Mergers and Acquisitions

Last verified on Monday 4th October 2021

Mergers and Acquisitions: Peru

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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?

Peru

M&A practice and volume of transactions in Peru remained constant and consistent with the previous years, with a variety of M&A processes in several industries, mainly with processes in healthcare, real estate, education and agroindustrial.

As in most parts of the globe, March 2020 was definitely a month full of uncertainty in the Peruvian market, starting with a 15-day lockdown that was extended for months and which really took a toll on some particular industries, such as food and beverage, real estate and entertainment. In fact, some buyers enforced MAE clauses to avoid closing deals in such turbulent times. 

After that bump, M&A activity resumed to pre-pandemic standards and for the past year M&A activity has been ongoing regularly, with deals happening on a well-rounded basis among the country's industries. Our perspective for 2021 is that the market will follow the trend of past years, based on the country's solid economic growth and legal securities for investors.

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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?

Peru

Peru's M&A actors have adapted quickly and smoothly to remote work and negotiation. As in most countries, Peruvian law allows M&A processes to be signed and closed through the exchange of signature pages or software that allow parties' consent with electronic signatures.

All the relevant milestones up to the closing date can be performed remotely, either by virtual meetings, drafting sessions and electronic exchanges. Regarding closing, the presence of at least the attorneys of the parties may be necessary when there are deliverables that need to be handled in hard copies or original versions, such as corporate books or certain key contracts or special forms, such as databases or other sensitive information (in technology or pharma-related deals, for example).

In the case of Estudio Muniz, even before pandemic the firm had a very strong remote work and WFH policy and platform in place for all levels and categories, so the shift to the virtual world was made swiftly and smoothly. 

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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?

Peru

There was a period between mid March - mid April 2020 in which the global uncertainty added to the recently enacted lockdown policies in the country made just a few buyers trigger MAE provisions to try to suspend or delay closing in certain transactions. As far as we know, in a couple of these cases this situation was challenged by sellers, since some of the deals were executed late February or starting March, so starting the interim period a buyer could reasonable foresee that COVID-19 could be a global and local issue.

Nevertheless, as mentioned in the previous questions, once the uncertainty began to decrease and news regarding vaccination and openings started to headline the news, both buyers and sellers regain trust and comfort to execute transactions within standard terms, adding some COVID-19 protections.

These protections mostly refer to the following: 

  1. From the buyer's perspective: Legal due diligence has become more extensive and rigorous regarding (i) compliance and potential renegotiations of contracts (including remedies applicable to extraordinary and force majeure scenarios); (ii) labor measures adopted through the pandemic; (iii) technology and IT issues (mostly related to integration and remote work feasibility); and (iv) measures that, although legal, could have affected the target from a reputational perspective in the market.
  2. From the seller's perspective: During the past year, sellers mainly have focused in excluding COVID-19 effects or consequences as a cause to trigger MAE clauses or special indemnities in M&A processes.

 

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4. Did buyers have difficulty obtaining acquisition financing during the pandemic?

Peru

The Peruvian financial system has kept growing and evolving over more than 2 decades, and banks have been eager to fund M&A activity in the country even during the pandemic. Furthermore, the Government also provided funds to companies for working capital so the economy would not stop (which was chaneled through the financial system), so - overall - the financial system and companies had money available to reactive the economy and undertake M&A activity.

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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?

Peru

M&A activity in 2020 in Peru was comparable to the one we had in the previous years, with considerable activity in multiple sectors (ie, electric, construction, food and beverage, retail, agroindustrial and pharma among others). The main factors influencing M&A activity are economic, political and regulatory.

Although the Peruvian economy has slowed its growth since 2014, it is still one of the best performing economies of the region and, in that sense, M&A activity has also remained steady. 2021 is expected to bring forth more economic growth, so we do not foresee a decrease in the number of deals and international players in the market. 

There was political instability in Peru during 2020, but the crisis did not have a major impact on M&A activity. Peru's Constitution and foreign investment laws are among the most friendly of the region, providing foreign investors the same rights as local investors (with few exceptions regarding owning property within 50km of the borders, or certain activities), including free flow of cash and profits.

The main regulatory update for 2021 is the newly enacted and in-force antitrust clearance regulation (see question 24). We do not expect these regulations to have a negative impact  as international investors are accustomed to antitrust regulations, even within Latin America. In fact, Peru was the only country that did not have in place an M&A antitrust control (except for the electricity industry).

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6. Which industries do you expect will see the most M&A activity in 2021?

Peru

We foresee that agroindustry, electricity, retail, pharma, mining and education will see the most M&A activity in 2021.

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7. What types of deals do you expect to see?

Peru

We expect to see a majority of total acquisitions, which has been the norm in Peru (the majority of companies in the Peruvian market are wholly owned family companies). In some cases, we will see acquisitions of majority stakes with call and put options to acquire the seller’s remaining stake in the years following the transaction. This structure permits buyers (especially foreign buyers) to use the seller’s experience in the region and the business during the first few years of investment before acquiring 100 per cent stake in the target. In the same vein, foreign investors with majority stakes will probably aim to consolidate a 100 per cent interest during 2021.

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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.

Peru

In 2021, we expect to see a similar distribution of M&A deals as in 2020, which are almost purely composed of: (i) domestic deals and (ii) deals involving a foreign acquirer of a Peruvian company (company acquisition or private equity deals).

Peru is positioned as an attractive destination for investors because, while its positive economic performance presents opportunities for foreign investors, many local companies are inclined to sell due to the decreased growth the Peruvian economy has faced as of 2014 (Peru was the country with the highest growth in the region in previous years). This creates an ideal scenario to align incentives among potential foreign buyers and local sellers. 

Furthermore, foreign investors may find Peru as a more attractive investment opportunity within the region considering the current political climate in other traditionally stable and investor-friendly countries, such as Chile, Argentina or Venezuela.

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

Peru

Private equity activity has been increasing in the region in recent years based on the presence of international and newly created local funds and investors, but it is still not one of the most important source of M&A activity in the country. However, we expect to see a certain increase in activity as the maximum disinvestment term for many private equity funds is coming to a close.

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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?

Peru

Financing in local M&A transactions is not typically employed in Peru. The average deal size in the region (except for Brazil) is much lower than the American or European markets, which limits the necessity to finance the transaction. In any case, for some specific deals, syndicated loans are included but they do not involve a high-level complexity. Financing usually comes either from local banks or international lenders. We do not foresee any limitation to the availability of funding during 2021.

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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?

Peru

Peru is very open to acquisitions by foreign buyers. There are no widespread restrictions on foreign entities investing in Peru, which creates an even playing field from a regulatory perspective. In fact, Peruvian laws encourage equal treatment to foreign companies and individuals to own companies (with few exceptions such as owning real estate property within 50km of the borders or specific industries such as telecommunications and aviation).

In a competitive bidding process, there are typically more foreign bidders than local bidders because of the limited size of the Peruvian economy. However, local bidders may be able to provide certain attractive conditions for the seller because they are willing to manage negotiations within a strictly Peruvian standard, including the application of Peruvian law in the acquisition agreements. This is very attractive for sellers, especially family companies (which make up the great majority of Peruvian enterprises). 

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

Peru

Corruption and compliance concerns are not affecting M&A activity in Peru in a significant manner, as they are usually handled through a thorough due diligence process and representations and warranties from the sellers in the acquisition agreement. Compliance regulations were recently enacted into force which require Peruvian companies to implement a compliance prevention system. The implementation of this system entitles the company and its officers to avoid responsibility in case of certain breaches of anticorruption regulations by its employees. 

Therefore, from a seller’s perspective, the implementation of an adequate compliance prevention systems will serve as a guarantee that: (i) only limited representations and warranties will have to be granted in anticorruption matters, and (ii) they will very likely be protected from any post closing claims.

From a buyer’s perspective, it is important to: (i) confirm during due diligence that the company has an adequate compliance prevention system that complies with the parameters set forth in applicable law, and (ii) demand that the seller grants the necessary representations and warranties, which will be more or less aggressive depending on the findings of the due diligence process.

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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?

Peru

Restructuring of financially troubled companies is not a significant part of M&A activity in Peru (see question 14 for further information).

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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?

Peru

Peru’s bankruptcy law does not permit the acquisition of an entity product of a debtor’s reorganisation outside of bankruptcy proceedings. Any restructuring and subsequent transaction involving the restructured entity of the debtor will have to be approved by the Creditors’ Assembly and the Peruvian regulatory authority (National Institute for the Defence of Competition and Intellectual Property-INDECOPI).

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15. Has there been any increase in public company M&A?

Peru

There has not been a significant increase in public company M&A. However, the biggest deal involving a public company was closed in a two-step public acquisition during 2020 and 2021, with the sale of Luz del Sur, the largest electricity distribution company in the country, for an aggregate amount of US$ 4.1 million to China Yangtze Power, subsidiary of China Three Gorges.

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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?

Peru

Minority shareholders in public companies are protected by the mandatory offer threshold. Public companies in Peru traditionally have a majority shareholder that controls the company. Therefore, buyers usually acquire a significant stake of the company directly from the majority shareholders before launching a mandatory tender offer for a minimum number of shares calculated pursuant to the following formula:

(X/Y) x (1-Z)

Where:

X = percentage acquired in the last three years

Y = third party participation before the acquisitions; and

Z = current third-party participation

Consequently, a third party may not acquire a significant stake of the company from a majority shareholder without launching a tender offer for a proportionately significant stake held by minority shareholders.

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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?

Peru

Shareholder activism and hostile takeovers are not common or significantly developed in Peru. It is not possible to identify common or permitted defensive measures because they are not commonly employed. Furthermore, directors (which would traditionally execute defensive measures against a hostile takeover) are expected to remain neutral as per the Corporations Law throughout the sale process and simply issue a report outlining the advantages and disadvantages of the transaction.

In rare instances, shareholders set forth poison pills or crowned jewel defence provisions in shareholders’ agreements, which would be triggered by a majority shareholder or the directors acting as instructed by the appointing shareholders.

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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?

Peru

The role of directors and controlling shareholders in M&A transactions has largely remained the same in recent years in Peru.

True decision-making power in Peruvian companies lies with the controlling shareholder, rather than directors, who will act diligently and neutrally within the restrictions of applicable law, the bylaws and existing shareholders’ agreements.

The directors’ duties in an M&A transaction are limited to issuing a report outlining the advantages and disadvantages of the transaction, as well as any conflicts of interests (only applicable for public companies). Therefore, directors have a duty to fulfil their obligations under applicable law and corporate governance documents, although they are not empowered to execute decisions that may require the existence of a fiduciary duty of the same nature as Common Law.

In the case of controlling shareholders, although they are in control of the company, there is no doctrine of fiduciary duty to minority shareholders, but rather limitations on their ability to enforce certain decisions on minority shareholders. For example, if the controlling shareholder votes to spin off a business to sell to a third party, the minority shareholder may separate from the company.

Minority shareholders are traditionally protected by the existence mandatory public offer threshold applicable to public companies (see question 16 for further information) and tag along rights and put options in private companies.

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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?

Peru

Controlling shareholders and officials of the company could potentially feel more concerned over media perception surrounding the transaction due to increasing media scrutiny, considering the latest corruption scandals in the region. Taking into account that the majority of companies in Peru are family-owned enterprises, there may be a certain trust associated to the brand that may require strategic publicity when announcing that the brand will now be controlled by a foreign buyer (ie, the acquisition of Inca Kola, an emblematic Peruvian soft drink, by the Coca-Cola Company). However, this is not a new concern, or a concern strictly limited to the region. 

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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?

Peru

Peruvian M&A is carried out under a fairly international standard. The structure and terms of purchase agreements and shareholders’ agreement are frequently familiar to foreign parties, which eases negotiations in cross-border deals. Foreign buyers will usually have to negotiate within certain conditions which are considered standard in the Peruvian market and may not be standard in international M&A markets (ie, the exclusion of consequential damages from the indemnifiable damages by seller, which is sometimes worrisome for foreign buyers who are sensitive to reputational damage). One specific aspect that may be more appealing to sellers in domestic transactions is that the applicable law, settlement of disputes and escrow clauses will not be questioned by a local buyer, as opposed to a foreign purchaser that may be more inclined to agree on international standards such as NY Law or its local law.

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

Peru

The M&A process has remained largely the same in recent years, and international trends apply in Peru in the same way as in foreign countries. The main difference would be that the local players in the market have become more sophisticated due to increased M&A activity, which makes Peru a friendlier destination for investors in terms of negotiation.

However, for transactions that fall within the scope of the newly in force M&A antitrust clearance regulations, additional provisions for the interim period while the clearance is obtained, as well as business management by the seller (within standards that are not considered as gun-jumping) will be more relevant.

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22. How level is the playing field for domestic and international bidders?

Peru

International buyers are traditionally more risk adverse because they are subject to international compliance policies and greater reputational risk than a local buyer. Therefore, practice shows that international buyers (especially the ones from developed countries) are more alarmist to due diligence findings and may require a higher standard of compliance or indemnity than a local buyer.

Nonetheless, in our experience, when properly advised by local counsel, international buyers are able to put certain risks in perspective with the Peruvian market.

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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?

Peru

The three most important pieces of advice are:

  • Due diligence: carry out a thorough legal due diligence process with a sophisticated and specialised firm that has real experience in each sector, including engaging the correct financial advisers to determine the purchase price and eventual adjustments; 
  • Antitrust: ensure that the firm advising you has a strong and specialist antitrust area that is able to advise you if the deal is subjected to antitrust controls; and
  • Indemnity: ensure that the representations and warranties granted by the seller are reviewed by a specialised team of lawyers that can ensure that they cover the contingencies that may emerge after closing, including indemnity provisions and enforceability of collaterals.

The three most important pitfalls are:

  • Context: avoid analysing commercial and legal risks purely from an international perspective, as they need to be analysed taking into account the Peruvian context;
  • Negotiation: be prepared to adapt to standard Peruvian M&A negotiation practices to ensure that your demands are not completely off-market and unacceptable to the seller (this requires the assistance of a sophisticated and experienced Peruvian M&A lawyer); and
  • Integration: not analysing the integration strategy before closing the deal, as M&A deals are not merely a combination of business and economic units, but foremost a cohesion of teams and individuals. This has taken special relevance during the pandemic, since remote work is currently an important trend in Peru and the globe. 

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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?

Peru

Before 2020, Peru was the only country in the region to not have in force M&A antitrust regulations (except for the electricity sector), although several discussions and proposals over the past decades were presented. The Antitrust Regulation Law has just entered in force and M&A players need to adapt to such reality.

According to the Antitrust Regulation Law, an act of concentration must be notified to INDECOPI when it confers control to the purchaser or the resulting company and meets both, a joint and individual threshold, as explained below:

  • Joint threshold: the aggregate amount of sales or gross income or accounting value of the Peruvian assets of the companies involved in the transaction exceeds 519.2 million soles; and,
  • Individual threshold: the amount of sales or gross income or accounting value of the Peruvian assets of at least two of the companies involved in the transaction exceeds 79.2 million soles.

An operation will qualify as an act of economic concentration if it entails a transfer or change of the control of a company or part of it, as follows:

  • a merger between two or more firms or companies;
  • an acquisition of shares that confers to the owner the control of the company;
  • joint ventures or another form of associative contract; and
  • acquisition of control of the productive and operative assets from another company, through property rights or other legal powers.

Therefore, transactions that meet the above requirements will be subject to antitrust control by the authority prior to closing. The competition agency will consider factors such as the structure of the relevant market, real or potential competition, sources of distribution and commercialisation, creation or strengthening of a dominant position, generation of economic efficiencies, etc as variables to evaluate to decide whether to authorise the operation.

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