The M&A market in Andorra has seen encouraging activity in the past 12 months and has shown strong signs of recovery. The current international economic and financial situation, the existing traditional ownership of companies in Andorra and the recent movements and transactions will certainly contribute to speeding up the local M&A market in the forthcoming months.

In addition, negotiations on an association agreement between Andorra and the European Union finalised by the end of 2023. This agreement, that will be submitted in the forthcoming months to the Andorran citizens for its ratification by means of a referendum, will provide a robust framework for economic diversification in Andorra.

Maintaining the trend of the last two years, the Andorran M&A market has been led by acquisitions and majority-stake investments by foreign international group companies in local entities, with a view to developing their businesses in Andorra, and with the benefit of already-existing target assets and commercial structures in place.

The key industries driving M&A activity in Andorra in the past 12 months were tourism and hospitality, logistics and infrastructure. Although this is not always a matter of pure M&A transactions, during the last 12 months, there has been a considerable increase in real estate transactions in the jurisdiction with predominance of foreign investments aimed at new developments.

It should be noted that there is no stock market in Andorra. Therefore, in M&A transactions, the primary technique for acquiring a company is to enter into a share purchase agreement (SPA) between the buyer and the shareholders of the Andorran target company. The SPA sets out the main terms and conditions regarding the transaction. The transfer of the shares needs to be notarised and it is registered in the Andorran Companies’ Register. Mergers are less frequent but may also be used as a means to acquire a company.

The primary regulators for M&A activity in Andorra are:

• Autoritat Financera Andorrana (Andorran Financial Authority or AFA) for M&A related to financial and insurance institutions;
• Ministeri de Presidència, Economia i Empresa (Presidency, Economy and Companies Minister) in charge of supervising merger control; and
• Registre d’Inversions Estrangeres (Foreign Investment Register or FIR) in charge of authorising and screening foreign investments in Andorra.

The foreign investment regime in Andorra qualifies as direct investment and includes investments made in Andorran companies by:

• non-resident natural persons;
• resident natural persons with less than three years of continuous residency in Andorra, since obtaining the residency authorisation when investing in real estate;
• legal persons of foreign nationality;
• Andorran legal persons with direct or indirect foreign equity participation equal to or greater than 50% of their share capital or voting rights. In case of investments in real estate, the foreign investment regime applies when the foreign participation in the equity of the Andorran legal person is higher than 5%; and
• any Andorran legal person when at least 50% of the voting rights of its board of directors are held directly or indirectly by a natural or legal person included in any of the four above-mentioned categories or when they are financed by any of the latter.

Specifically, the term “direct investments” covers:

• the incorporation of an Andorran company;
• the total or partial acquisition of the shares of an Andorran company; or
• the acquisition of any other rights that entitle the foreign company or natural person to participate in the share capital of the Andorran company or to acquire voting rights.

If as a result of the acquisition, the acquirer holds, directly or indirectly, a stake in the Andorran company higher than 10% of its share capital or voting rights, the foreign investment regime requires the acquirer to obtain prior authorisation from the government of Andorra issued through the relevant ministry.

Otherwise, where the stake in the Andorran company held by the foreign company or natural person is equal to or less than 10%, it is sufficient merely to notify the Foreign Investment Register after the transaction.

There are no antitrust regulations applicable to business combinations in Andorra.

Nevertheless, Andorran regulations do foresee the control of economic concentrations. Economic concentrations are deemed to arise where there is stable change of control of the whole or part of one or more companies due to:

• the merger of two or more previously independent companies;
• the acquisition by a company of control of all or part of one or more companies; or 
• the creation of a joint venture and, in general, the acquisition of joint control over one or more companies, where these undertakings perform on a lasting basis the functions of an autonomous economic entity.

Andorran regulations also foresee that certain economic concentrations are subject to notification to the Andorran government. Such economic concentrations are those where:

• all the companies involved in the concentration achieve, according to publicly available information, a share equal to or greater than 50% in any relevant market in Andorra; and 
• at least two of the participating companies individually achieve an annual turnover in Andorra of more than EUR2.5 million.

If a bidder acquires a target company in Andorra with employees, to the extent that as a result of the takeover there is no change in the conditions of the workers as their employer has not changed, the acquirers should not be concerned about any specific labour law regulations.

Notwithstanding the above if, following the acquisition, the acquirer wishes to implement restructuring measures that include the dismissal of a certain number of employees, and if such dismissals exceed certain thresholds in a certain period of time, this is considered a collective dismissal and a specific procedure has to be followed.

The ministry competent in matters related to foreign investment can deny authorisation for foreign investments if it considers that such investment could hinder, even occasionally, the exercise of public authority, sovereignty and national security, public order and economic order, the environment, public health or the general interests of Andorra.

There have been no significant court decisions or legal developments in Andorra related to M&A properly. However, there have been recent, important legal developments in respect of incorporation requirements and financing benefits applicable to start-up companies to attract the creation, development and establishment of technological companies in Andorra.

In parallel, the Andorran government has also developed a legal framework to create companies with the purpose of issuance, management, deposit or trading of any type of digital assets, such as programmable sovereign digital money (DDSP), cryptocurrencies, stablecoins or stable tokens. These companies must be registered before the Andorran Financial Authority (AFA).

It should be noted that Andorra does not have a specific law controlling takeovers. However, the companies’ legislation and the merger and spin-off regimes are currently under review to identify gaps with European Union regulations, so significant changes in such matters could occur in the coming 12 months.

As explained in 3.2 Significant Changes to Takeover Law, as there is no specific law controlling takeovers, there are no legal impediments to building a stake in the target prior to launching an offer.

However, building a stake in the target prior to launching an offer is not customary in Andorra due to the relatively small size of the companies, the concentration of the share capital among a small number of shareholders, and the family character of companies in Andorra.

There are no material shareholding disclosure thresholds or filing obligations in Andorra regarding takeovers. 

However, a change in the share capital distribution of an operating entity in the Andorran financial system requires the previous authorisation of the AFA, if a shareholder: 

• reaches a qualified shareholding;
• increases its qualified shareholding so it holds a share capital percentage or voting rights equal to or greater than 20%, 30% or 50%; or
• by virtue of such acquisition, controls the entity.

Additionally, a legal obligation that applies to all companies in Andorra is the obligation to disclose information about each natural person who ultimately holds or controls, directly or indirectly, at least 25% of the capital or voting rights (a beneficial owner) to the Andorran Companies’ Register (Registre de Societats Mercantils).

This information is accessible to any person or organisation that can prove a legitimate interest.

The regulatory reporting threshold is compulsory and cannot be modified by companies. However, non-regulated companies can freely adopt internal reporting thresholds in their by-laws, but this kind of rule is not used since there is no stock market in Andorra and the size of the companies is quite small.

Nevertheless, Andorran companies usually increase thresholds related to the majorities needed for the approval of certain agreements as reflected in their by-laws.

Dealing in derivatives is allowed in Andorra. However, since there is no stock market in the jurisdiction, this type of dealing is not commonly used as a strategy to acquire a company. 

See 4.2 Material Shareholding Disclosure Threshold.

As there is no stock market in Andorra, all companies are private and there is no requirement to make known the purpose of an acquisition. 

The only sector where it is compulsory to request authorisation and therefore, to disclose an acquisition to the AFA, is the financial sector.

See 4.6 Transparency. 

Under Andorran regulations, there is no obligation for a target company to disclose a deal. 

However, in the financial sector, the decision to acquire or sell a qualified stake in a financial entity must be disclosed to the AFA by the potential acquirer, the seller and by the financial entity as soon as it becomes aware of that decision. Therefore, when negotiations commence, this must be disclosed to the financial authority.

Notwithstanding the initial disclosure of the acquisition of a qualified stake in a financial entity, it is also subject to prior authorisation by the AFA.

On the other hand, in mergers, the resolutions adopted by the shareholders’ meetings of the companies involved need to be published in two newspapers so that creditors of the companies involved can oppose the merger, and the resolutions are only effective after one month has elapsed from the date of publication of the resolutions.

This is not applicable in Andorra.

The due diligence process is not specifically regulated in Andorra. However, it is common to conduct a due diligence process prior to the acquisition of an Andorran target company. The scope of due diligence usually covers all the legal aspects applicable to the target company such as corporate, tax, intellectual property, litigation, real estate, financing, permits, regulatory compliance, and personal data protection. The scope of due diligence may differ depending on the business, sector or assets own by the target company. 

Standstills are not usually demanded in Andorra. On the other hand, exclusivity is usually required, since most Andorran companies are family controlled.

It is permissible for tender offer terms and conditions to be documented in a definitive agreement. Usually, the tender offer contains the main terms and conditions of the transaction, and therefore, it is documented in the definitive agreement, along with other terms and conditions that may arise from the due diligence process.

The duration of the process for acquiring/selling a business in Andorra depends on several factors, such as the scope of the due diligence process or the need to obtain financing. The duration of the process also depends on the timing of the authorisation by the government of Andorra for foreign investments and/or the AFA, as the case may be.

Based on the above, the process for acquiring/selling a business in Andorra generally takes four to 12 months.

Andorra does not have a mandatory offer threshold.

Cash is more commonly used as consideration in Andorra. In deals with high-valuation uncertainty, it is usual to fix an initial price upon signing and to adjust such fixed price upon closing using the completion accounts mechanism.

As Andorran companies are all private, the offer conditions are usually negotiated directly between the parties involved in the transaction, before such terms and conditions are reflected in the SPA.

The most common conditions included in transactions in Andorra are conditions related to government approval in terms of foreign investment, communications to the Presidency, Economy and Companies’ Minister regarding merger control, and the approval of other regulators such as the AFA for M&A deals involving operating entities of the Andorran financial system.

The relevant control thresholds in Andorra are to own more than 50% of the share capital or voting rights of the Andorran target company in order to gain control of such company.

However, due to the composition of share capital of Andorran companies, it is common for M&A transactions to aim for the acquisition of all the shares that constitute the share capital of the Andorran target company.

In Andorra, the closing of a transaction can be subject to the bidder obtaining financing.

The usual types of deal security measures that bidders seek are exclusivity period during the negotiation of the deal, break-up fees, non-solicitation provisions, non-compete provisions and confidentiality clauses.

If a bidder does not seek 100% ownership of a target, the bidder can secure additional governance rights by entering into agreements with other shareholders. The usual additional governance right that the bidder may seek is to have the right to appoint members of the board of directors or of the management of the target company.

Shareholders generally have the right to designate another person, whether or not that person is a shareholder of the company, as a proxy-holder to represent them at a shareholders’ meeting and vote on their behalf. 

The proxy must be granted in writing separately for each general meeting, unless a power of attorney with powers of representation has been previously granted.

Squeeze-out mechanisms, short-form mergers and other similar mechanisms are currently not specifically regulated by Andorran law. 

A bidder may seek to obtain irrevocable commitments to tender or vote from the principal shareholders of the target company, as such commitments are accepted in Andorra. 

See 5.1 Requirement to Disclose a Deal. 

See 5.1 Requirement to Disclose a Deal. 

There is no obligation for bidders to produce financial statements in their disclosure documents. In Andorra, financial statements need to be prepared in accordance with the International Financial Reporting Standards (IFRS).

See 5.1 Requirement to Disclose a Deal.

The principal duties with which a director needs to comply are the duties of diligence and loyalty.

Duty of Diligence

According to the Companies Act, the duty of diligence forces a director to have appropriate involvement in the performance of the company, and to apply to such activity the time, effort and knowledge that can be expected from any business person in a similar position.

Additionally, the director is required to be adequately informed about the company’s performance, to participate actively in its management, and to investigate any irregularities in the management of the company.

Duty of Loyalty

According to the Companies Act, the duty of loyalty forces a director to act with the honesty that can be expected of a representative who manages the resources of others and, in particular, to refrain from competing with the company, from taking advantage of the company’s business opportunities and from using the company’s assets for private purposes.

Under Andorran legislation it is not compulsory, or common, to establish special or ad hoc committees in business combinations.

However, in complex transactions it is common to establish joint committees between representatives of the acquiring company and the target company to supervise the fulfilment of the steps and conditions established for the interim period between signing and closing.

Although Andorran law or case law does not expressly provide for a rule such as the business judgement rule, under Andorran legislation, the directors are required to act in accordance with their duty of diligence and loyalty.

The independent outside advice that it is commonly given to directors in a business combination in Andorra is legal, tax, financial and strategic advice.

Conflicts of interest of directors are not expressly regulated under Andorran legislation. However, conflicts of interest can be considered a breach of the duty of loyalty and, therefore, an action influenced by a conflict of interest could be considered a breach of the duty of loyalty and may be subject to judicial scrutiny. 

Andorran law does not distinguish between hostile and friendly takeovers, so they are not regulated in this jurisdiction. In any case, hostile tender offers are unusual in Andorra, as most companies are privately owned, mostly small or medium-sized, and managed by their majority shareholders.

See 9.1 Hostile Tender Offers.

Andorran law does not expressly define a list of defensive measures in the event of a hostile tender offer, as these are not expressly regulated.

However, in practice, the management or the board of directors of the target entity would have to respond in an attempt to protect their position in the company by implementing certain measures likely to prevent the hostile bidder from taking control of the company.

Such measures would usually require the prior approval of the shareholders’ general meeting and might entail an increase in share capital, the purchase of the target company’s own shares, or the search for an alternative bidder.

See 9.2 Directors’ Use of Defensive Measures.

If the management or the board of directors obtain the prior approval of the shareholders’ general meeting to implement defensive measures against a hostile tender offer, they have a permanent duty to act in a coherent manner with the social interest of the company, understood in Andorran law to be the interest of the legal entity, pursuing its purposes in the common interest of the stakeholders and with the aim of ensuring the prosperity and continuity of the company.

Even when they are also majority shareholders, directors cannot “just say no”, as they are bound to act in the best interests of the company by considering all factors that may be affected by the offer.

For example, the unjustified refusal of a tender offer when the target company is in dire straits and is liable to benefit from such offer, could make the directors liable for the target company’s insolvency.

M&A transactions in Andorra do not usually lead to lawsuits in the event of disputes between the parties. Such disputes are usually settled out of court in an informal and amicable manner and mainly concern the warranties granted by the parties.

In the event of a dispute between the parties, it is most likely to occur in the post-closing phase of the transaction.

As already noted, deal-breaking problems do not usually go to court and are settled amicably in Andorra.

Shareholder activism is not a relevant force in Andorra, as most companies are small or medium-sized and they are generally controlled by only a few shareholders and/or are family-owned, with minority shareholders being mostly passive.

Exceptionally, minority shareholders who have the power to block certain important decisions – eg, a merger/spin-off of the company, can use it to obtain better financial terms in the planned transaction or a higher dividend before leaving the company.

There are no significant examples of activists seeking to encourage companies to enter into M&A transactions, spin-offs or major divestitures in Andorra.

See 11.1 Shareholder Activism.