Corporate M&A 2021

Last Updated April 20, 2021

Panama

Law and Practice

Authors



Alemán, Cordero, Galindo & Lee represents both purchasers and sellers in all types of local and international transactions involving Panamanian corporations and operations located in Panama. The firm has advised Citibank, Julius Bär, First Quantum Minerals Ltd, Celsia S.A., Equity International, Banco Panamá, Phoenix Tower International and Cable & Wireless Panama, among others, on their M&A matters. The firm advises and provides counsel to clients on the reorganisation and restructuring of their operations and in the drafting of articles of incorporations and bylaws. Alcogal has acted as legal counsel for many corporate and banking mergers, including advising Grupo Aval in its acquisition of a majority interest in Multi Financial Group, advising Banco Panamá in its merger with a subsidiary of Banco Aliado, Julius Bär in regard to its acquisition of BoA/Merrill Lynch’s operations in Panama, and Citigroup in Scotiabank’s purchase of Citigroup’s retail and commercial banking operations in Costa Rica and Panama.

In Panama, despite the COVID-19 pandemic, the M&A market remained active in 2020, particularly with the closings of various high profile transactions that had been signed in 2019.

Between 2010-16, the Panamanian economy experienced unprecedent growth (constantly over 5% GDP growth), which in turn led to the establishment of many foreign business in Panama. Those years were a period of significant M&A activity, particularly in the financial and industrial sector. Since 2018, Panama’s economic growth has slowed to about 2% to 3% GDP growth per year. 

Even though those numbers are much lower than the country had become accustomed to, as they are still above the world median, Panamanian companies have remained attractive targets for foreign investors. Additionally, having a dollar economy and no exchange controls has made Panama an attractive target for multilatinas.

It is worth noting that Panama’s economy has been severely impacted by the business closures resulting from the COVID-19 pandemic, and as such it is too soon to tell what the impact on this contraction will have on the local M&A market.

Despite the COVID-19 pandemic, the M&A market was active in 2020, although less so than in 2019 , and saw the closing of various high profile transactions that were entered into in 2019, particularly in the financial services industry (banking). This trend is expected to continue into 2020. The market is primarily driven by private M&A, however, in 2018 the sale of Inmobiliaria Don Antonio (Grupo Rey) to Corporacion Favorita, an Ecuadorian group was structured by way of a Public Bid (OPA).

The last year two years have seen the acquisition of a majority stake in Multi Financial Group, parent company to Multibank Inc., by Grupo Aval, solidifying Grupo Aval’s presence in Panama, the merger between Banco Panama and Banco Aliado, and the acquisition of Banvivienda by Global Bank. In recent years, the telecom sector has also been very active with the acquisition made by Milicom of Telefonica and Cable Onda, a dominant player in the Panamanian market for pay-TV, internet and telephone services.

Although there are no specific driving factors behind an increase in M&A activity for the coming year, the economic downturn will likely lead to consolidation among Panamanian companies and make Panamanian companies attractive targets for international bidders. Additionally, local companies are incentivised to consolidate when they operate in competitive industries. It is worth noting that transactions, particularly in the Central American region, tend to be structured with Panamanian holding companies who have operations in the region (such is the case of most Central American financial institutions).

It is expected that most of the M&A activity will continue to take place in the financial industry (banks, investment advisors, and insurance companies). Given the slower economic growth registered in the past two to three years, an increase in activity in the distressed asset market is also anticipated. This being said, the outbreak of COVID-19 provides a degree of unpredictability to the market.

The financial industry (mostly mid-size and smaller banks) has experienced significant M&A activity in the past 12 months. Additionally, an uptick in M&A has been seen in the energy and retail sector. 

There were significant acquisitions by international players in the energy market approximately five to seven years ago and now those international players themselves are being purchased, which has led to the indirect change of control of several Panamanian entities.

The services sector (hotels, restaurants, tourism) have been particularly hard hit by the restrictions imposed by the Government of Panama due to the COVID-19 pandemic. It is likely there will be consolidation among players in these industries.

Cash offers and standard share purchase agreements and mergers are the most common means for acquiring a company in Panama. Acquisitions in the distressed asset market are typically structured as asset purchases. 

However, asset purchases in Panama are more challenging to document as the transfer of certain assets require specific formalities (public deeds, registrations, etc). Mergers are also quite common.

Panama does not have an M&A regulator per se. The primary regulator for M&A activity in Panama will depend on the nature of the business undertaken by the target company. For example, in the case of banks, the primary regulator would be the Superintendence of Banks of Panama, and in the case of broker dealers or investment advisory firms, the primary regulator would be the Superintendence of the Securities Market (formerly known as the National Securities Commission). In all cases that may result in an economic concentration, the antitrust authority (known as ACODECO) could play an important role.

Please bear in mind that the relevant Panamanian laws governing M&A include Law No 32 of 1927, as amended (the “Corporations Law”), Law No 4 of 2009 (the “Limited Liability Company Law”), the Commercial Code and the Civil Code. Additionally, industry specific regulations (banking, securities, mining, energy, etc) may come into play. As M&A activity tends to lead to taxable events, the Tax Code and its regulations are also applicable.

There are no restrictions on foreign investment in Panama. To amplify, there are no restrictions on the amount of foreign investment permitted or the nationality of said investor. There are, however, restrictions on investments in certain specified areas, such as: investments in the retail sector by non-Panamanian nationals (subject to certain exceptions), water and sewage services, radio services and transmission of electricity, among others.

The applicable antitrust legislation in Panama that applies to business combinations is Law No 45 of 31 October 2007 (as amended).

The submission of a transaction for review to the Authority for Consumer Protection and Defense of Competition (ACODECO), the antitrust regulator in Panama, is not mandatory. The economic agents interested in a “prior review” of any particular transaction may submit any transaction to the review of ACODECO, requesting their favourable opinion.

ACODECO Decisions

ACODECO must issue a decision within 60 calendar days after it has received all the information requested. If it does not respond in that timeframe, the approval is deemed to have been granted. ACODECO may request additional information within 20 days of the initial filing. ACODECO usually issues a resolution indicating that no additional information is needed, which triggers the 60-day countdown.

A list of documents and information has to be submitted, such as: the transaction documents, market and industry studies of the respective parties to the transaction, corporate authorisations and the background of the parties to the transaction, among others. Every document that is produced abroad has to be legalised and translated into Spanish (if the documents are in a foreign language) by a licensed translator in Panama. A technical antitrust (economic/market based) analysis has to be attached as part of the filing.

ACODECO Conditions

ACODECO may impose certain conditions to be complied with by the transaction or order partial or total unwinding, termination of control or annulment of acts. 

On the one hand, the law has a safe harbour provision and, if the transaction receives the “favourable concept” from ACODECO, the parties may carry out the economic concentration without the risk of the legality of the transaction being questioned. On the other hand, the economic concentrations that did not voluntarily submitted themselves to prior verification, may be challenged by ACODECO or third parties within the three subsequent years after the transaction is carried out. ACODECO has the authority to investigate and challenge economic concentrations which have not been submitted to prior verification.

Therefore, whether or not a concentration has the effect or potential effect of lessening, restricting, harming or impeding free competition and free access of the economic agents will be deemed to be legal or illegal depends on an analysis of its positive and negative effects on competition, production, competitiveness, among others, in each of the relevant markets.

In the case of Panama, acquirers should be aware that, as a general rule, under the Panama Labor Code, employment relationships may terminate in any of the following manners:

  • by mutual consent if it is in writing and does not involve waiver of any rights accrued by the employee;
  • upon expiration of the agreed term if the employment is for a definitive term;
  • upon dismissal with just cause or the resignation of the employee; and
  • by the unilateral decision of an employer, within the formalities and limitations established by the Labor Code, such as employees with indefinite period contracts with less than two years of continuous services.

In the context of an M&A transaction structured as an asset sale, it is more likely that the employment relationships would terminate either by mutual consent of the parties, or unilaterally by the employer. In the event that an employee is fired for just cause, and contests the termination, the cause would have to be proven in a labour proceeding, or the company will be ordered to reinstate the employee, with any applicable fees and penalties associated with the unjustified termination; or payment of indemnisation, backpay, and surcharges if the company does not wish to reinstate them.

Termination Payment

In a transaction of this type, and in relation to those employees that will not be assumed/transferred to the acquirer’s entity(ies), it would be most ideal for them to be terminated by mutual consent (mutuo acuerdo) if there is no justified cause for termination. The likely components of the termination payment in this scenario would be:

  • the payment for seniority bonus is equal to one week for every year of employment (prima de antiguedad);
  • the 13th month salary (décimo tercer mes): under Panama law, employees are to be paid a 13th month every year, equal to one month’s salary, payable in three installments, every four months;
  • the employer must pay any accrued and unpaid vacation time (vacaciones); and
  • although not mandatory and subject to negotiation, in order to induce an employee to agree to a termination by mutual consent, it is typical to pay a “bonus” or “indemnity” payment in addition to the accrued benefits listed above, roughly equal to one month for every year of employment.

An employee cannot waive payment of bullet points one to three. Bullet point four is subject to negotiation. In all cases, termination will be subject to a case-by-case analysis based on the particulars of each employment relationship.

Additionally, it is becoming more common to see golden parachute arrangements (both by way of the issuance of shares or cash), which typically include a premium for the CEO and certain key employees, payable upon the completion of a business combination. These arrangements require careful review at the moment of a business combination because depending on how they are structured may lead to labour liabilities going forward.

Generally, there are no national security review of acquisitions in Panama. Having said this, there are certain specific industries that cannot be held by foreigners, as ownership is limited to the State (for example, energy transmission, water and sewage, among others).

There have been no significant court decisions or legal developments related to M&A transactions in Panama in the last three years.

There have been no significant changes to takeover law in the past 12 months, nor is takeover legislation under review, in current knowledge, in a way that could result in significant changes in the coming 12 months.

It is not customary for a bidder in Panama to build a stake in the target prior to launching an offer.

As a general rule, there are no material shareholding disclosure schedules. However, in the case of regulated entities, in general terms, material shareholding disclosure thresholds and filing obligations are triggered whenever “control” is affected. Control may be construed as the direct or indirect power that allows the exercise of a determining influence over the administration, direction and/or policies of an entity, whether by ownership of shares with voting rights, contractual rights or other means.

It is also considered “control” whenever a person, individually or by mutual agreement with other persons, is owner of exercise rights over no less than 25% of the outstanding social capital holding voting rights. It is understood to be "control" provided that a person(s) owning any other lower percentage of the social capital has a determining or decisive influence in the management of the entity, by itself or in agreement with others, whether directly or indirectly shareholders of the entity.

Corporate law does not provide for specific hurdles to stakebuilding in Panama; such hurdles, if any, are more likely the result of provisions in the articles of incorporation or bylaws of the relevant company, but are not common in Panamanian corporations.

Dealing in derivatives are allowed in Panama, though they are not specifically regulated in a meaningful manner.

Filing/reporting obligations for derivatives under securities disclosure and competition laws are not specifically regulated in Panama.

Shareholders are not generally required to make known the purpose of their acquisition and their intention regarding control of the company in Panama, except in certain regulated industries (such as banking, insurance and financial services, among others) which require prior regulatory approvals.

A takeover offer of a public company must be made to all the shareholders, with equal terms and conditions and the purchase price must be paid to all shareholders who accept the offer.

If a bidder offers to purchase more than 25% of the shares of a public company, or offers to purchase any number of shares which, as a result of said purchase, would result in the bidder owning more than 50% of the issued and outstanding shares of the public company, the offer must be subject to the public tender offer rules under the securities laws.

If the tender offer will result in the bidder owning more than 75% of the issued and outstanding shares of the public company, the offer must be made for all shares of the target which are not owned by the bidder.

In the case of private targets, any disclosure will depend on the articles of incorporation or any applicable shareholder agreements.

Market practice on timing of disclosure does not materially differ from legal requirements.

The scope of due diligence usually conducted in Panama in a negotiated business combination is fairly standard, including tax, legal, financial, environmental, labour, among others, depending on the nature and activities of the target entity. The COVID-19 pandemic has increased the necessity to review labour arrangements, particularly those in connection with the suspension of labour contracts or decrease in hours. Further, since local banks have granted moratoriums with respect to payments of debts for affected companies, due diligence exercises are also including further review of communications between the clients and the banks.

Standstill and exclusivity arrangements are becoming more common in M&A transactions in Panama.

It is permissible for tender offer terms and conditions to be documented in a definitive agreement.

The duration of an M&A process in Panama will vary greatly, mostly depending on the complexity of the transaction and whether it is in a regulated industry. The average process for a regulated entity would generally take between four to six months between signing and closing. 

Even though governmental offices were initially closed, fairly quickly governmental measures taken to address the pandemic have created more efficiencies in the regulatory approval process for M&A transactions. Local regulators have done a good job moving into a digital structure, which now allows for documents being filed exclusively online (with originals to follow) which has created efficiencies for the ultimate clients and decreased response times at the respective regulators.

In a public M&A structured through an OPA (Oferta Publica de Acciones), once a purchase is attempted of over 25% of the issued capital, or an amount of shares that would make the purchaser hold over 50% of the issued capital of a company, an OPA would be triggered, which would require that all shareholders are offered the opportunity to sell their respective shares. As soon as the OPA is launched, trading on the shares will be temporarily suspended.

Cash is more commonly used in Panama as consideration. Having said this, consideration can also be equity in a different entity or any other chattel property. The use of escrow agreements, holdbacks and earn outs are common tools used to bridge value gaps in these times.

There is no specific M&A regulator, however, in regulated entities such as banks, broker dealers, insurance companies, etc, the regulator will analyse the conditions included in takeover offers as part of its analysis when deciding whether to approve the transaction or not. With respect to public tenders, the offer has to be open for at least 30 days.

Public tenders can be conditioned on a minimum amount as a condition for the offer to be effective.

A business combination can be conditional on the bidder obtaining financing. It is not typical to see transactions conditioned on the bidder obtaining the required financing. In fact, it has become common that sellers request assurances that the bidder will have the required funds at closing.

M&A financing in Panama is typically carried out by local or international banks. In Panama, there is no limitation on international lending. Less frequently, M&A transactions are financed by way of local or international securities issuances. The Panamanian securities market has grown substantially in the past few years and is able to accommodate larger transactions that would previously have taken place outside Panama.

It has become more common to see break-up fees included in M&A transactions. In a public tender offer, any person can launch a competing offer. Additionally, any holder of shares can revoke its acceptance at any time while the tender is open.

Additionally, parties to M&A transactions are looking into the MAC and MAE definitions in detail in order to either include or exclude the effects of the COVID-19 pandemic in a transaction. It is certainly one of the most contested points in a negotiation as to whether further lockdowns, closures, changes to the labour regulations

There have been no changes to the regulatory environment.

If a bidder does not seek 100% ownership of a target, then the bidder can seek any additional governance rights with respect to a target that would not result contrary to law of public policy, including voting arrangements, management provisions, special majority decisions at the board and shareholders level, among others.

It is possible for shareholders to vote by proxy in Panama.

Squeeze-out mechanisms, short-form mergers or other similar mechanisms are not commonly employed to buy shareholders that have not tendered following a successful tender offer. The viability of these mechanisms are unproven and may be questionable under Panama law.

It is not common to obtain irrevocable commitments to tender or vote by principal shareholders of the target company.

How and when is a bid made public? In a public company, a bid is made public once a purchase is attempted of over 25% of the issued capital or an amount of shares that would make the purchaser hold over 50% of the issued capital of a company. This would only apply to shares that are registered at the Superintendence of Capital Markets (the “Public Bid”).

As a general rule, applicable to corporations, pursuant to Article 13 of the corporation’s law of Panama, to the extent the articles of incorporation of the company do not provide otherwise, each shareholder has a first right of refusal to subscribe to new shares issued by virtue of a capital increase of the company. in the same proportion of shares said shareholders hold.

In light of this, if the company intends to increase its capital and issue new shares this must be disclosed to the existing shareholders of the company in order for them to be able to exercise their first right of refusal.

Relevant Events Communications

In respect of companies whose shares are registered with the Superintendence of Capital Markets (SCM), pursuant to Accord No 3-2008 on “Relevant Events Communications” (Comunicados de Hecho de Importancia), whenever there are mergers or consolidations that involve the issuer of the shares registered with the SCM, said events shall be communicated to the SCM and to the public.

This communication shall include information on the form, means and times set forth in the aforementioned Accord, and provided on the working day following the approval of the merger or consolidation by the Board of Directors of the company that is a registered issuer with the SCM, and the workday following the approval by the shareholders of the companies that are part of the merger or consolidation.

If the companies involved in the merger or consolidation are subject to other regulations, these shall issue the Relevant Events Communications on the following workday, in accordance with the provisions set forth in the corresponding regulation.

Privileged Information and Criminal Provisions

Until the public communications have been made, all persons involved in the merger or consolidation process of a registered issuer with the SCM are subject to the privileged information provisions established in the Panama Securities Laws and to the criminal provisions that may apply.

Once the merger, consolidation or spin-off agreement has been recorded with the Public Registry of Panama, a copy of it must be sent to the SCM within the two business days its registration date. 

Public Bids

Additionally, when a public bid is launched the SCM must be sent the following principal documents: prospectus or offering document, guarantee of the public bid, a draft of the announcement to be published, the contracts part of the offer, the corporate authorisation of the offeree and the financial statements for the previous three years of the offeree.

In a public bid, the bidder needs to provide audited financial statements for the previous three years. Listed companies and financial institutions are required to use IFRS or US Generally Accepted Accounting Principles (US GAAP), pursuant to regulations issued by the Superintendence of Banks and the Superintendence of Capital Markets. Insurance companies are required to apply IFRS.

If the bid in question is a public bid, then all transaction documents must be disclosed in full. All transaction documents need to be sent to the recipients of the offer as well as a document which summarises all aspects of the proposed transaction.

Panama’s Commercial Code, Article 444 (which applies generally to commercial legal entities, including Panamanian corporations), establishes that directors are, in general, not personally liable for the obligations of the corporation, but may incur personal liability for:

  • the effectiveness of the payments made by the partners;
  • the actual existence of any dividend payment agreed upon;
  • correct accounting;
  • improper fulfilment or performance of their commission [mandate], as corporate representatives; and
  • violation of laws, the articles of incorporation, by-laws, or agreements and resolutions of the shareholders’ assembly. If the violation of any of the foregoing occurs through the issuance of a resolution, those directors that were absent from the meeting or objected in due time, will be exempted from liability.

Directors duties are owed only to the company shareholders. However, if a dividend or distribution of assets is declared such that the value of the assets of the company is reduced to less than the amount of its debts, a director will be jointly and severally liable vis a vis the creditors of the company for any resulting harms, taking into account:

  • its capital;
  • if the amount of the capital is reduced; or
  • if a declaration or a report is made that is false regarding a point of substance, the directors that have given their consent for such acts, with knowledge that with such the capital is affected, or that the declaration or report are false.

Depending on the size of a company and its board, it is common to have committees whose role it is to asses business combinations, as a strategic matter, prior to a transaction taking place and at a later time in order to successfully integrate or transition the business.

There is no similar concept in Panama except that directors must act with the prudence of a bonus pater familias, which is analogous to the standard of care of a reasonable person.

Typically, tax, legal and financial advice is typically given to directors in a business combination. It is fairly common for companies to have corporate governance consultants which are also, typically, asked for advice in the context on business combinations.

There is no awareness of any conflicts of interests of the directors, managers, shareholders of advisers and, as such, none are the subject of judicial or other scrutiny.

Typically, the bylaws of Panamanian companies expressly allow that directors enter into business with the respective company whose board they sit on. Nonetheless, recently it has become more common for Companies to include in their bylaws that, in the event that a director has a conflict of interest, they should abstain from participating in the decision being taken.

Hostile tender offers are permitted in Panama. However, public tender offers are possible only with respect to shares registered with the Superintendence of Capital Markets. Current knowledge provides that all public bids that have taken place (which have not been many) have not been hostile.

The Securities Laws do not permit that the issuer, or anyone else, purchase shares while a public bid is open.

There is a poison pill mechanism included in the Securities Laws of Panama, but it is only applicable in a particular set of circumstances that would make public bids of those companies near to impossible. This would only apply to companies:

  • registered in Panama or abroad;
  • that have their offices or are authorised to do business in Panama;
  • that have more than 3,000 shareholders (the majority of whom must be domiciled outside of Panama); and
  • that have permanent offices in Panama and investments of over USD1 million.

It does not appear that the prevalence of defensive measures has not changed due to the pandemic.

Local laws and regulations do not include any specific director duties when enacting defensive measures.

There is no provision for directors to be able to "just say no". In a public tender, the offer is made to each individual shareholder and, as such, the directors cannot control whether a shareholder decides to sell its shares.

Shareholder litigation is uncommon in connection with M&A deals and there has not, as yet, been any case in which a shareholder has intended to block a transaction. In certain transactions, litigation brought by a third party with the intention to cause a material adverse effect that would impede closing has been seen. 

As mentioned in 10.1 Frequency of Litigation, litigation is fairly uncommon, but if it were to occur, this would typically be once the transaction is completed. If the plaintiff is able to prove irreparable harm, they may be able to obtain an injunction, which could, in theory, prevent a transaction from going forward until the merits of the litigation are passed upon. Said injunctions may also be lifted.

Have there been any lessons learned from disputes between parties with pending transactions in early 2020?

Certainly special attention is being paid to MAC and MAE clauses, as well as the corresponding concepts included in Panamanian legislation of fuerza mayor and caso fortuito.

Shareholder activism is not an important force in M&A in Panama.

This is not applicable in our jurisdiction, and as such there has been no impact due to the pandemic.

As mentioned, shareholder activism is not common and, as such, it is unlikely that activists will interfere in transactions prior to completion.

Alemán, Cordero, Galindo & Lee

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Author Business Card

Trends and Developments


Authors



Arias, Fábrega & Fábrega has been advising leading international financial institutions and multinational corporations, as well as some of the largest domestic companies in Panama, for over 100 years. Highly specialised multidisciplinary legal teams enable efficient handling of complex M&A transactions, covering corporate law, antitrust, taxation, securities regulation, banking, environmental law, labour, real estate, regulatory work and IP. The M&A team consists of 13 lawyers with a wealth of international experience, and nearly half the team admitted to the New York or Florida Bar. Recently the firm has counselled Grupo Rey in the sale of a 73% stake to Favorita, United Continental on a complex joint venture deal with Avianca and Copa, shareholders of Cable Onda in the sale of 80% to Millicom, Assicurazioni Generali in an asset sale agreement to ASSA, and Inchcape in its acquisition of Grupo Rudelman. The authors would like to thank legal assistant Daniel García de Paredes, who helped bring this chapter to completion.

Overview

Prior to the COVID-19 outbreak, M&A activity in Panama had been stable but focused on particular industries. On March 2020, the outbreak began to impact the economy, including M&A activity, causing certain transactions to be paused, others to be renegotiated and others to pick up speed.

M&A activity in Panama is expected to accelerate in 2021, as Panama’s economy is projected to bounce back from a fall of more than 17% in GDP in 2020 as a by-product of the lockdown measures and temporary labour furloughs related to the pandemic. The government has prepared anti-cyclic measures to push for economic recovery, including a public works investment program, which the IMF projects will lead to a GDP growth of more than 4% in 2021. The government is aiming to get back to steady GDP growth, and pick up from where it left in establishing Panama as a solid and stable option for FDI, a status only amplified in relation to the region’s ongoing economic woes. Prior to the COVID-19 pandemic, Panama was receiving 51% of all foreign direct investment (FDI) in Central America as reported by the Economic Commissions for Latin America and the Caribbean (ECLAC/CEPAL) and was the fifth-largest recipient of FDI in the region.

Notable acquisitions

The few notable acquisitions during the 2019-20 period were mostly in the technology and logistics sectors, including the acquisition of Glovo by Appetito 24 and PedidosYa and the investment by one of the main local economic groups in local messenger service ASAP, both transactions that involved the two main delivery apps in the country. The recent merger between J. Cain & Co and Colon Import & Export, two leaders in logistics services for multinational companies also signaled the importance of Panama’s role as a logistics hub, and it’s need to consolidate amongst a multitude of players in the wake of sluggish demand due to the pandemic.

The banking industry also continued to consolidate, with the successful completion of the acquisition of Multibank by Grupo Aval, another banking group which owns an important player in the local industry: BAC Panama. While the transaction was reported to sign in 2019 and expected to close in the second quarter of 2020; however, it was widely reported that conditions precedent were not met and a 39% price reduction was renegotiated prior to closing.

Recovery

As Panama’s GDP is expected to recover in 2021 in excess of 4% according to the IMF, Panamanian companies will become more attractive targets for foreign buyers. This high level of activity spurs purely domestic M&A deals as local companies look for strategic alliances in order to compete with new market conditions and new market entrants, which are usually large multinationals, or to better position themselves as viable targets for further acquisitions. The government is also betting on public spending in infrastructure works, especially through a new public private partnership law, which will facilitate FDI in public infrastructure, and on other initiatives such as an entrepreneurship law, aiming to facilitate businesses for micro, small and medium-sized initiatives.

Impacts to 2021 resurgence

That said, a haphazard vaccine roll-out and expected sluggish consumer demand during 2021 may also continue to disproportionally impact certain industries, especially considering that Panama has no centralized bank to implement expansionary monetary policies. Leading local economists also warn on the uncertainty of the degree of recovery from the COVID-19 pandemic and the ability of the government to balance its finances post-COVID-19, amid imminent reforms required to save the government pension system and increased unemployment rates. These issues, coupled with ongoing corruption scandals and the continued inclusion of Panama in Financial Action Task Force (FATF) and EU tax haven blacklists place significant question marks over FDI and cross-cross M&A activity for 2021/2022 compared to prior years.

Banking Consolidation Will Likely Continue – The Moratorium Impact

Over the past few decades, Panama’s banking industry has undergone an era of consolidation, and numbers suggest the trend will continue over the coming years, as it tends to occur in more mature economies. In the year 2000, there were 57 general-licence banks in Panama. In 2017, that number came down to 44 and in 2021, 39.

This level of consolidation amongst small to medium sized banks is expected to pick up as banks face pressure due to local regulatory burdens and increased compliance standards. In addition, banks are currently subject to a government mandated moratorium in favour of debtors that have been affected by the COVID-19 outbreak; such mandate encourages banks to enter into renegotiated loan agreements with their clients, but ultimately has prevented such banks from foreclosing and collecting loans in the ordinary course of business. Such restrictions may further drive M&A in this this sector as bank operations continue to face additional challenges, especially, as mentioned, in small to medium sized banks.

Start-up Activity

Panama has proved to be an attractive environment for foreign investors in tech-based companies and industries, and a boost in strategic alliances and M&A activity in this sector is expected to increase rapidly. Many Panama-start-ups have seen substantial cash injections from private equity groups, regional players, and international buyers looking to enter the ever-stronger Latin American playing field. Encuentra24, an online classifieds and real estate platform first launched in Panama, is reported to have secured USD5 million in funding from private equity groups. Degusta, a food-industry centric platform and app, is reported to have secured a first round of initial funding, permitting subsequent stable growth. Appetito24, a food delivery app, was acquired by German conglomerate Delivery Hero, and in 2021 acquired and merged one its main competitors, Glovo jointly with PedidosYa, surviving the latter.

Other applications, such as Cuanto, a payment-processing service platform, and Panadata, a background checks platform, have both received support from American seed accelerator Y Combinator. Recent reports also indicate that Google has entered the local market through a distribution and agreement with local investors, acting as media sales representative and hence commercializing Google Ads in the country.

New Entrepreneurship Law

The government enacted the new Entrepreneurship law in December 2020, which creates a new type of corporation in Panama: the entrepreneurship company. The aim of this new type of entity will be to facilitate the creation of formal companies by entrepreneurs by lessening the bureaucratic burden of such process and providing certain tax incentives.

New PPP Law

The government is also aiming to drive the economic recovery with investments in public infrastructure projects by way of public private partnerships pursuant to the recently enacted PPP law. President Laurentino Cortizo announced in January 2021 that in its first phase, three PPP initiatives will be undertaken: a 2,000 km road maintenance works, the costanera road in Panama Oeste and the Corredor Norte of David, Chiriqui, in the western part of the country. Such law was recently regulated in December 2020 with the technical assistance of the World Bank, and cooperation from multilaterals such as CABEI, CAF, and IDB.

It is expected that such three initial projects will pave the way for many more projects in the coming years, which will provide opportunities for private investment, and M&A, to follow suit.

A New Reorganisation Regime

As the COVID pandemic impacted companies all around the world in 2020, including Panama, there was a renewed focus in the insolvency regime and its suitability to handle the economic crisis. In particular, Panama had recently adopted a new insolvency law in 2017; however, such law had not been generally tested and no insolvency-specialised courts, as mandated by such law, had been created. One of the most notable local companies to enter into reorganisation during the pandemic was Importadora Maduro, owner of one of the leading and most storied department stores in the country: Felix B. Maduro.

Perhaps following Colombia’s initiative, which at the beginning of the pandemic enacted reforms to its insolvency regime to quicken the reorganization process, the National Assembly of Panama approved in March 2021 a new law creating a special reorganisation regime expressly relating to the COVID-19 emergency. Such new law aims to assist companies with a more expedient reorganisation process than what is currently provided in the previous law enacted in 2017. Should such law succeed in its objective, it may allow companies in trouble to survive as a going concern and seek alternatives, such as DIP financing, to remain competitive.

Other Regulatory Developments

In recent years, Panama’s tax authority (DGI) has increased audit and enforcement measures for capital gains tax, focusing particularly on high-profile transactions. The DGI has also begun reviewing and, on occasion, conducting full audits of local targets, triggered by public announcements of deals being signed or closed. In addition, stricter criminal statutes for tax evasion were enacted in early 2019. The pressure on tax audits may increase in the following years considering the budget deficits that have been undertaken by the government following the COVID-19 pandemic.

ACODECO, Panama’s antitrust and consumer protection agency, on the other hand, has also increased scrutiny in recent deals, resulting in potential buyers to demand stricter representations and indemnities. This has been focused on purely local deals than for deals where the buyer has no prior presence in the country. However, amidst the pandemic, the protection agency has, at least on one occasion, allowed for consolidation of a particular industry, which may hint at increased flexibility during these times.

Expectations for 2021 and Beyond

The administration of President Laurentino Cortizo continues its attempts to remove Panama from the tax havens lists. The government now faces the challenge of leading the economic recovery of a country that prior to the pandemic had been known for being a stable investment-grade economy, welcoming to foreign investment. But pandemic-related challenges, such as growing unemployment, weaker consumer demand and the effects of the 2020-21 lockdowns on the wider economy cannot be ignored. In addition, other country-specific factors may affect business valuations and may impact negatively M&A activity, such as the recent credit-rating downgrade for the country and for certain local financial entities, which may increase the cost of funds for domestic transactions. Hence, although the expected economic recovery suggests FDI (and hence broader M&A activity) may well increase in 2021, M&A deal flow will still be slower than the expected.

Nonetheless, the most active sectors for M&A activity in 2021 and the years ahead will likely continue to be in the logistics sector, followed by the banking industry, as further consolidation in the market is expected. A weaker than expected recovery in tourism and consumer spending will likely also drive acquisitions of distressed assets in the real estate, hospitality and retail sectors. Increased lending and technology upgrades and compliance costs specific to Panama’s banking sector, and a recent legislation allowing for consolidation between mobile carriers are imminent and are expected to drive M&A and FDI levels in both these industries.

Arias, Fábrega & Fábrega

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Law and Practice

Authors



Alemán, Cordero, Galindo & Lee represents both purchasers and sellers in all types of local and international transactions involving Panamanian corporations and operations located in Panama. The firm has advised Citibank, Julius Bär, First Quantum Minerals Ltd, Celsia S.A., Equity International, Banco Panamá, Phoenix Tower International and Cable & Wireless Panama, among others, on their M&A matters. The firm advises and provides counsel to clients on the reorganisation and restructuring of their operations and in the drafting of articles of incorporations and bylaws. Alcogal has acted as legal counsel for many corporate and banking mergers, including advising Grupo Aval in its acquisition of a majority interest in Multi Financial Group, advising Banco Panamá in its merger with a subsidiary of Banco Aliado, Julius Bär in regard to its acquisition of BoA/Merrill Lynch’s operations in Panama, and Citigroup in Scotiabank’s purchase of Citigroup’s retail and commercial banking operations in Costa Rica and Panama.

Trends and Development

Authors



Arias, Fábrega & Fábrega has been advising leading international financial institutions and multinational corporations, as well as some of the largest domestic companies in Panama, for over 100 years. Highly specialised multidisciplinary legal teams enable efficient handling of complex M&A transactions, covering corporate law, antitrust, taxation, securities regulation, banking, environmental law, labour, real estate, regulatory work and IP. The M&A team consists of 13 lawyers with a wealth of international experience, and nearly half the team admitted to the New York or Florida Bar. Recently the firm has counselled Grupo Rey in the sale of a 73% stake to Favorita, United Continental on a complex joint venture deal with Avianca and Copa, shareholders of Cable Onda in the sale of 80% to Millicom, Assicurazioni Generali in an asset sale agreement to ASSA, and Inchcape in its acquisition of Grupo Rudelman. The authors would like to thank legal assistant Daniel García de Paredes, who helped bring this chapter to completion.

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