1. How strong were M&A trends in the first couple of months of 2020, before the pandemic? How has the covid pandemic affected M&A activity since March 2020? Have you seen an increase in recent months? What are the prospects for 2021?
Before the pandemic, M&A trends in Costa Rica gave very good indicators of a healthy and growing economy in several sectors. During the first months of 2020, the Commission on the Promotion of Competence (Coprocom) had more filings registered than during the first months of previous years.
As the pandemic effects started to show in early 2020, local companies started to be more focused on reorganization and crisis management, as well as cost reduction and other trends brought on by the outbreak of the pandemic. Obviously, this had an immediate negative impact regarding M&A trends in Costa Rica, and there were no filings registered with Coprocom from April until October 2020.
Nonetheless, at the end of 2020, there was an increase in M&A activity due to the effects of the pandemic having created favourable conditions for sales and alliances to start flourishing. The economic crisis had weakened companies in key sectors, creating a buying opportunity for strong competitors and investors interested in diversifying and seeking long-term results. Companies are clearly acting in response to their experience and proactively preparing for a different market outlook.
Since then, there has been a gradual but steady increase in M&A activity, which has also been the trend in 2021. Latin America has great global potential to experience growth in M&A during 2021, and this phenomenon would have an impact on the Costa Rican market.
2. How has working remotely affected the ability to do the intensive work needed to complete a deal? Have you been successful in completing all the different aspects of a deal on a remote basis – company owners getting to know each other, diligence, negotiations?
Aside from the initial months of the pandemic, there has been little to no effect in the ability to do intensive work associated with deal closings in relation to working remotely. Like in most jurisdictions, virtual meetings and work from home has allowed for a seamless continuation of business transaction on a remote basis.
3. Did many buyers try to terminate or renegotiate pending deals because of the adverse effects of the pandemic by, for example, claiming that the seller had suffered a material adverse effect, had breached its covenant to conduct business in the ordinary course or otherwise failed to comply with the purchase agreement?
These types of collateral effects associated with the pandemic have been sector specific and not a rule in M&A activity. The most heavily affected business did indeed pursue termination or renegotiation of deal terms.
4. Did buyers have difficulty obtaining acquisition financing during the pandemic?
It has not been the experience, as most buyers are acting on an opportunity to diversify and strengthen their position as well as preparing for a different market outlook using M&A transactions for such purposes.
On the other hand, sellers have had financing difficulties as the weakening of family businesses in the sectors with the greatest restrictions: tourism, hotels, restaurants, commerce, franchises, entertainment, education and real estate are the most sensitive areas under the current circumstances, making them attractive targets for investors and competitors.
At this moment, business leaders are focused on addressing the immediate impact covid-19 has on liquidity, supply chains, revenues and profitability, whereas companies are reconfiguring and readjusting their response in real time as events evolve rapidly.
5. Besides the pandemic, 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 had a gradual but steady growth pattern in late 2020 and early 2021, with key economic indicators reflecting a recovering economy. The country continues to attract the attention of foreign companies that see it as a stable emerging economy with potential for growth despite adverse pandemic effects. 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 include the implementation of the recently passed tax law reform, government debt and social situation appearing as obstacles, the M&A market should continue to be active following Latin American trends. 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. Local stock market activity is not expected to grow in the following months.
6. Which industries do you expect will see the most M&A activity in 2021?
The most dynamic sectors in the country on a pre pandemic basis 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 2021.
Furthermore, the growth of collaborative businesses, e-commerce and technology may force companies in these sectors to develop a rapid strengthening in key markets, and M&A opportunities will be key for such achievements.
7. 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 historically to be the most common by number and value. We expect this trend to continue in 2021, although the growth of collaborative businesses, e-commerce and technology during the pandemic may trigger a slight rise on joint ventures and minority investments.
8. Discuss the level of M&A activity you have seen over 2020 and expect to see in 2021 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 2020 and 2021 so far were:
- GERSA acquiring Comeca and Grupo Empresarial de Supermercados SA;
- Banco BAC San José SA acquiring from Multibank Inc MB Créditos SA and MB Leasing SA;
- KKR and Telefónica Chile SA acquiring joint control of InfraCo SpA;
- Portafolio Inmobiliario Internacional SA y Nature Global Holdings Inc. Acquiring Complejo Riverwalk RW SA;
- Bain Capital Investors LLC and Cinven Capital Management (VII) General Partners Limited acquiring joint control of Lonza Specialty Ingredients;
- Compañía Arrocera Industrial SA acquiring machinery, brands and inventories from Comercios El Barreal SA;
- Almacenes el Colono SA acquiring Ferreterías Comaco del Norte SA, Comaco de Huacas SA, Fun and Games SA and Inversiones Maydeco del Norte SA; and
- Compañía de Galletas Pozuelo DCR SA and Compañía Americana de Helados SA acquiring Grupo Belina.
There were also some pure domestic deals that occurred during 2020 and 2021 that do not exceed the legal thresholds for having to register filings, mostly in the consumer and services sector, where consolidation of groups was the trend. We anticipate this to continue for late 2021 and 2022 as local companies are aiming for transformation and growth.
9. 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 2020 and early 2021. Services and financial sectors were main industries of participation, especially, given the size of the country.
10. 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.
11. 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?
At this moment, Costa Rica is recognised as a top destination for foreign investment in the region and in the world despite its small size, with medical devices, software and information technology and business sectors accounting for 60 per cent of inbound projects in 2020 according to Greenfield Performance Index.
12. 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 and construction) 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.
13. How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2020 as compared with 2019, due to the pandemic or otherwise? What are the prospects for 2021?
A small uptrend in M&A activity involving financially troubled companies is anticipated. Although targets do exist under financially distressed situations amid the pandemic, a recovering financial environment in global and local markets make this a lesser pool for buyers to choose from.
Regardless of the above, some companies have had financial difficulties deemed by the weakening of family businesses in the sectors with the greatest restrictions: tourism, hotels, restaurants, commerce, franchises, entertainment, education and real estate, which under current circumstances make them attractive targets for investors and competitors.
14. 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. New regulations regarding bankruptcy will enter into effect in December 2021, with changes that will seek for the advancement and agility of the Costa Rican Bankruptcy Law, and propose solutions and agreements that will allow the preservation of the economy of the companies, without this meaning that the interests of the creditors are not or less protected.
15. Has there been any increase in public company M&A?
As noted in answer 5, only a limited number of companies are listed on the local stock market. No significant activity exists and main trading relates to debt instruments. No public company M&A increase exists.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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.
21. 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.
22. 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.
23. 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 workforce, 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.
24. 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 of the economic agents that participates in the merger, as 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 hint of any other circumstance that the Commission considers protects the interests of national consumers.