For the purposes of this chapter, a private equity transaction is considered by the authors to be any acquisition of the total or majority shares of a private company where either the buyer or the seller is, or is controlled by, a private equity fund. It shall be noted that private equity funds acting in the Uruguayan market are in most cases (if not all) incorporated abroad (typically in the USA, the UK or Brazil).

Regarding private equity transactions and M&A deals more generally in Uruguay, after an exceptionally high number of transactions in 2021 and 2022, the number of deals has since somewhat decreased. According to Exante, a local consultancy firm, there has been a 70% decrease in the number of deals in the first half of 2023 compared to the same period of 2022.

The main reason for the slowdown in the M&A activity is being attributed to the increase in interest rates by the principal central banks worldwide (in response to high inflation rates), which has increased the cost of capital. Another reason attributed to the decrease in activity is the fact that 2021 and 2022 saw high numbers of deals that were originally scheduled for 2020 but delayed as a consequence of COVID-19.

Although the number of deals has decreased, it should be noted that the values of transactions closed in the first half of 2023 have been significant compared to previous years.

During the last 12 months, the sectors which have stood out in private equity deals have been energy, infrastructure and forestry. Energy sector transactions have related mainly to the acquisition of wind farms or solar power plants, meanwhile infrastructure sector transactions have mainly been related to public roads and education centres.

With respect to M&A deals more generally, 50% of transactions during the first half of 2023 have taken place in the mass consumption (retail) sector. Other significant sectors have been metallurgical, software and fintech, and meatpacking and slaughterhouses.

Regarding macroeconomic factors, an increase in activity is expected in the private equity industry in the coming period, given that inflation rates have begun to slow down, and interest rates (and the cost of capital) are expected to decrease. In relation to the prices, terms and conditions of the deals, these developments will probably shift the current “buyer-friendly” environment to a “seller-friendly” one.

Finally, it should be noted that Uruguay has particularly attracted, and continues to attract, private equity funds and investors looking for legal certainty, transparency and a market with economic stability. Moreover, although Uruguay has a small market, investors appreciate its strategic location, being next to two big markets in Brazil and Argentina.

Modifications to Antitrust Law

In 2020, an amendment to Uruguayan antitrust law was put into effect. Pursuant to this modification, the merger control regime in respect of certain economic concentration acts evolved from a “notification” regime to a “prior authorisation” regime.

With the new law, prior authorisation from the Comisión de Promoción y Defensa de la Competencia (“Antitrust Commission”)shall be obtained in respect of all economic concentration acts, where the operation participants’ collective annual gross turnover in Uruguayan territory, in any of the three prior economic periods, is equal to or higher than 600 millionUnidades Indexadas (as of September 2023, approximately USD90 million).

It is worth mentioning that, as of September 2023, the Uruguayan Parliament is analysing a new amendment to the antitrust law. Pursuant to this, authorisations shall only be required where, in addition to the threshold being surpassed on a collective basis, the annual gross turnover free of taxes of two or more participants in the operation, considered on an individual basis, is equal to or higher than 30 million Unidades Indexadas (as of September 2023, approximately USD4.5 million). Should this amendment be approved, it is likely that the number of requests for authorisation before the antitrust commission will be considerably reduced.

Amendments to Taxation on Foreign Passive Income

Pursuant to a new law passed in 2022, passive income earned abroad by a Uruguayan entity which is part of a multinational enterprise (“MNE”) will be subject to corporate income tax (IRAE by its acronym in Spanish) when the entity is considered “non-qualified”. This modifies the prior regime where, in accordance with the “source rule”, in principle, passive income from assets located abroad earned by a Uruguayan entity was not levied with IRAE.

The new law states that “qualified entities” are those that have an adequate economic substance in the country. In turn, to meet the “adequate substance” standard, where the entity is a holding company, the entity shall employ human resources which are adequate to manage the investment assets, and it shall have adequate facilities to develop the activity. Unless otherwise proven, a resident director is presumed to fulfil the requisite of adequate human resources.

ESG

In 2020, Uruguay passed a law creating the Ministerio de Ambiente (“Ministry of Environment”). Previously, environmental aspects were subsumed by a ministry which also handled housing and zoning issues. The stated purpose of creating a specific and separate Ministry of Environment is to prioritise environmental matters, and to strengthen and professionalise the regulatory, supervisory and permitting stages.

Also, with regards to ESG, a law has recently been passed, creating an integral framework in respect of waste management. This governs the transport, treatment, storage and disposal of all manners of waste (except radioactive waste and waste generated by mining activity). As a general rule, the responsibility for the management and the assumption of costs lies with the entity which generated the waste. In respect of certain special wastes, such responsibility will be allocated to the manufacturer or importer.

The Primary Regulators and Regulatory Issues

In general terms, the acquisition/sale of private companies is not regulated in Uruguay and no notifications or authorisations are required, except for antitrust clearance (if applicable), the communication of the new beneficial owners before the Central Bank of Uruguay, and certain notifications or authorisations which may be required for a change of control in respect of businesses in certain regulated sectors.

• Antitrust clearance – with regards to the procedure, the Antitrust Commission has a 60-day period since the economic concentration act is notified by the parties and the required documentation has been submitted in a complete and correct manner to resolve (if the commission does not resolve within the 60-day period, the authorisation shall be deemed granted). During this period, the commission can either:
1. authorise the transaction;
2. subordinate the authorisation to the fulfilment of certain conditions; or
3. deny the authorisation.
• Communication of the ultimate beneficial owners (UBOs) – Uruguayan entities are obliged to communicate the identity of their UBOs and shareholders before a registry carried by the Central Bank of Uruguay (which is confidential), and any modifications (eg, after a PE acquisition). UBOs are defined as natural persons which hold, directly or indirectly, at least 15% of the shares in the reporting company.
• Change of control notifications or authorisations from governmental authorities – the primary regulators in regulated sectors which require prior notification or authorisation include:
1. the Central Bank of Uruguay, which regulates the financial services sector;
2. the Regulatory Unit of Communication Services (URSEC by its acronym in Spanish), which regulates and supervises telecommunication activities;
3. the Regulatory Unit of Energy, Fuel and Water (URSEA by its acronym in Spanish), which regulates and supervises the energy, fuel and water industries;
4. the Ministry of Transport and Public Works (MTOP by its acronym in Spanish), from which prior consent may be required, for example, in respect of a change of control of a concessionaire company; and
5. the National Administration of Power Plants and Electrical Transmissions (UTE by its acronym in Spanish), a state-owned electricity company from which prior consultation may be required, for example, in respect of a change of control of a concessionaire company.

Foreign Investment

Uruguay has an Investment Promotion Law which expressly sets forth that foreign and national investors shall be treated alike for all purposes. No specific authorisations are required for foreigners to invest in Uruguay. Moreover, the law states that investors can freely transfer their capital and profits abroad in freely convertible currencies.

There are no general limitations in respect of the shareholding of Uruguayan companies, which may be owned partially or entirely by foreign legal or natural persons, and there are no general limitations regarding the composition of the board of directors, which may be entirely composed of foreign and/or non-resident legal or natural persons. Uruguayan law expressly acknowledges the legal existence of foreign companies in respect of isolated circumstances (holding shares in a local company, filing or defending a suit, participating in a tender process, etc). However, in order to carry out its business purpose in Uruguay, the foreign legal entity is required to establish a branch or a subsidiary company.

AML/CFT and Anti-bribery

In 2017, Uruguay passed a law setting an integral framework against money laundering and terrorism financing, which brings Uruguay into compliance with OECD and UN regulations. Although Uruguayan banks already had AML/CFT regulations before then, these controls have since increased significantly. Parties in a PE transaction must consider these controls where a local wire transfer of the purchase price shall be made.

Since 1998, Uruguay has also had a law in place which establishes a framework for the prevention, suppression and eradication of corrupt practices by civil servants and public officials. Corruption within the private sector is not expressly regulated, but such practices may amount to other felonies.

ESG

Uruguay does not have a law dedicated to setting forth the regulatory framework of the three aspects of ESG (environmental, social and governance), but it does have numerous scattered laws and decrees addressing the three issues. As mentioned in 2.1 Impact of Legal Developments on Funds and Transactions, the specific Ministry of Environment has recently been created, which handles the different stages of environmental permitting processes.

The level of legal due diligence carried out will usually depend on the size of the target and the requirements of the PE purchaser, and it will usually be focused on or tailored to the specialisation of the target. For instance, if the target is a software company, special attention will be paid to IP law matters, and, if the target has extensive human resources (eg, a call centre), special attention will be paid to labour law aspects.

Notwithstanding the foregoing, the legal due diligence will, in most cases, include the main areas of law (corporate, regulatory, contractual, labour, litigation, IP, environmental, real estate). The investigation can also include tax due diligence, although this investigation is sometimes carried out by a separate financial adviser (who would usually also undertake the accounting and financial due diligence).

Certain areas of investigation can be undertaken based on samples, especially where there are significant levels of documentation. For example, with respect to contractual matters, only a summary of the top ten clients and/or providers may be provided. Regarding labour law matters, the investigation may be limited to a sample of the employees.

The result of the due diligence will usually consist of a “red flag” legal due diligence report, which would highlight the main findings (ie, executive summary), discriminate between the high, medium and low contingencies found, and provide suggested methods of mitigating or addressing these contingencies.

The contingencies or findings of the investigations can result in (among other things):

• adjustments to the agreed purchase price;
• inclusion of specific indemnities in the share purchase agreement and/or the seller’s post-closing undertakings; and
• inclusion of guarantees to address the contingencies found (escrows, corporate guarantees, etc).

Vendor due diligence is most commonly seen in auctions or competitive sales. In this regard, vendor due diligence reports serve as a means to attract more bidders to the process (given the transaction cost cutting they may imply) and to speed up the process (by saving bidders’ time allotted for their investigations). To serve that purpose, vendor due diligence reports usually provide reliance to the bidders. However, bidders will nonetheless undertake independent confirmatory due diligence, to verify the accuracy of the vendor’s reports and to eventually challenge them.

Implementation of Acquisitions

Most acquisitions in Uruguay are implemented through share purchase agreements (where the target is a corporation:sociedad anónima) or membership interest assignment agreements (where the target is an LLC:sociedad de responsabilidad limitada). In the latter case, the intervention of a notary public and the registration of the acquisition before the National Registry of Commerce are necessary (and the payment of specific stamp duties is required).

Acquisitions of all or substantially all the assets of a company (so-called establecimiento comercial, which freely translates to “commercial establishment”) are rarely seen. The main reason for this is that this kind of acquisition has significant tax costs (VAT and corporate income tax are levied on the goodwill) and entails a lengthy statutory process which includes obtaining special certificates before the fiscal and social security authority. Mergers of companies also entail a long statutory procedure including publications in the official gazette and registration before the Registry of Commerce; these are also hardly seen. Finally, court-approved schemes are reserved for bankruptcy or liquidation procedures.

Auction Sales v Bilateral Sales

Auction sales or competitive sale procedures are becoming increasingly common in private equity transactions (and M&A deals generally) in Uruguay, particularly in respect of the sale of large companies or assets. Some of the auction sales seen in recent years refer to the sale of concessionaire companies in the energy or infrastructure sectors (which have a power purchase agreement or a PPP contract with a governmental entity), or in the natural resources sector.

In comparison to bilaterally negotiated transactions, the terms of the documentation in auction sales tend to be more seller friendly. This is obviously derived from the nature of the process, where several bidders compete to purchase the target, leaving the seller with more bargaining power. Consequently, sellers will usually seek to provide limited representations and warranties (R&W), with low liability caps, or directly require warranty and indemnity (W&I) insurance. Moreover, buyer-friendly terms, such as deferred payment considerations structures or earn-out schemes, are rarely seen in auction sales.

Private equity funds and/or sponsors typically use a special purpose vehicle (SPV) for the purchase of the target, which can be incorporated in either Uruguay or in a country with a favourable tax environment and with which Uruguay has a double-taxation treaty in place. The use of SPVs is especially common where the buyer is a consortium of two or more PE funds or co-investors, as a way to pool and encapsulate their investments.

On occasion, the buyer will be a Latin American holding company of the PE fund group. It is a common practice of PE funds to ring-fence their Latin-American companies/business under one holding company, helping them in terms of both internal organisational purposes and facilitating a future exit from the region. The holding company may be incorporated in Uruguay, given that the country’s “source rule” tax regime makes it suitable for holding company activity.

Private equity transactions are typically funded by a combination of both equity and third-party debt.

The portion of equity is usually provided to the SPV by a private equity sponsor, either by means of capital contributions or through shareholder loans. In respect of such equity contributions, sellers may request the provision of an equity commitment letter from the private equity sponsor, which enables them to enforce payment of the purchase price at closing should the SPV fail to do so. The seller might also require a comfort letter from the group’s parent company.

The portion of third-party debt is usually provided by banks, which strongly predominate in the financial system in Uruguay (in comparison to capital markets). On rare occasions, the PE acquisition may be highly leveraged (LBO), and the bank will require suitable guarantees such as a pledge over the shares of the target or liens over the target’s assets (eg, an assignment of accounts receivables, which is the cheapest and quickest security interest to perfect).

To evidence the availability of third-party funds to the purchaser, sellers usually require the delivery of bank commitment letters either at signing or even at an earlier stage (eg, during the binding offer stage of an auction sale).

In large-scale acquisitions, the buyer may be composed of a consortium of two or more private equity sponsors. However, large-scale acquisitions are not common in Uruguay, and, in most cases, the purchaser is a single investor.

Completion Accounts and Locked-Box Consideration Structures

Completion accounts consideration structures were the general rule for Uruguayan private equity transactions (and M&A deals generally), especially in large-scale acquisitions. In light of geopolitical uncertainties and the extraordinary circumstances that have taken place lately (COVID-19, war in Ukraine, etc), buyers are not willing to fix the price in anticipation of closing, as it would make them bear the risk of the performance of the business during the timeframe between signing and closing. In contrast, by adopting completion accounts structures, PE buyers obtain comfort that the price they will pay reflects the actual value of the company at the time of completion.

The current buyer-friendly environment, caused by rising interest rates and high costs of capital, also explains the adoption of completion accounts structures.

However, fixed locked-box structures have become increasingly used in PE transactions (and M&A deals generally), especially in auction sales. In these cases, the buyer will pay a pre-agreed fixed price at closing, and this price will not be adjusted post-closing unless the seller has breached a “no leakage” undertaking during the timeframe between the latest financial statements of the company (used for fixing the price) and closing. In addition to no leakage undertakings, the seller will also agree to conduct the business in a manner consistent with past practice (in the ordinary course) and shall indemnify the buyer should this undertaking be breached.

Earn-Outs, Deferred Consideration and Rollover Structures

Given the current buyer-friendly environment, earn-outs and deferred consideration schemes are also becoming increasingly common in Uruguay, although they are not the rule.

Earn-out schemes enable buyer to reduce the risk of an acquisition by deferring a portion of the purchase price and making it conditional on the actual performance of the target after closing. Typically, where an earn-out payment is arranged, the seller will remain working or linked to the company during the applicable earn-out period as a way to “defend” their earn-out payment.

Where a deferred consideration payment is adopted, the buyer will pay an upfront amount at closing and hold back the balance for a later stage (eg, periodic instalments). In such cases, a seller with certain leverage will usually require adequate guarantees from the buyer (share pledge over the shares of the target, parent company guarantees, etc).

Rollover schemes, where the seller remains co-invested with the buyer by reinvesting or rolling over part of the purchase price of the target in exchange of a minority shareholding, are not common in Uruguay.

Where a locked-box consideration structure is adopted, the seller may seek to charge the buyer interest on the fixed purchase price as compensation for running the business for the benefit of buyer from the locked-box date to the closing date (commonly referred to as a ticking fee). On the other hand, the buyer may seek to charge the seller interest on any leakage that occurs during the locked-box period (“reverse interest”).

In practice, neither ticking fees nor reverse interest are normally seen in Uruguayan PE transactions. They are quite common, however, in auction sales where sellers enjoy certain bargaining power.

Where a completion accounts structure is agreed, the parties will normally establish a specific dispute resolution mechanism to settle disputes that arise in respect of the closing financial statements. This mechanism typically consists of resorting to a third-party expert, and the parties will usually agree in the share purchase agreement that the third-party expert shall be a reputable accounting firm.

Regarding locked-box structures, it is not common to have a specific dispute resolution mechanism in place. In the event of a dispute (eg, where the buyer claims the occurrence of a leakage), parties will usually have to refer to the general dispute resolution mechanism established in the share purchase agreement (eg, ordinary courts or arbitration).

Given that closing certainty is of utmost importance for both PE buyers and sellers, parties will usually seek to reduce the number of conditions precedent to closing as much as possible. These will normally be reduced to mandatory or strictly necessary actions, such as (if required), authorisations from governmental authorities (eg, antitrust clearance), authorisations from other third parties (eg, contractual change of control waivers, or project finance lenders’ consent in infrastructure projects), and approval from corporate bodies of the buyer or seller (eg, approved by the shareholders in a shareholders’ meeting).

In light of the current buyer-friendly environment and the unusual events that have taken place lately (COVID-19, war in Ukraine, etc) buyers may also seek to include as condition precedent the “absence of material adverse effects”. However, this clause will usually be strongly resisted by sellers, especially PE sellers who are committed to returning proceeds of the sale to their investors.

In cases where the target company’s assets are mainly composed of land or real estate (eg, forestry companies), it is common that closing will be conditional to a satisfactory title study by the buyer. Nevertheless, it is worth highlighting that title study is quite a standardised process in Uruguay, with little room for discretionary interpretations or legal uncertainties.

By agreeing to a “hell or high water” undertaking, the buyer compromises by taking whatever step necessary to close the transaction. This type of undertaking is usually strongly resisted by PE buyers and is not commonly seen in Uruguayan PE transactions.

The main reason for this is that, as per antitrust law, the Antitrust Commission has the authority to subject its authorisation to the fulfilment of certain conditions, which could include PE buyer’s divestment of other businesses from its portfolio. Clearly, this makes a hell or high water undertaking one that PE buyers are not willing to take.

In respect of foreign investment conditions, it should be noted that they are practically nonexistent in Uruguay, and hell or high water clauses could therefore hardly be linked to them.

Break fees are not frequently seen in PE transactions in Uruguay. In cases where a break fee is agreed, a PE buyer will normally negotiate that the break fee shall only apply in the circumstance that the non-consummation of the transaction is attributable to the buyer’s breach of the share purchase agreement (and shall not apply if the transaction is not consummated for reasons not attributable to the buyer).

Reverse break fees (ie, termination fees in favour of the buyer) are also not commonplace in Uruguayan PE transactions. There have been instances where buyers have requested cost reimbursements in relation to competitive processes where the buyers have bid within a certain price range but the seller has selected another bidder.

Circumstances Allowing the Parties to Terminate the Acquisition Agreement

As mentioned, closing certainty is an important element looked for by both PE buyers and sellers in PE transactions. Therefore, parties will usually reduce the causes for termination as much as possible. These limited circumstances for termination are usually the following:

• a mutual agreement between the parties;
• the will of either party should a governmental authority issue an order restraining or prohibiting the consummation of the transaction;
• the will of either party should there be a material breach of any representation, warranty, covenant or agreement by the other party such that a condition precedent to closing will not be satisfied; and
• the will of either party should closing not take place before a given longstop date (regardless of any breach to the R&W or covenants by any party).

Longstop Dates

Longstop dates depend on the conditions precedent to closing being satisfied. When a governmental authorisation is required (eg, antitrust or regulatory clearance) or when project finance lenders’ consent needs to be obtained, longstop dates can be as long as 12 months.

Termination Rights after Closing

In PE transactions where an earn-out payment or deferred consideration is agreed, the seller may try to reserve its right to terminate the share purchase agreement after closing, with a reversal of title to shares, should the buyer fail to perform its payment obligations. However, buyers will usually strongly negotiate against and resist this clause, and it is therefore hardly seen in Uruguayan PE transactions (particularly given the complexity, in both theoretical and practical terms, of a “return of business” scenario taking place).

Given that PE-backed sellers aim to have “clear exits” when selling a business, they will usually try to sell the company “as is”. In comparison to corporate sellers, PE-backed sellers will frequently not be willing to assume risks other than liability in respect of fundamental R&W (eg, title to shares in the target) and fraud. However, given the course of negotiations, and depending on the bargaining power of the buyer, PE sellers will normally be “forced” to also provide general or business R&W.

In respect of these general R&W, the PE seller will naturally aim to reduce them as much as possible in terms of scope, time and amount. Moreover, the PE seller may require the purchase of W&I insurance in respect of these general R&W, especially in the context of auction sales.

R&W and Indemnities

Representations and warranties normally provided by sellers are divided into two categories: (i) fundamental R&W, which typically refer to seller’s title to shares, the existence of the target, the capacity of seller, etc, and (ii) general R&W, which refer to the business of the target, such as environmental and employment matters, tax, intellectual property, litigation, real property, etc.

In addition, where a significant known contingency exists (eg, environmental irregularities or the lack of a permit), either disclosed by the seller or found by the buyer in its due diligence, PE buyers will usually require specific indemnities in respect of this contingency.

As mentioned before, the number and scope of the R&W and indemnities are normally one of the most strongly negotiated sections of the acquisition agreement. Naturally, the PE seller will seek to reduce them as much as possible.

Limitation of Liabilities by Duration and Amount

Fundamental R&W usually have a long-term duration (eg, two, five or ten years) and are normally capped at an amount equal to the purchase price. General R&W have shorter duration periods (eg, one or two years) and are capped at an agreed percentage of the purchase price (10%, 30%, etc). Tax representations, particularly, are usually agreed to be valid during the statute of limitation period, which, depending on each given case, might be of five or ten years since the underlying tax obligation became due and payable. Other representations such as employment matters may also be limited to their statute of limitation period. Finally, with regards to specific indemnities, they will usually have specific expiry periods and amount limits associated with the relevant contingency.

PE sellers usually require de minimis and threshold/basket provisions. Pursuant to this mechanism, the seller shall not be liable to compensate the buyer unless and until (i) the amount of the loss determined in respect of an individual claim is more than a certain amount (de minimis), and (ii) the aggregate amount of all individual indemnification claims against the seller exceeds a certain amount, in which case the buyer may be entitled to recover all losses or, alternatively, the losses that exceed a certain threshold. It should be noted that de minimis and threshold/basket provisions may not apply to fundamental R&W or to specific indemnities.

Data Room Disclosure

When sellers have a strong bargaining power – mainly in auction sales – they may demand disclosure of the data room against the warranties (meaning that all the information contained in the data room shall be deemed to be disclosed by the seller and known to the buyer). Buyers will normally resist this request and require the seller to disclose any qualifications to the R&W in a detailed disclosure schedule.

W&I Insurance

The use of W&I insurance is becoming increasingly common in PE transactions in Uruguay, especially where a relevant international component exists (eg, the buyer is a foreign company). Where there is no such international component, the use of W&I insurance is unlikely, since local insurance companies do not currently offer W&I insurance products. Where W&I insurance is required, it will usually cover general R&W only (not fundamental R&Ws).

Purchase Price Retentions and Escrows

PE-backed sellers will strongly resist purchase price retentions and/or escrows to fund post-closing liabilities, given their commitment to return proceeds to investors as soon as possible and achieve clean exits. However, where a significant known contingency exists (eg, permitting issue), sellers may be “forced” to agree to retentions over the purchase price and/or the constitution of escrow accounts.

Non-compete and Non-solicitation

Where the seller worked at the target organisation and is known for being competent in the relevant industry, PE buyers will usually negotiate the inclusion of non-compete and non-solicitation clauses.

Litigation in PE transactions is not common in Uruguay. Where conflicts or discussions arise in respect of the execution and/or interpretation of the acquisition documentation, parties will normally tend to settle them via an agreement.

Conflicts or discussions (where they do arise) normally refer to the determination of the net working capital adjustment and/or the occurrence or determination of leakage events (depending on which consideration structure was adopted). Discussions may also arise in turn of the determination of earn-out payments.

Public-to-private transactions are practically non-existent in Uruguay given the small number of publicly traded companies.

Pursuant to Uruguayan regulation (specifically the rules of the Montevideo Stock Exchange (BVM by its acronym in Spanish)), a buyer of shares in a listed company is obliged to disclose its identity and submit certain information before the BVM the first time it acquires shares (irrespective of the percentage of shares acquired, for example, 1%, 10% or 60%). After such first purchase, no additional disclosure is triggered by exceeding certain thresholds.

Under Uruguayan regulation, there are no shareholding thresholds which trigger mandatory offers to the minority shareholders.

Tender offers for listed companies are practically non-existent in Uruguay (given the small amount of publicly traded companies). Therefore, there is no market practice on whether cash or shares are more “commonly” used as consideration.

With respect to tender offer regulations, there is no minimum price requirement.

Conditional tender offers are not allowed under Uruguayan regulation. However, while the offers must contain the amount offered for the purchase of shares, this amount can be modified up until the moment of the award of the shares. The contents of offers will be considered confidential information until the moment the successful bidder is awarded the shares.

Even if a bidder does not obtain 100% ownership of a target, it will still have broad governance rights in the case that it has more than 50% of the shares. With its majority shareholding, the buyer will be able to modify the bylaws, appoint and remove members of the board of directors, and resolve capital increases, among other things.

Uruguayan law does not provide a squeeze-out mechanism in relation to minority shareholders.

As mentioned before, tender offers for listed companies are practically non-existent in Uruguay. Therefore, there is no consolidated market practice with respect to irrevocable commitments to tender or vote by the principal shareholders of the target company.

Incentivisation of the management team through equity instruments (eg, shares) is rarely seen in Uruguayan PE transactions. Equity incentivisation of employees in Uruguay is frequently seen in multinational companies listed in major international stock exchanges, but it is not commonplace in the context of local private equity transactions.

With regards to PE transactions, management incentivisation schemes are more often implemented through contractual arrangements. For example, granting the manager the right to a percentage of the future net earnings of the company, or through salary incentives such as bonuses linked to the performance of the company.

As mentioned in 8.1 Equity Incentivisation and Ownership, equity incentivisation of the management team which includes combining “sweet equity” with “institutional strip” is rarely seen in PE transactions in Uruguay. Where managers participate in the shareholding of the company, this is usually because the manager was the seller of the company (and arranged to maintain a minority shareholding at the time of the sale) or because the manager is a co-investor. In such cases, the PE fund shareholder and the manager (as minority shareholder) will usually agree to issue shares classified into series or classes where the shares of the minority shareholder allow the manager to appoint at least one member to the board of directors.

Where management incentivisation plans exist (which are usually contractual arrangements), these are usually linked to “vesting provisions”, meaning that the manager will only be entitled to a given benefit after completing a minimum period of service at the company. For instance, the company and the manager may arrange the payment of a bonus which shall only be due once the manager completes three years of service at the company. In the case that the manager leaves before this date, the bonus shall not be due.

Also common in management incentive plans are “good leaver” and “bad leaver” provisions. Good leavers are managers who leave the company due to causes such as retirement, disability, or other specified “justified causes”. Bad leavers are those who are not good leavers. The relevant distinction between these categories is that good leavers are “fully vested”, meaning that they will be entitled to the whole portion of the benefit plan, or at least the percentage accrued, whereas bad leavers may lose the whole benefit plan.

Managers of PE companies are usually subject to non-compete and non-solicitation undertakings, which will incur penalties in the event that they are breached. Non-disparagement undertakings are rarely seen. However, in such cases, the PE company may be entitled to seek damages in accordance with labour law.

Where managers hold a minority shareholding in the company, they will usually seek to negotiate protections such as anti-dilution rights, which allow them to protect their ownership percentages. Moreover, although manager minority shareholder will not normally have control over or influence on the exit of the PE fund, they might arrange tag-along rights, which allow them access to better offers for their exit from the company.

High-level decisions on the operation of the company will usually be reserved for the PE fund shareholders of the company. High-level decisions include the appointment of directors, disposal of significant assets and the issuance of general powers of attorney.

Shareholder Control

PE funds usually entrust the day-to-day operations of the PE company to a manager or management team, reserving the high-level decisions for themselves.

Under Uruguayan law, as shareholders of the PE company, the PE funds will usually decide on the matters reserved to the shareholders’ meeting. These matters include appointment of members to the board of directors (which will usually be representatives of the PE fund) and their remuneration (if applicable), approval of financial statements, distribution of dividends, modifications to the bylaws and increases in social or paid-in capital.

In addition to these matters, PE funds will usually also reserve the approval of other significant decisions, such as incurring debt that exceeds certain threshold, issuance of powers of attorney, disposal of significant assets, creation of liens over the company’s assets or the granting of guarantees in favour of third parties, etc.

Information Rights

Given that representatives or employees of the PE fund are usually appointed as members of the board of directors, the PE fund will have comprehensive information concerning the operations of the PE company. As a minimum, they will have the information rights assigned to all shareholders in a Uruguayan company. On top of that, they normally require certain reporting, which varies on a case-by-case basis but usually includes financial reporting and reporting on other metrics of performance.

Portfolio companies are usually established as corporations (sociedades anónimas), in which case the liability of shareholders with respect to the actions taken by the company is, in principle, limited to the amount of their contributions. On occasion, portfolio companies may be established as LLPs (sociedades de responabilidad limitada) due to tax reasons, in which case the liability of membership interest holders is also limited to the amount of their contributions, except with regards to labour salary claims and liability derived from income tax and social security contributions of the company.

Notwithstanding the foregoing, it is worth highlighting that the “lifting of the corporate veil” doctrine is expressly recognised under Uruguayan law, and, in these circumstances, shareholders may be found liable for the acts of the company. The lifting of the corporate veil applies where a company is used fraudulently (against the law) to violate public policy, or it is used fraudulently against the rights of shareholders or third parties.

Finally, Uruguayan law provides that shareholders shall be liable for damages caused to the company due to:

• voting in shareholders’ meetings in an abusive manner; and
• for not abstaining to vote in respect of decisions in which they have a conflict of interest with the company.

The divestment of Uruguayan PE portfolio companies is made through private sales (either via bilateral negotiation or auction processes).

IPOs (and therefore also “dual-track” exits) are very rarely seen in Uruguay given that the equity capital market is practically nonexistent. In fact, as of March 2023, there were only seven Uruguayan companies listed in the BVM – with only four of them having had activity in the last 15 years.

The participation of PE funds in recapitalisation schemes (eg, where the PE fund acquires a majority ownership in the company while the seller retains a portion of the shares) or schemes where the PE fund stays invested in the company alongside the buyer (eg, selling part but not all the shares, “rollover equity”), are also rarely seen in Uruguay.

Drag-Along and Tag-Along Rights

Where a PE sponsor participates in the shareholding of a company with a minority shareholder, they will usually have a shareholders’ agreement in place granting the PE sponsor drag-along rights. The possibility to “drag” the minority shareholder will certainly improve the PE sponsor’s chances of a satisfactory exit from its investment (ie, by being able to offer potential buyers to acquire the total stake in the company). Minority shareholders may enjoy tag-along rights in turn, depending on a case-by-case basis.

Thresholds

Drag-along provisions do not usually distinguish if the right applies when the offer involves a proposal to purchase 100% of the company or a lesser percentage (eg, 51%). Moreover, shareholders’ agreements will usually state that the sole decision of the majority PE sponsor to exercise its drag right will be sufficient to trigger the mechanism (ie, without the need to convince other minority shareholders where the company has three or more shareholders).

Finally, both drag-along and tag-along provisions are usually set on a pro-rata basis. For example, in the case that the majority shareholder sells 50% of its shares, the minority shareholder shall, or is entitled to (as the case may be), sell 50% of its shares too.

As mentioned before, IPOs are very rarely seen in Uruguay given that the equity capital market is practically non-existent. Therefore, there is no market practice with respect to lock-up arrangements, relationship agreements and other particularities of an IPO.