1. Has the level of M&A activity slowed, increased or remained flat in 2019 as compared to 2018, and what are conditions like today? In general terms, what level of activity is foreseen for 2020? What are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Stock market performance? Liquidity? Rule of law? Other?
The M&A market in Costa Rica remained active in 2019, with key economic indicators reflecting a healthy economy. The country continues to attract the attention of foreign companies that see it as a stable emerging economy with potential for growth. Costa Rica’s value proposition with a proven track record, strategic location and business climate provides for an environment that attracts buyers and makes target companies appealing.
Notwithstanding outside factors or local political and fiscal trends, which includes the implementation of the recently passed tax law reform, the M&A market should continue to be active in 2020. The consolidation of consumer goods companies (wholesale and retail), lower commodity prices, in particular oil, as well as an inflow of South American groups owing to the country’s logistic advantages, should have a favourable influence in the M&A market.
Only a limited number of companies are listed in the local stock market. No significant activity exists and main trading relates to debt instruments.
2. Which industries do you expect will see the most M&A activity in 2020?
The most dynamic sectors in the country have been life sciences, services and distribution, hospitality, consumer, advanced manufacturing and industrials. These sectors are the main focus of foreign direct investment and should be the main focus for new potential M&A dealings in Costa Rica for 2020.
3. What types of deals do you expect to see?
The market trend for the past few years, based on reporting provided by the ex-ante merger control system, which became effective in April 2013, suggests outright or total acquisitions to be the most common by number and value. We expect this trend to continue in 2020.
4. Discuss the level of M&A activity you have seen over 2019 and expect to see in 2020 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.
M&A activity has concentrated on deals involving a domestic target and foreign acquirer or vice versa. The most important transactions for 2019 were:
- Roma Prince SA and Alimentos SA acquiring Kalicox Holding Corp;
- UPL Corporation Limited acquiring Industria Bioquímica Centroamericana SA;
- Grupo Empresarial Aizenman (Veinsa Motors) S. acquiring MotoresCostaRicaPuntoCom SA;
- Consultores Financieros COFIN SA acquiring Corporación de Inversiones Credomatic SA; and
- INDECOMM acquiring AVANTICA.
There are some pure domestic deals that occurred during 2019, mostly in the consumer and services sector, where consolidation of groups was the trend. We anticipate this to continue for 2020.
5. What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
There is private equity involvement in the M&A market; nonetheless there is limited exposure and mixed success. Both domestic and international funds were involved in deals during 2019. Services and financial sectors were main industries of participation, especially, given the size of the country.
6. Is acquisition financing available for deals? Where is financing coming from? How much concern do you have that an increase in interest rates or risk of a recession will limit the availability of financing?
Yes, acquisition financing is available for deals. The most common funding structures, regardless of the acquirer are: bank lending, corporate debt, capital increases (private placement of shares of stock) and securitisations or security trust agreements. The withholding of taxes is an important issue affecting funding structures, as these may apply if interest is paid to a bank domiciled abroad but not registered in Costa Rica either as a first order bank or as an institution normally dedicated to financial operations. The debt-to-equity ratio depends on the type of deal, but is usually in the region of 70:30 or 60:40.
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?
Costa Rica is an open economy; foreigners have the same rights and obligations as nationals do. No restriction exists for foreign ownership and no foreign exchange controls exist. Foreign and domestic bidders have a level playing field when competing for a target company.
8. Are corruption and compliance concerns affecting M&A activity? Are there industries where this is a particular issue?
The Costa Rican judicial system and rule of law provide certainty for M&A activity. Nonetheless, although not specifically related to M&A activity, recent ongoing investigations in government procurement (eg, medical sector) have raised concerns over corruption-related issues. M&A activity involving companies that participate in government contracts requires special attention in regard to political risk issues.
9. How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2019 as compared with 2018? What are the prospects for 2020?
No particular spike in M&A activity involving financially troubled companies is anticipated. Although targets do exist under financially distressed situations, an improving financial environment in global markets and a stable local market make this a lesser pool for buyers to choose from.
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?
Costa Rica permits the reorganisation of an entity that cannot repay the debts it owes to creditors. The administration and reorganisation under judicial intervention is regulated under articles 709 to 742 of the Civil Procedure Code but is not commonly used and few companies have submitted to it. Therefore, not much M&A-related activity is associated with companies that are under the administration and reorganisation under judicial intervention.
11. Has there been any increase in public company M&A?
As noted in answer 1, only a limited number of companies are listed in the local stock market. No significant activity exists and main trading relates to debt instruments. No public company M&A increase exists.
12. How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisers, fairness opinions?
Minority shareholders can achieve protection through shareholders’ agreement and/or the creation of preferred shares with different voting rights and rights to nominate directors.
There are no effective mechanisms in Costa Rica that allow the squeeze-out of the shareholders or the elimination of minority shareholders. By statute, in furtherance with article 29 of the Commerce Code, minority shareholders can obtain protection against increased payments beyond their existing participation in the company. Article 32-bis of the Commerce Code also protects minority shareholders against mergers that might increase their responsibility.
In 2016, the Law for the Protection of Minority Investors came into force, aimed specifically at protecting the rights of minority shareholders.
13. 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?
Hostile takeovers are not common in Costa Rica. Shareholder activism is also limited; the majority of companies are private, and usually family owned or controlled by few shareholders. The stock market has a small number of publicly traded companies. Control is usually addressed by means of shareholder agreements. Hedge funds do have participation in the local M&A market, especially in transactions that include Costa Rica together with other jurisdictions. The Costa Rican Commercial Code calls for cumulative voting in corporate decision-making, which may be contracted out of by the parties. It also provides for the possibility of creating “nomination rights” for preferred shares. However, no direct appointment of directors by shareholders is allowed, so such mechanisms are generally implemented by allowing certain classes of stock to nominate a certain number of directors, with the actual appointment being made by cumulative vote. Note that these sorts of provisions should be included in the articles of incorporation.
14. 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?
As the level of sophistication in the transactions and companies has increased, directors, management and controlling shareholders have matured and evolved in how they conduct M&A deals. This has made directors, management and controlling shareholders more diligent in their review of M&A transactions and other related matters.
Controlling shareholders, directors and management have the fiduciary duties of loyalty and care. The latter two are jointly and severally liable before the company and its shareholders for breach of their duties in furtherance with article 1045 of the Civil Code and 189 of the Commerce Code. Shareholders will be jointly and severally liable but limited to the amount of their investment.
15. Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure, shareholder lawsuits and liability from potential litigation?
Avoiding negative publicity, shareholder criticism, regulatory pressure, shareholder lawsuits and liability from potential litigation is critical for the success of an M&A deal. Having a superior business model and strategy, good local management and cultivating best practices provides a good defence against such hazards.
16. 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?
There are no major differences on how domestic and cross-border deals are conducted. Nonetheless, documentation associated with cross-border dealings tends to be broader, especially when common law jurisdictions are involved.
17. Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
The most significant change to how M&A transactions are conducted in Costa Rica deals with changes that were inserted for antitrust purposes, which are detailed in following answer and the Law for the Protection of Minority Investors.
18. How level is the playing field for domestic and international bidders?
As noted in answer 7, Costa Rica is an open economy; foreigners have the same rights and obligations as nationals do. No restriction exists for foreign ownership. Foreign and domestic bidders have a level playing field when competing for a target company.
Buyers subject to anticorruption laws in their home jurisdiction do tend to carry out more strenuous due diligence. In particular, there are differences between the level of tolerance when compared to domestic companies, which are more familiar with business environment and risks.
19. 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?
International buyers and investors looking at deals in Costa Rica need to fully understand the market, the target company and how it will integrate with the acquirer. Taking advantage of tax incentive regimes is key to maximise the synergies, growth, cost reductions or higher earnings that are being pursued: face up to tough issues early, take care in negotiating puts, calls and divorce clauses (when applicable).
After the transaction closes, attention turns to managing the work force, achieving sales numbers, addressing differences in culture and becoming a single unit – all challenges that must be promptly managed to optimise the desired benefits. Costa Rica is a very formalistic jurisdiction and employment law is very protective (eg, no employment at will exists) – understanding this and navigating the cultural differences are the main challenges or pitfalls to be avoided.
20. 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?
On 5 October 2012, a substantial amendment to the Costa Rica Competition Law was entered into that includes a new ex ante merger control system, which became effective in April 2013.
This relatively new merger control system applies to the following transactions:
- those for which the sum of the productive assets of the involved economic agents exceeds 30,000 minimum salaries (this applies to successive transactions that take place during a period of two years that exceed that amount); and
- those for which the sum of the total income generated in the national territory by the agents involved during the last tax period exceed 30,000 minimum salaries.
The changes from the new Competition Law establish that the regulating agency (the Commission) must approve mergers that do not have the following object or effects:
- acquire or increase the substantial power in an important way that will have the effect to limit or decrease competition; or
- facilitate the coordination (expressly or tacitly) between competitors or the free participation with respect to equal, similar or substantially related goods and services.
If it is determined that the merger has one of the previously described objects or effects, the Commission shall consider the following issues prior to approving it:
- if the merger is necessary to obtain economies of scale or develop efficiencies, like those described in the law, which benefits are greater than the anticompetitive effects;
- if the merger is necessary to avoid the withdrawal from the market of productive assets from one the economic agents that participates in the merger, like would be the case of an unsustainable financial situation;
- if the anticompetitive effects may be attended by conditions imposed by the Commission; or
- if there is a pretention of any other circumstance that the Commission considers protects the interests of the national consumers.