General overview

What legislation governs M&A activity in your jurisdiction?

Business combinations are regulated mainly in the Code of Commerce, which has specific provisions regarding mergers and acquisitions. The anti-competitive effects of these combinations are dealt with in the Competition Promotion and Consumer Protection Act. Regarding mergers of financial entities, such as banks, financial institutions, bonded warehouses, stock brokerage firms and investment companies, there are specific regulations contained in the Central Bank Organizational Law, the Securities Market Regulatory Law, the General Regulation of Investment Fund and Managing Companies, the Private Regime of Complementary Pension Funds, the Regulations on the Requirements for the Authorization of Tender Offers, the General Regulations for the Negotiation of Stock Market Issuance and other regulations issued by the Superintendent of the Securities Market.

What impact have recent legislative changes had on the nature and amount of M&A activity?

Government monopolization and lack of market reform in sectors such as energy, telecommunications and insurance have resulted in limited activity in comparison to other Latin American markets and jurisdictions.

What have been the most significant M&A transactions in your jurisdiction over the past year?

Wal-Mart International purchased a 33.3% interest in Central American Retail Holding Company (CARHCO). CARHCO is central America's largest retailer, with 363 supermarkets and other stores in the region. CARHCO has about 23,000 associates. Its sales during 2004 were about $2 billion. Wal-Mart acquired its interest in CARHCO from the Dutch retailer Royal Ahold. CARHCO was formed as a joint venture in 2001 with three equal partners: Ahold and two central American groups: the Paiz family, the major shareholders of La Fragua, with headquarters in Guatemala, and Corporacion de Supermercados Unidos (CSU), with headquarters in Costa Rica. The purchase price was not disclosed.

Grupo Q, an automobile company with headquarters in El Salvador, purchased Compañía Mercantil, an automobile components company with headquarters in Costa Rica. The purchase price was not disclosed.

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted?

Foreign involvement in M&A is unrestricted in Costa Rica. However, certain sectors have legislative restrictions to foreign ownership. The two best examples are:

• According to the Maritime Zone Law (Zona Marítimo Terrestre), article 47, a foreign company (owner of more than 50% of the total shares of the company) cannot apply for a concession in the Maritime Zone. Moreover, concessions owners within the Maritime Zone cannot transfer their shares of stock to foreigners.
• According to the Radio Law (Ley de Radio), article 3, a foreign company (owner of more than 35% of the total shares of the company) cannot establish and administer wireless services companies.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

As a matter of law, certain information regarding the transaction becomes public. Private mergers have no formal disclosure requirements. Influence of US and European law firms and financial advisers have made the use of standard legal due diligence lists involving the corporate, commercial, fiscal, regulatory and environmental issues of the business object of the acquisition commonplace. If a merger is held, the shareholders' meeting minutes in which the merger agreement is taken must be filed with the National Public Register, after a notice is published in the Official Gazette. The merger is effective before third parties one month after the publication of the notice and once it is registered in the Public Register. If the acquisition is through an asset purchase, a publication of the summary of the price and basic terms and conditions of the transaction must be published in the Official Gazette.

As for publicly traded companies, there are further disclosure requirements. According to the Securities Market Regulatory Law, any person or company participating in the securities markets (directly or indirectly), as well as the acts or contracts referred to these markets and the issuance of securities for tender offers, have to be registered with the National Register of Securities and Intermediaries. The information of the Register is considered public information. The acts or contracts subject to registration include, among others, authorization of public offers of services or securities, authorization of public offers of acquisition, authorization of incorporation of a financial group, modifications to any of the mentioned authorizations, and penalties applied. Furthermore, registered companies or persons are obligated to provide information regarding relevant facts (any fact or decision that might influence the decisions of the investors, or other participants in the stock market), periodical financial information, and risk evaluations of the issuance of debts and investment funds, among others. Moreover, the registered companies or persons must file annual financial statements and other corporate financial information determined discretionally by the Regulator. A holding company must present a consolidated financial statement. In case of tender offers, an advance authorization from the regulatory agency is required. Within five days after this authorization is issued, the offeror is obligated to make public the authorized offer. If the offer is accepted, the corresponding Superintendence may request information concerning the number of acceptances filed.

To what extent do the current disclosure requirements achieve market transparency?

Most M&A transactions are private. So as a general principle of contracting transparency must be upheld between the parties involved in the transaction. Although there are no formal legal requirements for transparency, nor a developed case law regarding due diligence and information exchange, Costa Rican laws should theoretically uphold a claim for damages if an information asymmetry causes an undue payment in price. So far no precedents uphold this rule in relation to M&A transactions. The only significant legal requirements involve the approval of mergers by shareholders' meetings and the publication of the terms and conditions of asset purchases to protect the interests of creditors in securing debts through corporate assets. Existing laws only uphold the most basic principles of market transparency and disclosure.

How significant an issue is prospectus liability in a typical M&A transaction?

There are no significant prospectus liability issues because of the small volume of transactions involving publicly traded companies.

How have recent M&A transactions and/or current legislation dealt with the issue of material adverse change clauses?

So far no case law or practice has addressed material adverse change clauses. As is the case in most worldwide jurisdictions, material adverse change clauses are routinely included by purchasers to protect themselves against occurrences that affect the business negatively before closing an M&A transaction. Such clauses are the subject of much negotiation among the parties. However, because of the incipient use of SPAs and APAs in the complex US style, there are no general usage conclusions to be explained.

What are the key unresolved issues in your jurisdiction?

The most important unresolved issues are the lack of judicial case law and practice regarding disclosure, due diligence practices, and complex SPAs and APAs. This form of implementing transactions has gained widespread acceptance even for small transactions. Judicial decisions and precedent are key to achieving clear rules in the new M&A marketplace in Costa Rica and central America.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

The Securities Market Regulation Act of 1997 as amended, the Regulations regarding Public Securities Offerings of 2003, and multiple rulings by the General Superintendent for Securities (known by its Spanish acronym, Sugeval) are the specific regulations that apply to takeovers. The General Superintendent for Securities is the main regulatory body involved with takeovers.

What are the various methods by which a takeover can be achieved?

Takeovers may be achieved through voluntary or hostile means. Voluntary takeovers are recognized by the laws and regulations as offers that are directed to all of the security holders in a particular company, and that suppose a transfer or purchase and sale transaction that involves the express participation and consent of shareholders who collectively, expressly and unanimously agree to sell a certain stake or percentage. Voluntary takeovers contrast with hostile takeovers, in which a certain individual or company undertakes to purchase a participation or stake in the open market, without the concerted consent of shareholders in the company. Both voluntary and hostile takeovers are subject to the proponent's compliance.

How differently are hostile and voluntary takeover bids treated?

There is a difference in the requirements for validity between voluntary and hostile takeovers. Voluntary takeovers may be made without compliance with the procedures indicated in the regulations for public offerings to acquire securities provided certain specific guidelines are met: (a) the voluntary offer for acquisition must be made for the benefit of all of the security holders in the target company, with similar benefits for all; and, (b) the security holders of the target company must unanimously approve the sale or exchange of shares as offered in the voluntary takeover.

Hostile takeovers may be validly made provided the acquirer provides Sugeval with basic information regarding the offer, including a prospectus with detailed description of the terms and conditions of the offer, a format of the public offering announcement, and, in case the offering price is the exchange of securities in another company, an independent valuation of the securities to be transferred in exchange for the securities purchased. The law and regulations contain more detailed descriptions of the information to be provided by the hostile offeror. Moreover, hostile takeovers are subject to an upwards sliding scale, which establishes the minimum percentage of the stake in the target company that a hostile acquiror must purchase to make the takeover valid.

What penalties are imposed for parties who violate takeover regulations (or equivalent)?

Pursuant to section 37 of the Securities Market Regulation Act of 1997, the penalty for lack of compliance with the requirements set out by the laws and regulations regarding takeovers of publicly traded corporations who are targets is that the acquirer is not able to exercise voting rights. Therefore all shareholder resolutions taken subject to quora and voting majorities in which such voting rights are exercised will be null and void under the law. Furthermore, any amendments to the articles of incorporation or bylaws approved through the exercise of voting rights of securities acquired in a takeover that has not followed the appropriate proceedings will be held to be null and void.

What are the thresholds for disclosing bids and offers?

The threshold for takeover offers is set by the laws and regulations at 10% of the total equity of the target company. Any offeror who wishes to acquire securities that grant direct, indirect or option rights over securities that represent at least 10% of the total equity of the target company must comply with the regulations and procedures set out in the laws and regulations for takeover offers.

Competition/Antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

No specific recent developments in competition law have affected or promoted M&A activity in the last five years. However, the Costa Rican legislation on antitrust is still new, as the relevant statute and regulations were passed in the mid-1990s. As a general matter, the Competition Promotion Commission of the Ministry of the Economy has exercised its powers for over a decade, producing a large body of law regarding antitrust. There are only a few relevant precedents regarding concentration and the relevance of M&A activity to competition in the local markets. None of them is a landmark decision that affects or promotes mergers and corporate acquisitions.

How are the competition/antitrust regulations enforced in your jurisdiction?

Competition policy and decisions are created and enforced by the Competition Promotion Commission, which is an adjunct body of the Ministry of the Economy. The Commission exercises its enforcement powers as a quasi-judicial administrative body, which receives complaints from consumers and economic actors in relation to facts and situations that threaten or hinder competition. It has broad investigation powers and its administrative decisions are reviewed by the Costa Rican courts specialized in administrative and government laws. In relation to M&A, the Commission does not have specific powers to authorize or require notices of acquisitions or mergers. However, the Commission does have broad investigation powers and may, either in following up a complaint or by ex officio impulse, decide to investigate and take action in relation to M&A transactions that might hinder competition.

How do legislation and regulation approach the issue of abuse of dominant position?

Costa Rican laws use the test of abuse of dominant position as the benchmark to establish whether an M&A transaction harms or threatens competition. The interpretation of this rule is similar to the interpretation applied in other jurisdictions. To determine if a transaction that involves concentration of assets or concentration of the stock of companies that operate in a specific sector of the market, it is necessary to determine: the substantial power of the merging entities or acquiror and purchaser; that the substantial power is framed within a relevant market; and that: the merging or acquiring entities achieve monopolistic or oligopolistic powers through the M&A transaction, or, that the entities intend to achieve such powers. The only relevant precedent in this point is in relation to the household paper products industry, and does not contain any specific or more concrete guidelines as to the interpretation of the foregoing rules.

To what extent are parties to an M&A transaction subject to prior notification requirements?

As mentioned above, Costa Rican antitrust laws do not establish ex ante notification or authorization requirements for M&A transactions. All analysis of M&A transactions is done on an ex post basis, either on the basis of a complaint or on the basis of the Commission's ex officio authority and initiative.

Author biography

Vicente Lines Arias & Muñoz - Costa Rica Vicente Lines is a partner at Arias & Muñoz. His main areas of practice are telecommunications, transactions and corporate law. Lines' transactional practice involves structuring and drafting complex deals, often encompassing issues in the areas of corporate law, minority shareholders' rights, real estate, and regulatory and other complex legal issues. He has counselled banks and financial institutions in constituting debt facilities in favour of Costa Rican, Nicaraguan and Honduran debtors. He has worked with regional, US and European investors in the private sector, in industries as diverse as auto retail, beverage, telecommunications and real estate development. Lines frequently provides regulatory counsel to competitive carriers, and value-added service and infrastructure developers in the telecommunications sector. He has worked with telecommunications infrastructure, service and equipment providers in market-entry issues throughout central America. Lines has represented telecommunications service providers in various transactional matters, including the structuring of joint ventures between private local partners and the government-owned incumbent operators in Costa Rica. Lines has advised infrastructure and service providers in licensing before the Nicaraguan Telecommunications Regulator. He has advised and counselled financial institutions and consortia with regard to prospective government procurement of telecommunications equipment. Lines holds an LLM in common law studies from Georgetown University Law Centre, in Washington, DC and is a Fulbright Scholar (1999). He obtained his Juris Doctor-equivalent law degree from the Universidad of Costa Rica Law School (1997). He is authorized as a practising attorney in the State of New York (2000), and a practising attorney and notary public in Costa Rica (1997). His experience includes a year as a foreign legal specialist with the telecommunications practice group at Swidler Berlin Shereff Friedman, Washington, DC from September 1999 through July 2000; an internship as a research assistant in the economic studies department, The Brookings Institute, Washington, DC during the summer of 1999; and a year as an associate attorney at Facio & Cañas, San José, Costa Rica (1997 to 1998). He has served as president of the board of directors of the Costa Rican Association of International Law (1997 to 1998). He speaks Spanish, English and Portuguese.