Peru's economy is enviably strong. It is the only economy in Latin America that is growing (4% this year as reported by the World Bank). And it is expected to continue growing for many years to come. Indeed, renowned Peruvian economist Diego de la Torre has announced that if steady growth is maintained and quality investments are made in infrastructure and education, Peru's economy will improve dramatically. It will overtake Chile's by 2017, will be similar to Portugal's in 2027, and will reach Spain's level in 2037. This mathematical prediction implies that Peru has the potential to achieve first world economic status within less than 30 years.
The world of M&A has not been a stranger to this welcome economic news. Despite constraints imposed by the international financial crisis, foreign capital keeps flowing into Peru in record figures and a flurry of acquisitions in many sectors of the economy is taking place.
Legal regime
Peru's legal framework has a key role in spurring M&A growth. It is clear, emphasises transparency, and favours facilitating investments rather than overburdening them with regulation.
All public and private companies are governed generally by Peru's General Law of Companies (Ley General de Sociedades). As expected, public companies are subject to special regulation under specific statutes, including the Securities Market Law (Ley del Mercado de Valores) and the Law on Investment Funds and Investment Fund Managers (Ley de Fondos de Inversión y sus Sociedades Administradoras). They also adhere to other regulations governing initial public offerings, tender offers, trading of securities, securitisation, clearing houses, enforcement and the preparation and issuance of financial statements.
Peru's financial regulator (Comisión Nacional Supervisora de Empresas y Valores or CONASEV) is charged with enforcing Peru's securities laws. Most investors resort to CONASEV in the event of a complaint or dispute. While civil courts have jurisdiction to decide corporate controversies, few cases reach them in due course.
Regulation of corporate activity in Peru is far from excessive. In comparison with the laws of other Latin American jurisdictions, Peruvian regulations are brief and to the point. They emphasise transparency in order to provide investors with as much information as possible so that they can make informed decisions. They do not, however, protect investors who make wrong or inappropriate decisions, so long as the relevant information was timely made available to them. This emphasis on transparency makes shareholder lawsuits a rare event in Peruvian courts.
Tax advantages
Peru's tax laws also stimulate M&A activity in a very significant way. Peru has two main taxes: income tax and general sales tax (or IGV). As a matter of national policy, the Peruvian Congress has enacted a statute exempting all capital gains derived from the sale of shares of Peruvian companies carried out through the Lima Stock Exchange (Bolsa de Valores de Lima or BVL) from Income Tax until December 31, 2011. In addition, Peru's General Sales Tax Law exempts all share transactions carried out through the BVL from IGV. Furthermore, qualified foreign investors may negotiate Legal Stability Agreements (LSAs) with the Agency for the Promotion of Private Investment (ProInversion). This can guarantee the stability of the legal framework existing at the time the investment is made, including tax, foreign exchange, and labor laws. This favorable treatment undoubtedly has a very positive impact on important investment decisions.
Merger control
Economic freedoms that facilitate M&A activity also include the absence of merger controls. At this time, Peru does not have merger control regulations similar to those in force in other jurisdictions, and no prior merger approvals are required from the government. This freedom fosters M&A activity, lowers transactional costs, and speeds up the merger process. But this freedom may be curtailed in the near future.
Recently, a boom in Peruvian agriculture led major companies to seek to acquire large tracts of agricultural land. While economically sound, this corporate impetus was immediately criticised as an excess of laissez-faire politics seemingly oblivious to the country's painful experience with agricultural reform in the 1970s. This caused the government to propose the enactment of merger control regulations in order to prevent concentration in the ownership of lands. While public debate over this merger control proposal continues, however, mergers are not subject to prior approvals or controls of any kind.
Constitutional guarantees
Peru's Constitution provides two very important freedoms to foreign investors: equal treatment vis-à-vis national investors and the absence of foreign exchange controls. With the exception of a constitutional provision reserving to Peruvian nationals the ownership of land, water, and energy resources within 50 kilometers of the border, and a restriction to foreign ownership of radio and television stations, all areas of Peru' economic activity are open to foreign investment. And everyone has the absolute freedom to use and possess any foreign currency.
Accounting standards
Finally, Peru has made great strides towards converging local accounting standards to International Financial Reporting Standards (IFRS). CONASEV has issued specific Financial Information Regulations requiring Peruvian companies to prepare their financial information using Gaap and eliminating any prior provisions conflicting with IFRS. As a result, prospective foreign investors are able to examine with relative ease the financial information provided to them in the process of due diligence.
Local practices
Owners of Peruvian companies representing attractive acquisition targets are aware of their privileged position and tend to have the upper hand in negotiations with prospective buyers. Foreign investors should be aware that their offers are likely to be examined by qualified investment bankers retained by the targets and compared against similar offers from other prospective suitors.
With respect to legal advice, most Peruvian owners are still reluctant to hire foreign counsel or international law firms to represent them in M&A transactions. Even when those transactions may involve substantial risks and significant amounts. Prospective buyers' counsel should be prepared to deal with very brief legal documentation and with Peruvian owners' insistence on using very short Peruvian agreements.
Peru is a civil law jurisdiction, and Peruvian lawyers do not favour long and detailed contract documents that are typical in common law practice. Thus, foreign counsel should be ready to negotiate the depth of due diligence review and the type of contract documentation to be used in a particular transaction very much as part of the deal itself. Also, since most Peruvian acquisition targets are owned or controlled by an individual or a family, the typical share purchase or asset purchase agreement may not be readily appropriate to the transaction. In such a situation, flexibility is key, and foreign counsel should be willing to adapt their documents in order to meet the target's requirements.
Peruvian owners have access to the latest technology and gadgets. Nevertheless, they prefer and insist on face-to-face meetings over any other type of communication. This is the same for Peruvian lawyers. While telephone conferences and electronic mail are used, Peruvian lawyers like to meet personally to discuss important transactions. Thus, foreign prospective buyers and their counsel should be prepared to travel to Lima.
| Author biography |
Víctor Marroquín
Marroquín & Merino
Víctor Marroquín was born in Lima, where he attended the Colegio de los Sagrados Corazones Recoleta, the Naval Academy of Perú, and the Pontificia Universidad Católica. He received his Juris Doctor degree with honors from the University of Miami, where he was Editor-in-Chief of the International and Comparative Law Review, and his Master of Laws degree magna cum laude from Harvard Law School.
Afterwards, Marroquín was invited to join the Legal Department of the IMF in Washington DC, where he worked on various international projects involving legal and financial issues in Europe and Latin America. Following his work at the IMF, Marroquín joined Baker & McKenzie as a member of its Latin America Practice Group. He was resident in Chicago, where, in addition to his involvement in other major projects and transactions, he acted as the project leader of the team that represented the Peruvian Government in the privatisation of the country's airports, ports, railroads, and energy facilities. This included the granting of a master concession for Lima's International Airport, the BOOT contract for Peru's main electricity transmission line and the master concessions for the license, exploitation, transportation, and distribution of hydrocarbons from the Camisea Gas Field, one of the world's largest deposits of natural gas.
Marroquín is now a senior partner at Marroquín & Merino, one of Peru's most prestigious corporate law firms. His most recent transactions include advising AIG in the acquisition of a major stake in Peru's Pacífico Seguros through a capital increase carried out in the Lima Stock Exchange (BVL), the merger of Avery Dennison and Paxar's operations in Peru, the acquisition of 22 mining concessions in Northern Peru by Sezar Russia Investments and the successful defense of Cisco Systems in litigation with Peru's National Tax Authority.
Marroquín's practice involves M&A, finance, insolvency, taxation, and complex civil litigation. A former Ford Foundation Fellow in Public International Law at the University of Miami, Marroquín is the recipient of the International Lawyer of the Year Award from the University of Miami, the Distinguished Service Award from the Chicago Volunteer Legal Services Foundation, and the Merit Award from the Legal Clinic for the Disabled in Chicago.
Among other activities, Marroquín teaches Corporate Law at the Graduate School of the Universidad del Pacífico in Lima and serves as Peru Country Representative for the Harvard Law School Association. He is also the President of Peru's International Dispute Resolution Institute, and a member of the board of directors of several Peruvian companies and non-profit institutions. |