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Trends and climate
What is the current state of the M&A market in your jurisdiction?
The M&A market in the Dominican Republic is mainly fuelled by its attractiveness to foreign investment. Although the latest Doing Business reports have raised questions around the legal certainty of the Dominican judicial system, other factors (eg, the new legal framework concerning insolvency matters, competition law, anti-money laundering legislation, trust law, and the new norms for mining and energy public procurement) have produced a positive effect which will strengthen the country’s position in the sector and increase the number of M&A transactions.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months?
The anti-money laundering law has been updated due to pressure from the Financial Action Task Force on Money Laundering. This will likely have a positive effect on the regulated market’s M&A activity, since the new legislation will align the Dominican Republic with international standards and improve its risk rankings. The market’s attractiveness will also be significantly affected by the new bankruptcy and insolvency rules, which are especially concerned with the recognition of, and access for, foreign creditors and stakeholders through international cooperation on insolvency matters.
Are any sectors experiencing significant M&A activity?
New rules and regulations in the insurance and financial markets will attract new M&A activity in these sectors. In addition, the tourism industry continues to receive significant attention considering the Dominican Republic’s strategic position and the regular increase of numbers in this market. Finally, the inflow of new capital from Latin America in the consumer sector forecasts significant activity in this field.
Are there any proposals for legal reform in your jurisdiction?
There are several bills in Congress that will have a positive effect on M&A activity in the Dominican Republic, namely:
- a new movable assets warranty law;
- a reform of the Labour Code;
- a reform of the Code of Civil Procedure; and
- a major reform of the Civil Code.
What legislation governs M&A in your jurisdiction?
M&A is governed by several laws in the Dominican Republic. The main laws to consider in every M&A transaction are:
- the General Law 479-08 for Companies and Limited Liability Individual Enterprises;
- the Bankruptcy and Insolvency Law 141-15 on restructuring and liquidation companies and merchants;
- the Tax Code 11-92 and its regulations;
- the Labour Code 16-92;
- the Competition Law 42-08;
- the Intellectual Property Law 20-00;
- Law 6186 on guarantees over movable assets for financing M&A deals; and
- other sector-specific (eg, insurance, banking, telecoms and energy) legislations.
How is the M&A market regulated?
The Dominican M&A market is regulated through a series of laws and regulations (see above). The scope and effect of each legislation will depend on the nature of the operation and the parties and assets involved.
Are there specific rules for particular sectors?
In addition to the general laws established above, M&A transactions involving regulated sectors must abide to specific laws, including the following:
- Banking – the Monetary and Financial Law 183-02 and its regulations;
- Trusts and fiduciaries – Law 189-11;
- Mining – the Environment and Natural Resources Law 64-00, Law 146-71 on the regulation of mining activities and Law 100-13, under which the Ministry of Energy and Mines was created;
- Water Resources – Law 5994-62 and the regulation on its application, as well as Laws 5852, 238-62 and 5994-62;
- Electricity – Law 125-01 and the regulation on its application;
- Ports – Law 70, Regulation 1673-80 on port services and Regulation 309-98 on port concessions;
- Telecoms – the General Telecommunications Law 153-98 and the regulation on its application;
- Tourism – Laws 84-79 and 541-69, the Promotion of Tourism Development Law 158-01 and the Environment and Natural Resources Law 64-00;
- Insurance – Law 146-02;
- Free zones – Law 8-90;
- Textiles – Law 56-07;
- Transportation – Law 63-17;
- The stock market – Law 249-17 ;
- Public procurement and concessions – Law 340-06; and
- Fossil fuel – commerce regulations.
Types of acquisition
What are the different ways to acquire a company in your jurisdiction?
The Dominican Company Law establishes different business combinations allowing companies to gain control over other companies via a direct acquisition, a spin-off or by joining forces with a competing company through a merger or special purpose vehicle.
Due diligence requirements
What due diligence is necessary for buyers?
The scope of due diligence will depend on the sector of the M&A transaction. Nonetheless, a standard due diligence for buyers will involve:
- corporate structuring;
- securities exchange (if a public company);
- intellectual property;
- labour and social security;
- finance; and
- regulated sector compliances.
What information is available to buyers?
The buyer has free access to the following documents:
- at the Mercantile Registry (local Chamber of Commerce), the seller’s bylaws, registered assembly meeting and mercantile registry;
- at the Dominican Tax Authority, the seller’s tax identification, tax outlook and registered assets;
- at the Dominican Securities Exchange Commission (SEC) (if a public company or bond issuer), the seller’s financial statements;
- at the Dominican Intellectual Property Office, trade name and trademark certificates;
- at the domicile of the seller, non-litigation or pending litigation certificates and active pledges;
- at the Ministry of Labour, payroll sheets;
- at the Social Security, employee tax compliance; and
- for regulated companies, at the respective regulatory body, the required operating licences or permits and published balances when mandatory by law.
All required documents are regularly provided by the buyer, considering that there are no hostile M&A transactions in the Dominican Republic.
What information can and cannot be disclosed when dealing with a public company?
Within 30 days of signing an M&A agreement, the parties must publish an extract or summary of the agreement in a national newspaper. If the companies are public companies, the agreement must also be filed at the SEC, along with an affidavit signed by the representatives of the companies expressing that the content of the agreement abides by the law. Once the SEC has reviewed and approved the agreement, it will publish its resolution in a national newspaper.
How is stakebuilding regulated?
Stakebuilding is regulated by Laws 479-08 and 19-00, which are audited and approved by the SEC.
What preliminary agreements are commonly drafted?
As in many other jurisdictions, non-disclosure agreements (NDA), letters of intent (LOI) and memoranda of understanding (MOU) are common at the beginning of an M&A transaction. Shareholders may establish mechanisms in their bylaws or via an agreement duly approved by an assembly meeting (eg, NDA, LOI and MOU), including an exclusivity clause, to protect deals from third parties, provided that these provisions are in accordance with the rule of law. These types of agreement are typically executed between the parties, setting out the general terms and conditions under which their negotiations and an eventual transaction will be undertaken, including a timeframe and milestones before closing.
What documents are required?
The documents required will depend on the type of corporate structures involved in the M&A transaction. In general, they will include:
- the M&A agreement;
- assembly meetings authorising the M&A agreement;
- minutes of the assembly meetings authorising the M&A agreement;
- the bylaws of the companies involved;
- the resulting bylaws according to the M&A agreement;
- the mercantile registry of the companies involved;
- identification (ID) of the shareholders of the companies involved;
- the tax ID certificates of the companies involved;
- certificate of tax compliance from the Dominican Tax Authority;
- audited financial statements;
- real estate property certificates;
- trade name and trademark certificates;
- non-litigation certificates; and
- the required operation licences or permits (depending on the scope of the activities of the acquired or target company).
Additional documents may be required for M&A transactions involving regulated companies.
Which side normally prepares the first drafts?
The buyer normally prepares the first drafts.
What are the substantive clauses that comprise an acquisition agreement?
A typical acquisition agreement involves a set of provisions on:
- the object of the purchase;
- form of payment;
- the cause of the purchase;
- justification of the seller’s ownership rights;
- authorisation to sell;
- new ownership rights;
- the seller’s obligations;
- closing and precedent conditions;
- escrow or secure deposit for pending contingencies (eg, labour and tax)
- the seller’s waivers;
- non-compliance due to force majeure;
- confidentiality and non–competition;
- the quality of the subscribers;
- heirs and assignees;
- applicable law;
- jurisdiction (arbitration);
- domicile; and
What provisions are made for deal protection?
Deal protection is ensured through the provisions on:
- the cause of the purchase;
- closing and precedent conditions;
- confidentiality and non-competition;
- amendments; and
- jurisdiction (arbitration).
What documents are normally executed at signing and closing?
The documents that are normally executed at signing and closing are:
- the transaction agreement;
- a closing checklist;
- attachments or exhibits;
- asset transfer authorisations;
- escrow agreements;
- consents and authorisations;
- waivers; and
- any other additional documents depending on the scope of the operation and sector requirements.
Are there formalities for the execution of documents by foreign companies?
No. Foreign and local investors are accorded equal treatment under Article 221 of the Constitution. However, foreign companies must be registered at the mercantile registry and the Dominican Tax Authority, depending on the nature of the agreement for execution purposes. In addition, official foreign documents must be certified and translated into Spanish.
Are digital signatures binding and enforceable?
E-commerce law establishes equal value on electronic documents and hard copies. Judiciary precedents also establish equal value, provided that the electronic data is reliable and auditable. Companies must register their digital signatures at the mercantile registry office before signing the agreement in order for it to be considered electronically agreed and therefore binding and enforceable.
Foreign law and ownership
Can agreements provide for a foreign governing law?
Yes. It is common for M&A agreements to establish the applicability of a foreign law which is authorised under International Private Law 544-14.
What provisions and/or restrictions are there for foreign ownership?
There are no provisions for foreign ownership. However, in certain regulated sectors there are some restrictions.
Valuation and consideration
How are companies valued?
The business standard is the discounted cash-flow valuation method. Alternatively, third-party valuations from authorised appraisals are used as a benchmark and asset-based valuation is also common.
What types of consideration can be offered?
The Civil Code allows the parties to set the terms and conditions of any transaction (except in certain instances). However, all M&A transactions must abide by the fair competition practices established under Competition Law 42-08 and the guidelines instituted in the Company Law. The Dominican Tax Authority has also become highly sophisticated in asserting transfer pricing issues, which could affect the cost of M&A deals. In addition, M&A operations relating to companies in regulated sectors must comply with the legal framework governing that sector. These frameworks may be extremely rigid (eg, in the banking and insurance sector).
What issues must be considered when preparing a company for sale?
Among other variables depending on sector-related rules, the parties must be aware of:
- restrictions in the bylaws of the companies involved in the transaction;
- the companies’ financial and tax statuses;
- labour and social security contingencies;
- pending litigation;
- environmental contingencies;
- IP rights;
- ownership and status of assets (eg, real estate, receivables, liens, encumbrances and warranties);
- contractual obligations (eg, concessions, licences and promissory notes); and
- movable assets liability.
What tips would you give when negotiating a deal?
The major influences on the success of an M&A transaction are:
- transparency between the parties during negotiations and exchange of information;
- competent, transactional and business-driven advisers on both sides;
- good will of the parties;
- appropriate submission of all required paperwork; and
- avoidance of the hurdles.
Are hostile takeovers permitted and what are the possible strategies for the target?
There are no hostile M&As in the Dominican Republic. All transactions follow the same rules as any business transaction; namely, the parties are free to negotiate the terms and conditions of their agreement.
Warranties and indemnities
Scope of warranties
What do warranties and indemnities typically cover and how should they be negotiated?
Warranties and indemnities are typically considered essential and determinant for the operation, thus they are an important milestone in any M&A operation. Normally, they cover:
- corporate standing;
- encumbrances, pledges, liens or attachments;
- tax liabilities;
- IP rights;
- labour and social security liabilities;
- financial standing;
- environmental contingencies; and
- other industry-related warranties.
Limitations and remedies
Are there limitations on warranties?
The only limitation on warranties is the statute of limitations, which varies depending on the type of warranty. For example, the limitation is two years for contractual liability.
What are the remedies for a breach of warranty?
The remedies usually involve a punitive damages clause, along with an option to forego closing and a claim for losses.
Are there time limits or restrictions for bringing claims under warranties?
Time limits can be set contractually between the parties, provided that they do not surpass the legal time set. Warranties are also subject to the statute of limitations. The time limit for contractual liability is two years. However, an ownership right over an asset warranty is suspended until the buyer loses it.
Tax and fees
Considerations and rates
What are the tax considerations (including any applicable rates)?
Depending on the type of assets involved in the operation, tax considerations usually include:
- income tax – a flat 27% on net annual income;
- tax on assets – 1% of a company’s taxable assets;
- asset transfer tax – 2%;
- real estate tax – 1%;
- real estate transfer tax – 3%; and
- capital gains tax – 27%.
Exemptions and mitigation
Are any tax exemptions or reliefs available?
Depending on the industry or sector of the transaction, reliefs could be available. As indicated above, a proper structure strategy could also mitigate tax contingencies and exposure.
What are the common methods used to mitigate tax liability?
The common methods used to mitigate tax liability include corporate structuring mechanisms, trusts and deal financing structures, among others.
What fees are likely to be involved?
Transfers of stock, real property and assets are subject to stock transfer taxes and real property transfer taxes charged by the Internal Revenue Department. Withholding taxes may also be imposed, depending on the seller.
Management and directors
What are the rules on management buy-outs?
Management buy-outs are subject to the same rules as any M&A transaction, which are set forth by the Company Law. In addition, management must abide to existing corporate governance rules.
What duties do directors have in relation to M&A?
Directors have fiduciary duties to the company and its shareholders. They are also liable for the information provided by third parties when representing the company.
However, before the approval of a merger in stock corporation, the companies involved in the transaction must appoint at least one commissioner to render a written report of the merger.
Consultation and transfer
How are employees involved in the process?
All employment agreements must be respected by the new entity. The new entity must maintain the existing contracts with employees or terminate their agreements and pay the legal severance packages. Employee credits are preferred over other credits due to their nature. Where an employee union is involved and a collective bargaining agreement is in place, this may affect the transaction.
What rules govern the transfer of employees to a buyer?
The Labour Code provides that the terms and conditions of an employment agreement cannot be varied to the detriment of the employees under any circumstances. Further, the resulting or remaining legal entity from a merger is responsible for all of the employment agreements of the absorbed company, since a continuation of the original employer-employee agreement is in effect.
What are the rules in relation to company pension rights in the event of an acquisition?
The same principle delineated above applies to the pension rights of employees.
Other relevant considerations
What legislation governs competition issues relating to M&A?
M&A transactions must abide by the fair competition practices established under Competition Law 42-08.
Are any anti-bribery provisions in force?
Yes, Law 448-06, the Criminal Code and the Anti-money Laundering and Terrorism Finance Law 155-17 are in force.
What happens if the company being bought is in receivership or bankrupt?
The transaction will be subject to scrutiny under Law 141-15.