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Peru: Financial assistance tensions

Roberto MacLean
Article 106 of the Peruvian Ley General de Sociedades (Law of Corporations) establishes that a corporation may not grant loans or provide guarantees to third parties, in support of the acquisition of shares issued by such corporation.

Some argue that this constitutes an absolute prohibition, and that any agreement providing such financing is null and void. With this in mind, some practitioners have designed structures that they believe avoid the prohibition simply because they avoid the form of a direct financing prohibited by article 106, hoping form will prevail over substance if the case comes to court.

Most in the legal community believe there are two aspects to the prohibition established by article 106, and that if these two aspects can be dealt with properly, some forms of acquisition financing may be permissible. According to commentators on the Law of Corporations, when a corporation lends funds to an acquirer of its shares or when its assets secure a loan made by a third party to the acquirer of its shares, it runs the risk of technically reducing its capital if the acquirer defaults on the loan or if the security interests over the assets are foreclosed. Under the Law of Corporations, creditors have the right to oppose a capital reduction of a corporation which will result in a cash payment to shareholders, and it has been considered that providing financial assistance would violate the rights of creditors. Another aspect to consider is the conflict of interest that arises when a majority shareholder uses their voting power to secure a loan by the corporation or its assets as security.

Most would agree that the legislators who enacted the Law of Corporations did not envision the ensuing surge in M&A activity nor the rise of private equity in the Peruvian market. That is why most practitioners believe that article 106 does not constitute an absolute prohibition, and that if the two abovementioned aspects, rights of creditors and conflict of interest, are dealt with adequately, an acquisition financing involving the assets of the target will not be exposed to annulment.

Roberto MacLean

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