Business Combinations
Mergers
Acquisitions
Business Establishments
Change in Legal Form
Taxation
Labour Considerations
Antitrust
Cross-border Transactions
Paraguayan mergers and acquisitions are governed by the Civil Code and certain provisions of the Merchants Statute. Taxation aspects are governed by the General Tax Law 125/91.
The Civil Code and Merchants Statute provide for several types of legal entities, of which the corporation (sociedad anónima) and limited liability company (sociedad de responsabilidad limitada) are the most common. While limited liability companies are subject to a simple and flexible regulatory framework, corporations are governed by more complex rules.
Usually, business combinations occur between corporations since (i) they do not trade shares and (ii) the partners' consent is required to sell equity interests or admit new partners, and to effect any type of company restructuring.
Generally, business combinations take the form of a merger by absorption or consolidation, or an acquisition through the purchase of shares or the bulk of an enterprises's assets.
The Civil Code prescribes mergers by absorption and consolidation.
In a merger by absorption, one or more entities ceases to exist (without entering into liquidation proceedings) and transfers all of its assets to the other entity.
In a consolidation merger, two or more merging companies cease to exist and transfer all of their assets to a newly formed successor company. All of the rights and obligations of the merging companies are transferred to the successor company. The merging companies need not have the same legal form if this is provided for by law.
The Civil Code lays down the conditions with which the merging companies must comply. Necessary documentation includes:
- a preliminary agreement to merge;
- a final merger agreement;
- special merger balance sheets;
- a written explanation of the reasons for the merger; and
- amendments or new by-laws for the merging company.
The merging companies must obtain authorizations from their representatives in accordance with their by-laws, and follow the provisions of the Civil Code concerning the anticipated dissolution of companies. In the case of corporations, the merger must be authorized by the board of directors of the merging companies in advance and then submitted to the special shareholders meeting, where the merger must be approved by the majority of shareholders with voting rights. The special shareholders meetings also approve audited financial statements and changes to company by-laws.
In the case of limited liability companies the decision to merge must be taken by a unanimous vote of all quota holders. Mergers do not adversely affect their rights of first refusal, unless the by-laws stipulate otherwise.
The merging companies must make available their balance sheets to their share or quota holders and creditors, and adhere to the mandatory provisions of the Merchants Statute.
The merger agreement must be executed in the form of a public deed before a notary. The draft of the merger agreement is subject to prior approval by the general meetings of all participating companies.
Creditors may oppose the merger if they have not been paid or if payment is not duly guaranteed.
The merger agreement must comprise:
- final approval of the merger agreement by the companies involved;
- a list of the shareholders and/or quota holders who will exercise their right to adjournment, and the capital stock they represent;
- a list of creditors opposing the merger (if any) and the sums owed to them;
- the companies' balance sheets; and
- in a merger by absorption, a plan specifying the participations of each shareholder or quota holder in the company that is being dissolved.
The representatives of the newly created entity must also represent the absorbed entity.
In order to protect shareholders and creditors, the Civil Code establishes special provisions regarding liability for damages caused by acts or omissions of the intervening officers and professionals, as well as remedies for obtaining nullification of a merger.
Acquisition of a corporation
The acquisition of a corporation is effected through the transfer of its shares. In the case of corporations with registered shares, the transaction is perfected with the endorsement of the shares in favour of the buyer (if this method is prescribed in the by-laws), and the subsequent recording in the registered share transfer books. The acquisition of a corporation the stock capital of which is represented by bearer shares is made by the physical delivery of the share titles from the seller to the buyer. Usually, a share purchase and sale agreement is entered into by the parties concurrently with the transfer of shares.
The acquisition of a public corporation may be effected privately between the relevant parties or through a public tender offer through the National Securities Commission.
In an acquisition agreement the buyer indirectly acquires the assets and business of the company. For this reason a legal investigation ('due diligence') is vital, as is the drafting of the representations and warranties provisions of the relevant agreement.
Stock purchase agreements are not governed by any specific legislation, and so the provisions of the Civil Code concerning commercial sales contracts and securities apply.
Acquisition of a limited liability company
The acquisition of a limited liability company is effected upon the approval, execution and registration of an amendment to the articles of association of the target company, which reflects the assignment and transfer of quotas, and the incorporation of new partners. Usually, a detailed quota purchase and sale agreement is executed simultaneously with the execution of an amendment, which includes terms and conditions concerning:
- the purchase;
- confidentiality agreements and non-compete provisions;
- representations and warranties;
- indemnification clauses; and
- guarantees (based on due diligence findings).
Upon completion, the purchaser may change the company's management by amending the relevant articles of association, or revoking previous appointment instruments and executing agreements with newly appointed officers.
A 'business establishment' (fondo de comercio) is defined as the possessions, rights and obligations of an entity that serve (or may serve) its operation. The law stipulates a special contractual form for the transfer of the entire enterprise to another legal entity.
A bulk transfer of assets is a transaction in which the buyer acquires the combined tangible and intangible assets and liabilities of a business establishment through a procedure established in the Merchants Statute.
According to the Merchants Statute a business establishment's constitutive elements include:
- its installations and goods;
- its trademark, commercial names and patents;
- its industrial drawings; and
- all rights derived from the commercial or industrial proprietorship, including goodwill.
The real estate where the business establishment's activities are undertaken is not included and, therefore, should be acquired separately (the execution may be performed simultaneously but through different agreements). The Merchants Statute lays down rules for the completion of such transfers with the aim of protecting the rights of the seller's creditors:
- The sale must be announced in two national newspapers. The announcements must include the name, address and a description of the business, as well as the names and addresses of the seller, buyer and notary public.
- The seller must submit the names and addresses of all creditors, the amounts owed to them and the maturity terms of the credits. These creditors (and others with the necessary proof) have 10 days in which to oppose the transfer regardless of whether credits are due.
- Once the 10-day term has expired, the parties may execute the final transfer agreement whereby ownership of the establishment is transferred to the buyer. However, the transfer of the bulk assets is effective towards third parties (and the buyer is protected from claims of the seller's creditors) only when the necessary agreements are filed within 10 days of the execution of the final agreements, and duly registered in the Public Registry of Commerce. Moreover, the buyer and seller (and notary public, if appropriate) are jointly and severally liable for any omission or violation of the Merchants Statute for the amount of credits that are left unpaid, up to the amount of the purchase price.
Where a change in a company's legal form takes place, the only changes are to the company's internal relations and shareholders' legal status. A transfer of business assets occurs and the company continues to exist.
No income tax is levied on M&A transactions unless the purchase price of the entity is lower than the fiscal asset value thereof, in which case income tax is levied at a rate of 30%. Business entities' mergers and acquisitions are subject to valued added tax at a rate of 10% on all relevant acts.
The Labour Code provides that in cases of partial or total transfers of business entities, labour contracts are assigned automatically to the surviving or newly formed entity and a so-called 'substitution of the employer' occurs. This does not affect the terms and conditions of the affected labour contracts, nor employees' seniority terms.
However, in cases of bulk transfer of a business establishment, the transfer must include the assignment from the seller to the buyer of the labour contracts (on the same terms and conditions) and the express acceptance of the employees to this assignment.
Both the initial and new employers are jointly and severally liable for the obligations derived from labour contracts and the duties established in the law for six months from the date of the merger or acquisition agreement. Upon expiration of this term, the new employer alone is responsible for compliance of the contract and labour laws.
No guidelines exist regarding the approval of mergers and acquisitions, although a bill containing a comprehensive set of antitrust rules has been submitted to Congress and is expected to be enacted soon.
Investment Law 117/91 guarantees a free exchange rate system which allows (i) the unlimited convertibility of local currency into foreign exchange, and (ii) the unrestricted right of remittance of capital, dividends, debt services and royalties for the transfer of technology.
Foreign capital to acquire a business or a company outside Paraguay need not be registered with any authority. However, interest, royalties and other income paid by recipients abroad from a Paraguayan source are subject to a 5% withholding tax, unless the investment generating the income enjoys the benefits of the Tax Incentives Law 60/90. The acquisition of securities offered through the stock exchange is also tax exempt.
For further information on this topic please contact Luis Breuer or Maria Yolanda Pereira at Berkemeyer Attorneys and Counselors by telephone (+595 21 446 706) or by fax (+595 21 449 694) or by email ([email protected] or [email protected]). The Berkemeyer Attorneys and Counselors website can be accessed at www.berke.com.py.