Due Diligence
Basic Transactions
Shareholders Agreements
Other Legal Considerations


Colombian regulations deal with several types of corporate transactions, the most common of which are the following:

  • mergers;

  • sales of business;

  • acquisitions; and

  • public takeover bids or public offerings.

The rules regarding public offerings and public takeover bids only apply to corporations whose shares are registered on the Colombian stock exchange, or when the shares of a corporation are to be sold through a public offering. Colombian securities regulations define a 'public offering' as an offering made to (i) a group of more than 100 individuals or entities, or (ii) an undetermined group of persons.

Consequently, if the corporate transaction involves publicly listed shares, or the purchase or sale is going to be solicited in a public manner (ie, public offering), then the rules that regulate the Colombian public securities market will be applicable.

The second type of public offering occurs in the secondary market, and includes the following:

  • public takeover bids;

  • public securities exchange bids; and

  • sale auctions.

The shares of corporate transactions are not registered with a stock exchange unless the transaction involves a public offering. There are no specific requirements or regulations applicable to corporate transactions, except antitrust regulations and the prior approval of certain governmental agencies in industries that are specially regulated, such as:

  • financial entities;

  • publicly listed companies;

  • certain telecommunications companies; and

  • companies subject to the permanent supervision of the Superintendency of Corporations.

Regulatory framework
The general Colombian regulations regarding corporate transactions are the following:

  • the National Constitution (Articles 333 and 334);

  • the Code of Commerce (Articles 172 to 179); and

  • Law 222 of 1995.

Specific rules governing corporate transactions include the following:

  • Law 155 of 1959;

  • Decree 2153 of 1992;

  • Decree 663 of 1993 as amended (which constitutes the Organic Statute of the Financial System);

  • Law 142 of 1994 (Public Services Law);

  • Resolutions 400 and 1,200 of 1995 as amended, issued by the Superintendency of Securities (which constitute the public market and securities main regulations); and

  • Circular 10 of 2001, issued by the Superintendency of Industry and Commerce.

Due Diligence

Due diligence is an important process that should be carried out before a merger and/or acquisition. This verifies the legal condition of the assets, liabilities and contractual obligations, as well as the financial situation of companies that are going to be either subject to a merger operation or the shares of which are going to be sold through a public offering.

Considering the financial issues that should be investigated in order to prepare a sound report beyond the review of required legal documentation and governmental filings, a due diligence review is important because it allows potential sellers, buyers and merger partners to evaluate the real characteristics of the specific business.

Legal documentation
Depending on the nature and characteristics of the transaction to be executed, the contracts or legal documentation that the parties may have to execute and/or obtain will vary. The following is usually necessary for a merger to be entered into:

  • a merger agreement concluded between the parties to the transaction, which must then be formalized into a public deed, notwithstanding other applicable formalities;

  • an authorization for the merger agreement obtained from the companies' boards of directors or shareholders meetings;

  • an assignment agreement concluded in order to implement a bulk transfer of assets or shares, so that the assets and liabilities of the absorbed company or companies are legally transferred to the acquiring entity; and

  • the corresponding guarantees for credits; these guarantees must be backed by the acquiring company if requested by the absorbed company's creditors.

To undertake a public offering of securities in the primary market, the following steps are necessary;

  • an offering memorandum or prospectus must be filed before the Superintendency of Securities;

  • the offering must be registered with the National Registry of Securities and Intermediaries and the stock exchange of the securities to be issued;

  • a letter must be addressed to the Superintendency of Securities containing the legal and relevant information of the transaction; and

  • the following contracts must be executed: (i) the underwriting agreement between the interested party and the intermediaries, (ii) the administration contract, (iii) the guarantees or pledges with an insurance company and/or banks, respectively, and (iv) the agreement between the issuer and the company representing the securities holders.

Basic Transactions

Asset deal
By acquiring just the assets of an existing company the investor can avoid assuming its current or potential obligations, which may have a financial impact on the company. This is not a real acquisition of the company, but only a sale agreement over the assets.

Share deal
By acquiring the shares of an existing company the investors will expect to be granted some degree of participation in the company's board of directors and shareholders meetings, at least on a proportional level to their investment. If they are minority investors they will seek efficient veto rights.

Under the Colombian Code of Commerce a merger operation takes place when one or more companies are dissolved without entering into a dissolution proceeding, in order for them to be absorbed by an existing company or to set up a new company.

Bulk sales
Under this kind of transaction the investors acquire no share participation but instead acquire all the economic units. This transaction is considered by Article 525 of the Code of Commerce as the acquisition of a commercial establishment. The parties will be jointly responsible for all the commercial activities of the establishment registered in the accounting books for the two months following the operation's registration.

Shareholders Agreements

Two or more shareholders that are not managers of the companies involved in these kinds of transactions may conclude an agreement establishing how they will vote in the general shareholders meeting or whether they want to be represented in this meeting. Under Law 222/1995 the signed agreement must be deposited in the company's administrative offices.

Other Legal Considerations

Commercial requirements
Merger agreements must be approved by the competent organ of the company (ie, the board of directors in the case of a limited liability partnership or the general shareholders meeting in the case of corporations) with the quorum set by the bylaws. If this is not established the decision must be taken by:

  • the majority vote of all the partners in the general partnership;

  • a majority representing 70% of capital in the limited liability partnership; or

  • by a simple majority vote in the corporation.

The Superintendency of Companies is empowered to authorize a merger submitted to its supervision or control.

The legal representatives must inform any third parties of the superintendency's approval by means of an announcement in a national newspaper. Other obligations include informing all the creditors of the companies involved in the transaction about the operation. Creditors may demand guarantees for the payment of their debts within 30 days of the merger's publication. If the petition is admitted, the judge will suspend the merger until guarantees are presented to the creditors.

Circular 10 of 2001 provides that:

"the Superintendency of Industry and Commerce will not object to any merger, consolidation, integration or takeover operations when such an operation does not fulfil any of the following conditions: (i) the companies involved jointly represent 20% or less of the respective market, measured in terms of sales during the immediately preceding year to that in which the operation is to be undertaken; or (ii) the joint assets of the companies involved exceed 50,000 times the legal minimum wage in force at the moment that the operation is approved by the competent corporate body."

Before this new provision the control of corporate transactions in the same market depended solely on whether the assets of the companies involved exceeded Ps20 million, an amount that had long since become outdated due to inflation. However, the new provision gives the superintendency the power to review merger transactions based on the combined value of the assets of each of the companies involved (a calculation that is now based on an indexed amount) and on the companies' total market share. This allows for an annual updating of the transactions that should be reviewed by the superintendency.

In order to determine the market share of the parties involved in the transaction, the total sales in the 12-month period before the operation are taken into consideration. In order to calculate the value of the assets of the entities involved, tangible assets as well as intangible assets (eg, goodwill and trademarks) are included in the calculations.

Circular 10 also outlines the information that must be submitted with an antitrust filing. This information includes the following:

  • a description of the transaction;

  • the identification of the market (ie, products, consumers, competitors and geographic area); and

  • the identification and description of suppliers and distribution channels.

Once the antitrust filing has been submitted, the Superintendency of Industry and Commerce has 30 working days to answer the petition.

The superintendency may only request additional information once, in order to analyze the information included in the filing. Where additional information is required, the 30-day period will recommence once this information is provided.

If the superintendency fails to answer the petition within the statutory period it will be presumed that the superintendency has granted authorization to proceed with the proposed transaction.

Colombian law sets a stamp tax equivalent to 1.5% of the value of an agreement, for any written agreement involving obligations that exceed Ps58.3 million. In addition, notary public fees of Ps2.7 per Ps1,000 for every Ps1,000 over the subscribed capital of the new or of the absorbed company are charged in the case of mergers. There is also a fee for registering the public deed before the respective chamber of commerce, equivalent to 0.7% over the capital of the new or of the absorbed company.

Under Colombian law statutory mergers are tax-free events pursuant to Article 14-1 of the Tax Code. No gain or loss will be recognized as a result of the merger and a carryover of tax basis in assets (step-up) will operate.

In this respect Article 14-1 of the code expressly provides that for income tax purposes the merger of legal entities does not imply a sale between the merged entities and that the resulting entity will be responsible for all taxes, advances, withholdings, sanctions, interests and all other tax obligations of the merged entities.

Pursuant to Article 428-2 of the code a similar tax-free regime applies to statutory mergers with regards to value added tax (VAT). The transfer of assets of the absorbed entity to the surviving entity is not subject to VAT.

Capital gains in the disposal of shares in Colombian entities will be subject to income tax at the rate of 35% plus a remittance tax of 1% if the payment is made abroad.

In case of tender offers for cash involving a sale of stock outside the stock exchange, any capital gain will be assessed considering the difference between the tax cost basis of the shares and the sale price received in consideration. However, any capital resulting arising from the sale of shares and corresponding to retained earnings that were taxed at the corporate level and that may be distributed free of tax is exempt from tax (Article 36.1 of the Tax Code). Losses arising from the sale of shares are not tax deductible.

Capital gains arising from the sale of shares quoted in the stock exchange owned by the same beneficial owner and corresponding to no more than 10% of the outstanding shares of the relevant company will not be subject to income tax (Article 36.1(2) of the Tax Code).

In the case of exchange offers for securities (swaps) involving shares in a Colombian corporation, capital gains must be calculated on the basis of the difference between the commercial value of the shares involved.

Labour laws
In Colombia labour regulations are mainly contained in the Labour Code as amended. Social security regulations regarding pensions, health and professional risks, and accidents are included in Law 100 of 1993, which is currently in force.

According to Colombian labour legislation several aspects should be observed during corporate transactions.

A corporate transaction should not affect employee benefits that had been previously recognized. Labour law in Colombia is intended to protect employees' rights and to provide labour stability. According to this, when a corporate transaction occurs, the favourable benefit plans of each of the companies shall be adopted for all employees as a result of the combination to prevent a possible claim under the principles of labour law regarding prior conditions of jobs and salaries.

In addition, if a reorganization is to be performed and the number of employees is to be reduced, a retirement plan may be designed. However, such a plan must not affect employees' minimum rights according to the law and cannot result in a massive dismissal of employees. In such a case specific rules should be observed and a permit should be requested from the Ministry of Labour and Social Security.

Finally, when there is a change from one employer to another (ie, employer substitution) and there is a continuity in the company's purpose, the contracts with the employees cannot be modified if the conditions will deteriorate. The new employer is responsible for all obligations arising from the date of the substitution.

Financial laws
Financial entities have 10 working days following the approval of an integration by the general shareholders meeting in order to file the request for clearance with the Banking Superintendency. However, the participating companies may also inform the Banking Superintendency three months before the decision on the merger is submitted for the approval of the corresponding corporate bodies.

Upon filing the request the Banking Superintendency has between one and two months to object to the proposed merger. The superintendency is entitled to perform a detailed investigation into the following aspects of the merger:

  • the entities involved;

  • the individuals who will manage the resulting entity;

  • the precedents of the entities and of the individuals who manage them;

  • the financial parameters of the merger;

  • the effects of the merger on the market and on the financial entities themselves;

  • the stability of the financial system in general;

  • compliance with the required levels of capital and reserves;

  • compliance with required capitalization; and

  • any detriment the merger may cause to the public interest.

Securities laws
With respect to entities whose shares are registered before the stock exchange, Colombian regulations establish that when a person directly or indirectly wishes to acquire 10% or more of the outstanding voting shares of a corporation, or if a beneficial owner of 10% or more of the outstanding voting shares of a company intends to acquire an additional 5% or more, then a public offering must be made.

Despite this the public acquisition offer will not be mandatory and may be made outside the stock exchange when either all the shareholders whose shares are to be acquired or the general shareholders meeting votes unanimously to approve the transaction.

The corporate transaction could also be structured by means of a public sale auction, which would be applicable under the same conditions under which a public takeover bid is conducted, but which would be undertaken by the sellers rather than by the buyers. The mechanism will allow for any potential buyer to participate in the process, subject to the conditions set forth by the sellers.

In order to undertake a public takeover bid or a public securities exchange bid an advertisement must be published announcing the bid to the general public. This advertisement must contain the following information:

  • the maximum and minimum number of shares to be acquired (the bid must be made for at least 5% of the outstanding voting shares of the company and a 20% difference must exist between the maximum and minimum number of shares to be acquired);

  • the price of the offer;

  • the date by which the offer must be accepted; and

  • the name of the stock broker through whom the offer will be made.

In addition, if the bid is to be made for more than 30% of the outstanding voting shares, then the acquirer must prepare a purchasing memorandum containing some basic information about the acquirer, the proposed offer and the purpose as well as the plans of the acquirer regarding the acquired company.

All this information must be filed with the Superintendency of Securities for approval. Once the information is filed the superintendency will inform the stock exchange and the trading of the corresponding shares will be suspended in the exchange until the date the offer advertisement is published.

A similar procedure will be followed when a seller undertakes a public auction, but in this case the seller must always prepare a sale memorandum containing information about the company and the auction rules.

Privatization laws
In accordance with Article 60 of the Constitution of Colombia, Law 226 of 1995 establishes that employees have the first option to purchase a state owned entity to be privatized. After this stage the government is allowed to sell what remains to private investors by an auction system, pursuant to prior written rules precisely established for this purpose.

For further information on this topic please contact Mauricio Jaramillo Campuzano at G√≥mez Pinzon & Asociados by telephone (+57 1 310 7055) or by fax (+57 1 310 6646) or by email ([email protected]).