Regulatory and Corporate Approvals and Interim Covenants in Latin American Deals
This is an Insight article, written by a selected partner as part of Latin Lawyer's co-published content. Read more on Insight
Latin America is a thriving territory for M&A deals. In 2022, despite the uncertainty, instability and volatility of the past couple of years, mainly due to the global economic crisis and the covid-19 pandemic, there were 3,452 M&A deals with a total (declared) value of US$97.9 billion. Moreover, the 2021 edition of the cross-organisational ‘Venture Capital & Private Equity Country Attractiveness Index’ positions key jurisdictions in the Latin American market such as Mexico, Chile, Brazil and Colombia in its list of the best 50 countries to invest in globally.
M&A transactions in Latin America are usually structured following US practice, entailing an acquisition agreement with a two-step procedure with a signing and closing date. The parties carefully regulate the transitional period between signing and closing, mostly in terms of the conduct of the seller. There are multiple reasons for having an interim period in certain circumstances. For example, certain M&A transactions may be subject to regulatory approval from various governmental agencies. As the global economy becomes increasingly interconnected, businesses seeking to expand their footprint in Latin America must navigate a complex web of regulatory and corporate approvals. While these approvals ensure the protection of local interests and maintain market integrity, they can pose significant challenges to potential investors and merging entities.
The transaction may also be subject to third-party consent (i.e., from a lender or commercial key partner). In some cases, there is a condition to closing for sellers to modify the group’s corporate structure or undertake other corporate reorganisation before the equity investment may be received.
Robust clauses covering the interim period from execution to closing prevent non-desirable scenarios for buyers while also bringing certainty to sellers. Additionally, strong and solid drafting clauses prevent the seller from jeopardising the economics of the target company in the relevant period before closing.
This chapter reviews the regulatory and corporate approvals needed for closing M&A transactions in Argentina, Peru, Costa Rica and Uruguay. It sheds light on the regulatory frameworks governing these transactions and provides key insights for negotiating the most common interim covenants in these countries. It also emphasises the importance of understanding local nuances and cultural considerations.
Even though local applicable laws of the above-mentioned countries are discussed, the chapter applies to the entire region, as the challenges posed by M&A transactions are similar within all Latin American countries. As the M&A landscape in these countries continues to evolve, staying abreast of the latest regulatory changes and best practices is paramount. Whether readers are seasoned investors or companies looking to establish a foothold in the Latin American market, this chapter aims to provide an overview of the key issues and considerations to keep in mind with respect to the interim period.
Regulatory and corporate approvals
When dealing with M&A transactions in the region, investors and potential buyers are often required to deal with a challenging regulatory landscape. Consequently, preparation in this regard is essential. In recent years, contrary to the liberal political landscape seen in the 1990s, increased protectionism has led to a more regulated environment from several standpoints.
Hence, good practice before entering into an M&A transaction in the region is to carefully scrutinise the regulatory requirements that will need to be followed not only in terms of the transaction but also in relation to the investment vehicle to be used as well as the requirements regarding the flow of the investment and the possibilities and mechanisms for repatriating funds due to the current regulations on foreign exchange controls.
Several countries across the region have bolstered their antitrust law regimes in recent years. For example, in Argentina, Law No. 27,442 (the Argentine Antitrust Law (AATL)), which entered into effect on 24 May 2018, replaced the former antitrust law. The AATL created the Argentine Competition Authority (ACA), which is composed of the Antitrust Tribunal, the Secretariat of Anticompetitive Behaviours and the Secretariat of Economic Concentrations.
The main difference between the AATL and the former antitrust law is that the AATL provides for an ex ante control regime for economic concentrations as opposed to the post-closing merger notification system provided for in the former law (i.e., parties to a transaction must now file within one week prior to the deal closing). However, because the ACA has not yet been created, the post-closing notification regime still applies.
Uruguay, which traditionally did not regulate pre-merger control for antitrust purposes, has gone down a similar path. Following amendments to its Antitrust Law in 2020, parties whose gross income within the Uruguayan territory totals at least US$90 million in the three fiscal years prior to the proposed merger require pre-merger authorisation. If parties fail to comply with this approval request, the transaction shall be deemed null and void (or not entered into, depending on certain civil law technicalities).
Since June 2021, Peru has had a regime for the control of corporate mergers, the purpose of which is to promote effective competition and economic efficiency in the markets for the welfare of consumers. The regulatory framework of Peru’s merger control regime is under the supervision of the National Institute for the Defence of Competition and Intellectual Property (INDECOPI). Certain transactions are subject to prior review by INDECOPI, such as:
- acts that qualify as a business concentration, or any act or operation that implies a transfer or change in the control of a company or part of it;
- acts of business concentration that produce effects in all or part of the national territory; and
- operations that meet the established thresholds in Law No. 31,112 and its regulations, approved by Supreme Decree No. 039-2021-PCM.
Costa Rica’s Competition Promotion Commission has been the main governing body for merger control since its creation, especially since pre-merger authorisation was implemented in 2013, pursuant to a modification to the law in 2012. Under an additional modification in 2019, the Telecommunications Superintendence was appointed as the merger control body for the telecommunications sector.
To sum up, many Latin American countries have progressively strengthened competition law to prevent antitrust practices and ensure a level playing field for all market participants. Obtaining antitrust clearance is a pivotal step in the M&A process, as closing certainty will be heavily impacted by, if not fully dependent on, obtaining clearance. Regulatory bodies rigorously assess the potential impact of a merger or acquisition on market dynamics. Companies must be prepared to provide detailed information about their operations, market share and possible competitive effects of the transaction. Depending on the jurisdiction involved, failing to secure antitrust approval can lead to significant legal repercussions, financial penalties and even the unwinding of the transaction. Understanding and navigating the antitrust authorisation process is essential for any successful M&A endeavour.
Other regulatory approvals
In addition to antitrust regulations, M&A transactions may also be subject to other governmental approval or compliance with mandatory filings, ranging from mere notification to mandatory prior approval or waiting period, depending on the type of industry, activity or transaction involved. When facing an M&A deal subject to prior approval from a governmental agency, it is essential that the target company, as well as both seller and buyer in some circumstances, gathers and provides the relevant corporate, financial and legal information to obtain authorisation. For this purpose, parties should be aware of their role in these requests, and this should be clearly stated within the share purchase agreement (SPA) as this often generates tension among the parties.
For example, in Peru, financial companies are required to apply for authorisation for a change of control from the regulatory body, the Superintendency of Banking, Insurance and Pension Fund Administrators. Requests for approval also apply in Costa Rica, as regulators must approve control changes in regulated industries. Additionally, complete ownership chains up to the final beneficiary, and any changes of control therein, must be reported to the Final Beneficiaries Registry. In Uruguay, entities operating under any licences issued by the Central Bank of Uruguay (i.e., banks, brokers, dealers, financial advisers, and insurance and pension fund management companies) require prior authorisation to transfer their shares. Finally, regarding consent for the transfer of shares in the Argentine financial industry, parties need the approval of the Argentine Central Bank when dealing with financial institutions and the consent of the Superintendence of Insurance when dealing with insurance and reinsurance companies or their mergers and spin-offs.
The financial sector is a prime example of an industry in which authorisation is required in the M&A sphere. Other key industries protected by the government also impose authorisation or notification requirements. Parties in the telecoms, health, and oil and gas industries must receive the green light from the appropriate watchdog prior to transferring shares.
Aside from governmental approval or third-party consent, a corporate restructuring of the target company may be required between signing and closing (e.g., to carve-out or transfer in certain assets). In Latin America, there are a variety of legal procedures for a company’s reorganisation:
- mergers (two or more companies combine to create a new independent company or one company absorbs the entire business of the other company, whereby the target company ceases to exist);
- simple reorganisations (assets and liabilities or business lines are segregated and transferred to a subsidiary or related company);
- spin-offs (assets and liabilities or business lines are segregated and transferred to another company or used to create a new company, or the company is completely split and spun-off to create two or more new companies); and
- transformation (the transformation of one company into another form of company or even into another kind of legal entity).
Some jurisdictions, such as Costa Rica and Panama, also allow for international or cross-border mergers or companies transferring to another country.
As the region’s start-up ecosystem matures, it is worth sharing some thoughts about corporate reorganisation in this area. Whenever a Latin American company considers bringing international investors into the company, the conversation about a corporate flip to an international corporate structure arises. Corporate flip is the process by which start-up founders transfer shares from the local subsidiaries to holding companies above the operating company to receive investment from seed and venture capital investors. Under this framework, the most common legal structures for start-ups in the region are the ‘Cayman sandwich’ (whereby the founders incorporate a Cayman holding company that wholly owns a Delaware LLC, which fully owns the local subsidiaries) or a ‘Delaware toast’ (whereby the founders transfer the shares of the local subsidiaries of a Delaware LLC to local subsidiaries). The potential investor then acquires shares from the Cayman holding company or the Delaware LLC, depending on the structure used.
Before adopting this strategy, a detailed analysis of the corporate structure, as well as the respective tax impacts, according to the conditions of the founders and the reality of the Latin American subsidiary should be carried out.
A covenant is an agreement, convention or promise entered by two or more parties in a written, signed and delivered instrument under which one of the parties undertakes to the other to do or not to do something or to affirm the veracity of certain facts.
Hence, affirmative and negative covenants are translated into commitments to do something or to refrain from doing something in the interim period from signing to closing. Failure to comply with these may enable the non-breaching party to demand specific performance or, upon material breach, to refrain from closing the deal and, in some cases, to claim damages from the breaching party.
Interim covenants play a pivotal role, acting as the connective tissue between the signing of an agreement and its eventual closing. These covenants serve multiple purposes, ensuring that both parties maintain the status quo and preserving the value and integrity of the transaction during the transitional phase, as well as regulating efforts and actions that need to be taken to reach closing.
At their core, interim covenants are designed to protect the interests of both the buyer and the seller. For the buyer, they offer reassurances that the business will continue to operate as usual, without any significant changes that might adversely affect its value or operations. For the seller, these covenants can provide guarantees against potential liabilities and ensure that the buyer remains committed to the transaction.
However, crafting effective interim covenants requires a delicate balance. They must be stringent enough to offer the necessary protections, yet flexible enough to allow for the regular course of business operations. Overly restrictive covenants can stifle a company’s ability to adapt to market changes, while overly lenient ones may expose the other party to undue risks.
Affirmative and negative covenants
Affirmative covenants are those in which one party binds itself to the existence of facts or to the future performance of a certain act, while negative covenants are those in which the grantor of the covenant undertakes not to perform a certain act. The most common interim covenants include:
- the covenant to operate the target in the ordinary course of business and to obtain the buyer’s consent for specific business matters;
- the covenant to undertake certain actions or efforts to reach closing, including obtaining governmental filings, authorisations or permits; and
- the covenant to maintain confidentiality and to refrain from making public announcements, among other things.
Ordinary course of business clause
One of the most important interim covenants in any M&A agreement is that related to conducting ‘the business in its ordinary course of business and in accordance and consistent with the target’s past practice’. The ordinary course of business clause plays a crucial role in ensuring the smooth progression of a transaction. This type of clause is designed to ensure that, between the signing of an agreement and its closing, the target company continues its operations consistent with its past practices and without taking any extraordinary actions that could affect its value or the terms of the deal. In essence, it is a protective measure that seeks to maintain the status quo of the business during the interim period.
This clause provides a clear framework in which the seller can operate the business without breaching the agreement. It allows the seller to make regular operational decisions, manage day-to-day activities and address routine matters without seeking the buyer’s approval. However, significant decisions, such as selling a major asset, entering unusual contracts or making substantial changes to business operations, would typically fall outside the ‘ordinary course of business’ and thus require the buyer’s consent.
For the buyer, the clause acts as a safeguard, ensuring they receive the business in the condition they expected when the deal was struck. It offers protection against any unexpected or drastic changes that could adversely affect the value or prospects of the target company.
While the concept seems straightforward, it can sometimes be a source of contention. The term ‘ordinary’ can be subjective, and what one party considers routine, another might view as extraordinary. Therefore, buyers should aim to include a list of all specific actions that are expected to require buyer consent, while sellers should aim to have specific exceptions (usually listed on a schedule) for actions that are in the pipeline or likely to occur between signing and closing.
The following are examples of items that generally expressly require buyer consent during the interim period:
- any amendments to the target’s by-laws or other corporate documents;
- payment of dividends or other distributions;
- granting of employee benefits that did not exist prior to signing;
- indebtedness outside the ordinary course of business or beyond a specified performance metric;
- granting of liens over certain assets;
- entering into agreements with related parties;
- to anticipate payments of any debt or liability; and
- acquisitions, investments or disposition of assets outside the ordinary course of business.
In some cases, sellers may also undertake the obligation to keep the buyer informed or provide reports about the target business.
Material adverse effect clause
In most purchase agreements, the closing is conditioned upon the absence of breaches of representations and warranties made by the seller or the target as a result of which there has been, or is reasonably expected to be, a material adverse effect (MAE). In jurisdictions such as New York and Delaware, courts carefully assessed the standard of an MAE clause and have been very reluctant to allow buyers to refrain from closing under an MAE clause, requiring that the buyer shows the occurrence of unforeseeable events causing sustained and severe business decline. The MAE standard is very high in these jurisdictions. However, if the purchase agreement is governed by the law of a Latin American country, there is uncertainty as to the legal standard set by MAE provisions.
For instance, in Argentina, it is unclear if a court may resort to the frustration of purpose doctrine provided for in Section 1090 of the Civil and Commercial Code, which enables a harmed party to terminate a contract if the conditions set forth in Section 1090 are met.
Also, MAE provisions are used to qualify certain representations, undertakings and events of default, which could be deemed to fit within the provisions of the Civil and Commercial Code that regulate the ways in which a contract can be validly terminated by a party due to a counterparty breach. Section 1084 of the Civil and Commercial Code provides that for a party to claim for the termination of the contract, the breach must be ‘of the essence’ in connection with the purpose of the contract.
Notwithstanding the above, a Latin American court would likely re-categorise the clause into the legal concept of force majeure, as this is more akin to civil law jurisprudence than MAE provisions.
Another key issue concerning interim covenants is the level of effort that buyers undertake to close transactions. Common variations include ‘best efforts’, ‘reasonable efforts’ and ‘commercially reasonable efforts’. Among M&A practitioners, it is generally understood that each variation represents a different level of commitment:
- best efforts: this implies the highest level of commitment. A party must take all necessary steps, even if costly or burdensome, to achieve the desired outcome;
- reasonable efforts: this is a more moderate commitment, requiring a party to act diligently and prudently, but not necessarily to the point of incurring significant costs or risks; and
- commercially reasonable efforts: this often takes into account industry standards and practices. It requires a party to exert effort consistent with sound business judgement and practice, balancing the desired outcome against potential costs and risks.
Again, it is uncertain how these standards would be construed under local law in Latin America. Jurisdictions such as Delaware have a body of case law distinguishing ‘best efforts’ from all other variations that generally require only ‘reasonable effort’ action from the buyer. In addition, in M&A transactions there is a clause known as the ‘hell or high water’ (HHW) clause, which requires the buyer to take all actions required for closing, even if adverse consequences are suffered along the way. Therefore, under an HHW clause, a party must do whatever is necessary, regardless of the cost involved and the difficulties that may arise, to achieve the desired result. This type of covenant is commonly used when the buyer must obtain something from a third party to close the transaction (e.g., an authorisation from the antitrust authority or the authority that regulates a particular economic sector).
To excel in M&A deals in Latin America, it is crucial to have a deep understanding of the region’s unique legal and regulatory idiosyncrasies.
Deals in Latin America have certainty thanks to the authorisations and clauses established by law, which provide a degree of investor protection. In that sense, it is possible to negotiate with contractual language to ensure that the deal is carried out to the benefit of both parties and that both parties comply with the covenants established in the agreement.
While specific terms of M&A transactions are standard no matter the jurisdiction, it is vital to understand that each country in Latin America has specific requirements that apply differently, especially in terms of antitrust authorisation.
Consequently, seasoned and quality legal advice is crucial for businesses to thrive in the ever-challenging Latin American landscape.
 Juan Bonet, Eduardo Patricio Bonis, Ricardo Güell and José Francisco Iturrizaga are partners at Deloitte Legal.
 See ‘The LatAm M&A landscape: Gradual rise in deals on the horizon’, Bnamericas, 30 March 2023, www.bnamericas.com/en/interviews/the-latam-ma-landscape-gradual-rise-in-deals-on-the-horizon.
 Law No. 25,156.
 Law No. 18,159.
 See ‘Doing Business in Peru: Overview’, https://uk.practicallaw.thomsonreuters.com/ 0-500-7812?transitionType=Default&contextData=(sc.Default)&firstPage=true#co_anchor_a887955.
 See Joe Castelluccio and Jenna Miller, ‘Pre-closing covenants and the pandemic’, 2020 M&A Journal 20(4), www.mayerbrown.com/-/media/files/perspectives-events/publications/2020/04/vol-20-no-4-the-ma-journal.pdf.
 Section 1090: ‘The definitive frustration of the purpose of the contract authorises the harmed party to declare its termination if it is caused by an extraordinary alteration of the existing circumstances at the time of its signing, unrelated and beyond the control of the parties and that exceeds the risk assumed by the affected party.’
 See ‘Los mejores esfuerzos (best efforts) en la contratación corporativa y financiera’ available at https://revistas.up.edu.pe/index.php/forseti/article/download/1756/1579/.