Trends and climate
What is the current state of the M&A market in your jurisdiction?
The level of M&A activity in 2015 has been moderate when compared to 2014; however, 2014 was an exceptional year for M&A activity in Peru. The following factors contributed to M&A activity in 2014:
- relatively low market volatility;
- availability of acquisition financing at favourable rates;
- a downturn in certain economy sectors, which offered good opportunities for players with cash to shop around; and
- the successful exits of certain private equity funds, which cashed in on their investments.
However, in 2015 growth slowed and investment opportunities became less attractive, causing M&A activity to decrease. Even with this decrease, Peru remains a key player, with one of the highest increases in gross domestic product in the region.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
Peru is a mining country and consequently the drop in the price of commodities has had a significant effect on the economy. This created new opportunities in the mining sector for market players with cash. Certain important mining M&A transactions are expected to close in 2015 and early 2016. Regarding political developments, presidential elections are scheduled to take place in April 2016 and the new president will take office in July 2016. While the elections have not created significant political noise so far, investors may take a more conservative approach as 2016 approaches.
Are any sectors experiencing significant M&A activity?
Over the past 12 months activity in mining, oil and gas, consumer products, health services and education has increased. Most recently, the energy sector has experienced significant M&A activity, as there is an excess of energy in the local market and a number of local and international players are looking to restructure their energy portfolios.
Are there any proposals for legal reform in your jurisdiction?
In April 2012 a bill was submitted for debate before Congress to establish merger control rules. While the bill has not been officially shelved, there has been little progress in its evaluation and passage.
What legislation governs M&A in your jurisdiction?
The legal framework mainly comprises the following regulations:
- The General Companies Act (Law 26887) – this contains general provisions which apply to transfers of shares, mergers, spin-off and split-off transactions and other corporate reorganisations.
- The Civil Code (Legislative Decree 295) – this regulates, among other things, contracts in general, obligations and property rights.
- The Securities Market Act (Legislative Decree 861) and complementary regulations issued by the Superintendence of Securities – these must be taken into account when dealing with public companies. The Regulations on Mandatory Tender Offers (Resolution Conasev 9-2006-EF/94.10) are particularly relevant, as they regulate, among other things, cases in which an acquirer is obliged to launch a public tender offer.
- The Securities Act (Law 27287) – this regulates the issuance and transfer of securities (including shares and debt instruments).
- The Anti-monopoly and Anti-oligopoly Act for the Electricity Sector (Law 26876) – this regulates vertical and horizontal concentrations on the electricity market.
How is the M&A market regulated?
As a general rule, there are no merger control rules (except in the electricity market) or restrictions on the acquisition of Peruvian companies. Thus, in principle, local or international buyers can complete acquisitions of Peruvian companies via the purchase of shares, mergers or otherwise, without obtaining any form of clearance or authorisation from a Peruvian governmental authority. Exceptionally, acquisitions in regulated sectors are either subject to specific restrictions or are conditional on obtaining certain governmental authorisations.
Are there specific rules for particular sectors?
Yes. In certain regulated sectors Peruvian regulations may:
- cap the equity interest that can be acquired by a single entity, person or business group (regardless of nationality or country of origin);
- impose specific restrictions on foreign acquirers; or
- insist on prior clearance from local authorities before closing takes place.
Financial entities and insurance entities
Peruvian regulations require the buyer of shares issued by a local financial institutions or insurers to obtain clearance from the Superintendency of Banking, Insurance and Private Pension Fund Managers in the following cases:
- any transfer of shares that enables the buyer to acquire or reach, directly or indirectly, 10% or more in the capital stock of a financial or insurance company; or
- any transfer of equity in a domiciled company owning more than 10% of the capital stock of a financial institution or insurer.
As a general rule, no person or entity, by itself or along with its affiliates, directly or indirectly, may hold more than 10% of the voting stock issued by a local securities exchange or local clearing and settlement institution. Exceptions may apply in limited cases.
Moreover, in the case of certain entities licensed and supervised by the Superintendency of Securities (eg, broker-dealers and mutual fund managers), the transfer of shares representing 5% or more of their outstanding capital requires previous authorisation from the superintendency.
The legal framework includes certain restrictions (which vary over time) with respect to the maximum equity interest that foreign investors can hold in aviation companies operating local flights.
Local regulations include limitations with respect to the acquisition of local companies holding rights over radio spectrum in certain bands.
Lands located in border zones
For reasons of national security, the Constitution limits the right of foreign investors to own land, mines, water, fuel or energy sources within 50 kilometres of the border zone. Exceptions can be granted by the government due to public necessity and subject to the issuance of a supreme decree.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
Acquisitions are typically structured through an acquisition of shares or a merger. Asset acquisitions are less common, due to the associated tax implications.
Acquisition of shares
Most M&A transactions are structured as direct or indirect acquisitions of shares.
Mergers and other forms of corporate reorganisations
Acquisitions are structured as mergers in which the target or holding company is absorbed by the buyer or special purpose vehicle. In terms of implementing the transaction, a merger is less straightforward than a direct purchase of the target’s shares, as several formal requirements must be satisfied under the General Companies Act to effect a merger involving Peruvian companies.
Acquisition of assets
Asset acquisitions are rare, due to the associated tax implications. Unlike a transfer of shares, the transfer of equipment and other forms of moveable assets or personal property is subject to value added tax at 18% of the purchase price, while the transfer of real estate is subject to a 3% rate.
Due diligence requirements
What due diligence is necessary for buyers?
Buyers usually undertake extensive legal due diligence over the target and its subsidiaries as a condition precedent to closing. Legal due diligence usually covers corporate, contractual, labour, tax, litigation, authorisations, licences and permits, insurance, intellectual property, environmental and, depending on the specific industry, compliance with regulatory
What information is available to buyers?
Information is typically provided by the seller, although in the case of listed targets there is also publicly available information. Generally, the buyer will send an upfront request for due diligence information. In the context of bilateral negotiations, the target and its advisers typically make all information available to the potential buyer from the early stages of the transaction. The dynamics vary when several bidders are attempting to acquire the same target, as the seller will typically disclose high-level information only during the early stages of the bidding process.
What information can and cannot be disclosed when dealing with a public company?
Where the target is an issuer of equity or debt securities registered with the Securities Market Public Registry, any material information relating to the target, its affairs or securities that has not been made public and could affect the price, quotation or liquidity of the securities issued by the target will be regarded as privileged. Undue use of privileged information to obtain a profit in the Peruvian securities market is regarded as insider trading and characterised as both an administrative infraction and a criminal offence.
Information concerning a potential M&A transaction qualifies as privileged. Thus, parties involved in an M&A transaction must be particularly cautious when reviewing and processing due diligence information, as well as when handling and distributing drafts of the transaction documents. While companies whose securities registered with the Securities Market Public Registry bear a general obligation to disclose any material information to the market, the target may request that the Superintendency of Securities grant an exemption to this obligation to keep the information relating to the negotiation of an M&A transaction confidential for a specified period.
How is stakebuilding regulated?
According to the mandatory tender offer rule, any person or entity acquiring or attempting to acquire, directly or indirectly, a significant participation by virtue of a single transaction or series of transactions in a company with at least one class of voting stock listed with a local stock exchange is bound to launch a mandatory tender offer.
A ‘significant participation’ is deemed to have been acquired whenever an investor acquires 25%, 50% or 60% of the issued and outstanding voting stock of a listed company and the acquisition is not covered by any of the exemptions found in the Regulations on Mandatory Tender Offers. It is also regarded to have been acquired whenever any person or entity that, without being entitled to the legal ownership of shares in an amount equivalent or exceeding the relevant thresholds, is entitled to:
- exercise voting rights to an amount that meets or exceeds any of the abovementioned thresholds;
- appoint or remove the majority of members of the board of directors; or
- amend the target’s bylaws.
The mandatory tender offer rule applies to the acquisition of listed voting stock and convertible bonds, pre-emptive right certificates and any other security entitling the holder to subscribe to voting stock in the target. In the case of convertible bonds, pre-emptive right certificates and similar securities, the obligation to launch a mandatory tender offer will be triggered whenever the right to subscribe or acquire voting shares may be exercised within 18 months of the acquisition.
What preliminary agreements are commonly drafted?
The most common preliminary agreements are confidentiality agreements, memoranda of understanding, letters of intent and term sheets. Where several parties bid to acquire the same target, the bidders must submit indicative non-binding offers during the early stages of the sale process.
What documents are required?
The main documents include share purchase agreements, subscription agreements and merger agreements. In addition to the main acquisition agreement, parties must enter into ancillary agreements (eg, escrow agreements, share pledge agreements, shareholders’ agreements and operation and maintenance agreements).
Which side normally prepares the first drafts?
What are the substantive clauses that comprise an acquisition agreement?
Peruvian M&A transactions typically follow the structure of acquisition agreements used in common law countries. Thus, the main clauses comprising an acquisition agreement are as follows:
- purchase price and form of payment;
- post-closing price adjustments;
- representations and warranties;
- conditions precedent;
- indemnity provisions; and
- termination events.
What provisions are made for deal protection?
Provisions commonly used for deal protection include:
- standstill provisions;
- break fees;
- ordinary course of business covenants; and
- indemnity provisions.
What documents are normally executed at signing and closing?
The documents generally executed at signing include the relevant share purchase agreement, subscription agreement or merger agreement. These documents normally set out the main conditions for closing, typically including the execution of ancillary documents.
If signing and closing do not take place on the same date, the ancillary documents which are typically executed and delivered at closing include:
- share certificates;
- entries in the relevant share ledger evidencing the transfer of shares;
- shareholders’ resolutions evidencing the appointment of new management members;
- the removal and revocation of authorities of existing officers; and
- the amendment of certain provisions of the target’s bylaws, in certain cases.
Depending on the industry, closing may also involve entering into management agreements, operation and maintenance agreements, trademark licensing agreements and non-compete and non-solicitation agreements.
If the buyer does not acquire all outstanding share capital in the target, it is common for the new majority shareholder to enter into a shareholders’ agreement with the minority shareholder, setting forth:
- the usual rules of corporate governance;
- veto rights;
- rights to appoint key management officers;
- deadlock provisions;
- share transfer restrictions;
- rights of first refusal;
- call and put options; and
- tag-along and drag-along rights.
Are there formalities for the execution of documents by foreign companies?
Subject to law, there are no specific formal requirements for foreign companies to enter into contracts. However, should the parties choose to formalise the relevant contracts in the form of a public deed to be executed in the presence of a Peruvian notary public, the foreign company must grant a power of attorney and register it with the public registry.
Are digital signatures binding and enforceable?
Yes, provided that the local regulations on digital signatures are complied with.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes. Agreements can be governed by a foreign law provided that there is an international connecting factor. The choice of a foreign governing law should thereby be upheld as valid by the Peruvian courts, except for the limitations of:
- Article 2049 of the Civil Code, which states that provisions of foreign law will be excluded if they are incompatible with international public policy or good morals;
- Article 2088 of the Civil Code, which states that the creation, content and extinction of security interests on tangible assets located in Peru are governed by Peruvian law; and
- Article 2.1 of the Bankruptcy Act, which states that any insolvency, bankruptcy, moratorium, fraudulent conveyance or transfer involving entities domiciled in Peru shall be governed by Peruvian law.
In any such scenario, the law of Peru will apply.
What provisions and/or restrictions are there for foreign ownership?
In general terms, Peruvian law does not restrict or limit foreigners (whether natural or legal persons) from undertaking any business activity or owning property in Peru, except for the limitations on shareholding ownership in certain regulated sectors (eg, aviation) and the ownership of lands located within 50 kilometres of the border zone. The latter is established by the Constitution for national security reasons, but this is not an absolute prohibition. Exceptions can be granted by the government due to public necessity and subject to the issuance of a supreme decree.
Valuation and consideration
How are companies valued?
Valuation procedures follow international standards and may vary depending on the industry. Financial advisers commonly perform earnings before interest, taxes, depreciation and amortisation multiple and discounted cash-flow models to value a company.
What types of consideration can be offered?
The law allows for both cash and securities to be used as consideration (including a combination of the two). However, the most common type of consideration is cash.
What issues must be considered when preparing a company for sale?
While the issues to be considered when preparing a company for sale may vary between industries, they will generally include the following:
- engage a financial adviser or valuation company;
- undertake internal due diligence before beginning the sale process;
- identify the strategic and financial potential acquirers and determine whether it is more convenient to engage in a one-on-one transaction or bidding process;
- evaluate the most legal and tax-efficient structure to complete the transaction; and
- ensure that the terms of the transaction provide protection after closing.
What tips would you give when negotiating a deal?
First, an M&A lawyer must understand the specifics of the industry in which the target operates. Each industry has its own specifics and it is important to learn them before entering into the negotiation process. It is useful to take the time to listen to the insights of the management. Second, ensure that all parties understand the timing of the transaction and what is expected of each party in order to fulfil the conditions required for closing. Finally, if possible, prepare the first drafts of the documents, as this will provide an advantage during negotiations.
Are hostile takeovers permitted and what are the possible strategies for the target?
Yes, hostile takeovers are permitted. Nevertheless, due to the small size of the Peruvian market and the fact that most Peruvian companies are owned by majority shareholders, hostile takeover bids are unusual.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
M&A documents in Peru follow international standards. Warranties and indemnities typically cover, among other things, title to assets, authority and capitalisation of the target, conditions of assets, financial statements which are true and correct, litigation, labour, taxes, solvency, environmental and intellectual property. It is usual to negotiate materiality, material adverse effects and knowledge qualifiers, as well as basket and liability caps.
Limitations and remedies
Are there limitations on warranties?
Generally, Peruvian regulations do not limit the issue of warranties. Nevertheless, the Civil Code includes certain general rules and restrictions which should be taken into account when preparing and negotiating the transaction documents (including the warranties section):
- All agreements must be negotiated under the good-faith principle, according to which parties are obliged to act and negotiate in good faith.
- Any limitation of responsibility arising from gross negligence or wilful misconduct will be void and invalid. Under Peruvian law, only limitations based on ordinary negligence are valid.
What are the remedies for a breach of warranty?
The typical remedy for breach of warranty is indemnification. In addition to the remedies that parties may agree on in case of breach of warranty, an error by a party may entitle the affected party to file an action for annulment, provided that the error is essential and could have been known by the other party.
Are there time limits or restrictions for bringing claims under warranties?
While there are specific rules and exceptions that will need to be reviewed on a case-by-case basis, the general statute of limitation terms for the most relevant matters are as follows:
- tax matters – five years;
- labour matters – four years, counted from the employee’s dismissal;
- extra-contractual damages – two years;
- contractual damages – 10 years; and
- extra-contractual liability for environmental damages – two years, provided that the damage is not ongoing.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Sale of shares
Transactions qualifying as direct or indirect transfers of shares issued by Peruvian resident companies are subject to income tax in Peru. If the seller is a Peruvian tax resident, a 5% income tax on the gain in case of individuals, and a 28% corporate income tax on the gain in case of companies (to be reduced to 27% in 2017 and 26% in 2019), will apply – regardless of whether the transaction is executed through the Peruvian stock exchange. If the seller is non-resident (either a natural or legal person), the applicable income tax rates are 5% if the transaction is executed through by the Peruvian stock exchange and 30% otherwise.
Sale of assets
The transfer of equipment and other forms of moveable assets or personal property is subject to value added tax (VAT) at 18% of the purchase price, while the transfer of real estate is subject to a 3% acquisition tax.
Mergers are considered tax neutral (ie, subject to neither income tax nor VAT), as long as the transaction is undertaken without revaluing the assets involved and all legal entities participating in the merger are resident in Peru (except for the 3% real estate acquisition tax which applies if any real estate is transferred to the surviving company as part of the merger).
Exemptions and mitigation
Are any tax exemptions or reliefs available?
Capital gains arising from transfers of shares through the Peruvian stock exchange will be income tax exempt between January 1 2016 and December 31 2018, provided that certain conditions are met (ie, the relevant seller and its related parties do not transfer a participation in the issuer exceeding 10% within a 12-month period and the shares being transacted are considered to have a material presence on the stock exchange). Further regulations are expected to be issued by the Ministry of Finance.
What are the common methods used to mitigate tax liability?
The typical remedy for breach a warranty is indemnification by the seller.
What fees are likely to be involved?
The most common fees involved are retainer fees and success fees.
Management and directors
What are the rules on management buy-outs?
There are no specific regulations on management buy-outs other than the general duties that management owes to the company and its shareholders. Management buy-outs are still in their infancy and only a handful have succeeded.
What duties do directors have in relation to M&A?
The law sets out for mandatory duties of directors which are enshrined in the principle that directors must behave as “good and orderly businessmen and loyal representatives” – that is, they should follow the criteria and practice that sound businesspeople would adopt in the same circumstances. In addition, they are compelled to keep all company matters confidential. Moreover, according to the General Companies Act, directors may be held jointly responsible without limitation before the corporation, shareholders and third parties for all damages and losses that may be caused due to agreements and acts performed by them that are illegal, are contrary to the bylaws or constitute wilful misconduct, abuse of faculties or gross negligence. Directors will also be held liable if they act beyond their powers or participate in any transaction involving a conflict of interest.
Consultation and transfer
How are employees involved in the process?
Labour regulations do not require the participation or involvement of the target’s employees in M&A transactions.
What rules govern the transfer of employees to a buyer?
No specific rules regulate the transfer of employees in an M&A transaction. A recent Supreme Court decision established the possibility of transferring employees from one company to another – without the need for the employees’ consent – in the case of sale of a business or productive unit, as long as the employees’ labour benefits are not affected.
What are the rules in relation to company pension rights in the event of an acquisition?
Company pension plans are unusual in Peru, mainly because the labour legal framework provides for a mandatory pension plan for employees. However, in those few cases in which the target has a pension plan in place, it will remain binding on the acquirer after closing.
Other relevant considerations
What legislation governs competition issues relating to M&A?
There is no mandatory pre-merger control in Peru. The only exception is in the electricity market. According to the Anti-monopoly and Anti-oligopoly Act for the Electricity Sector, vertical and horizontal concentrations of companies engaged in electricity generation, transmission or distribution activities are subject to prior clearance by the Peruvian Antitrust Authority if they diminish or prevent effective competition. If a concentration involves companies that before or after a horizontal merger or acquisition transaction had a market share of at least 15%, or before or after a vertical merger or acquisition had a market share of at least 5%, then the merging companies or acquirer must apply for prior authorisation from the National Institute on Defence of Competition and Intellectual Property.
Many transactions could be characterised as concentrations with the potential to diminish or prevent effective competition. Acquisitions of electricity companies are among such transactions.
Are any anti-bribery provisions in force?
Specific criminal offences are regulated in the Criminal Code. However, the existing regulations are not as comprehensive as the US Foreign Corrupt Practice Act or UK Bribery Act.
What happens if the company being bought is in receivership or bankrupt?
Bankruptcy law provides that in case of insolvency, the powers and privileges of the general shareholders’ meeting and the board of directors of the debtor are transferred to the creditors’ meeting. Thus, distressed acquisitions are typically undertaken by acquiring debt, equity or a combination of these.
Broadly speaking, the Bankruptcy Act provides for two different bankruptcy proceedings:
- ordinary proceedings; and
- preventive proceedings.
‘Ordinary proceedings’ allow creditors to decide whether to restructure or liquidate the debtor, considering its financial situation and the viability of its restructuring. In preventive proceedings, a distressed debtor may obtain a moratorium, lower interest rates and other financial waivers. In this scenario, liquidation is not an option for the creditors.
Once the insolvency proceedings are initiated, creditors have 30 business days to file for recognition and allowance of their credits before the insolvency agency. This is required for the creditors to participate in the creditors’ meeting, which is entitled to adopt all decisions concerning the debtor. Once established, the creditors’ meeting resolves whether to restructure or liquidate the debtor. If the decision is to restructure, the creditors’ meeting must approve a debt restructuring plan. If the decision is to liquidate, the claims will be paid from the liquidation proceeds in the following order:
- labour credits;
- secured credits;
- tax credits; and
- unsecured credits of any other nature.