A merger is a corporate structural modification transaction. Mergers essentially modify the composition and legal relationships among participating companies, their creditors and partners. An acquisition, however, is simply the sale of a company. It is important to distinguish among the different types of mergers and acquisitions, for while these terms are often mentioned together, they are not equal and do not have the same meaning.
The term fusion (merger) in Spanish comes from the Latin term fusio, which is defined as the action of uniting or melting two or more things or ideas. A company merger is defined in Law 32 of 1927 as: “The union of two or more companies, until then different companies, so as to become one single company;” or “[W]hen two or more companies combine and join their interests to form a new company having all rights, privileges, franchises and assets of the merged company.”
A company merger is a legal union of two or more companies constituted as independent entities in order to create a new single company or to become one of the merged companies, while absorbing the others. In the case of a merger, assets of one or several companies are exchanged for shares of a new company or for those of the company surviving the absorption, which sometimes results in the dissolution of the merged companies.
- A Pure Merger or Merger by Integration is when two or more companies unite themselves to create a new company, which due to the dissolution of the merged companies, acquires their assets, liabilities, rights and obligations and its own legal personality, different from the extinct companies to carry out its objectives.
- A Merger by Absorption or Incorporation is when a corporation related to the transaction absorbs the others; i.e., all companies are dissolved without liquidation except for the one assuming all of the assets, rights and obligations of the others.
An acquisition refers to the sale or change of owners and titleholders of companies or corporations which is usually done through the acquisition of assets or the acquisition of shares. In the case of an acquisition, assets or shares of the same companies are exchanged for a price; therefore, the result is not the mandatory dissolution of the selling or acquired company. This sale of shares to acquire companies, at the level of public bids of sale or purchase, is usually regulated and sometimes encouraged in the securities regulations of various countries so as to protect the public and the minority shareholders.
Panamanian legislation regulates company merger transactions. Under Panamanian Law, mergers can take place between companies of different types and from different jurisdictions. Mergers can be vertical or horizontal, and can include companies of the same shareholder group, sister companies or corporations completely alien to each other.
In Panama, there are two bodies of rules applicable to company mergers. Articles 501 - 505 of Panama’s Code of Commerce regulate mergers for mercantile companies in general, while Articles 71 - 79 of Law 32 of 1927 regulate mergers for corporations. In addition, Article 11–A of Panama’s Code of Commerce regulates the merger of Panamanian companies with foreign companies.
Under Panama’s Code of Commerce, company mergers may be carried out provided that there is at least a 90 day prior notice to creditors and through a merger notice that must have a Statement of Financial position, an agreement to settle liabilities, and a summary of the merger agreement. These details must be published so anyone believing they have the right to oppose the merger may do so. This right to oppose the merger must be judicially exercised, and the merger procedure will be suspended until the opposition claim is decided. Once the 90 day period has elapsed -- after the publication of the merger or when the submitted oppositions are resolved or withdrawn -- the expected merger will take effect and the new company or the surviving company will acquire the rights and obligations of the extinguished or merged companies. This merger procedure is not usually carried out in Panama since most of the merger procedures involve corporations and they are subject to the requirements contained in Law 32 of 1927 which regulates corporations.Panama’s current legislation seems only to take into account the Merger by Integration. While Panamanian corporation law does not provide regulations for the Merger by Absorption, Law 32 of 1927 is used in practice to carry out these merger transactions. According to Law 32 of 1927, “…two or more corporations formed in accordance to this law may consolidate themselves so as to constitute a single corporation”.
Under Law 32 of 1927, the Merger by Absorption procedure begins with an Agreement of Merger granted by the Board of Directors of each corporation which defines the terms and conditions of the transaction. The Agreement of Merger must then be approved by the shareholders of each of the corporations involved. If the Agreement of Merger is approved, the law requires the issuance of a certificate issued by the secretary or sub-secretary of each corporation confirming the decision taken. Finally, the Merger Agreement must be registered officially at the Mercantile Registry before the merger can take effect.
In a Merger by Absorption, the involved corporations will stop existing and the resulting or surviving corporation, under Law 32 of 1927, “will succeed the extinct ones in all their rights, privileges, powers and franchises as proprietor and owner of same, subject to the restrictions, obligations and duties that used to belong to the constituents….” In this regard, the new company or the surviving company will assume all rights and obligations of the merged ones by virtue of the latter ceasing to exist without going through a liquidation process. The Articles of Association of any company may also establish specific conditions to carry out a merger process.
Finally, Article 11-A of Panama’s Commercial Code regulates the Merger with Foreign Companies and is widely used by investors from around the world. Article 11-A states that “One or more companies constituted according to the laws of the Republic of Panama may merge with one or more foreign companies to form one single company….” Under Article 11-A, mergers with foreign companies include a set of additional requirements:
First, foreign companies must be registered in Panama under Article 90 of the Law 32 of 1927, which is known as the “branching” procedure of corporations. Under Article 90, the corporation’s constitution deed must be protocolized and registered at the Public Registry, in addition to a copy of the corporation’s last bank balance and a declaration about the capital intended to be used in the Republic of Panama, with an authenticated Certificate of Good Standing. Once the foreign company registration procedure in Panama is completed, the merger procedure can move forward.
After the merger is finalized, Article 11-A of Panama’s Commercial Code adds one more requirement: In cases where the company resulting from the merger is a foreign company, that company must remain registered at the Mercantile Registry for at least 5 years after the day of the merger. During that time, the foreign company must have an Attorney-in-fact in Panama with the power to be served in the name of the company. If at any time the company has no Attorney-in-fact, the Registered Agent may be served. This last requirement seems to depart from the generally intermediary and passive nature of the Registered Agent in all cases, but this is another matter.
In summary, the Panamanian legislative regulation of mergers is rather flexible and the setting is favorable to carry out national or international mergers. This makes Panama a very appealing market for both local and global mergers of companies and corporations.