The M&A sector in Colombia experienced a slowdown during 2023 compared to previous years, both in terms of volume and aggregate average deal value; the number of transactions decreased by 5.04% and aggregate value decreased by 32.34% as compared to 2022.

The country has not been immune to major global factors such as high interest rates, geopolitical events disrupting supply chains and the increased empowerment of regulatory authorities in countries where deals originate, nor to regional factors such as the slow pace of economic recovery in Brazil, the adoption of populist policies and recent changes in government and upcoming elections.

At a local level, deal activity has been affected by factors such as an increase in the country’s risk profile, increased taxation rates and the new administration’s proposed reforms in critical sectors such as energy, utilities, pensions, and healthcare, which have introduced a layer of unpredictability into the business environment.

However, these factors did not prevent some very significant transactions from taking place. Companies such as GEA (Nutresa, Sura, and Argos), Almacenes Éxito, and Genfar demonstrated that various investors still believe in the country as an investment destination. This belief is based on attributes such as its geographical location, demographics, the quality of its human resources, and the strength of its institutions.

While COVID-19 no longer affects the pace of M&A deal activity locally, the difficulties faced by many companies during the pandemic (2020-2022) changed valuation and deal structuring methods. For instance, there has been a rise in the use of earn-outs or other forms of deferred payment methods, reflecting a more conservative approach to valuation and the use of safeguards in light of volatile past performance and unpredictable prospects.

*Special thanks to associates Maria Camila Vargas and Maria Paula Moya for their contributions to this chapter.

Artificial Intelligence (AI)

In 2023, AI emerged as a catalyst for transformation, poised to revolutionise M&A transactions. The profound impact of AI on the legal landscape is set to reshape the way M&A lawyers operate, making it an indispensable tool throughout the entire M&A process.

Notably, AI is poised to enhance and streamline due diligence exercises and deal execution, increasing efficiency and effectiveness.

Environmental, Social, and Governance (ESG)

ESG factors have surged in importance, driving considerable deal activity, especially in sectors related to the energy transition. The focus on ESG is not only influencing the types of deals being made, but also how companies are evaluated as potential targets.

A company’s approach and history regarding ESG issues have become crucial factors in investment decisions and are subjected to thorough due diligence. Increasingly, a company’s ESG stance is being scrutinised by acquirers to ensure alignment with their values and objectives, marking a shift towards more value-driven M&A activities.

Hostile Tender Offers

The numerous hostile tender offers launched by the Gilinski Group for Grupo Sura and Nutresa continue to dominate the headlines in the Colombian market. These transactions have garnered attention due to the relevance of the targets, both admired Colombian companies deeply rooted in tradition, and the prominence of the controlling shareholders of the targets.

Gilinski’s public tender offers have brought to the fore the weaknesses present within Colombian securities regulation across multiple facets, ranging from inadequacies in the regulations pertaining to fiduciary duties and conflicts of interest of officers and directors of listed companies, to regulatory constraints that hinder competing tender offers, and to the absence of guidelines for the pricing of follow-on tender offers.

The industries that experienced significant M&A activity in the past 12 months and will continue to do so in the foreseeable future include fintech (due to the ongoing trend in emerging markets towards banking digitisation and democratisation, which was accelerated by the pandemic, and the continued expansion of platforms that rely on a digital ecosystem) and the healthcare sector, despite regulatory uncertainty in the healthcare sector, in anticipation of increased health spending due to demographic factors and the higher prevalence of diseases associated with obesity.

Additionally, the electricity sector has been active, despite regulatory and climate uncertainties. The impetus for energy transition is a key driver. Additionally, there seems to be a paradoxical increase in acquisitions of existing assets in anticipation of a potential slowdown in new project development.

The primary techniques/legal means for acquiring a company in Colombia depend on whether the acquisition is of a private or public/listed company.

Private Companies

Equity acquisition

In this scenario, the buyer can acquire either a controlling or minority interest in the target company’s equity. This can be achieved by acquiring shares from existing shareholders or through the subscription of newly issued shares.

Asset acquisition

This involves taking over both the assets and liabilities of the company, as a going concern or, alternatively, acquiring selected assets. In this case, the buyer may become the successor to the seller for certain obligations related to the acquired assets, but not for all liabilities.

Listed Companies

The acquisition of listed companies in Colombia is subject to Decree 2555 of 2010 and certain specific rules set primarily by the Colombian Superintendence of Finance (Superintendencia Financiera de Colombia – SFC) and the Colombian Stock Exchange (Bolsa de Valores de Colombia – BVC). See 4.2 Material Shareholding Disclosure Threshold.

SFC

The SFC oversees and regulates Colombia’s financial sector and capital markets. Its responsibilities encompass supervision, compliance, and ensuring the stability of financial institutions (banks, insurance companies, etc), issuers, intermediaries, brokers, and stock exchanges.

Superintendence of Industry and Commerce

As Colombia’s competition authority, the Superintendence of Industry and Commerce (SIC) administers the general anti-trust authorisation regime. Its role involves promoting fair competition and preventing monopolistic practices.

BVC

The BVC operates the trading platforms for equities, fixed-income securities, and standard derivatives in Colombia. It serves as a vital hub for investors, brokers, and companies seeking to participate in the Colombian capital market.

Restrictions on Foreign Investment

Colombia welcomes foreign investment across all sectors of its economy, with a few exceptions. Foreign investment is not allowed in activities directly related to defence, national security, and the processing or disposal of toxic, dangerous, or radioactive waste not generated within the country.

Colombian companies can also be fully foreign-owned, except for those in the national broadcast television sector, where foreign ownership is capped at 40%.

Approval and Registration Process

Foreign investments must be registered before the Colombian Central Bank and where there are funds remitted, channelled through local financial institutions or a registered clearing account (cuenta de compensación). To complete this process, foreign investors must register the investment by submitting a foreign exchange declaration (declaración de cambio). Registering foreign investment ensures access, through the formal exchange market, to convertible currency to remit dividends and repatriate the investment. Failure to report and register may result in fines and compel investors to rely on the informal exchange market to acquire convertible currency.

Equal Treatment for Foreign Investors

Foreign investors receive equal treatment as local investors. Access to convertible currency is guaranteed with respect to registered foreign investment, with limited exceptions reserved for extraordinary circumstances. One such exception may arise when international reserves fall below the value of three months’ worth of imports. To our knowledge, there have been no reported instances of such exceptions being invoked.

In Colombia, an antitrust filing before the SIC is required prior to a business combination if: (i) there are market overlaps, meaning the parties are engaged in the same business (horizontal overlap) or carry out activities within the same value chain (vertical overlap), directly or indirectly through other controlled companies; and (ii) the aggregate operating incomes or total assets of the parties exceed certain thresholds.

Whenever a business combination meets the criteria described above, the parties have to obtain clearance from the SIC prior to closing, either through a fast-track notification proceeding or through a pre-evaluation proceeding, depending on the joint market share of the parties in any of the overlapping markets (ie, market threshold), in accordance with the rules outlined below.

Fast-track

If the aggregate market share of the parties to the transaction is below 20% in all of the overlapping markets, the business integration is deemed authorised provided that the transaction is previously notified to the SIC.

Pre-evaluation

If the parties’ joint market share is 20% or higher in any of the overlapping markets, express prior approval from SIC is required. These are information-intensive proceedings, with the SIC undertaking a substantive analysis of the transaction (a “pre-evaluation”) before making a decision.

The primary labour law regulations that acquirers should be concerned about in any jurisdiction will significantly depend on whether the transaction is structured as a share deal or an asset deal.

Share Deals

When a business is transferred through a share deal, there is no change of employer. Consequently, employee conditions, benefits, and entitlements remain unaffected. Consent from employees or labour unions is generally not required for the transfer, unless specifically defined in a collective bargaining agreement (which is uncommon).

Asset Deals

In asset purchase transactions where the assets constitute an ongoing concern, the transfer of employees directly linked to such assets operates automatically by virtue of law: transferred employees cannot legally refuse the change of employer or demand the payment of benefits. This is because the employment agreement remains intact and is not terminated, suspended, or modified. As a general rule, however, the former and the new employer will be jointly and severally liable with respect to the obligations accrued prior to the transfer.

Colombia has not formally adopted any national security review. However, foreign investment in activities directly related to defence or national security is prohibited in Colombia.

Mercantil Galerazamba S.C.A & others vs. Muñoz Merizalde & CIA (2020), an arbitral award, created significant legal precedent by shedding light on the interpretation of key aspects of Colombian law-governed M&A transactions such as: (i) the validity and enforceability of sandbagging and anti-sandbagging provisions; (ii) the role of representations and warranties; and (iii) the process for instituting claims.

This precedent has been reinforced by another recent arbitral award, Korn Arquitectos S.A.S. vs. César Antonio Pérez & others (2021), emphasising its relevance and impact in shaping M&A practices in Colombia.

The tribunal reached several noteworthy conclusions, which are outlined below.

Sandbagging

In the absence of a specific provision to the contrary (pro-sandbagging), a buyer cannot claim for damages arising from circumstances it was aware of before closing a transaction.

Representations and Warranties

Representations and warranties are alien to Colombian law and thus are difficult to understand within the framework of obligations under civil law, which categorises them as obligations to give, to act, or to refrain from acting (dar, hacer y no hacer). However, representations and warranties should be given legal effect and viewed as statements of facts which, if untrue or inaccurate, may lead to indemnification as specified in the acquisition agreement.

Nevertheless, if the agreement lacks an indemnity clause or specific consequences for misrepresentations, a misrepresentation could lead to the termination of the agreement or reduction of the purchase price. This can be sought by claiming hidden defects (vicios ocultos) under the agreement, or by claiming losses resulting from the breach of the agreement or failure to meet disclosure duties.

Claims Process

The parties are free to establish the process to institute claims in share purchase agreements and if such process is not followed, this may result in the loss of the right to claim.

This ruling aligns with the principle that, according to Colombian law, the agreement itself sets out the rules that govern the relationship of the parties (autonomía de la voluntad privada).

There have been no significant changes to takeover law in the past 12 months. A change occurred in January 2024, to add an additional item in the list of events exempt from the obligation to launch a public tender offer. Note, however, that this regulation was tailor-made to facilitate a particular transaction, so we do not anticipate it will have significant effects in the takeover law going forward.

Although there is no particular takeover legislation currently under review that could result in significant changes within the coming 12 months, we anticipate that the weaknesses that were highlighted by the Gilinski public tender offers (see 1.2 Key Trends) will probably soon be in the regulatory agenda.

A noteworthy development is that the stock exchanges of Colombia, Chile, and Peru have established a joint, regional stock exchange encompassing the three markets. This integrated exchange is anticipated to commence operations in 2025.

Stakebuilding prior to launching non-solicited offers is uncommon, because hostile tender offers themselves are uncommon (Gilinski’s hostile takeover attempts were an exceptional occurrence).

Still, bidders are allowed to acquire shares directly in the open market up to an amount that is less than 25% of the voting shares of a given target before having to launch a public tender offer.

Disclosure

Listed companies are required to disclose, as special or material information, the fact that a single person has become the beneficial owner of 5% or more of its voting shares.

No express equivalent obligation exists for non-listed shareholders. In practice, shareholders who hold or intend to hold 5% or more of voting shares (but less than 25%) avoid the disclosure obligations by acting through two or more holding vehicles, none of which exceed the 5% threshold. Some consider such strategy an aggressive approach. If the holding vehicles are given discretion on how the shares are to be voted (pursuant to a mandate, a trust, a swap or otherwise) then the shareholder is not considered to be the ultimate beneficial owner and thus no reporting obligations apply, even under the most conservative of approaches.

Filing Obligations

Public tender offers are mandatory when:

• any person (or group of persons constituting the same beneficial owner) intends to acquire shares representing 25% or more of the voting shares of a listed company;
• any person (or group of persons constituting the same beneficial owner) who already owns 25% or more of the voting shares of the relevant company, intends to acquire an additional 5% or more of the voting shares of a listed company;
• any person (or group of persons constituting the same beneficial owner) has acquired voting shares representing 25% (or representing more than 5% if the buyer already owns 25% or more) or more of a listed entity company as a result of a merger, in Colombia or abroad (in which case an “ex- post” public tender offer must be launched within three months of the transaction, unless the buyer divests the relevant shares within three months of the merger);
• any person (or group of persons constituting the same beneficial owner) holds more than 90% of the shares of the public company, if: (i) this threshold was reached by other means than a public tender offer for all of the shares in the company; and (ii) the minority shareholders owning at least 1% of the voting shares of the target company request the launch of a public tender offer (in which case the public tender offer must be launched within three months of the date on which the 90% threshold was exceeded); or
• the shareholders of the listed company decide to delist the company by a simple majority shareholder vote (as opposed to a unanimous shareholder vote).

A listed company may not introduce higher or lower reporting thresholds to facilitate stakebuilding via articles of incorporation or by-laws.

Stakebuilding is limited in Colombia by a combination of the following:

• the concept of beneficial ownership: the “beneficial owner” of a share is defined as the person or group of persons that, directly or indirectly, as a result of a contract or otherwise, has decision-making capacity over such share – ie, the ability or power to vote the share in the election of the management of the company issuing the share or to direct or control such vote, as well as to sell or encumber the share;
• the disclosure obligation triggered for the listed company when the same beneficial owner holds 5% or more of the voting shares of a listed entity; and
• the obligation to launch a public tender offer in the situations described in 4.2 Material Shareholding Disclosure Threshold.

Dealings in derivatives are permitted in Colombia, provided that certain rules are followed.

The filing and reporting obligations for derivatives dealings, under securities and competition law, are the same as those applicable to the acquisition of shares in publicly listed companies as described throughout this chapter.

When launching a public tender offer, bidders must disclose the purpose of the acquisition and their intention with respect to the control of the company, and explicitly outline their plans regarding the future activities of the target company.

Such disclosure must include, where appropriate, plans for the future use of the assets of the listed company, changes in the management bodies and amendments to the company’s by-laws, as well as any intention to delist the company.

Private Companies

There is no specific legal requirement to disclose a deal for privately held companies. The specifics of how the parties choose to reveal the transaction to the public, such as through a press release clause, are regulated in the transaction documents.

Listed Companies

A listed company is required to disclose a deal whenever it learns that binding agreements have been reached. Note, however, that targets themselves do not necessarily play a role in an acquisition, as the decision to sell the shares of a company lies solely with the shareholders, and not with the board of directors or any other body of the target.

Market practice regarding the timing of disclosure often aligns with legal requirements. On many occasions, the parties involved in a business combination that must be closed by a specific date work backwards on the calendar to ensure timely compliance with all applicable disclosure obligations.

The scope of legal due diligence can vary significantly depending on whether the company is private or public, the specific type of transaction and the target company business.

Private Companies

Typically, the due diligence scope for a private entity involves a review of key contractual obligations (top clients and suppliers), compliance with regulations and permits, corporate structure, consumer protection claims, environmental licenses, real estate matters, outstanding litigation and administrative proceedings, labour and pension issues, intellectual property, taxes and financing obligations.

Listed Companies

The due diligence scope for a listed company will primarily encompass public information, unless controlling shareholders persuade (or otherwise prevail over) the management to disclose all necessary information for the bidder to conduct a regular due diligence process, mirroring the scope typically undertaken for a private entity.

The scope of the due diligence process was unchanged by the COVID-19 pandemic.

Standstill agreements are not common practice because hostile takeovers rarely occur, and because the decision to sell shares of public companies rests solely with the shareholders, not with the target. This structure inherently reduces the likelihood of hostile tender offers, thereby making standstill agreements or hostile tender offers less relevant.

On the other hand, exclusivity provisions are common practice in Colombia. Typically, exclusivity terms are included in term sheets, binding offers, preliminary transaction documents and in the share purchase agreements themselves, rather than in separate and independent agreements. The duration of the exclusivity varies case by case.

Written undertakings with the selling shareholders are the market practice.

However, because, as a general rule, the acquisition of shares in a listed company must take place through the BVC and pursuant to a public tender offer if exceeding the thresholds set forth in 4.2 Material Shareholding Disclosure Threshold, the agreement defining exchange terms cannot actually transfer share ownership. Instead, it is limited to (i) the bidder’s commitment to offer to buy and/or launch a public tender offer on the pre-agreed terms; and (ii) the shareholder’s commitment to accept such offer or public tender offer (as applicable) on the pre-agreed terms.

This does not, however, prevent the parties from including customary stipulations, such as representations and warranties from the sellers regarding the shares and the target, the relevant indemnification obligations as well as break-up fees as deal protection.

Private Companies

The duration of an M&A transaction is influenced by various factors such as the length of a due diligence process, third-party consents, regulatory approvals, sophistication of the parties, and whether the transaction is handled as an auction process or by means of bilateral negotiations.

Overall, there is not a specific timeframe to complete a transaction. However, should express antitrust clearance be necessary (as opposed to a fast-track filing or no filing), the time required for completion can be extended by an additional five to eight months.

Despite the pandemic, no supplementary measures were implemented that impact the length of transaction completion. Nonetheless, transactions are generally taking longer to complete due to heightened regulatory scrutiny and/or bureaucracy.

Listed Companies

Once regulatory authorisations (such as antitrust clearance) are granted, the timeline to apply for authorisation to launch a public tender offer, launch it and settle it usually ranges from one to three months.

Private Companies

There is no obligatory threshold for offers unless specified within a bidding process established by a particular seller.

Listed Companies

Public tender offers are mandatory in Colombia in the following scenarios:

• any person (or group of persons constituting the same beneficial owner) intends to acquire shares representing 25% or more of the voting shares of a listed company;
• any person (or group of persons constituting the same beneficial owner) who already owns 25% or more of the voting shares of the relevant company, intends to acquire an additional 5% or more of the voting shares of a listed company;
• any person (or group of persons constituting the same beneficial owner) has acquired voting shares representing 25% (or representing more than 5% if the buyer already owns 25% or more) or more of a listed entity company as a result of a merger, in Colombia or abroad (in which case an “ex- post” public tender offer must be launched within three months of the transaction, unless the buyer divests the relevant shares within three months of the merger);
• any person (or group of persons constituting the same beneficial owner) holds more than 90% of the shares of the public company, if: (i) this threshold was reached by other means than a public tender offer for all of the shares in the company; and (ii) the minority shareholders owning at least 1% of the voting shares of the target company request the launch of a public tender offer (in which case the public tender offer must be launched within three months of the date on which the 90% threshold was exceeded); or
• the shareholders of the listed company decide to delist the company by a majority shareholder vote (as opposed to a unanimous shareholder vote).

Private Companies

Cash is usually preferred over shares as consideration in private companies. In a deal environment or industry with high valuation uncertainty, some of the common tools used to bridge value gaps may be:

• spinning-off disputed assets or defining the transaction’s perimeter more narrowly from the outset; or
• in private company deals incorporating earn-outs or deferred payment mechanisms into acquisition agreements, assuring the acquiring party that the company will achieve certain financial targets, while also providing the seller with potential additional compensation.

These approaches can help align the interests of both parties and facilitate a smoother transaction.

Listed Companies

Cash is the form of consideration that has been offered in the overwhelming majority of public tender offers. Shares in listed companies, bonds and debentures issued by the Colombian government or other sovereign issuers (among other forms of securities) are acceptable, but at least 30% of the consideration must be offered in cash.

Once a public tender offer is launched (ie, once the offer notice is published), it is irrevocable and cannot be made subject to pre-conditions (except as described below). Thus, any governmental approvals or other applicable conditions will have to be obtained or satisfied prior to launching the tender office.

In a pre-arranged transaction, it is common for the buyer’s obligation to launch the public tender offer to be subject to the satisfaction of pre-conditions such as securing antitrust clearance.

In practice, the bidder’s obligation to purchase the shares is subject only to the condition that acceptances correspond to at least the minimum number of shares specified in the offer notice, and that the shares to be acquired do not exceed the maximum number of shares the bidder offers to acquire in the offer notice.

A bidder will be required to acquire at least 5% of the voting capital in a listed company, and the difference between the minimum and maximum offer should be at least 20%.

Should the public tender offer fail to receive acceptances that satisfy this condition, the bidder has the option to either waive the condition or allow the offer to lapse, in which case, the public tender offer would be unsuccessful.

Private Companies

In private transactions, it is indeed an option for bidders to incorporate a condition in their offers pertaining to the procurement of financing. This stipulation, if included, should be explicitly articulated in the offer.

Additionally, any pertinent details concerning the status of the financing, such as term sheets, should be clearly stated. By adopting this approach, sellers can gain enhanced assurance regarding the availability of funds, thereby facilitating a smoother transaction process.

Listed Companies

In public transactions, once a public tender offer is launched it cannot be conditioned on the bidder obtaining financing. On the contrary, bidders will be required to demonstrate certainty of funds by providing a performance guarantee, covering a certain percentage of the value of the transaction to the BVC. The guarantee can be in the form of cash, a stand-by letter of credit or a bank guarantee, among other options.

Break-Up Fees

In private acquisition processes, break-up fees and penalty clauses are rare but not unheard of. In the case of public transactions, break-up fees are more common and are employed to ensure that initial selling shareholders compensate the bidder if a third party launches a competing offer and acquires the relevant shares. In certain instances, the SFC has revised agreed break-up fees to reduce them whenever it considers them excessive.

Exclusivity Agreements

In Colombia, exclusivity agreements are a more common deal security measure, yet still very heavily negotiated. These agreements restrict the seller from negotiating with other potential buyers during a specified period.

Pandemic Risk Considerations

Risks associated with COVID-19 have significantly influenced the drafting of material adverse effect clauses. These clauses now explicitly include new pandemics as adverse material effects. Parties are carefully considering the impact of unforeseen events like pandemics on their transaction’s success and are adjusting contractual language accordingly.

Regulatory Environment and Interim Periods

While there have not been specific changes to the regulatory environment, overall the length of interim periods has increased. Extended regulatory approvals and unforeseen delays are nowadays triggered by changes in the workforce of public entities resulting from changes in government and regulatory authorities that actively promote antitrust measures and exhibit less flexibility towards private investments.

In Colombia, control of a company can be established through a majority shareholding of more than 50% (although certain limited decisions may require higher thresholds in accordance with the law) and through other governance or contractual mechanisms. Bidders seeking less than 100% ownership of a target can negotiate the additional rights outlined below.

Vetoes and Supermajority Decisions

Bidders can negotiate veto rights over specific strategic decisions, such as major acquisitions, capital expenditures, or changes in corporate structure.

Supermajority provisions (requiring approval by a higher percentage of shareholders) can also grant the bidder additional influence over critical decisions.

In any case, certain decisions require higher voting thresholds per law, such as the decision to issue shares not subject to preemptive rights.

Board and Officer Appointments

Bidders can secure the right to nominate directors and officers to the target company’s management.

Board representation allows the bidder to actively participate in corporate governance and strategic planning.

Voting Agreements

Bidders can enter into voting agreements with other shareholders.

These agreements may include commitments to vote in a certain way on specific matters, ensuring alignment of interests.

Shareholders can vote by proxy in Colombia.

In Colombia, there are no legal squeeze-out mechanisms for listed companies and thus minority shareholders cannot be compelled to sell their shares.

On the other hand, minority shareholders holding at least 1% of a publicly listed company’s shares are entitled to request a public tender offer for them to sell their shares. This provision comes into play when an entity acquires more than 90% of the target company’s shares through means other than a comprehensive tender offer for all the shares of the target company. In such scenarios, the entity is obligated to launch the public tender offer within a period of three months from the time it exceeds the 90% ownership threshold.

Listed companies are usually acquired through irrevocable commitments from principal shareholders. In these agreements the prospective buyer’s obligation is to launch a public tender offer on the pre-agreed terms and conditions, and the other party’s (the selling shareholder’s) obligation is to accept the public tender offer, if it meets the pre-agreed terms.

However, because applicable regulations expressly prohibit agreements that hinder the right of shareholders to accept competing offers, these agreements can include break-up fees that would apply if the sellers accept a better offer.

Once a bidder files the public tender offer authorisation request, the SFC must notify the BVC in order to suspend the negotiation of the shares until the day after the publication of the tender offer notice. From this moment, the market will know a public tender offer is expected to be launched. If and when approved by the SFC, the public tender offer may be launched, and its content will become public.

Further, when a bidder agrees to initiate a public tender offer and a shareholder commits to accepting said offer through “prearranged transactions”, the details of such agreements must be disclosed to the SFC, the BVC, and the market at large, at least one month before the date on which they are to be settled.

As a general rule, the board of directors must approve rules and regulations for the issuance and placement of shares. Said rules and regulations must include the number and price of shares, form of payment, deadline for the subscription of the shares, and other certain information regarding the terms and conditions of the issuance of the shares.

If the business combination involves a listed company as a target and the consideration consists of securities, the offer notice shall include, inter alia, the following information:

• issue;
• type of security and
• stock exchanges where the securities are listed and, if applicable, the reference stock exchange.

Additionally, when the consideration consists of securities issued by an entity other than the bidder, the offering booklet shall include, inter alia, the following information:

• the financial information of the issuing company of the securities offered as payment, which was provided to the stock exchanges where they are listed during the previous 12 months;
• the nature and characteristics of the securities offered as payment and the amount and proportion to which they will be delivered;
• the rights and obligations embodied in the securities, with express reference to the conditions and the date from which they entitle the holders to participate in profits, as well as express mention of whether or not they enjoy voting rights;
• a brief description of the tax, foreign exchange and foreign investment regimes applicable to the securities offered as payment; and
• information on the methodology used to value the securities offered as payment.

Bidders must include audited financial statements (of the last fiscal year), prepared in accordance with IFRS, as part of the offering booklet.

The SFC has the power to request disclosure of the transaction documents in full. However, they are usually satisfied with detailed summaries of such documents.

In a business combination, by way of acquisition, merger, or otherwise, directors of the potential buyer or merger party play an important role in leading the process. In both, private and listed companies, directors’ fiduciary duties are owed to the company, as opposed to the interest of shareholders alone. Note that directors of the targets do not necessarily play a role in an acquisition, as the decision to sell the shares of a company lies solely with the shareholders, and not with the board of directors or any other body of the target.

Directors are generally held to the standard of an informed “good businessman”, which demands a level of care and diligence greater than that of an average individual. They should follow three fundamental principles of conduct: good faith, loyalty, and diligence.

Good faith assumes the legitimacy of actions without deceit or malice, aligning with ethical standards. Loyalty requires administrators to advance the company’s objectives without yielding to conflicts of interest, maintaining integrity and prioritising the company’s welfare over personal gains or those of any appointing shareholders.

Lastly, diligence equates to the foresight and caution of an experienced professional, ensuring informed and thorough decision-making.

It is common for companies (private and listed) to establish special or ad hoc committees when evaluating an acquisition, a merger or the sale of shares in another company.

Note that directors of the targets do not necessarily play a role in an acquisition, as the decision to sell the shares of a company lies solely with the shareholders, and not with the board of directors or any other body of the target.

While the ad hoc committees can serve as an initial screening mechanism to identify potential conflicts of interest, the regulatory process is that, in the event of a conflict of interest, the director has the alternative to either refrain from engaging in the conflicting activity or seek prior approval from the shareholders. Consequently, special committees are not entitled to definitively resolve conflicts of interest.

The business judgment rule, recently formalised in corporate regulations, serves as a benchmark for judges when assessing directors’ decisions. It allows directors the freedom to make business decisions without fear of being held accountable by judicial authorities due to negative outcomes in the business. However, this freedom is curtailed during takeover attempts by the passivity rule, which bars directors and management from deploying defensive tactics once a hostile tender offer is initiated.

In the case of public offers, the target company’s management does not participate; the decision to sell shares in publicly listed companies rests solely with the shareholders. As a result, in Colombia, there is an absence of legal precedent regarding the assessment of directors’ behaviour in these scenarios, as they do not participate in the decision-making process.

Private Companies

A common and beneficial practice for directors is to draw on the expertise of external advisers who can provide an independent perspective on a business. These advisers may offer a wide range of services including, for instance, financial, tax, legal, and marketing consultancy.

Listed Companies

In a typical sale process, the target’s board of directors does not play any role, and therefore it is uncommon for the board of director to seek independent outside advice. In business combinations, by way of acquisition, merger, or otherwise, the board of directors is typically more involved, and therefore it is quite common for the board to seek guidance from external advisers.

The Superintendence of Companies has previously examined situations involving conflicts of interest. It has specifically evaluated whether certain actions or agreements represent a conflict of interest, with a particular focus on related-party agreements.

Additionally, a recently issued regulation explicitly states that a conflict of interest exists when directors have an indirect or direct interest that could compromise their judgement or independence in the decision-making targeted towards the company’s best interest. This regulation lists cases of potential conflicts of interests by way of example, including when the counterparties to agreements entered by the company are:

• companies legally represented by the same individual;
• individuals or companies that exercise indirect or direct control over the company; or
• family members of the director or the director’s partners (up to second degree of consanguinity or civil relationship and second degree of affinity).

To our knowledge, there are no known cases where the Superintendence of Companies has determined that a conflict of interest duly approved by the company’s highest governing body was ultimately harmful to the company.

Hostile tender offers are allowed in Colombia but are rare.

Public market regulations limit the availability of defensive measures pursuant to the passivity rule.

According to this rule, from the moment share negotiation is suspended – which coincides with the filing of the public tender offer authorisation before the SFC – until the offer’s outcome is published, the company and its directors are prohibited from carrying out the following actions (unless they were approved prior to the filing of the public tender offer authorisation):

• issuing shares or convertible securities;
• conducting direct or indirect operations on the shares;
• disposing of, encumbering, or performing any act that could result in the definitive sale of, assets representing 5% or more of the total assets, as well as leasing assets that could impede the normal progress of the offer;
• executing transactions that could significantly alter the price of the target shares or securities; or,
• engaging in any act outside the company’s ordinary course of business; these restrictions extend to subsidiaries and affiliates if the target is part of a business group or under control.

Nevertheless, regulations do allow for the possibility of a third party presenting a competing tender offer. Therefore, seeking a “white knight” – ie, an entity completely independent of the company’s directors – may be permissible, as it would not involve any of the previously mentioned prohibited actions. This process can provide a strategic alternative for companies facing hostile takeover attempts, ensuring that all actions are within legal boundaries and corporate governance standards.

Given the scarcity of hostile takeovers in Colombia, there have not been any instances where defensive strategies have been employed. This absence of visible scenarios involving such measures could suggest a business environment that is either less aggressive or more regulated in ways that deter hostile attempts to gain control of companies.

While defensive measures are limited under Colombian regulations, directors face a challenging paradox. They are subject to a strict liability regime, which, coupled with the prohibition on acting before a public tender offer is made, presents a dilemma. Directors navigate between adhering to their fiduciary duties and complying with securities regulations. This situation underscores the complexity of corporate governance, where regulatory constraints can sometimes conflict with the responsibilities entrusted to company directors.

Except for certain business combinations such as mergers, directors of a target do not play a role in rejecting or accepting public tender offers, nor in negotiating a transfer of shares. It is the shareholders who possess the exclusive right to determine whether or not to sell their shares.

In Colombia there have been fewer instances of litigation associated with M&A deals compared to the United States and other common law jurisdictions.

However, claims related to breach of representations and warranties and purchase price adjustments are not unheard of.

Most frequently, M&A disputes arise after the closing of the transactions. Broken-deal disputes triggered by a failure to close a transaction (due to the occurrence of a material adverse change, or otherwise) are rare.

To our knowledge, no broken-deal disputes that established relevant precedent and legal principles arose in Colombia resulting from the COVID-19 pandemic.

However, there are valuable lessons to be learned in the M&A landscape following the COVID-19 pandemic. Deal makers are now placing greater importance on certain aspects, such as:

• ensuring that exit or walk away rights are properly drafted and negotiated, specifically including provisions related to material adverse effects caused by pandemics and other disruptive events;
• carefully negotiating interim covenants between the signing and closing of a deal, particularly in uncertain times; this includes provisions related to operating the business in the ordinary course, in accordance with past practices or in a prudent and reasonable way;
• rethinking the extensions to drop-dead dates; and
• purchase price and related adjustments, including completion accounts and locked-box mechanisms.

In Colombia, corporate culture has traditionally involved closed-capital companies with a limited number of shareholders, contrasting with common law jurisdictions. This environment has historically limited shareholder activism.

One of the mechanisms available for activists is the shareholders’ corporate action known as “acción social de responsabilidad”, which is employed against directors who fail to act in the best interest of the company. To date, the use of this action has been limited, because in practice it was restricted to the controlling shareholder. However, this may change with the recent introduction of Decree 46 of 2023.

According to this Decree, any shareholder (including any minority shareholder) may file claims on their own account, but in the interest of the company, to seek compensation for the losses suffered as a result of breaches of the directors’ duties (ie, if a director acts in a conflict of interest that results in losses to the company). We consider this action to be relevant for the future of shareholder activism in Colombia.

In most companies, it is the shareholders or associates who decide whether to sell their shares. Consequently, acquisition deals are primarily governed by the decisions of the shareholders rather than the directors.

This principle also applies to mergers and spin-offs, which are typically considered amendments to the by-laws and are usually decided by the shareholders. This framework ensures that the primary stakeholders retain control over major corporate restructuring decisions.

It also highlights that agency problems may arise not only between shareholders and directors but also between majority and minority shareholders, providing opportunities for activists to intervene.

Interferences can arise in M&A deals with varied shareholder profiles. However, in spin-offs or mergers, minority shareholders have a safeguard: they can exercise withdrawal rights, demanding the repurchase or redemption of their shares.