Mergers and Acquisitions 2017

Last verified on Thursday 20th April 2017

Colombia

Andrés Hoyos and Paola Ordoñez
Gómez-Pinzón Zuleta (Bogotá)
  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. M&A activity in Colombia decreased moderately in 2016 as compared with 2015. Over the past three years M&A activity slowed down and is far from the levels reached in 2012 and 2013. The main reasons for the slowdown relate to the effects of the global fall in oil prices, the high devaluation of the Colombian peso as compared to the US dollar and an appreciable increase in inflation, all of which has affected Colombia’s economy.

    However, despite the above, Colombia’s M&A market retained a good level of activity compared with other countries in the region, mainly as a consequence of:

    • a good appetite for Colombian businesses on the part of foreign investors;
    • intense competition among regional players to acquire strategic competitors and assets, and market shares;
    • a sophisticated legal marketplace;
    • a sophisticated M&A investment banking market;
    • a strong rule of law;
    • new trade and investment treaties entered into by Colombia;
    • a high rate of return on investment in Colombian companies;
    • traditional family-owned companies sold by controlling stockholders; and
    • big competitors seeking to consolidate economies of scale by acquiring smaller competitors.

    Over the past decade, Colombia has worked very hard to improve its macroeconomic policies, strengthen the rule of law, continue to produce GDP growth and fulfil its commitments to respect foreign investors’ rights, particularly when compared to other governments in Latin America. Despite the above, Latin America is suffering a slowdown. For instance, Colombia saw a 1.2 per cent increase in GDP growth for the third trimester of 2016, which represents a slowdown compared with a 3.2 per cent increase in GDP growth for the third trimester of 2015. The International Monetary Fund is more optimistic and expects economic growth of Colombia to reach 2.7 per cent levels, which contrasts with a pessimistic view for the rest of Latin America, which is expected to contract by 0.6 per cent driven by Venezuela and Brazil.

    In 2017 the Colombian economy may shift as consequence of the peace agreements that have already been executed and will begin to be implemented in 2017. This stable atmosphere may contribute to show Colombia as an amicable place for business and investments. In fact, according to the Doing Business index, Colombia is the 10th country worldwide and the 1st in Latin America in protecting its investors. This may even get better owing to the political changes brought in 2016.

    Throughout 2016, we saw several strategic acquisitions in Colombia by regional, international and local investors, as well as a very active private equity fund activity and many of 2016’s M&A activities will close in the first quarter of 2017. 

    Some of the most important M&A transactions of 2016 were:

    • Urgo, French pharmaceuticals company, purchased family-owned counterparts Laboratorios Gerco and Inmobiliaria Herbie;
    • Colombian bank Colpatria renewed a US$29 million consumer benefits programme with Chilean retained Cencosud.
    • Chilean energy conglomerate Copec entered a deal to buy ExxonMobil’s lubricants and fuels businesses in Colombia, Ecuador and Peru.
    • Brookfield completed the acquisition of a 57.66 per cent stake from Ministerio de Hacienda y Crédito Público in Isagen, one of the largest power generation companies in the country.
    • Empresas de Energía de Bogotá and Empresas Públicas de Medellín sold their stake in Isagen to Brookfield, completing its 11.2 billion pesos acquisition of Colombian power company.
    • The Dutch arm of US credit agency TransUnion acquired a 71 per cent stake in Cifin, a Colombian analytics company, from 17 local and international banks.
    • Irelandia acquired a 100 per cent stake in Colombian airline VivaColombia from venture capitalists Grupo Fast and Sentido Empresarial Internacional.
    • Cementos Argos, a Colombia-based cement and concrete producer, through its subsidiary Argos USA, closed the acquisition of a group of cement assets in the United States from Germany-based HeidelbergCement.
    • Shareholders of TV Azteca, a Mexico City-based TV channel operator, subscribed US$60 million in a US$100 million capital increase of the company’s Colombia-based subsidiary Azteca Comunicaciones, in which TV Azteca already subscribed US$40 million. Fondo de Capital Privado Inmobiliario Colombia, controlled by Fiduciaria Bancolombia, acquired 49 per cent of Viva Malls from Almacenes Éxito. The deal value was US$263.55 million.

    As part of the financing for new infrastructure projects, privatisation of state assets will continue to play an important role in 2017. The District of Bogotá is conducting the valuation of some of its energy and technology assets such as the Empresa de Energía de Bogotá and Empresa de Telecomunicaciones de Bogotá, two key players in the energy and telecom industries, respectively. The sale of part or all of the district’s participation in these companies is scheduled to occur at the end of the first semester of 2016 or beginning of the second semester.

    We also expect to see the privatisation of government stakes in the logistics industry and other industries in order to raise enough funds to secure the development of fourth-generation route concessions, the ongoing public–private partnerships and other infrastructure projects.

  3. 2.

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

  4.  

    In 2017, we expect to see M&A activity in the energy (especially power and generation plants), industrial, infrastructure, real estate and telecommunications industries.

    Because of the fall in oil prices, we saw a decrease in M&A activity in the oil sector in 2015 and 2016; however, stabilisation of oil prices at the end of 2016 may change the trend for 2017. Ecopetrol, the Colombia’s largest petroleum company, has already announced a discrete increase of its expenditure plans for 2017 as compared with 2016, expecting to rise 16 per cent over than the expected expenses in 2016.

    M&A activity is expected to moderately increase as compared to 2016.The Colombian financial sector is highly liquid – there are significant financial resources that could be used to finance acquisitions and, as a result, it could be expected that the number of M&A transactions could moderately increase as it actually did in 2016. Many of the deals that were negotiated throughout 2016 will only see closing in 2017 due to larger negotiation and increased due diligence periods, mainly due to an increased focus in compliance.

    We also expect to see M&A deals involving infrastructure projects to continue. The Colombian National Infrastructure Agency (ANI) opened in the past years several public bidding processes to award fourth-generation concessions as part of the national government’s plan to revamp the country’s infrastructure. The ANI is implementing 25 fourth-generation (4G) concessions for the construction of national highways, covering 8,917 kilometres, for an estimated aggregated value of over US$24 billion. The Colombian government is also working in the concession projects involving the re-establishment and development of the long defunct Colombian railway system, the construction of river ports along the Magdalena River and the refurbishment of the Bogotá and Barranquilla airports. We have seen important M&A activity in the 4G concessions that have already been awarded. Seven of the 4G projects have had their financial closing and others are expected to occur in 2017. Also, the construction phases of these projects are expected to begin in 2017.

  5. 3.

    What types of deals do you expect to see?

  6. We expect to continue seeing strategic investments by key players in Colombian assets in the form of total acquisitions or majority investments. Mergers of equals are not common deals in our jurisdiction. However, back in 2014 we saw the largest telecoms merger ever in Colombia by Millicom and UNE EPM – a true merger of equals.

    We also expect more private equity activity, which has rapidly increased in the M&A arena over the past six years, and is foreseen to continue to grow as local and international private equity firms consolidate their trust and investments in Colombian assets. Several private equity funds will be seeking to exit their matured investments by selling to institutional investors or other private equity funds.

    Privatisations will take on an important role in the M&A market (eg, the sale of a majority stake in ETB – Empresa de Telecomunicaciones de Bogotá and other stakes in EEB – Empresa de Energía de Bogotá), as they will constitute an important source of the funds required to complete 4G concessions and other infrastructure national and reginal projects, and to cover for the commitments that the government is undertaking as a result of the peace agreements entered into with the FARC guerrillas. 

  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. The most common types of deals seen in 2016 involved domestic targets being acquired by foreign investors – mainly strategic assets bought by multinationals seeking to penetrate the Colombian market or trying to expand their market share in our jurisdiction and the Andean region (see question 1). Additionally, local and international private equity funds were very active in the M&A arena, acquiring or disposing of local assets (see question 5). Pure local deals were not as common in 2016. 

  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 activity has been constantly increasing in Colombia in recent years owing to the appetite of international, regional and local private equity funds for Colombian assets and the country’s wide range of investment opportunities.

    Private equity regulations have boosted the incorporation of local funds and the opening of local offices by foreign funds by stepping up the levels of sophistication since 2007.

    According to the 2015–2016 update of the Latin American Private Equity and Venture Capital Association (LAVCA) Scorecard on the Private Equity and Venture Capital Environment in Latin America, in recent years commitment to the development of a domestic private equity and venture capital industry remains strong, with policymakers and industry practitioners collaborating to form and revise regulations on an ongoing basis. However, regulation on private equity and venture capital has become increasingly more detailed and complex which leads to a downgrade on laws governing private equity and venture capital fund formation and operations due to new and cumbersome requirements such as mandatory third-party valuation of portfolios by designated external consultants. (http://lavca.org/wp-content/uploads/2015/11/UPDATED-FINAL-Scorecard-15-16.pdf). Despite the above, equity funds are increasingly becoming major players in the M&A market.

    According to the 2015–2016 update of the LAVCA Scorecard on the Private Equity and Venture Capital Environment in Latin America, Colombia (with a score of 60 – with a former score of 61 in 2014 and 2013) maintained its fourth place, surpassed by Chile in first place (74), Brazil in second (72) and Mexico in third (65). 

    As an alternative to traditional bank financing, domestic companies have turned to private equity funds seeking fresh capital in the form of equity investments and mezzanine financing in order to finance working capital, expansion plans and acquisitions. Private equity funds also present an excellent investment opportunity to procure local resources from institutional investors such as pension funds and insurance companies that can later be injected into healthy companies of several economic sectors with capital needs.

    In 2016, we saw a good number of private equity deals (by private equity firms and regulated private equity funds) and expect to see more of this type of deal, mainly in the infrastructure, retail, real estate, regulated and unregulated financial services, and energy sectors.

    Examples of private equity deals seen in 2016, according to the financial media, include deals made by Ashmore Group and InfraRed in infrastructure and PPP projects.

    In 2017, we believe private equity activity will be driven, among other things, by a wave of divestment by private equity funds of a number of investments made over the past six years which began in 2015, following the natural maturity of their investments in local assets.

    In 2015 there had already been press releases related to a new private equity fund created by CAF and Ashmore Group which will provide financing to infrastructure and PPP projects in Colombia, up to 1.4 billion Colombian pesos, the first private equity fund exclusively dedicated to provide financing for infrastructure in Latin America. 

  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 continues to be available for all types of deals and acquirors. Banks have high liquidity and funds available for corporate acquisitions at very competitive rates compared with debt raised on the capital markets. In fact, in 2016 we saw very few local debt offerings aimed at financing acquisitions, as investors preferred to turn to local and regional banks to leverage their acquisitions and business development projects.

    In particular, Law No. 1328 of 2009 eliminated the legal restrictions on local banks financing M&A transactions by modifying the Financial System Statute and allowing banks to grant acquisition loans (previously, local banks were precluded from granting loans aimed at financing the acquisition of shares).

    There is growing confidence among banks, which are likely to assume higher risks in M&A financing owing to Colombian assets becoming more trustworthy. In 2015 we witnessed the single largest financing ever structured in Colombia and the largest ever acquisition financing in history: 3.5. billion peso acquisition financing to Almacenes Éxito from a syndicate of Colombian banks formed by Banco Davivienda SA, Banco de Bogotá SA, Banco de Occidente SA, Banco Popular SA, Banco AV Villas SA, Leasing Bancolombia SA for the acquisition of Libertad and Grupo Pao de Azucar. In 2016 we saw, for instance, the amendment of a US$122 million loan agreement of Isagen. 

    In addition, we also saw syndicated financing coming from local banks along with foreign banks. Back in 2015 we saw this model in the acquisition of the Colombian company Intecplast Inyección Técnica de Plásticos and Peruvian company Pieriplast by Acon Investments. Each of said companies entered into debt restructuring multi-currency syndicated facilities, denominated in Colombian pesos and US dollars. Banco Bilbao Vizcaya Argentaria Colombia and Banco Colpatria Multibanca Colpatria acted as lenders of the Colombian tranche and Scotiabank Perú acted as lender of the Peruvian tranche.

    As an alternative to traditional bank financing, domestic companies have continued to turn to private equity funds seeking fresh capital (equity or mezzanine financing) in order to finance acquisitions. Private equity funds are closely monitoring and balancing risk and return under their equity investment and mezzanine financing devoted to these types of deal. Financing in Colombia for 2016 came mainly from domestic and foreign banks and private equity funds.

    As indicated, there are a few examples of leveraged buyouts, but in our experience a rough estimate of the ratio between debt funds and self-funded resources (buyer’s own resources) in these types of deals would be 40:60. This notwithstanding, there are increasingly more financing resources available in the Colombian financing market, where target companies are being used as borrowers of such financings. 

    We expect to see investment banks, affiliated to commercial banks, being more active in the market, structuring not only the sale part of an acquisition but also the required financing for the same transaction, combining acquisition and financing in one package.

  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. In general terms, there is a level playing field when foreign and domestic bidders compete to buy the same domestic target company.

    Colombia has been wide open to investments and acquisitions by foreign buyers since 1990. There are no major restrictions on the inflow of investments and repatriation of dividends. The Colombian foreign investment regime is governed by the following principles:

    • equality of treatment (foreign investment is treated in the same way as domestic investment);
    • universality (free flow of foreign investment with no restrictions (except for national defence and security; toxic, hazardous or radioactive wastes; and public television);
    • automaticity (as a general rule, foreign investment requires no previous authorisation); and
    • stability (conditions for reimbursement of the investment and remittance of dividends shall be the same in effect as of the date of registration of the initial investment).

    Moreover, Colombia is party to 15 international investment agreements (IIAs) that grant qualifying foreign investors standards of protection over qualifying investments made in Colombia, usually under international investment law (ie, fair compensation for expropriation, fair and equitable treatment, full protection and security, freedom of transfers, national treatment, most-favoured-nation treatment and the right to pursue international arbitration for the country’s violation of standards of protection provided for in the treaty, among others). Colombian IIAs include bilateral investment treaties (BITs) and investment chapters in free trade agreements (FTAs).

    To date, the following Colombian IIAs are in force and effect:

                IIA

                     Entry into force

    BIT Colombia–China

    2 July 2012

    BIT Colombia–India

    3 July 2012

    BIT Colombia–Peru

    30 December 2010

    BIT Colombia–Spain

    22 September 2007

    BIT Colombia–United Kingdom

    10 October 2014

    BIT Colombia–Japan 

    11 September 2015

    BIT Colombia–Switzerland

    6 October 2009

    FTA Colombia–Canada

    15 August 2011

    FTA Colombia–United States

    15 May 2012

    FTA Colombia–Chile

    8 May 2009

    FTA Colombia–Mexico

    1 January 1995

    FTA Colombia–South Korea

    15 June 2016

    FTA Colombia–Costa Rica

    1 August 2016

    FTA Colombia–Pacific Aliance (Mexico, Chile and Peru)

    1 May 2016

    FTA Colombia–Northern Triangle (Honduras, Guatemala and El Salvador)

    Guatemala: 12 November 2009

    El Salvador: 1 February 2010

    Honduras: 27 March 2010

    Colombia has signed BITs with the Belgium–Luxembourg Economic Union, France, Singapore, Brazil and Turkey, which have not yet entered into force. Similarly, FTAs with investment chapters have been signed with Panama and Israel, but their entry into force is still pending.

    In addition, Colombia entered into FTAs with the European Free Trade Association (in force since 1 July 2011, Switzerland and Liechtenstein), which includes Liechtenstein, Switzerland, Norway and Iceland, and with the European Union. These FTAs include certain provisions on investment, but do not have dispute resolution provisions.

    According to recent reports in 2016 Colombia was notified of its first international investment disputes under the Spain and Switzerland BITs and the Canada FTA. 

    [1] Please note that the entry into force took place in different dates with each country: Colombia-Switzerland, 1 July 2011; Colombia–Liechtenstein, 1 July 2011; Colombia-Norway, 1 September 2014; Colombia–Iceland, 1 October 2014. 

  15. 8.

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

  16.  

    Colombia has recently seen the effects of corruption situations in Brazil. This notwithstanding, the effects of ongoing investigations have had repercussions on the Colombian assets of foreign investors that have been in corruption scandals, primarily in the oil and financial industries.

    The Colombian congress enacted Law 1,778 of 2016 by which measures against foreign bribery are adopted. This law has been regulated by instruments issued by the Colombian Superintendency of Corporations, promoting the use of ethics programmes in companies that fulfil a series of criteria related to size, assets and kind of industry. Another main consequence of this law is that state procurement contracts that are being performed may be declared null and void as result of foreign bribery acts carried out abroad by contractors even if they have no direct relation to acts performed in Colombia. The effects of this law and its regulation are yet to be ascertained in the M&A arena.

    The general rule before was that acquisitions involving a US or UK buyer or a multinational with substantial links to the United States or United Kingdom, were heavily centred on anti-corruption due-diligence and representations and warranties regarding compliance with the Foreign Corrupt Practices Act and the UK Bribery Act. In general terms, such representations and warranties state that the sellers, the target and its directors, officers, employees and agents have not taken any action that violates such anti-corruption statutes (eg, anti-money laundering transactions; illegal political contributions; gifts, bribes and kickbacks to governmental officials, etc), that such persons or entities have not been included on any anti-money laundering or blocked persons lists (eg, the US Treasury Department’s Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals List), and that such persons or entities have not entered into any transaction with a person or entity that is organised or resident in a country or territory subject to trade sanctions (eg, Cuba, Iran, Sudan and Syria).

    In 2016, these kinds of provisions is becoming every time more common also bearing in mind that the local law landscape has changed since Law 1,778 of 2016. In the case of pure local acquisitions, it is becoming more common to include such types of representations and warranties, making reference to local anti-corruption rules (eg, Law No. 1,474 of 2011). If the acquisition involves bank financing, it is even more common to see anti-corruption representations and warranties and even specific reference to OFAC and other listings.

  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. Owing to Colombia’s economic growth and the confidence of international investors, we have not seen much M&A activity involving financially troubled companies. Despite the above, in 2016 we saw one of the biggest debt restructuring of a financially troubled company: Pacific Exploration & Production Canada. The company filed an insolvency proceeding petition before the Canadian authorities under Canadian insolvency laws, pursuing to restructure its debt. The restructuring plan was recognised in Colombia as a foreign insolvency proceeding by the Superintendency of Corporations on a conditional basis mainly imposing guarantees to protect Colombian creditors. Pacific Exploration & Production Canada was finally restructured and as consequence the Superintendency approved the lifting of the guarantees in the Colombian branches.

    For 2017, we may expect an increase in M&A activity involving financially troubled assets because there is a trend of Colombian companies becoming more insolvent. The market is in not in its best condition, which may alter M&A activity of financially troubles companies.

    The Superintendency of Corporations has also been active throughout the second semester of 2016 by intervening other types of companies such as payroll deduction loan companies, although these interventions have not affected M&A activity.

  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. Colombia does permit reorganisation as a going concern, but Colombian regulation does not contemplate the “bankruptcy sale” concept that US law does (ie, section 363 of the Bankruptcy Code). As a general rule, Law No. 1116 of 2006 (the Colombian Bankruptcy Law) does not prohibit the sale of equity by the shareholders of an insolvent company. However, in respect of sales of assets of an insolvent company, the Colombian Bankruptcy Law provides that such sales are allowed if the sale is within the ordinary course of business of the insolvent company. Otherwise, prior authorisation form the bankruptcy judge is required.

    In cases of mergers and spinoffs of an insolvent company, the start of the insolvency proceeding stays certain statutory rights granted to creditors (eg, the right to demand guarantees) and to shareholders (eg, appraisal rights).

  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. In Colombia, hostile takeovers have been rare due to a high concentration of share ownership. In general terms, the Colombian equity securities market is not deep enough to allow these kinds of transactions. Also, Colombian regulation on the matter is not very flexible and leaves little or no space for these kinds of acquisitions, making measures such as poison pills or other anti-takeover protection unnecessary.

    Acquisitions of Colombian public companies are actually non-hostile takeovers, partly owing to the fact that in Colombia there are only 71 publicly traded companies, some of which are controlled by a small number of beneficial owners, so only a minority stake is owned by small shareholders, making it easy to negotiate privately with the controlling shareholder.

    In practice, due to share ownership concentration, in the event of an acquisition or takeover, management does not play a significant role. Commonly, acquisition negotiations are conducted at the shareholder level of the target with little or no involvement by the board and senior management.

    In Colombia, listed corporations are subject to certain restrictions when a tender offer is made to its shareholders. In general terms, any person or group of persons constituting a beneficial owner who intend to purchase 25 per cent or more of the outstanding voting equity of a listed Colombian corporation must launch a mandatory tender offer to purchase such shares under the same terms and conditions addressed to all the shareholders of the target. During the tender offer period, the target is precluded from the following:

    • placing equity securities or convertible securities;
    • entering into transactions over the target’s shares that would affect the tender offer;
    • transferring, creating liens or entering into any transactions disposing any assets representing at least 5 per cent or more of the target’s assets;
    • leasing real property or other assets of the target that may trouble the smooth process of the tender offer;
    • entering into any transactions with the purpose or effect of creating a material fluctuation of the price of the target shares;
    • entering into any other transaction outside the ordinary course of business or with the purpose or effect of negatively affecting the due course of the tender offer; and
    • if the target company is subordinated by another person or forms part of a controlling group, the controlling parent and its affiliates shall refrain from performing any actions that may interfere with or negatively affect the tender offer.

    On the other hand, we have seen increasing shareholder activism, especially from certain pension funds that own portions of companies such as Almacenes Éxito, ETB, Isagen and Ecopetrol, mainly in connection with matters such as access to information and payment of dividends.
    Finally, regarding the activity of international hedge funds, in Colombia we have seen few of these funds investing in securities of high-risk companies. Although these funds are not yet very common in the market, international hedge funds do have investments in Colombian companies. 

  23. 12.

    How well protected are minority shareholders in public companies? Recent developments -- more independent directors, special committees, independent advisers, fairness opinions?

  24. Minority shareholders in public companies are well protected under Colombian Law. Article 44 of Law No. 964 of 2005 establishes that board of directors of companies listed in a stock exchange must be constituted by five to ten members, at least 25 per cent of which must be independent. 

    The Superintendency of Corporations in the use of its jurisdictional attributions has developed clear standards for the decision-making process of boards of director or special committees adopting the business judgement rule standard used by Delaware courts. According to such standard, directors must take decisions for the benefit of the company with all due information (ie, counting with the proper legal advice and fairness opinions from suited firms in the respective industry).  

    The Superintendency of Corporations has also applied the entire fairness test when a conflict of interest exists for the directors making a decision. In such events, the Superintendency has evaluated whether the decision was made under the standards of fair dealing (ie, the transparency and fairness of the decision making process) and fair price or fair consideration (ie, the adequacy of the terms and conditions of the transaction). 

    In 2015 a legislative proposal by the Superintendency of Corporations and the Ministry of Foreign Commerce was studied by the Colombian Congress. Such bill attempted to clarify director’s liability regime, as well as to clear up the scenarios of conflict of interest within corporations and the procedure to solve such conflicts of interests, which are currently regulated by Law No. 222 of 2005 and Decree No. 1,925 of 2009. Unfortunately, the bill failed to be passed and as consequence, the legislative standards regarding director’s liability and conflicts of interest remain subject to the traditional standards. We expect new initiatives in this sense in 2017, which would formalise the trends that the Superintendency of Corporations has been establishing through its rulings.

    Finally, article 5.2.4.1.5 of Decree No. 2.555 of 2010 establishes that all companies listed in a stock exchange must reveal in a clear, complete and timely appropriate way relevant information to the market (ie, financial and accounting situation, legal status, commercial and labour situation, financial crisis events). This type of disclosure of information constitutes not only a protection to the market itself, but to minority shareholders who are not part of the daily administration of listed 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. Other than the traditional fiduciary duties of good faith, loyalty and care owed by officers and directors to the company and the shareholders under corporate law, there are no special fiduciary duties owed by them in the case of an M&A transactions under Colombian law. Notwithstanding, as mentioned above, there is a new trend for Colombian courts (especially the Superintendency of Corporations) to develop more clear standards for decision-making processes of directors and management. As a consequence, there have already been rulings in which the business judgement rule and entire fairness tests have been applied in situations surrounding an M&A transaction. The bill proposed by the Superintendency of Corporations and the Ministry of Foreign Commerce could have resulted in a modification of standards applicable to management in the context of an M&A transaction. As stated previously we expect new initiatives in this sense in 2017.

    As the financial market deepens and M&A transactions multiply, we are starting to see a change in attitude. There is certainly more awareness when it comes to negative publicity, shareholder criticism and liability from potential litigation in order to avoid certain constitutional actions (ie, collective, class and tutela actions) that have been seen in the past against M&A deals. Also, directors have started to take a more active role when it comes to reviewing these deals and providing advice, especially in antitrust and conflict of interest matters.

  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. In an M&A context, there is always a risk of negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation. Directors, management and controlling shareholders should be aware of and concerned with these risks.

    For example, as regards regulatory pressure, under Colombian securities laws controlling shareholders of a publicly traded company shall disclose to the market any relevant ongoing negotiations regarding a potential sale of their stake. This is a rather new concept developed in recent years under local securities regulations and enforced more vigorously by the regulator. Before this change in regulation and enforcement focus, it was argued that only the listed company had disclosure duties to the market and, hence, if an acquisition negotiation was handled at the controlling shareholder level then, if management had no actual knowledge of such negotiations, the company had no duty to disclose. Nowadays Colombian courts would likely argue that directors and management should disclose all relevant information to all shareholders for the sake of duty of loyalty, regardless of whether the company is or not listed. 

    Controlling shareholders might also be aware of criticism that could be raised by minority shareholders. Even if, as a general rule in an M&A context, under Colombian corporate law there are no fiduciary duties owed by the controlling shareholders to the minority shareholders, controlling shareholders might want to be careful in giving a chance to minorities to participate in the deal to try to avoid criticism and negative publicity. 

    However, court and arbitral precedents have developed the theory of abusive exercise of rights by majority shareholders against minority shareholders. Colombian tribunals have held majority shareholders liable for passing resolutions at the shareholders meeting or taking corporate actions that create a disadvantageous situation for minorities, when such actions are taken with the intent to cause harm to minority shareholders or to obtain unjustified benefit. In general terms, majority shareholders cannot exercise their dominant position in the company in an abusive way with the purpose of subjugating or depriving minority shareholders of their rights. For example, local tribunals have said that capitalisations (placement of new shares among shareholders to raise capital) approved by majority shareholders, that were not made in the best interests of the company, and that were made with no real economic rationale only with the intent of causing harm to minority shareholders and their subsequent dilution, are against the law. Shareholders’ resolutions dictating to pay dividends in the form of new stock (capitalisation of dividends) or creating special reserves and reinvestment of dividends, instead of paying cash, with no financial basis or rationale as to the needs of cash capital by the company, taken with the intent to deprive minority shareholders of cash sources and force the sale of their shares at a lower price, is also a good example of abusive exercise of majority shareholder rights.

  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. The M&A market is becoming more sophisticated and demanding, and the need to achieve international standards has become a priority. The documentation for these deals is usually drafted in English, following common law practices; even if the share purchase agreement (SPA) is drafted in Spanish and governed by Colombian law, in large M&A deals (commonly involving a foreign party) the SPA would follow the typical New York-style SPA format (eg, definitions, acquisition of shares, purchase price, purchase price adjustment, representations and warranties – of the seller, regarding the target and of the buyer, and including disclosure letter or schedule – conditions to closing, covenants, indemnification, termination, non-compete, dispute resolution and miscellaneous, etc).

    Currently, there are no major significant differences between domestic and international deals. It could be said that civil and common law differences have been reduced when negotiating and documenting an M&A deal, to some extent thanks to front-runner law firms adopting a global standard to handle cross-border deals, which they apply to both domestic and international transactions.

    Of course, when using the New York-style SPA for a deal governed by Colombian law, special care should be given to using the appropriate Colombian legal terms and forms and dropping New York law provisions not applicable under Colombian law (eg, equitable relief, waiver of jury trial, punitive damages, best efforts and specific performance, etc).

    For example, when drafting representations and warranties and breaches thereof, there are not as many precedents and case law in Colombia testing these kinds of provisions as compared to other jurisdictions such as New York. In Colombia, there are a handful of recent arbitration awards enforcing and giving full force and effect to indemnification due to the breach of representations and warranties under New York-style agreements (governed by Colombian law when the agreements provided that the consequence of the breach was indemnification). We are not aware of any precedents not enforcing or disregarding these types of provisions or indemnity structures, but it should be noted that these provisions are new to arbitrators and judges and contractual remedy for such breach should be explicit under Colombian law.

    Other good examples are the terms “material adverse effect”, “material adverse change” and “best efforts”. These terms are not regulated under Colombian law and, when taken alone, have little meaning or effect under local law or may even conflict with local law forms as force majeure or good faith obligations that all parties must comply with. A way to avoid confusion and ensure accurate interpretation by arbitrators of such terms, in the case of a dispute, could be to include definitions of such terms under the SPA that are comprehensive enough to afford the arbitral tribunal sufficient basis for determining the agreement of the parties, the legal effect intended by the parties and to give full effect and correct interpretation of such terms.

  31. 16.

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

  32.  

    In 2016 there were no substantial changes. In recent years, M&A transactions have begun to be more uniform and standardised. As more clients demand international standards, local practitioners must keep up with these practice standards, which have been introduced by Anglo-Saxon firms. Also, we have seen, depending on the type of deal, that the structuring and negotiation may become very sophisticated, following other foreign jurisdictions (such as New York).

    Nonetheless, on 26 December 2012, the Colombian Congress enacted Law No. 1,206, which reforms certain tax law provisions and has had a material impact on how M&A transactions were and will be conducted in Colombia in the short and long term. These are some of the most notable changes introduced by this tax reform that have affected M&A and corporate practice in Colombia since 1 January 2013:

    • Mergers and spin-offs between Colombian companies or between Colombian and non-Colombian companies, and the transfer of assets located in Colombia as a result of an off-shore merger or spin-off, will not be subject to income tax or capital gain tax in Colombia unless certain requirements are met, and subject to certain limitations. Before the tax reform, all kinds of mergers and spin-offs were income tax free. As of 1 January 2013, each merger or spin-off will require a thorough, case-by-case analysis to establish if the transaction is taxable or not.
    • The goodwill resulting from the purchase of shares will remain deductible for income tax purposes, but only to the extent that it complies with general deductibility rules and provided that the respective loss in value is proven by technical studies. The acquired company, as well as the companies that result from merging, spinning-off or liquidating a company, will not be able to deduct the goodwill amortisation expenses.
    • In-kind equity contributions to Colombian companies will not be subject to income tax or capital gains tax, provided certain requirements are met and subject to certain limitations. In-kind equity contributions to Colombian companies without complying requirements, and to non-Colombian companies, will be taxed.
    • Reduction of the capital gain tax rate from 33 per cent to 10 per cent, applicable to Colombian companies and to non-Colombian entities regardless of whether the capital gains were earned with or without a branch or a permanent establishment in Colombia. This is particularly relevant for the seller side in an M&A deal when structuring the deal from a tax perspective.
    • Reduction of the corporate income tax rate from 33 per cent to 25 per cent, applicable to Colombian companies and non-Colombian entities earning taxable income through a branch or a permanent establishment. The corporate income tax rate applicable to non-Colombian entities earning taxable income without a branch or a permanent establishment remains the same (33 per cent).
    • Adjustments to the formula for calculating the maximum amount of annual profits to be distributed as non-taxable dividends to shareholders. Additionally, the transfer of branch profits to foreign main offices will be deemed to be dividend distributions for income tax purposes.
    • Inclusion of a thin capitalisation rule according to which interest expenses will be deductible for income tax purposes to the extent that they result from debts in which the average amount during the tax year does not exceed three times the net worth as at 31 December of the previous year.
    • Inclusion of an anti-abuse rule according to which the tax authorities may reject the tax treatment given to an entity, legal act or proceeding that has been proven to be abusive, in order to recharacterise the operation and determine the corresponding tax implications as if the abusive behaviour had never occurred.

    Besides the above, on 29 December 2016 the Congress approved a new tax reform (Law 1,819 of 2016), which may affect the M&A activity during year 2017. The most important amendments introduced by this tax reform are the following:

    • The elimination of the CREE tax (Impuesto a la Renta para la Equidad) and the introduction of several and important amendments to the corporate income tax. The corporate income tax rate will be 33 per cent; however, the tax reform created a surcharge of 6 per cent for year 2017 and 4 per cent for year 2018, applicable to any company having a net taxable income of more than approximately US$267,000 in each of those fiscal years;
    • The creation of a tax on dividends paid to individuals and non-residents. The rate applicable to individuals that are resident in Colombia could go up to 10 per cent depending on the amount of the dividend paid and the rate applicable on dividends paid to foreign entities and individuals non-resident in Colombia is 5 per cent;
    • The introduction of several anti-avoidance provisions such as the creation of CFC rules for Colombian residents, the obligation to disclose the ultimate beneficial owner of any Colombian company, permanent establishment, trust or fund in Colombia and a new definition and procedure for the determination of tax abuse and the recharacterisation of abusive transactions; and,
    • The increase of the value added tax (VAT) from 16 per cent to 19 per cent.

    In the field of arbitration, in 2012, Colombia adopted a new national and international arbitration statute (Law No. 1,563 of 2012), which entered into force on 12 October 2012. This new set of arbitration rules should have an impact on how arbitration provisions are drafted under stock purchase agreements governed by local law. This statute unifies and amends the rules applicable to domestic arbitration, most of which are based on traditional institutions of Colombian procedural law. The new statute includes a section on international arbitration and incorporates the UNCITRAL Model Law on International Commercial Arbitration, as amended in 2006. However, several changes were made in order to adapt the UNCITRAL Model Law to the requirements drawn from the precedents issued by the Colombian Constitutional Court. It also incorporates a number of other non-Model Law provisions.

    In the field of data protection Law No. 1,581 of 2012 and Decree No. 1,377 of 2013 affected M&A transactions in regards to disclosure of information to potential buyers during a due diligence process (see question 19).

  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. In general terms, in our experience, there is no higher tolerance for risk from domestic buyers than from multinational buyers. Both seem to be equally tolerant of transaction risks and deals are structured similarly in order to distribute risks among the parties using contractual mechanisms.

    Regarding the risks of regulatory approvals, acquisition agreements are structured in a way that such regulatory authorisations are conditions precedent to closing. Without the completion of such conditions, neither party will be bound to close the transaction (except in the case of negligence of the other party). In this case, the parties have no indemnification rights, since the reason for being unable to close depends on a third party – a governmental agency. As a result, neither of the parties has to bear the risk of not obtaining regulatory approval. 

    Bearing the risk of non-compliance or corruption issues within the target company is a delicate matter. Anticorruption regulation is recent in Colombia. In July 2011 the Colombian Congress enacted Law No. 1,474 of 2011, which is the first comprehensive anti-corruption statute in our jurisdiction. Although this law was intended to prevent, investigate and sanction corrupt actions and, more generally, control public governance, some of its provisions apply to the private sector (see question 8). 

  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. The first piece of advice would be to search for and use modern local legal professionals, given that certain sectors and activities are very complex and subject to specialised regulations, so a competent and sophisticated legal counsel could make the difference.

    Second, in the case of buyers, a good, efficient escrow structure is paramount. Buyers should be in a position to reach and secure the escrow funds easily when an indemnity event arises. For this purpose, a jurisdiction is preferred where escrow formulations are flexible, allowing banks to follow buyers’ instructions without unnecessary formalities, and where the inflow and outflow of funds from the country is quick and easy. Following certain foreign exchange rules, in the case of the acquisition of Colombian targets escrow accounts could be constituted in foreign jurisdictions.

    It is also very important to draft a clear arbitration clause in the agreement and even more important to be extremely careful with technical pre-arrangements to settle the dispute, as they might affect the validity of the arbitral holding. A favourable legal framework for international arbitration exists in Colombia.

    Moreover, from a structuring point of view, it is important to explore tax-efficient structures depending on the nature of the deal. Parties to a transaction should explore the existing choices to benefit from tax incentives. Also, buyers in cross-border acquisitions should explore the advantages and tax efficiencies provided under several double-taxation treaties entered into and ratified by Colombia (ie, Canada, Chile, Mexico, Spain and Switzerland) when structuring the deal).

    As for pitfalls that should be avoided, we consider that simultaneous negotiation in two languages (English and Spanish) is not advisable. Having twice the documentation (usually requested by foreign acquirors) is burdensome and may actually become a double-edged sword in terms of doubt or ambiguity and enforcement.

    In addition, in the case of cross-border acquisitions, parties should try to avoid converting pure local legal documents that, according to local practice, are drafted in some specific fashion (eg, security and corporate documents to be enforced before local courts), into New York or foreign-style documents. Such legal documents might lose their meaning and effect under Colombian law, or cause confusion and incorrect interpretation by persons not party to the transaction, such as regulators, arbitrators, judges and other constituents. If any of the deal documents need to be part of or an exhibit to a pre-approval administrative filing, the regulator might raise observations or objections to documents that are supposed to be pure local law documents drafted in a foreign fashion.

    Finally, negotiating a purchase agreement under the assumption it will be governed by New York law (or other foreign law), and at the end of negotiations only including Colombian law in the governing law provision, should be avoided at all costs. As noted, certain New York law provisions do not work under Colombian law.

  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. Law No. 1,581 of 2012 and Decree No. 1,377 of 2013 (the Colombian Privacy Law) recently entered into force in Colombia, affecting two main aspects of M&A deals.

    First, any person who collects from his or her clients, customers or employees information that can be classified as personal data must comply with the obligations under the Colombian Privacy Law. Moreover, the use and transfer of personal data is subject to prior express and informed consent by the data owner, and the data holder is obligated to retain proof of such authorisation by any means that allows further consultation.
    The mentioned rule brings a great challenge for sellers when disclosing information to potential buyers during due diligence. It is common and reasonable that potential buyers request sellers or the target information regarding the target’s employees, customers and vendors. If such information is deemed personal information under the Colombian Privacy Law, then, in a strict sense, the target (ie, the holder of the personal data) should request prior express and informed consent by the data owner before disclosing it to potential buyers. This is inconvenient if the deal is at a negotiation stage (or due diligence is being conducted and no binding agreements have been entered) and is being kept confidential. Experts on privacy laws and M&A lawyers have been discussing how to manage compliance with the requirements of Colombian Privacy Law and at the same time preserve the confidentiality of the deal.

    Another aspect that has impacted M&A practice in connection with the Colombian Privacy Law is the implementation of internal policies and procedures regarding the use of personal data and procedures to ensure its full compliance with the law. Due diligence conducted for some deals during 2014 showed that targets were not 100 per cent in compliance with this legal obligation and, in some instances, had not even adopted policies in this regard. We expect that for 2015 most of the targets will have been in full compliance with Colombian Privacy Law and will have adopted pertinent internal policies (or else they will face substantial fines by the authorities). 

    In 2013, a novel change was made to foreign exchange transactions by External Resolution No.1 promulgated by the board of the Colombian Central Bank on 13 January 2013. Before this new regulation, as a general rule, payments between Colombian residents could only be made in Colombian pesos, meaning that if a Colombian company (even if incorporated as a local vehicle by a foreign investor) acquired a local target from Colombian shareholders, the purchase price had to be paid in Colombian pesos. This general rule had a few, narrow exceptions. External Resolution No. 1 introduced the possibility of making payments in a foreign currency between Colombian residents as long as the payment comes from a compensation account (registered before the Colombian Central Bank) and the funds are deposited into another compensation account. For example, a Colombian buyer could pay the purchase price in US dollars for a local target to the selling Colombian resident shareholders, as long as the purchase price (paid in foreign currency) comes from a compensation account held by the buyer and the funds are deposited into compensation accounts held by each one of the shareholder sellers. This is an attractive alternative for Colombian residents seeking to keep foreign currency abroad, and also avoids the burden of jumping through the hoops of converting foreign currency into Colombian pesos through the foreign exchange market. Most importantly, if the purchase price is agreed in foreign currency, since there is no need to convert into Colombian pesos, currency exchange fluctuation risk is prevented. 

    A compensation account is an account opened by a Colombian resident at a foreign, regular commercial bank in a foreign currency (ie, a current account opened by a Colombian company in US dollars at a US bank) that is registered by the Colombian resident as a compensation account before the Colombian Central Bank. Holders of compensation accounts must report the movements of the account on a monthly basis to the Colombian Central Bank and also report on a quarterly basis to the Colombian tax authority (DIAN).

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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? Recent developments -- more independent directors, special committees, independent advisers, 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? 


Other chapters in Mergers and Acquisitions 2017