In El Salvador, the technology M&A market has been growing exponentially over the past year. This is due to the current commitment to modernisation and the implementation of new technologies in El Salvador’s financial market. Several factors have contributed to this boom, among which new technology adoption and favourable regulations can be highlighted, which in turn has led to foreign investment and an expanding start-up market.

In comparison to the global market, El Salvador still has a very small technology M&A market; however, new regulations have sparked new interest, which has accelerated the pace of growth. Even though it is considered immature, the technology M&A market in El Salvador is leading all the indicators of growth in the region, and it is becoming increasingly relevant at the global level, emerging as a pioneer in the region. Of course, compared to the global level, M&A transactions in El Salvador are still very limited in scope and size; however, if the situation is compared to that two years ago, or to other reference points in the region, growth has been considerable.

The key trends in El Salvador in the last 12 months are as follows:

• increased foreign investment – new business models have led to an increase in interest in El Salvador’s technology M&A market from foreign investors;

• focus on technology – there is growing demand for tech-driven solutions and services;
• regulatory changes – evolving regulations and government policies, including the adoption of Bitcoin as legal tender, are shaping the M&A landscape and encouraging new investment opportunities;
• collaborative ventures – investors are seeking new business opportunities with local actors to take advantage of the emerging market; and

• tokenisation – as a financial instrument in El Salvador, tokenisation offers innovative opportunities for enhancing liquidity and enabling fractional ownership of assets; converting physical assets into digital tokens on a blockchain facilitates secure transactions and broadens access to investment opportunities for a wider range of investors.

New regulations offer a series of tax incentives for companies looking to operate in the technology market in El Salvador, allowing them to maintain some of their operations and profits tax-free. Therefore, this has served as an attractive option for investors looking to establish an entity in El Salvador.

The time it takes to incorporate a new company varies depending on the industry and the operations to be carried out, but it is approximately two to four weeks.

The initial capital will vary depending on the business model, but for a limited liability company (LLC) the amount is USD2,000. Furthermore, a new business model has been created for small entrepreneurs, called the simplified stock company (SAS), which only requires one person and can be set up with only USD1.

The type of entity entrepreneurs choose depends on their business goals, their needs and the nature of their operations.

The most common types are as follows.

• Corporation: This entity is suitable for businesses seeking to raise capital through the issuance of shares. It allows for limited liability, meaning shareholders are not personally liable for the company’s debts.
• Limited liability company (LLC): Often preferred by small to medium-sized businesses, this structure offers limited liability and is generally easier to manage than a corporation, with fewer regulatory requirements.
• SAS: This newer entity type is designed for entrepreneurs with more informal operations who are looking for flexibility and simplicity. It has no minimum capital requirement and can be founded by just one shareholder, making it very suitable for start-ups.
• Partnerships: These entities can be suitable for smaller ventures or professional services where the partners want to share responsibilities and profits directly; however, they are less common.

The choice of entity affects factors like taxation, liability and governance, so entrepreneurs and investors are usually advised to carefully consider which one suits them best. However, regulations allow for changes during the process, and businesses often start with one idea regarding the entity type but switch to another as they evolve.

Commonly, early-stage financing comes from local investors, family offices and government-sponsored funds. However, with new market regulations, more seed investment and foreign investors looking for current business opportunities in El Salvador are being seen.

In El Salvador, a typical source of venture capital (VC) is government-sponsored funds that offer grants to start-ups. These grants are more common than overall VC funding. Additionally, foreign VC firms are gradually becoming more active in providing financing, but the availability of home-country VC for start-ups remains limited.

The VC ecosystem in El Salvador is still developing. As such, standardised documentation practices are evolving.

As mentioned before, it is common for start-ups to begin with a very basic structure – ie, a corporation or SAS structure, as they are easier to set up and are the industry standards. However, as start-ups develop and seek VC financing, they may be inclined to consider changes in their structure or jurisdiction. For example, as start-ups expand their operations, they often need more complex structures, like a corporation in Delaware, to attract investment. Investors may prefer to invest in entities with a more familiar corporate structure, and companies may also face stricter regulatory requirements, prompting re-evaluation of their corporate structure.

Investors in El Salvador looking for a liquidity event are more likely to pursue a sale process rather than a public listing, given the developing nature of the local market. Acquisitions are seen as a more reliable and strategic way to achieve returns. Most investors prefer running a sale process because it generally provides quicker returns and involves less regulatory complexity compared to an initial public offering (IPO).

If the company decides to pursue a listing, it is more likely to opt for foreign exchange rather than a home country exchange. This is primarily due to the small local market, which is predominantly focused on debt securities, such as debt issuances and financing for projects, rather than equity offerings. The limited scope of the domestic exchange makes it challenging for companies to achieve the visibility and capital-raising potential that foreign exchanges can provide. Therefore, seeking a listing on a foreign exchange may offer greater opportunities for growth and investor interest.

In El Salvador, there is no mechanism as such to squeeze our minority shareholders following a successful tender offer. Thus, the listing of a company on a foreign exchange could impact a future sale in the internal market.

In El Salvador, if the sale of a company is chosen as a liquidity event, the sale process is most likely to be a bilateral negotiation with a chosen buyer. The Salvadoran financial market is still somewhat small; therefore, a large part of the transactions that take place within it is based on trust among the involved parties.

Individuals with capital to invest are not very numerous in El Salvador. However, with new regulations and business models attracting foreign investors, this is changing. Additionally, local investors are increasingly seeking to bring in foreigners to participate with them in their businesses.

The sale of a privately held technology company with a number of VC investors can be structured as an asset sale, where the buyer acquires specific assets and liabilities of the company, or as a share sale, where the buyer acquires ownership of the shares in the company. A share sale is more common for VC companies as it allows for a simpler transition of ownership.

The decision to sell the entire company or only a portion of its equity largely hinges on the underlying motivations for the sale. If the primary goal is to secure additional capital for growth, it may be more strategic to sell minority stakes, allowing the founder to maintain a significant ownership interest while still attracting the necessary investment to drive expansion.

In the case of an established company where the seller no longer wishes to remain involved, it is logical for the entire business to be sold. This approach allows for a clean transition of ownership and can provide the seller with a complete exit strategy.

In El Salvador, it is more common for transactions to involve a complete sale of the company for cash. While there are instances where a stock-for-stock transaction occurs, or where buyers acquire stock and also provide cash, it is important to note that assets owned by the state typically remain excluded from such deals.

Founders and VC investors are expected to be held responsible for representations and warranties, as well as certain liabilities after closing. This is often established in the agreement, through indemnification clauses and other mechanisms that clearly define who is responsible.

An escrow can be a security mechanism to cover potential claims; however, an insurer can be more effective as it translates the risk and responsibility to a third party to cover any possible claim.

In El Salvador, spin-offs in the technology industry are not very common; however, they are becoming more popular because of the entrepreneurial ecosystem and innovation. The entrepreneurial culture has started to flourish, driven by incubators, accelerators and universities that promote start-up development. Some factors leading to the emergence of spin-offs include government and institutional support, incubator programmes and education and training.

In the current legal framework, spin-offs are not tax-free entities in El Salvador. However, there are new laws that offer certain tax benefits that may apply to specific operations of a spin-off – such as capital gains while trading digital assets – or to any other tech company.

A spin-off followed immediately by a business combination is possible in El Salvador. However, all regulations must be complied with to establish a formal corporation, limited liability company, SAS or other preferred entity.

The timing for a spin-off should be the same as that for establishing a normal entity, namely two to four weeks. Registration before the tax authority and a tax identification number are mandatory.

There are no public companies as such in El Salvador that are in the primary market.

In El Salvador, there is no specific mandatory offer threshold established by law, since that type of transaction is not regulated. However, there are regulations regarding thresholds in certain private companies that, due to their operations, have a special regulatory framework and limitations that may be applicable. For example, regulations for banks and pension funds are designed to ensure transparency and market stability.

Due to the nature of transactions involving a public entity and a private partner, various structures must be considered. As mentioned before, El Salvador does not have public companies that are in listed in the market; however, it does have public-private partnerships, such as joint ventures between the state and private entities, as well as concessions, particularly when public services or the exploitation of state resources are involved.

In El Salvador, public company acquisitions in the technology industry can be structured as cash transactions or stock-for-stock transactions; however, they are mostly cash transactions. The only regulation regarding the specific minimum price is that it is not possible to sell all shares at the nominal price.

There is no regulation for takeover offers in El Salvador, since they mostly occur in the private sector – ie, between private parties.

It is customary to enter into transaction agreements in El Salvador in connection with a takeover offer or business combination, not only for public companies but also between companies in the private sector. Both public and private companies typically provide representations and warranties regarding their operations, assets and financial condition. This practice helps reassure the buyer that they are acquiring a company that meets the expected standards and reduces the overall risk associated with the transaction.

Concerning the minimum acceptance conditions for tender offers in El Salvador, the following should be considered:

• minimum acceptance threshold – this ensures that the bidder achieves a meaningful level of control over the target company;
• regulatory considerations – the bidder must disclose their intentions regarding control of the company and the potential impacts of the offer on shareholders; and
• strategic reasons – setting a minimum acceptance threshold helps the bidder assess the viability of the offer and ensures that they have sufficient shares to effectively influence corporate decisions.

These conditions are designed to protect the interests of both bidders and shareholders, ensuring a fair and transparent acquisition process.

In El Salvador, squeeze-out mechanisms allow a majority shareholder to buy out minority shareholders who have not tendered their shares after a successful tender offer in accordance with the following:

• ownership threshold – a threshold of at least 90% ownership is typically required to initiate a squeeze-out;
• legal mechanism – once the 90% threshold is met, the bidder can begin a formal process to buy the remaining shares at fair market value;
• fair value determination – the price offered must reflect fair value, determined through independent valuations or agreed-upon methods, ensuring minority shareholders receive adequate compensation; and
• regulatory oversight – the Superintendence of the Financial System (SSF) oversees the process to ensure compliance with legal standards and to protect all shareholder rights.

In El Salvador, “certain funds” (ie, financing documents with bank certification) are not always required to launch an offer. However, it is advisable – and commonly requested – to have secured financing to ensure the viability of the offer.

The offer can be made either by the buyer or by the financing banks, depending on the structure of the transaction. If certain funds are not required, a takeover offer or business combination can be conditional on the bidder obtaining financing. This must be clearly stated in the offer documentation and communicated to shareholders.

A target company can grant several types of deal protection measures, which may include:

• break-up fees – the target company may agree to pay a fee to the bidder if the deal is terminated under specific conditions, discouraging competing offers;
• matching rights – the target can grant the initial bidder the right to match any superior proposal from another party, allowing them to retain the opportunity to complete the transaction;
• force-the-vote provisions – in a merger scenario, the target company can include provisions that require shareholders to vote on the merger agreement, ensuring that the transaction is put to a vote even if there are competing offers;
• non-solicitation provisions – the target may agree not to solicit other offers or engage in discussions with potential bidders, helping to protect the initial offer; and
• exclusivity agreements – the target company can enter into agreements that grant exclusivity to the bidder for a specified period, preventing the target from negotiating with other parties during that time.

These measures aim to protect the interests of the bidder and facilitate the completion of the transaction, while also balancing the interests of the target company’s shareholders.

In El Salvador, if a bidder cannot obtain 100% ownership of a target company following a takeover offer, they can still secure certain governance rights, including board representation and shareholder agreements, to establish voting rights in decision-making processes and other governance matters. Minority protection rights are not especially relevant under Salvadoran legislation but are nonetheless recognised.

These governance rights enable the bidder to have a degree of control and influence over the target company, even without full ownership.

In El Salvador, it is advisable to obtain irrevocable commitments from the principal shareholders of the target company to tender their shares or support the transaction. This can provide greater assurance to the bidder regarding the likelihood of a successful offer.

These commitments typically outline that the principal shareholders will tender their shares or vote in favour of the transaction. However, they often include provisions allowing the shareholder to withdraw their commitment if a superior offer is made. This “out” clause provides flexibility for the shareholders such that they can act in their best financial interests.

In El Salvador, the offer generally needs to be approved by the SSF before launching; this is to ensure compliance with securities regulations. The regulator does not typically approve the offer price itself but ensures that the terms are fair and compliant with legal requirements.

The regulator or stock exchange may set a timeline for the tender offer, which outlines how long the offer will remain open. If a competing offer is announced, it can affect the timeline of the original tender offer. The initial bidder may have to respond by extending their offer or revising the terms to remain competitive. These processes are designed to protect shareholders and ensure transparency in the acquisition.

Another factor to consider is whether the transaction significantly impacts the market conditions; a review by the Superintendency of Competition (Superintendencia de Competencia) may be necessary to prevent monopolistic practices.

A takeover offer or tender offer cannot be completed in El Salvador before the expiry of the offer period due to the lack of regulatory or antitrust approvals. The extension terms typically depend on the agreement between the parties and may require a notification to shareholders.

Therefore, the parties involved sometimes seek approval, or a form of reference approval, before making the transaction.

The regulatory landscape in El Salvador depends on the specific technology sector one wants to enter. For instance, there is a new legal framework applicable to all entities operating in the digital assets market, regardless of whether the intention is to be a digital asset provider, issuer or certifier. Additionally, Bitcoin has its own distinct regulations.

First and foremost, a formal commercial entity must be established in El Salvador. This typically involves setting up a company that complies with all legal and tax requirements. Subsequently, the specific regulations governing the target industry must be navigated, encompassing various aspects of technology, finance and banking, as well as consumer and data protection.

Key regulatory bodies involved in this process include the Superintendency of the Financial System, the Central Reserve Bank, and the National Commission of Digital Assets of El Salvador, among others. The entire process of obtaining the necessary permits and approvals usually takes around four to six weeks, assuming all requirements are met.

For companies looking to operate on the stock exchange of El Salvador, there are also specific regulations that must be followed.

The primary securities market regulator for M&A transactions in El Salvador is the Superintendency of the Securities Market.

In El Salvador, there are no major restrictions on foreign investment. Currently, foreign direct investment is encouraged, and there are various incentives to attract investors. However, certain sectors, such as telecommunications and energy, have specific regulations that may limit foreign investment in these areas.

Regarding investment filings, a formal filing is not typically mandatory, so the filing is not suspensory. However, a notification to the Ministry of Economy is sometimes advised, where the investment can proceed while the notification is processed. It is mandatory to register formally to obtain a tax identification number.

In El Salvador, there is no formal or legal national security review process specifically for acquisitions, as seen in some other jurisdictions. Although there are some AML processes and guidelines to follow regarding transactions, they are not specifically related to national security concerns, instead relating more to internal money laundering agreements.

Nevertheless, certain sectors may be subject to additional scrutiny, particularly those involving critical infrastructure or national security concerns.

As for restrictions or considerations based on the investor’s geographic origin, there are generally no specific prohibitions. However, political relations and international agreements may limit certain commercial relations.

In El Salvador, the basic antitrust filing requirements for takeover offers and business combinations are regulated by competition law. The legal framework has established thresholds for transactions based on the size of the companies involved, which is in turn related to their total assets or annual sales. A notification to the Superintendency of Competition is required prior to the merger or acquisition, including detailed information about the companies involved, the nature of the transaction and potential impacts on market competition; the Superintendency will review the transaction to assess its effects on competition before finally approving or denying the transaction. Reasons for denying a transaction may vary; however, they tend to be related to the impact that the merger or acquisition may have on the market.

In El Salvador, labour regulations largely adhere to international standards and are based on employee rights, job stability and contract continuity. Currently, there is no specific legal requirement for the formation of a works council in the context of acquisitions; therefore, there is no binding obligation for boards of directors.

El Salvador does not have currency control regulations, as it uses the US dollar as its official currency. This dollarisation means that there are no restrictions on currency exchange or capital flows related to M&A transactions. Also, El Salvador has recently adopted Bitcoin as another official currency.

The most significant legal development in El Salvador in the past three years related to technology M&A has been the adoption of Bitcoin as a legal tender, followed by the new regulatory framework regarding digital assets in general; this regulates the issuance, purchase and sale of digital assets, establishing a legal framework for cryptocurrencies and other digital assets. It facilitates the creation of a secure environment for investors and users.

Relevant laws include the following:

• the Digital Assets Law regulates the issuance and trading of digital assets, providing a secure environment for investors and users and offering fiscal benefits;
• the Cybersecurity Law protects information systems and ensures security in the use of information and communication technologies, outlining responsibilities for public and private entities;
• the Personal Data Protection Law aims to regulate the collection and processing of personal data, to safeguard citizens’ privacy and rights;
• the technology Investment Promotion Lawencourages investment in technology projects through tax incentives and simplified procedures for businesses; and
• the Electronic Signature Law establishes a legal framework for the use of electronic signatures, granting them the same legal validity as handwritten signatures – together with the Digital Protocol, this law aims to ensure the integrity and confidentiality of publicly issued electronic documents that require notarisation and facilitates electronic transactions and digital contracts, thereby promoting trust in online dealings.

In El Salvador, public companies must provide bidders with due diligence information, encompassing financial performance, operational data, legal compliance and any material contract. They are also required to offer the same information to all bidders to ensure fairness. Regarding technology due diligence, the board of directors can assess IT systems, software and cybersecurity measures while protecting sensitive information. However, since this information may be sensitive, confidentiality agreements are advised to ensure the protection of data shared between parties.

In a due diligence process, because of the nature of the inquiry, sensitive information is always going to be shared between the parties involved. However, this does not mean that all information can be or has to be shared; there are always limits. Often, parties involved in due diligence will enter into confidentiality agreements that restrict the sharing of sensitive information to protect trade secrets and proprietary data. Certain information may be protected by laws, such as privacy laws or regulations regarding financial disclosures, which limit how and when that information can be shared. Only information that is material to the transaction or relevant to the parties’ decision-making processes should be shared. Irrelevant or immaterial information is typically excluded.

Depending on the industry (eg, financial services, healthcare), there may be specific regulations governing what information can be shared. For example, to share information that involves third parties, additional consent may be required, or sharing may be restricted by third-party privacy rights. Only information that is publicly available or can be disclosed without violating any agreements or laws can be shared without restriction.

As of now, the only acquisition in El Salvador made through the stock exchange involved pension fund administrators (PFAs) and a bank. Shares were traded on the stock market, and this case is quite unusual because it involves regulated companies. Specifically, the regulations require that any investor intending to hold more shares of these companies, which are subject to specific controls due to their industry, must seek authorisation from the Superintendency of the Financial System for approval of the purchase at the conglomerate level.

Additionally, when a natural or legal person will not own more than 50% plus one of the shares, but will own more than 10%, they must also request authorisation.

However, this does not apply to technology companies but could be applicable in the future for a bank that operates solely as a digital platform, which, due to their nature, fall under special regulations.

Under the regulations in El Salvador, a prospectus is not required for the issuance of shares in a stock-for-stock takeover offer or business combination. Additionally, there is no requirement for the buyer’s shares to be listed on a specific exchange in the home market or any other identified markets.

In all transactions and markets, bidders are usually required to produce financial statements, pro forma or otherwise, in their disclosure documents for both cash and stock-for-stock transactions. In El Salvador, these financial statements must be prepared in accordance with the applicable accounting standards, which are typically based on international financial reporting standards (IFRS) or generally accepted accounting principles (GAAP), as required by the regulatory authorities.

If a transaction is going to be reviewed by the Superintendency of Competence, the parties involved in a takeover offer or business combination are typically required to file copies of the transaction documents, thus ensuring regulatory oversight and transparency in the transaction process. The specific documents that need to be filed may include the offer document, prospectus and any agreements related to the transaction. Also, there are certain thresholds that are reviewed by the Superintendence, which typically sets a monetary threshold based on the combined turnover of the parties involved. If the transaction exceeds this threshold, notification and review may be required.

Market Share

The Superintendence may also consider the shares of the merging entities in relevant markets. If the merger could significantly affect competition (eg, by creating or strengthening a dominant position), it may trigger a review.

Mandatory Notification

Certain types of M&A may require mandatory notification to the Superintendence, particularly if they meet specified thresholds. This allows the authority to assess potential anti-competitive effects.

Exemptions

Some transactions might be exempt from review, depending on their size, nature or specific regulations.

In El Salvador, directors have a fiduciary duty to act in the best interests of the company and its shareholders during a business combination. This includes exercising care, loyalty and good faith. While directors primarily owe their duties to shareholders, they must also consider the interests of – and their legal obligations to – others such as employees and creditors, especially in the context of long-term sustainability and corporate governance.

Whether special or ad hoc committees are established in business combinations depends on the type, scope and size of transaction. Nevertheless, there is usually significant involvement from the owners, who are typically part of the board of directors. Committees are typically tasked with overseeing the transaction, ensuring that the interests of all shareholders are represented and that the process is fair and transparent in a more informal process.

The board is expected to be actively involved in negotiations and can defend the company’s interests during a business combination. It is relatively uncommon for an M&A transaction to end in litigation; however, this can happen. The buyer should consider how involved the board of directors was in the transaction. This ensures that everyone is informed and in agreement at the time of executing the agreement, minimising the possibility of any opposition. This approach helps avoid any judicial proceedings, which would only delay the process.

Directors commonly seek independent outside advice in connection with a takeover or business combination. This typically includes legal advice and financial advice, with financial advisers often providing fairness opinions to assess whether the terms of the transaction are fair from a financial perspective. This practice helps protect the directors by demonstrating that they acted with due diligence in fulfilling their fiduciary duties.