Mergers and Acquisitions 2017

Last verified on Thursday 9th March 2017

Uruguay

Tomas Guerrero Costa and Tomás Gurmendez
Posadas, Posadas & Vecino
  1. 1.

    Has the level of M&A activity slowed, increased, or remained flat in 2016 as compared to 2015, and what are conditions like today? In general terms, what level of activity is foreseen for 2017? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Liquidity? Rule of law? Other?

  2. Despite its size, Uruguay is undoubtedly one of the most attractive Latin-American countries to invest in. Its social and political stability, favourable and adequate legal framework and strategic location make it a great host country for foreign investment.

    In line with the region, particularly Argentina and Brazil, 2016 was not an active year in terms of M&A. As compared with 2015, the level of activity was considerably lower in terms of number of transactions, although similar in the total value (in US$).

    However, for 2017 we should expect a moderated increase in the level of activity, which is already the case for the last quarter of 2016 (in which the activity appears to have taken off).

  3. 2.

    Which industries do you expect will see the most M&A activity in 2017?

  4. Uruguay is predominantly a producer of agricultural commodities, so the agribusiness sector will always be active in terms of M&A. Also, we expect to have a lot of activity in the retail industry, an industry in which international investors have shown great interest in recent years. Finally, many renewable energy projects – mainly wind farms and biomass plants – were constructed or are under construction in Uruguay as a consequence of firm public policies adopted by the national energy company (UTE), leading to a potential increase in M&A activity within this industry as investors from North America and Europe seek to grab a share of this growing market. 

  5. 3.

    What types of deals do you expect to see?

  6. Normally, M&A transactions in Uruguay take place through a purchase of shares, which may be a total, majority or minority acquisition. Acquisition of the going-concern business or pure asset transactions is also possible, although not normally used due to tax disadvantages (in relation to a stock purchase) and certain bureaucratic requirements imposed by law in order to complete the transaction. Merger transactions are scarce given the fact that a merger is subject to a formal and time-consuming control by the governmental agency in charge of the oversight of Uruguayan corporations (note that is not an antitrust control, but a formal corporate control). Finally, since Uruguayan companies are predominantly closely held (there are very few publicly traded companies) hostile takeovers or public tender offers are non-existent.

  7. 4.

    Discuss the level of M&A activity you have seen over 2016 and expect to see in 2017 of:
    (i) pure domestic deals;
    (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
    (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.

  8. In 2016, domestic deals were relevant in terms of number but normally not in terms of amount, and this trend will probably remain the same for 2017.

    Foreign investment is the main engine of M&A deals. As in previous years, the major and most relevant M&A transactions were acquisitions of local companies by international investors. Traditionally, Argentinean and Brazilian companies and funds have intensely invested in Uruguayan companies. More recently, investors from other Latin-American countries such a Peru, Colombia and Chile also closed relevant deals. Outside the region, investment came mainly from United States (mostly private equity) and European countries such as Spain, France, England, Finland and the Netherlands. Finally, Chinese and Indian companies are showing great interest in Uruguay.

    Owing to the size of the country, Uruguay is definitely a host country for foreign investment, especially considering its geographical location which sets it apart as an ideal logistical hub or regional distribution centre, a factor which has been of strong interest to the country since the early 1980s.

  9. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?

  10. Private equity (PE) transactions have been increasing steadily in recent years, with PE investors attracted by the political stability and economic growth of Uruguay and the advantages and security Uruguay presents as compared to neighbouring countries. International funds such as Advent International, Gavea Investimentos, JH Partners, Linzor Capital, Magna Capital and Tribeca Partners are leading the PE market. Domestic funds are not relevant in PE deals.

    Most PE funds acquire 100 per cent of the shares of the local company. In certain cases, PE funds do not buy the entire target but simply take a controlling stake. On the other hand, minority investments are scarce. We have also seen PE funds team up to jointly purchase strategic targets.

  11. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?

  12. Acquisition financing is available, although not common, in the domestic banking market. Normally, foreign investors raise funds in the international market, so this is not an issue to address in Uruguay.

  13. 7.

    How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?

  14. Uruguay has historically been open to foreign investment in all sectors of its economy. Foreign investment has continued growing in recent years under signs of protection of free market rules and different government incentives such as tax exemptions for foreign investments in certain critical areas. In 2012, foreign direct investment (FDI) represented approximately 5 per cent of the GDP thus ranking Uruguay second in terms of FDI/GDP in South America after Chile. Recent discoveries of natural resources (ie, iron, gas and oil) have led the country to welcome new massive investments from multinational corporations. Economic growth has also attracted foreign companies to purchase existing players in sectors such as services, transportation, abattoirs and the retail business.

    The Uruguayan legal system protects equality as a constitutional right and at a statutory level where no distinctions are made between nationals and foreigners. Besides, foreign investment is generally admitted without any previous authorisation or filing requirements before any governmental agency and capital inflows and outflows are free (no foreign exchange control whatsoever). These rules apply to government contract bidding and to corporate rules on purchase of companies. Furthermore, the judicial system provides efficient and adequate remedies in cases where a foreign bidder wants to contest the fairness of a bidding procedure.

  15. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?

  16. The level of corruption in Uruguay has traditionally been very low (Uruguay ranked number 1 within Latin America according to International Transparency 2013). Therefore, corruption is not a relevant issue when doing business in Uruguay.

  17. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2016 as compared with 2015? What are the prospects for 2017?

  18. In 2016, the number of companies in reorganisation or restructuring processes increased as compared to 2015. This led, in turn, to an increase in the number of distressed M&A transactions, although the number is still marginal.

  19. 10.

    Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?

  20. Uruguay has historically been open to foreign investment in all sectors of its economy, going as far as to declare, through law 16.060, that the promotion and protection of domestic and foreign investment be of national interest. Foreign investment has continued growing in recent years under signs of protection of free market rules and different government incentives such as tax exemptions for foreign investments in certain critical areas, such as renewable energy, biotechnology and machinery and agricultural equipment manufacturing. IIn the first half of 2016, foreign direct investment (FDI) represented approximately 9 per cent of the GDP thus ranking Uruguay second in terms of FDI/GDP in South America after Colombia. Economic growth has also attracted foreign companies to purchase existing players in sectors such as services, transportation, abattoirs and the retail business.

    The Uruguayan legal system protects equality as a constitutional right and at a statutory level where no distinctions are made between nationals and foreigners. Besides, foreign investment is generally admitted without any previous authorisation or filing requirements before any governmental agency and capital inflows and outflows are free (no foreign exchange control whatsoever). These rules apply to government contract bidding and to corporate rules on purchase of companies. Furthermore, the judicial system provides efficient and adequate remedies in cases where a foreign bidder wants to contest the fairness of a bidding procedure.

  21. 11.

    Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?

  22. Hostile takeovers are inexistent in the Uruguayan market which is characterised by the predominance of closely held family businesses or international holding groups, being publicly traded companies an exception. Therefore, no specific responses have been developed in this context.

  23. 12.

    How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisors, fairness opinions?

  24. Publicly traded companies are almost inexistent in Uruguay, therefore shareholder activism and minority protections are not developed for public companies.

  25. 13.

    Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?

  26. Despite the  increase in the M&A activity in recent years, there have been no significant changes in how management or controlling shareholders act in M&A transactions. Again, it is important to bear in mind that Uruguayan corporate law is designed to be applied mostly to closed corporations, thus specific fiduciary duties applicable in an M&A process to directors of publicly traded companies, as known in Anglo-American systems, do not exist in Uruguay.

    Under Uruguayan Law, directors and managers have a duty to act with ­"loyalty’ and ‘diligence" under a "good businessman" standard. These fiduciary duties are not specific to directors or managers acting in the context of an M&A deal, but are applicable to all acts and omissions of directors or managers, towards the corporation and shareholders and exceptionally towards third parties. Along with these “general” fiduciary duties, directors and managers carry a duty of confidentiality due to the information and knowledge of the business which they possess and a duty relating to conflicts of interest which prevents them from putting their interests over that of the company.

    Finally, controlling shareholders are liable for the damages caused by the abusive exercise of their voting rights and are also liable under the general principle of abuse of right.

  27. 14.

    Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?

  28. Despite the fact that the economic growth of recent years has rendered the Uruguayan market more dynamic and brought more media interest in large corporate transactions, exposure to shareholder criticism, regulatory pressure or liability for negative publicity or potential litigation is not a matter of specific concern for directors or managers of Uruguayan companies as may be in other countries.

    Furthermore, in 2014, a new law was enacted (Law No. 19.196) which establishes a new system of criminal liability for employers who breach safety and hygiene rules and regulations, in the scope of work relations, with regards to their employees. According to this law, said breaches may be punishable by three to 24 months of prison in the case of employers who effectively exercise managerial power on behalf of the company and who do not adopt the safety methods and practices provided for by laws and regulations.

  29. 15.

    Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?

  30. Business people and legal practitioners in Uruguay have shown a significant degree of openness and flexibility in adapting their legal instruments to those that are standard in international deals. This was fostered by the fact that many Uruguayan corporate lawyers have studied in US or European universities or worked abroad for international firms. Nowadays, purchase and other agreements used in acquisitions of local companies by foreign investors are totally aligned with the standard documents used internationally and have been success­fully related to equivalent concepts and rules under Uruguayan law guaranteeing the enforceability of the same in Uruguayan courts. However, even in standard cross-border deals, certain particular rules of local law still have an impact on transactional documents.

  31. 16.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?

  32. In recent times deals have become more sophisticated with the progressive arrival of foreign investors. Transactional documents and the process of due diligence have been standardised to meet the international practice requirements. In general, a new generation of lawyers, which professionally grew up in the environment of M&A transactions during the first decade of this century, is taking control of these processes and therefore, legal services are more easily available and the capacity of timely response has much increased. The number of providers of legal services in the M&A market has increased, substituting a model where only a handful of lawyers were able to assist foreign investors.

  33. 17.

    Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions, such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target company? If so, does this give domestic buyers a competitive advantage over international buyers? 

  34. Domestic buyers tend to have greater tolerance, as multinational buyers generally require a more extensive due diligence to be performed. Furthermore, through their first-hand knowledge of the domestic commercial environment and the implications and depth of each individual risk, domestic buyers are more willing to undertake certain risks that under the standards of a multinational buyer may not be acceptable. Whether this constitutes a competitive advantage will depend on the transaction itself, as other factors such as financial implications and market dominance, may have priority over the involved risks.

  35. 18.

    For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?

  36. First and foremost, they should conduct a thorough tax analysis of the investment to identify the most suitable and tax-efficient purchase instrument (purchase of shares, purchase of assets, purchase of the ongoing business, merger, etc) and special purpose vehicle. Second, Uruguayan labour law can be complex and burdensome and thus requires a concise and deep understanding in order to plan an investment. Finally, the structure for the enforceability of post-closing claims is an issue that should be addressed carefully, including an analysis of applicable law (Uruguayan conflicts of law rules are mandatory and private parties cannot freely elect the applicable law), competent venue (arbitration should be preferred in relation to local jurisdiction) and security to be granted (escrow collateral, pledge of target shares, etc).

  37. 19.

    Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc? 

  38. The entry into force of Antitrust Act No. 18.159 constitutes a significant change in our antitrust regulatory system. This Act established a new regulator, the Commission for Defense and Promotion of Competition, which has started issuing its first decisions and, more significantly, recently issued its largest sanction for ‘anticompetitive measures’ against the largest company in the beer market. Furthermore, this Act regulated for the first time in Uruguay a merger control that can be summarised as follows:

    Depending on specific thresholds or circumstances, economic concentration transactions may need to be either notified or authorised to the governmental authorities. According to applicable law, an economic concentration transaction is any kind of legal agreement (merger, acquisition, sale of assets, etc) by which the total or partial control of economic units or companies is transferred. ‘Control’ implies the possibility to determine the decisions in a company by owning most of the company’s capital or by other means.

    There are three levels of regulation regarding mergers, acquisitions and any economic concentration transaction:

    • transactions that only require to be notified to the governmental authority;
    • transactions that require to be authorised by the governmental authority; and
    • transactions that are not subject to any control whatsoever.

    Two types of transactions require only to be notified to the governmental authority:

    • transactions as a consequence of which the company reaches a 50 per cent or higher market share of the relevant market; and
    • transactions in which the group of participants obtained an annual gross income in Uruguayan territory in any of the last three fiscal years, equal to or higher than 750 million Indexed Units (approximately US$100 million).

    The notification must be made 10 days before the closing of the transaction (when change of control is verified). Failure to notify is sanctioned with warnings and fines.

    On the other hand, a transaction must be authorised by the governmental authority only in case a ‘monopoly in fact’ arises after the conclusion of the transaction. Monopoly in fact is the situation in which a company controls, as offerer, 100 per cent of the relevant market.

    The following transactions do not need to be notified or authorised by the governmental authority:

    • transactions that do not have as a consequence an achievement of a market share greater than 50 per cent in the relevant market or when its participants jointly do not reach the gross invoicing annual amount of 750 million Indexed Units in any of the last three fiscal years;
    • the acquisition of companies of which at least 50 per cent of the control was already owned;
    • the acquisition of rights that do not grant control over the decisions of a company (eg, shares with no right to vote, debentures, bonds);
    • the first investment of a foreign company with no assets or participations in other companies in Uruguay (not limited to the relevant market, being sufficient for the foreign company to previously own any asset in any other market located in Uruguay in order for the exemption not to be applied); and
    • the acquisition of companies that did not register activity in the prior year to the execution of the transaction.

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Questions

  1. 1.

    Has the level of M&A activity slowed, increased, or remained flat in 2016 as compared to 2015, and what are conditions like today? In general terms, what level of activity is foreseen for 2017? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Liquidity? Rule of law? Other?


  2. 2.

    Which industries do you expect will see the most M&A activity in 2017?


  3. 3.

    What types of deals do you expect to see?


  4. 4.

    Discuss the level of M&A activity you have seen over 2016 and expect to see in 2017 of:
    (i) pure domestic deals;
    (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
    (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.


  5. 5.

    What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?


  6. 6.

    Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From domestic or international sources? What amount of debt/ equity leverage are you seeing in private equity transactions? Where is financing coming from – domestic sources, international lenders? Governmental agencies? Banks or capital markets?


  7. 7.

    How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?


  8. 8.

    Are corruption and compliance concerns affecting M&A activity?  Are there industries where this is a particular issue?


  9. 9.

    How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2016 as compared with 2015? What are the prospects for 2017?


  10. 10.

    Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?


  11. 11.

    Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?


  12. 12.

    How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisors, fairness opinions?


  13. 13.

    Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?


  14. 14.

    Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?


  15. 15.

    Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?


  16. 16.

    Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?


  17. 17.

    Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions, such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target company? If so, does this give domestic buyers a competitive advantage over international buyers? 


  18. 18.

    For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?


  19. 19.

    Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc? 


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