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Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
A typical transaction begins with the execution of a preliminary agreement, such as a letter of intent or a memorandum of understanding (MOU). This generally will include an exclusivity agreement and the terms by which due diligence will be conducted. A non-disclosure agreement (NDA) is also generally signed prior to or with the signing of this preliminary agreement.
Legal and financial due diligence, aimed at detecting any contingency affecting the target company, occurs after a preliminary agreement has been executed.
To finalise a transaction, the parties will execute an agreement, either in the form of a merger agreement, a share purchase agreement, an asset purchase agreement, or a sale of business transaction. The form depends on the requirements and goals of the parties involved. Generally, the agreement will include supplemental documents (such as escrow or trust agreements, a non-compete agreement, or other post-closing obligations).
The amount of time a transaction takes depends on the amount of information available and the experience and motivation of the parties involved. No statutory provision limiting how long offers remain open exists.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
In general, the Commerce Code regulates corporations and limited liability companies from article 17 to article 200. Articles 201 to 219 of the Commercial Code regulate the termination and liquidation of Companies. Articles 220 to 225 regulate the basics of mergers and transformations of corporations. Articles 478 to 489 regulate the acquisition of a business.
The Law for the Promotion of Competition and the Defence of Consumers regulate aspects related to merger control in articles 16 to 16-ter, as well as its regulation in articles 38 to 62.
Share purchase agreements do not have to be governed by local law. They can provide for a foreign governing law. However, local requirements regarding proper registration and transfer of shares must be in accord with Costa Rican legislation to be valid. For example, local legislation covers the requirements for endorsing and recording the transfer of shares for corporations and limited liability companies (see question 3).
Local law formalities, such as using a notary public for asset transfers involving real estate, mortgages, intellectual property (IP), movable assets (boats, airplanes, vehicles, etc) or transfers of movable registered pledges or similar warranties apply. Similarly, the acquisition of a business is subject to specific formalities that the Commerce Code establishes. Nevertheless, an agreement governed by foreign laws can be made, although it might be limited to some extent by the local laws and provisions indicated herein.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
The mechanism for transferring legal title varies depending on the nature of the asset being sold and certain other factors. For instance:
- for the transfer of legal title of share certificates in a corporation share purchase agreement, the physical share certificates must be endorsed. Also, for corporations, the transfer entry must be recorded in the shareholder book of the corporation. For limited liability companies, the transfer of quotas entry must be made in the quota holders book, but no physical endorsement applies;
- the transfer of real estate, intellectual property, and other movable assets require certain local formalities such as using a public notary to validate the required documents for legal title to transfer. Many of these assets are subject to registration and the national registry provides a certificate of ownership once the transfer is complete; and
- requirements for legally acquiring a business are subject to other specific formalities established in the Commerce Code.
The concepts of legal and beneficial title are recognised. Potential buyers ought to be aware of these differences when evaluating and documenting their acquisitions.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
To acquire shares each shareholder must agree to sell the shares he or she owns. When there is an agreement to extend the social term, or to move the domicile to a foreign country, or to transform or merge the company in a way that there is an increase of responsibility for the shareholders, the shareholders that do not agree can withdraw from the company and request a reimbursement for their shares according to paragraph 1 of article 32-bis of the Commercial Code.
In the case of asset purchase agreements, to sell or pledge assets that represent 10 per cent or more of the total assets of the company, the board of directors or similar governing body must approve the transaction.
These are both mechanisms recently established in the law to protect minority shareholders. Action before the courts is always available for minority shareholders for whose rights are not respected.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Tax, labour, social security, and environmental liabilities cannot be excluded through an asset purchase agreement or a sale of business. Otherwise, in an asset sale the buyer is generally able to select the assets and liabilities to be included in the transaction.
Articles 478 to 489 establish a procedure required for the transfer of an ongoing business. The transaction must be published in the official newspaper for three consecutive days and give notice to the seller’s creditors, providing them an opportunity to oppose the transaction or exercise their rights within 15 days.
Other third-party consents, such as those from banks or other commercial parties in the case of a change of control, might also be required.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
As a general rule, there are no restrictions on foreign ownership. However, smaller restrictions, such as prohibition of ownership of real estate in the Maritime Zone, may apply. Along similar lines, a small number of industries require the employment of a certain percentage of Costa Rican citizens.
Some approvals in certain regulated industries might be required, depending on the nature of the company’s business. Examples of such industries requiring additional approval include insurance, telecommunications, and banking. A merger control law imposes the obligation on the parties to obtain consent from the antitrust authorities whenever a transaction results in a change in control or results in the formation of a new economic agent. Approval must be obtained either prior to the closing of the transaction or within five days of the transaction’s execution. Transactions where the total sum of the productive assets of all the propositions involved and their headquarters surpasses 30,000 minimum wages, which is valued around US$15 million, or those where the total sum of revenue produced by all the actors involved within the national territory during the last fiscal year surpasses 30,000 minimum wages, require consent from the anti-trust authorities. Small and medium transactions therefore are not subject to this law. In some regulated industries like telecommunications, notification of mergers is always required regardless of the amount of the transaction.
Are any other third-party consents commonly required?
A merger with another legal entity must always be authorised by the shareholders of the Costa Rican company. In asset purchase agreements where 10 per cent or more of the total assets of the company are pledged, the board of directors or similar governing body must approve the transaction (see question 4). For other asset sales, shareholders are not required to authorise the sale unless the articles of incorporation stipulate they must. The same applies for a sale of shares and purchase of an ongoing business or company. Nevertheless, it is common practice to require a shareholder’s agreement prior to these transactions, as well as the agreement of the board of directors.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Question 6 includes details on required regulatory approvals and filings, including merger control filings. There are no filing fees required.
Law 9416 created in 2016 a centralised shareholders registry in the Central Bank of Costa Rica where final shareholders of corporations and limited liability companies must be registered. However, the implementation of this registry is still suspended because there is still no regulation to the law.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Parties will typically utilise financial advisers to assist in various facets of the transaction, including valuation, financial position, or other relevant analysis and advice depending on the nature of the transaction. Accountants and tax advisers may also be utilised, particularly in the due diligence phase. Environmental advisers are commonplace when the acquisition involves facilities that require environmental permits.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
In general terms, the Civil Code establishes in Chapter 3 of the Preliminary Title, General Efficacy of the Legal Provisions, a duty to exercise all rights according to the requirements of good faith (article 22).
Directors, management, and controlling shareholders do have fiduciary duties of loyalty and care to the company when negotiating a transaction.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
Typical documentation includes:
- NDA to begin due diligence;
- letter of intent, memorandum of understanding, term sheet, or similar document;
- asset or share purchase agreement, or a sale of business agreement;
- shareholders agreement or approval of the transaction;
- board of directors or management approval of the transaction;
- change of control consents, when necessary; and
- escrow agreement, non-compete, or other ancillary documentation .
Are there formalities for executing documents? Are digital signatures enforceable?
In general, there are no formalities imposed by law to execute documents between the contracting parties. However, the documents must be executed by authorised individuals. Further, assets being transferred that are registered with the public registry require execution via a public deed and registration in public registry. Shareholder certificates must be endorsed and duly recorded in the corporation’s shareholders book and quota transfers must be recorded in the limited company quota holder’s book.
For the sale of a business, in total or in its majority, the formalities and requirements of articles 478 to 489 shall be fulfilled or the sale might be considered null before third parties, and the buyer might not pay the price agreed.
Digital signatures are enforceable provided they satisfy the provisions of Law 8454, requiring that such signatures be issued under a valid digital certificate issued by a registered certifier.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
Legal and financial due diligence is usually conducted by the buyer, allowing the buyer to evaluate any contingencies of the seller and evaluate its overall position. The scope of the due diligence proceedings, including whether or not a seller will provide the buyer with a due diligence report or the buyer will conduct due diligence itself, can be decided in the execution of a preliminary agreement. Typically, the buyer will evaluate the target companies financial and legal positions and contingencies. It is always advisable to independently assess due diligence reports received from sellers.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Sellers can be held liable for pre-contractual or misleading statements, but in general it is recommended that the seller’s potential liability must be expressly stated in an agreement between the parties. The expressed liability of the seller can be limited by the contracting parties. For instance, the seller could limit its liability by stating its representations are accurate to the best of its knowledge.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
The National Registry or the notary publics protocol books keep for the public registry the articles of incorporation, all the registered changes to a private company, and the information regarding its proxy holders, board of directors, social domicile, capital, amount of stock, managers, and other officials. In regards to real estate and registered movable assets like vehicles, the information is also publicly available through the National Registry office.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
Knowledge of a particular situation might reduce the possibility of a buyer bringing a successful claim against its seller.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
There are no restrictions on pricing mechanisms nor on the forms they may take. Pricing is customarily determined by the negotiations between the contracting parties. The parties will take into account the relevant factors specific to the transaction in question, including but not limited to a financial analysis. Often, purchase price is determined by the target company’s earnings before interest, taxes, depreciation and amortisations. Price adjustment mechanisms are commonly included.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Cash is the most common form of consideration. However, buyer shares or target shares are other forms of consideration that may be used. There is no overriding obligation to pay multiple sellers the same consideration. The type of consideration paid to different sellers can be determined by agreement of the parties.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
Earn-outs are usually used to incentivise the target company when it retains a business relationship with the buyer.
Escrows are commonly used, and often implemented after a letter of intent has been executed, usually in the form of an escrow for contingencies. The amount of the purchase price put in escrow varies depending on the nature of the transaction and factors influencing its completion.
How are acquisitions financed? How is assurance provided that financing will be available?
Acquisition financing is available. The most common financing structures are bank lending, corporate debt, capital increases, and securitisations or security trust agreements.
Most acquisitions are financed in the acquirer’s market. Because many buyers are foreigners, most financing comes from abroad. Financing may also be available through regional or global banks.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
There is no legal authority prohibiting privately held companies from conditioning an offer on the buyer obtaining financing. There are no provisions prohibiting the seller from giving financial assistance to a buyer or other similar limitations that might impact the financing structure.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Signing and closing can occur simultaneously. Other transactions may include closing conditions. Generally, conditions to closing are included in the acquisition agreement. In a sale of business under Costa Rican legislation, the buyer can impose a condition that there are no oppositions filed against the transaction, reserving the right to cancel the transaction if such opposition arises.
Asset purchase agreements may contain closing conditions requiring the contracting parties to consent to executing the signed documents. Further, asset purchase agreements may require the registration of the assets in the Public Registry.
A common closing condition is the authorisation from the competition authority or other relevant regulatory authorities to the transaction.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
This varies depending on the type of transaction and business. Usually, a collaboration obligation with regard to information and documents is placed to the seller in the agreement. In some occasions, the obligations of closing conditions are completely the responsibility of the seller; however, it is also usual for the buyer to handle post-closing conditions provided the seller collaborates with him or her to do so.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
When utilised, pre-closing covenants generally stipulate that the seller will:
- continue to operate the business consistent with the last several years of operation;
- inform the buyer of any material changes in the business; and
- along with the buyer, use their best efforts to get waivers from contractual parties of the seller regarding the transaction
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
The parties can stipulate in the purchase agreement under what conditions, if any, the transaction may be terminated after signing. For instance, the buyer can impose a condition that there be no oppositions filed against the transaction, reserving the right to cancel the transaction if such opposition arises. Transactions may also be subject to the right to terminate the agreement if approval from the competition authorities is not obtained, when applicable.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Break-up fees are not that common in a sale of business or shares. They are more common in a particular asset purchase agreement. When utilised, break-up fees are generally included by the contracting parties in a preliminary agreement. There are no legal restrictions on the usage of break-up fees or reverse break-up fees; however, they can be subject to review for proportionality and reasonability.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
Representations, warranties, and indemnities are not expressly covered in Costa Rican law. However, foreign buyers will frequently demand their usage. As a result, they are typically required by the buyer. In the absence of statutory guidance on warranties, representations, or indemnities, their scope is determined by each agreement. Generally, when utilised, sellers qualify their representations and warranties with ‘material adverse effect’ and ‘to the knowledge of the seller’ stipulations. Indemnifications typically state the survival period of the warranties and representations, provide quantitative restrictions, and outline incidents that cannot form the basis for a claim.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
While sellers can be liable for pre-contractual misrepresentations and misleading statements, it is recommended that this potential liability is specifically articulated in the agreement between the contracting parties. Accordingly, any caps or limits on the seller’s liability or survival period of the liabilities should also be expressly included in the parties’ agreement.
In a share purchase agreement, the seller’s liabilities are transferred. A seller should disclose all liabilities to the buyer, and create an agreement establishing the scope of the liability from these disclosures to protect against a buyer’s claim that certain liabilities were not disclosed. Limitations to liability are usually established on a case-by-case basis.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
It is common to have a hold back amount of the price of the sale in an escrow account during some time to cover incidentals that might appear post-closing and that are the responsibility of the seller. The terms of this hold back amount is usually negotiated by the parties case by case.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Post-closing covenants are usual in transactions. Conditions vary depending on the industries involved and type of agreement being utilised. Common covenants include non-competition provisions covering territorial and durational limitations on the seller, IP licence agreements (when applicable), and confidentiality agreements.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Transfer taxes are payable in certain transactions. A real property transfer tax rate of 1.5 per cent is applied in asset sales that are registered. Unless the contracting parties agree otherwise, the buyer and seller are typically jointly liable for the transfer tax. The transfer tax does not generally apply to a transfer of shares, however, when the target of a share sale owns real estate, an indirect transfer tax at 1.5 per cent of the real estate’s value will apply.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Income taxes apply only to income generated in Costa Rica. A value added tax does not apply to sales of real estate or used assets. Capital gains are only subject to taxation when they are produced from the transfer of tangible and depreciable assets or from a seller’s habitual activity. There is additionally a stamp duty on all contracts and agreements at a rate of 0.5 per cent of the documents’ economic value. Otherwise, no corporate taxes are payable on a share sale or asset sale. Other minor stamp taxes may also apply depending on the type of transaction.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
The employees are automatically transferred when a buyer acquires shares in a target company. The employees may or may not be retained by the purchaser. If the employees are dismissed, obligations are imposed to make the dismissed employees certain payments.
Employees are not automatically transferred in a business or asset purchase. In a business purchase, the buyer could sign new employment contracts with the terminated employees or the employees could agree to an employer substitution. It is also possible to transfer the complete pay roll from one company to the other; however, in these cases, employees’ may opt to terminate the labour relation with cause.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
There are no legal obligations to notify or consult with employees or their representatives in any type of acquisition.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
In an asset purchase agreement, as employees are not automatically transferred to the buyer, and their contracts are terminated; pensions and other benefits also do not automatically transfer, and therefore the new registration shall be made in the relevant authorities.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
As a recurrent recipient of international investment, Costa Rica’s market continues to be very active in M&A transactions. Many of its transactions are a consequence of the global transactions occuring in multinational firms that have operations in the country. Nevertheless, more recently, local companies are also experimenting a growth in the amount of M&A transactions taking place, including regional transactions. Areas like the life sciences cluster, technology, telecommunications, and manufacturing of different goods are the sectors where M&A activity has been focused in the past 12 months.