of the company’s voting capital and wish to increase their participation by more than 5%, must do so by means of a tender offer.
As mentioned in 2.2 Primary Regulators and 2.5 Labour Law Regulations, depending on the industry of the companies involved in an M&A transaction and the level of economic concentration, certain prior governmental authorisations may be required.
Dealings in derivatives are allowed but the market in derivatives in Colombia is still developing. These transactions can only be carried out by financial institutions or through stockbrokers.
There are no specific filing or reporting obligations for derivative dealings under securities disclosure and competition laws. See 2.4 Antitrust Regulations and 4.2 Material Shareholding Disclosure Threshold vis-à-vis merger controls and filings with the Chamber of Commerce, respectively, which would also apply to dealings in derivatives.
There are no rules relating to the disclosure of an acquirer’s purpose in an acquisition of a privately held company. Regarding a publicly traded company, under applicable securities laws, whenever a tender offer is launched, the offeror must make the purpose of their acquisition known as well as their intention regarding the control of the company.
The timing of the disclosure of a deal depends on whether the target company is publicly traded or privately held. With privately held companies, there will be no requirement to disclose a deal and the issue is normally addressed in transaction documents. However, with regard to publicly traded companies, there must be a disclosure of material information which normally takes place upon the execution of the agreement.
Market practice is usually the same as legal requirements. Disclosure by companies according to market practice is normally made once the transaction has been declared according to relevant laws.
Although the scope of due diligence may vary, depending on several factors (eg, if the target is publicly traded or privately held, the industry in which the target company operates, the target company's statutory auditor, and the sophistication of the target company's management), due diligence will normally be carried out in two stages: an initial due diligence process, conceived as a "red-flags report" that corresponds to high level analysis highlighting the most relevant legal issues; and a second due diligence process, with a more detailed report and description of the business, together with a report of the target company’s main issues.
Due to the COVID-19 pandemic, certain aspects of the due diligence process have gained relevance, especially matters that aim to determine the legal and economic effects of the pandemic on the target as well as the fulfilment of related legal obligations. Thus, the scope of the due diligence now incorporates a more detailed analysis of potential default risks, supply chain risks, the breach of any material agreement due to measures taken by the government or the financial situation of the target, the termination of material contracts, compliance with health and safety policies (especially with respect to new regulations about the implementation of biosafety measures), business continuity and emergency contingency plans, among others.
Standstills are not common (mainly due to the fact that hostile takeovers are uncommon in Colombia), but exclusivity obligations are relatively common. Exclusivity obligations are normally granted at an advanced stage of a deal, when the parties have reached a price range and the counterparty is comfortable with finalising the deal.
The information and form in which a tender offer need to be undertaken is regulated in Colombia. There have been cases in which the basic principles of the tender offer are set forth in the definitive agreement, but this will not relieve the parties from complying with legal requirements.
The process for acquiring/selling a business in Colombia takes, on average, from six to 12 months, depending mainly on the companies involved (publicly traded or privately held), the industry (regulated or unregulated) and the merger control requirements (antitrust). Other than minor delays due to social distancing measures, the pandemic in Colombia has not created major practical delays or impediments to the deal-closing process. Technology plays a critical role in the negotiation, drafting and closing process.
Colombia only has a mandatory offer threshold for publicly traded companies. When purchasing the following percentages, a mandatory public tender must be made to all the company’s shareholders:
Generally, cash is the most common form of consideration used for acquisitions in Colombia. Merger transactions, however, usually imply share issuances as consideration.
Some common tools used to bridge value gaps between the parties in a deal environment with high valuation uncertainty include:
While, as a rule, offers for publicly traded companies must be unconditional; takeover offers for privately held companies may be subject to some common conditions, such as:
Regulators in Colombia do not particularly restrict the use of offer conditions for privately held companies.
As stated in 6.2 Mandatory Offer Threshold, the relevant control thresholds of listed companies in Colombia are 25%, or 5% when the offeror holds more than 25% of company stock. Reaching these percentages triggers an obligation to undertake a public tender offer.
The minimum acceptance condition for public tender offers concerning publicly traded companies varies significantly. However, it is usual for the offeror to include an acceptance condition equal to the share percentage that the offeror requires to gain control of the company.
A merger may be conditional on a bidder obtaining financing, provided that the bid is for a privately held company, in which case it is usually regulated in the agreement as a condition of closing the deal.
For tender offers related to publicly traded companies, this is not possible. In fact, prior to tendering the offer, the bidder must deliver a guarantee that ensures full compliance with the tender offer and payment obligations. When the payment is made in cash, the guarantee may be a cash deposit, a bank guarantee or a stand-by letter of credit, an insurance policy, debt securities issued or guaranteed by the state, the assignment to the Colombian Stock Exchange of rights in funds or collective portfolios or an international security deposit in a financial institution that meets certain requirements. When the consideration consists of securities, it must be proven that these are free of encumbrances, that they are available and that their effect on the result of the offer, through their delivery in custody or by any other means, guarantees such availability.
It is becoming a common practice for a bidder to seek compensatory fines or break-up fees, as cost-covering mechanisms, in the form of a liquidated damages provision to ensure an expeditious enforceability process. Force-the-vote, no-shop and non-solicitation provisions supplement these mechanisms. A bidder will usually demand a considerable value for the cost-covering mechanism to avoid sellers "trading" on the agreed exclusivity.
Regarding new contractual tools for managing “pandemic risk” in the interim period, it is becoming common to expressly regulate if a certain change in regulations and/or measures adopted by governmental authorities due to the COVID-19 pandemic shall be (or not be) considered as a material adverse effect.
There have not been any changes to the regulatory environment that have impacted the length of interim periods.
The bidder may seek to negotiate a shareholder’s agreement with minority shareholders to regulate certain rights and obligations of the shareholders executing the agreement, especially in relation to the governance of a company and the rules governing transfers of shares.
Shareholders can vote by proxy (a third person or another shareholder) in the shareholders' meeting by simply filing the respective written proxy before the shareholders’ assembly, including the following information: the name of the shareholder, the name of the proxy, the date of the meeting (or meetings) and any additional requirement under the company’s by-laws. Directors, however, cannot act as shareholder proxies.
Colombia’s tender-offer regulations do not include a squeeze-out provision. Therefore, squeeze-outs are rare in Colombia.
Nevertheless, once a company becomes private, it may be registered as a simplified stock corporation, a type of company that allows equivalent mechanisms to the squeeze-out.
Prior to Law 1258/2008, forcing a shareholder out of a company was particularly complicated. However, Law 1258 included certain provisions to enable a buy-out of shareholders. Such mechanisms, however, are exclusive to simplified stock corporations and essentially consist of:
Through exclusion, a majority of shareholders can vote a shareholder out of a company (the causes for exclusion and its procedures are expressly stated in the by-laws). Following the exclusion, the company shall buy out the excluded shareholder’s holdings.
The other mechanism that may be explored allows a majority of shareholders to approve a merger or a spin off, and to exclude minority shareholders from participating in the resulting entity. Instead of receiving stock, the company can distribute cash to the minority shareholders as payment, thus achieving the buy-out.
Additionally, Law 1258/2008 provided a short-form merger applicable to companies owning 90% of the shares of a simplified stock corporation. Here, the decision of legal representatives or the board are enough to approve a merger and a shareholder vote is not needed. The merger can be structured to provide for a cash payment for certain minority shareholders, as explained above, and therefore achieve the buy-out.
Although it is permitted to execute preliminary agreements (pre acuerdos) with the principal shareholders of the target company in public bids, they must be submitted to the Finance Superintendence and to the Colombian Stock Exchange along with the rest of the documentation required to authorise the public tender offer. In addition:
Yet, in private bids, it is possible to execute preliminary or syndication agreements with the principal shareholders of the target company. There is no special provision under which these agreements must be disclosed to the rest of the shareholders, although disclosure is permitted. This type of transaction, in both public and private offers, usually takes place at the beginning of the process and before formal negotiations have been initiated. Although the documents pertaining to such bids are non-binding, the clauses in which they are regulated tend to be binding (or at least for a fixed period).
Finally, although these commitments may provide a way out for the principal if a better offer is made, it is more common for them to include a no-trade provision during a fixed term.
Disclosure will depend on whether the target company is a privately held company or a publicly traded one. In the first case (privately held companies), public disclosure generally occurs at closing or, in some cases, after signing.
In contrast, with a publicly traded company, once the parties have executed the binding transaction agreements, the company must disclose the situation to the market according to the law. The latter is completed through the relevant information report the company must submit to the Superintendence of Finance.
Transactions regarding publicly traded companies, where the threshold is exceeded and a mandatory public tender offer must be made, need to be previously disclosed to the Colombian Stock Exchange and the Superintendence of Finance.
All publicly traded companies must disclose any kind of share issue. Article 22.214.171.124.1 of Decree 2555/2010 provides that disclosure must be true, sufficient, complete, and easily understood by investors. Regarding issuances, companies must file a "relevant information" report to the Superintendence of Finance, disclosing the relevant amount, number of shares, payment terms and any other relevant conditions of which an expert investor would be reasonably expected to be aware.
According to Article 126.96.36.199.13 of Decree 2555/2010, a bidder under a tender offer must prepare a booklet including its audited financial statements. If a bidder is controlled or part of a business group, the rest of the participants' financial statements must be submitted.
In Colombia, financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS).
There is no legal requirement in Colombia to disclose transaction documents in full. Even publicly traded companies shall only disclose relevant information to the extent provided according to the law, particularly pursuant to the relevant information report that must be submitted to the Superintendence of Finance.
Pursuant to Colombian law, directors of a company must act in good faith, with loyalty and with the diligence of a "good businessman". Their actions must be carried out in the company's best interest and considering the shareholders’ interests. Courts have thus interpreted that directors have three primary duties: care, loyalty and good faith. In general terms, a director’s duties are owed to the company. Nonetheless, directors may also be found liable before third parties due to the breach of their fiduciary duties.
Every duty shall be abided by in a business combination. The duty of loyalty, however, has particular relevance in business mergers since it manifests the statutory protection against conflicts of interest and competing activities.
It is uncommon to establish special committees for business mergers to avoid or prevent a conflict of interest. In any case, directors with a conflict must refrain from voting on a specific matter without express authorisation at the shareholders’ general meeting, otherwise they could be found liable for a breach of their duty of loyalty.
In Colombia, only shareholders can waive a conflict of interest or authorise or ratify a transaction involving a conflict of interest.
Nevertheless, there are initiatives under way to include a measure in the Colombian legal system under which directors will not be responsible for damages arising from a decision made in good faith, based on a recommendation made by a committee of recognised technical suitability and independence, chosen by the board of directors or at the shareholders’ meeting. This is without prejudice to the responsibility that may be placed on the committee members. This mechanism would not apply if there were a conflict of interest.
Although, in recent years, there have been proposals to include business judgment rules as express statutory law, for the moment the business judgment rule continues to apply by way of Article 23 of Law 222/1995 and Article 200 of the Commercial Code. These articles regulate the fiduciary duties of directors (ie, good faith, duty of care and duty of loyalty) and certain rules regarding the liability of directors vis-à-vis the company, the shareholders and third parties.
The Superintendence of Companies, in recent rulings, has upheld the existence of the business judgment rule and granted deference to directors and officers. Courts shall apply this rule and assume that directors act with a fiduciary duty to protect the company and, unless it can be proven otherwise, the benefit of the doubt is given to the board members. This reasoning is therefore applied in takeover situations.
A company commonly retains investment bankers, legal advisers and business consultants during a business combination.
Since 2012, there have been specialised court rulings in Colombia on a wide range of corporate matters, particularly breaches of directors’ duties, including conflicts of interest. The duty of loyalty and its scope regarding conflicts of interest have been specified by the decision-making practice of the Commercial Procedures Office of the Superintendence of Companies (Delegatura de Procedimientos Mercantiles of the Superintendencia de Sociedades) on various occasions.
Hostile acquisitions are not common in Colombia, as there are usually controlling shareholders in both privately held and publicly traded companies.
Colombia’s tender offer regulations include a duty of neutrality and passivity similar to the one set forth by the EU Takeover Directive. Directors of Colombian listed companies do not hold the right to block a takeover transaction, and as a general rule do not play any active role in a given transaction. Therefore, hostile transactions are not generally applicable in Colombia. In fact, directors must refrain from performing activities that have not been previously approved by the general shareholders’ assembly and owe a duty of passivity in the event of a hostile bid.
Directors are under a statutory duty of passivity and neutrality during a tender. Additionally, once the offer is publicly tendered, the stock negotiation must be suspended. Therefore, defensive measures taken by directors are almost non-existent. The best, and probably only, measure used in public markets is a competing offer. This situation has not changed because of the pandemic.
As described in 9.3 Common Defensive Measures, directors must refrain from performing activities that have not been previously approved by the general shareholders’ meeting.
Directors cannot take action to prevent a business merger, considering the duty of neutrality and passivity set forth in Colombian tender offer regulations.
Although, some years ago, M&A litigation was rare, it is now rapidly increasing in quantity and complexity. Claims are normally brought before arbitration panels since M&A agreements usually include arbitration clauses. Claims are normally solved before a judgment has been reached, and it is common that the conflict (if found) is settled directly by the parties.
It is common for share purchase agreements in cross-border deals to be governed by foreign laws (usually English or New York State law) or to agree that any dispute be submitted to international arbitration. Colombia is a party to the New York Convention 1958 and has enacted a UNCITRAL-based law for international arbitration.
Most claims are brought at a post-closing stage.
From a buyer’s perspective, the most important lesson is to structure and regulate an enforceable exit mechanism in the agreements. For instance, it has become very important to include clear and objective events whereby the material adverse effect (MAE) clauses will apply. Particularly given the lack of case-law in Colombia related to the application of such clause.
On the other hand, from the sell-side, the most important lesson is to structure and negotiate agreements that provide transactions with high deal certainty, for which any “back-door MAE” shall be avoided. Interim covenants which are outside of sellers’ control should also be avoided.
Colombia has a very concentrated market and thus controlling shareholders are extremely common in both public and closed corporations. Such property concentration is a disincentive to shareholder activism and, even if there are certain exceptions, minority shareholders are generally passive investors.
Activists do not seek to encourage companies to enter into M&A transactions. Generally, the controlling shareholder is the one seeking M&A opportunities. This situation has not been impacted by the pandemic.
Minority shareholders may have effective means of ensuring consideration for minority interests and enhancing oversight over controlling shareholders or the management. In these instances, it is common to deal with the opportunistic behaviour of minority shareholders seeking liquidity opportunities.