I OVERVIEW OF M&A ACTIVITY
The Colombian economy has experienced a significant improvement in recent years. As a result, for the past three years Standard & Poor’s and Moody’s have ratified Colombia’s credit classification to investment grade.2 Credit rating companies generally agree that the Colombian economy has certain strengths that will make up for potential negative impacts that may derive from the current decrease in oil prices. For example, Joydeep Mukherji, Standard and Poor’s operating risk manager for Latin America, believes that Colombia has a wide flexible exchange rate that allows it to deal with the decreasing oil prices and global economy problems. In recent years, foreign investment has also been constant in several industries.3 The Colombian economy grew (in terms of GDP) by 4.8 per cent in the past five years, and for 2015 grew approximately 3 per cent despite the low global growth rates expected in recent years. This favourable economic atmosphere is reinforced by Colombia’s position in Latin America as an investor-friendly economy, economic certainty and stability in the international markets, the consolidation of the Pacific Alliance, and the implementation of best practices in public policy in order to join the Organisation for Economic Co-operation and Development.4 In 2016, Colombia was ranked as the 54th country in the World Bank’s ‘Doing Business’ publication, and was recognised as one the top three Latin American countries, along with Peru and Chile, in which it is easiest to do business.
As a result of the aforementioned achievements, increased investor confidence is expected to be maintained this year, which is likely to have a positive impact on the local market for M&A. Trends that have generated an increase in M&A activity in Colombia include the search for better returns, the construction of infrastructure and public utilities, the selling of traditional family-owned companies and the consolidation of economies of scale through the acquisition of smaller players by big corporations.5 These trends may be explained as a result of Colombia becoming a more attractive investment centre due to its rate of economic growth, positive GDP6 and free trade agreements (FTAs), together with the securities and regulations of the Colombian market.
Consequently, the Colombian market continues to consolidate itself as a leading market in M&A in Latin America. As of 2015, Colombia held third position in terms of the number of local companies acquired by foreign investors (59), behind only Brazil, Chile and Mexico,7 and held fourth position in terms of percentage representation in the Latin American M&A market (6 per cent). The size and complexity of the transactions that we are seeing now in Colombia are unprecedented, and cross-border transactions are now common in the Colombian market. For example, in 2014, the Brazilian bank ‘Banco Itau’ signed a deal to merge its Chilean and Colombian operations with Chilean Corpbanca SA (Chile) and its Colombian subsidiaries operating under the Itaú name. This merger implies the combination of banking business in Chile and Colombia, creating an Andean banking platform with an approximate value of US$8 billion.
Most of the M&A deals were strategy-oriented and involved various sectors of the economy. Hot industries include massive consumption, finance and banking, energy and telecommunications. It is also interesting to note that deals took place through a wide variety of structures, including share swaps, public tender offers, share acquisitions, asset acquisitions and synthetic share structures. This shows that market participants and practitioners are highly sophisticated and that the Colombian legal framework is receptive to market needs. It is also interesting to note that many private deals involved tender offers, or ‘beauty contests’, advised by the most sophisticated investment banks in the field.
A key factor fuelling M&A activity in Colombia continues to be the participation of private equity funds registered in Colombia, some of which are controlled by international funds such as SEAF, Brookfield and Ashmore.
Notwithstanding the foregoing, private equity funds are also finding it increasingly difficult to compete against strategic buyers, as the latter, with a long-term approach, are willing to pay higher multiples for their targets.
Another significant source of M&A activity is driven by the reorganisation of state-owned companies, such as ISAGEN’s privatisation process, as well as the merger of Millicom and UNE EPM Telecomunicaciones SA ESP. This kind of transaction includes an element of public law, which varies depending on the structure of the transaction and may range from mandatory offerings to the general public and the observance of mandatory bidding processes to less burdensome publicity requirements (see Section II, infra). In addition to, and not inconsistent with, these public law requirements, these transactions are structured using the same contractual tools commonly used in private M&A transactions.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
i General framework
The general rules and regulations relevant to M&A transactions are found in a number of statutes, including:
- a the Commercial Code;
- b the Civil Code;
- c Law 222 of 1995;
- d Law 964 of 2005 and Decree 2555 of 2010; and
- e Law 1258 of 2008.
The legal framework regulates aspects such as:
- a shareholder approval of the merger project, including the observance of certain formalities to allow shareholders to review the conditions of a transaction;
- b notice to and rights of the public and the creditors of the companies involved in the merger;
- c appraisal rights; and
- d the proceedings before the relevant authority (usually the Superintendency of Companies (SOC)), when required.
Except as set out below in connection with the relatively new simplified share corporations, squeeze-outs, short-form mergers and cash-out mergers are not expressly contemplated by Colombian law. The relevant decision-makers in M&A transactions in Colombia are the shareholders, as opposed to the board of directors. Concerns regarding directors’ fiduciary duties (including, for example, Revlon duties) and shareholder rights plans are not common in the Colombian context.
Corporate acquisitions are mainly subject to contract and commercial law, providing, as a general rule, that the shares of a corporation are freely negotiable unless pre-emptive rights apply pursuant to the respective charter documents or applicable law.
It is not unusual that M&A and related agreements in Colombia (governed by Colombian law) be drafted following the Anglo-American model, setting forth representations and warranties, closing conditions and indemnification obligations. Most of these provisions have not been reviewed by local courts, which represents a challenge for local M&A practitioners.
Law 1258 of 2008 sets forth a new form of company called the simplified stock corporation (SAS). This type of company has become the most common type of company in Colombia (representing approximately 93 per cent of the companies incorporated in Colombia in recent years).8 In addition to providing a very dynamic governance structure, SAS offer tools that are already proving to be useful for M&A practitioners due to, inter alia, the following characteristics:
- a increased recognition and enforcement of SAS shareholders’ agreements (SHAs) as compared to other types of companies due to the legal mandate that the management of an SAS must disregard any decisions that may conflict with a validly registered SHA;
- b squeeze-out provisions, which were not previously allowed under Colombian law, are permitted with respect to SASs;
- c share transfer restrictions for up to 10 years (which may be successively renewed) that are unlawful in other types of corporations are permitted with respect to SASs;
- d the shareholders of an SAS may agree to force disclosure of any change of control with respect to the shareholders and the squeeze-out of such shareholders;
- e cash-out mergers and spin-offs are allowed with respect to SASs; and
- f short-form mergers are allowed when the acquirer owns more than 90 per cent of the equity ownership of the target.
The main setback of the SAS, however, is that it may not be listed on a Colombian stock exchange; nor may it be registered as an issuer of securities.
ii Listed companies
In addition to the general framework, M&A of listed companies are subject to the relevant rules set out in the securities markets regulations.9
The main rule relevant to the acquisition of shares in publicly traded companies is that all such transactions must be conducted through the exchange where they are listed, except when the price of a share transaction is lower than 66,000 ‘real value units’, or approximately US$5,900. Trading on the target shares is not limited or restricted in connection with a proposed acquisition, which generates an interloper risk. This has been one of the biggest challenges faced in M&A transactions of listed companies, and has led on several occasions to the delisting of shares to prevent such risk.
For public tender offers, the general rule is that if a person or group of persons that constitute the same beneficial owner wish to acquire or become the beneficial owner of 25 per cent or more of the voting securities of a listed company, these people must launch a public tender offer in connection with the securities exceeding the indicated threshold. A public tender offer is also required if the purchaser is already the beneficial owner of more than 25 per cent of the voting capital of a listed company and wishes to increase its interest to more than 5 per cent.
The sale of shares and convertible securities owned by governmental entities (except to another governmental entity) is governed by the law on privatisations.10 The privatisation framework rests on two rules that represent significant challenges for M&A involving state-owned companies:
- a certain employees, workers’ federations and pension funds (which comprise the ‘solidarity sector’), inter alia, have a right of first refusal to acquire the securities under special conditions, most importantly regarding the granting of credit and grace periods for the payment of the securities. Only once the securities have been offered to the solidarity sector may the balance be offered to other persons (including strategic investors); and
- b the government must foster the democratisation of property, which means that every person shall have the right to participate in the sale; accordingly, the government must conduct the sale through a process that guarantees broad publicity and permits the participation of the public.
Even though it has not yet been confirmed by High Court decisions, the majority of practitioners and scholars believe that the acquisition of newly issued shares of a state-owned company is not subject to the foregoing rules. However, the general principles of public law, including those regarding publicity and transparency, continue to apply.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
Recently, the enforceability of SHAs has been strengthened by the enactment of the Colombian General Procedural Code (Law 1564 of 2012) coupled with the increased awareness of the authorities and the judiciary of the importance of SHAs in connection with M&A and corporate activity. Specifically, Article 24 of the Code grants judicial power to the SOC in connection with controversies related to compliance with SHAs and the performance of the covenants and obligations included in such agreements. Consequently, the SOC has issued certain decisions that reflect a favourable attitude towards the enforceability of this type of agreement. For example, in a recent judgment issued in April 2013,11 the SOC stated that SHAs that comply with all requirements provided under Article 70 of Law 222 of 1995 are enforceable against the company and thus, votes issued in and decisions of the shareholders’ assembly that have been completed or taken in breach of such an SHA may be challenged, set aside, and eventually declared null and void. Additionally, in the same judgment, the SOC acknowledged that in order to guarantee performance of the covenants and obligations provided in an SHA, it may force a certain shareholder to issue a specific vote in the shareholders’ assembly; change the direction in which a certain shareholder has voted in the shareholders’ assembly; or order the performance of a new meeting of the shareholders’ assembly whereby any and all decisions issued in breach of the SHA are revoked. Consistently with this approach, the Superintendency of Finance12 recognised that the only SHAs that are required by law to be deposited in respect of an issuer are those that consist of voting agreements, which implies that other agreements are valid among the parties, yet unenforceable against the company. Furthermore, it has been widely acknowledged that all SHAs executed in respect of a simplified stock company (which is the most common type of company nowadays in Colombia), regardless of their content, are enforceable against the company and all shareholders of the company (irrespective of whether they are a party to the agreement). Furthermore, as a general rule, SHAs in connection with types of companies different from the SAS that do not comply with all requirements provided under Article 70 of Law 222 of 1995 (i.e., be circumscribed to voting agreements and not executed by administrators) have been recognised as being fully valid among the parties, although not enforceable against the company or third parties. Nonetheless, recent and significant decisions reflect that the increasing opinion in Colombia is to strengthen the enforceability and effectiveness of SHAs.
It is worth mentioning that several FTAs recently became effective, including FTAs with the United States, the European Union, the EFTA countries (Norway, Iceland and Liechtenstein), El Salvador, Guatemala and Honduras. Furthermore, Colombia has FTAs with, inter alia, Canada, Chile and Mexico. Likewise, several treaties eliminating double taxation have come into effect, including with Chile and Panama. In addition to this, Colombia executed the framework agreement for the Pacific Alliance with Chile, Mexico and Peru, which seeks the commercial and economic integration of these countries, and the South American Nations Union founding treaty recently entered into force.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Colombia has been identified as a good destination for foreign investment according to the World Bank’s ‘Doing Business’ publication. Colombia has steadily improved in the ‘Doing Business’ ranking as a result of sustained reform efforts. Colombia’s ranking on the ease of doing business rose from 79th among out of the 175 economies included in 2006 to 54th among the 189 economies included in 2016. Colombia is also now recognised as the second country worldwide where it is most easy to get credit.13
Foreign direct investment (FDI) in Colombia maintained at approximately US$13 billion in 2015, which is a good indicator of the fact that global economies have not grown in recent years.14 FDI has exceeded US$10 billion during the past six years. In 2011, FDI almost doubled in comparison with the previous year, and increased almost tenfold since 2003 to US$14.6 billion in 2011, reaching levels even higher than those reached before the crisis.15 In addition, FDI amounted to US$16.772 in 2013, which constitutes a record figure.16 In 2015, the most significant foreign investors in Colombia came from the United States, Spain, Switzerland, the Netherlands, Chile, England, Canada, Germany, France and Sweden. Out of this FDI, the industries that currently receive the most investment are oil (33 per cent), manufacturing industries (20 per cent), finance (15 per cent) and tourism (15 per cent).17 In 2015, the country that contributed the highest rate of FDI in Colombia was the United States (30 per cent).18
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Significant transactions
The most relevant transactions during the past few years include the following:
- a the merger of Chilean and Colombian operations of Brazilian banking powerhouse Banco Itaú and Chilean Corpbanca SA, which resulted in a combined entity worth approximately US$8.8 billion (January 2014);19
- b the US$6.6 billion acquisition of 84 per cent of ISAGEN (Colombia) by Brookfield (CAN) (first trimester 2016);
- c the US$4.4 billion cross-border merger of UNE Telecomunicaciones and Millicom Spain Cable to consolidate the telecommunications business of both Millicom and EPM in Colombia (June 2014);20
- d the US$1.8 billion indirect acquisition in cash of 19 per cent of the total capital of Grupo Pão de Açucar, and the indirect acquisition in cash of a 100 per cent stake in Libertad in Argentina, by Almacenes Éxito SA (Colombia, France, and Brazil) (August 2015);
- e the US$190 million acquisition of 100 per cent of CO Internet (Colombia) by Neustar (US) (first trimester 2014);21
- f the US$187 million acquisition of 100 per cent of CIFIN SA by Transunion Netherlands II (Netherlands) (first trimester 2016);
- g the US$170 million acquisition of an equity stake in the Spanish group of Nubiola, conformed by Comercial Quimica Dibon, SL, Vhem Corporacion Quimica, SL and Ivory Corporation. In connection with Colombia, Ferro acquired indirectly (through Vhem Corporacion Quimica, SL and Ivory Corporation) Nubiola Colombia Pigmentos SAS, the subsidiary of Nubiola Group in Colombia, which is a manufacturing plant located in Girardota, Antioquia responsible for the manufacturing and production of inorganic substances and basic chemicals by Ferro Corporation (Spain and US) (July 2015);
- h the US$97 million acquisition of 88 per cent of Hoteles Royal by NH Hotel Group (Spain) (March 2015);
- i the US$86.2 million acquisition of 100 per cent of Incolacteos, Lechesan, Conservas California, Erwis Asociados and Enfriadora Vallenata by Peruvian group Gloria (February 2014); and
- j the US$50 million acquisition of a minority stake in Bodytech, one of the biggest chains of gyms in Colombia with a presence in Chile and Peru (first trimester 2016) by Catterton Partners through a vehicle.
ii Key trends and hot industries
2015 showed an increase in strategy-oriented M&A activity in a wide variety of sectors, including tourism, oil and gas, telecommunications, energy, construction and finance.
In addition to this, outbound M&A has become a major ingredient of the local and regional M&A markets. Colombian companies continue to acquire foreign companies, which have maintained their position as crucial investors in Latin America. Examples of this trend include Grupo Nutresa, which has implemented an ambitious expansion plan since the 2000s, including the acquisition of Tresmontes Lucchetti,22 the second-largest food company in Chile, in 2013, as well as the acquisition of 44 per cent of Dan Kaffe in Malaysia.23 Another example of this trend is the US$720 million asset purchase from Vulcan Materials by Grupo Argos in the United States, which positions the Colombian cement manufacturer among the seven companies with largest installed capacity in the cement industry worldwide.24
From a buyer’s perspective, the Colombian market offers attractive opportunities to private equity funds. While in 2006 there were only two private equity funds operating in Colombia, and in 2009 there were around 17 funds, today there are up to 50 private equity funds registered as active in Colombia.25 These private equity funds include some of considerable proportions, such as Brookfield Colombia–Ashmore, Nexus Capital Partners, Darby–Mercantil Colpatria, MAS SEAF, Teka Capital, Tribeca Partners, Terranum Capital and Altrafund. As of 2014, private equity funds had placed investments pending for an exit for an amount of approximately US$4.5 billion, 10 per cent higher than the private equity investments placed in 2014.26 Private equity investments represent 1.7 per cent of Colombian 2015 GDP.27
Pursuant to local regulations, local pension funds may invest up to an aggregate of US$1.5 billion in local private equity funds and another US$1.5 billion in foreign private equity funds. Additionally, US$3.1 billion from voluntary pension schemes can be invested in private equity funds.
Private equity funds invest in a wide range of industries, including real estate, logistics, transportation, healthcare, mattresses, film, biotechnology and applied engineering and medical services. Private equity has been drawn towards medium-sized transactions, but it would not be surprising to start seeing more private equity funds participating in larger transactions in the future as the industry matures. Examples of important medium-sized transactions including private equity investments are the acquisition of a minority stake in Ocensa, the largest oil pipeline in Colombia by Advent Latin America private equity fund, and the acquisition of 26.7 per cent of the trust rights of Hyatt Regency hotel by FCP Bricapital. Overall, private equity funds in Colombia raised US$4.3 billion in 2014.28
Colombia has increasingly gained a reputation as a breeding ground for start-ups, and although the number and amounts of venture capital deals that we are seeing in Colombia nowadays is unprecedented, it is expected that such number and amounts shall increase in the future.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Pursuant to the 2009 financial reform (Law 1328 of July 2009), local banks are now allowed to extend credit with the purpose of acquiring a controlling stake in corporations or associations, thereby increasing acquirers’ ability to leverage their M&A. This reform represents a significant development, which will reasonably continue to increase M&A activity in the future.
Financing of M&A has also been, and will probably continue to be, affected by the development of the Colombian capital market, which is increasingly becoming an important source of financing for local companies.
It is also worth noting that while most deals continue to have a large component of cash, some deals are being structured as a combination of cash and equity or different structures such as earn-outs.
The main features of cross-border M&A financing in Colombia are that:
- a foreign funds must be delivered to an authorised foreign exchange intermediary in Colombia or a resident’s foreign currency account registered as a ‘compensation account’ with the Central Bank and registered with the Central Bank by means of a foreign exchange form that must be completed and submitted through a foreign exchange intermediary when the funds are sent to Colombia; and
- b foreign banks are allowed to finance the acquisition of a controlling interest in a Colombian company, and investors are allowed to look for such financing for their intended transactions.
Additionally, by means of Resolution No. 5 of 28 October 2011 issued by the Central Bank, Colombian companies are now allowed to legally obtain loans from foreign entities, including intercompany loans. It is possible that this regulation allow Colombian residents to finance M&A transactions with funding from their foreign affiliates or holdings.
VII EMPLOYMENT LAW
The most relevant issue to bear in mind, particularly in M&A transactions structured as asset deals, is what Colombian labour law considers employer substitution. According to this legal figure, if there is a change of employer, the identity of the commercial establishment survives and the same employee continues to provide work to the new employer under an unaltered labour agreement, the new employer will be jointly and severally liable with the former employer for the existing labour obligations of the former employer prior to the employer substitution.
This is particularly relevant in asset deals, since it exposes the buyer to any labour contingencies that the seller could have prior to closing. In practice, this means that the buyer is as exposed as it would be if the transaction were completed pursuant to a share deal.
Even though the former employer and the new one may enter into private arrangements to regulate the economic effects deriving from the substitution, such agreements are unenforceable against the employees.
To avoid this joint liability, it is common practice that the buyer requires the seller to terminate the labour agreements in place and that it hire back the employees, starting a new and fully independent labour relationship with them. Under this option, the seller must comply with the labour laws providing for severance payments and protection of employees in cases of collective dismissals. The termination of employment agreements requires the approval of the Ministry of Social Protection.
Another alternative to mitigate this potential liability is to require the former employer, without terminating the employment agreement, to agree to pay each employee severance for the corresponding year until the moment the substitution takes place.
VIII TAX LAW
i Tax neutrality in connection with mergers and spin-offs
As in many jurisdictions, under Colombian law the transfer of assets pursuant to a merger or a spin-off can qualify as a non-recognition event. Therefore, such mergers and spin-offs do not trigger income tax, sales tax (VAT), industry and commerce tax or any withholding taxes (i.e., they are tax-neutral) as long as certain requirements are met. Failure to meet these requirements is construed as an indication that the transaction was intended as a sale and will be taxable as such.
Broadly, the requirements for tax-neutral spin-offs and mergers (as introduced by Law 1607 of 2012) are as follows: that at least 75 or 85 per cent of the shares, quotas or participations of any kind represented in the relevant entities prior to the merger or spin-off are represented in the resulting entity or entities; and that at least 90 or 99 per cent of the considerations for the shareholders of the merged or spun-off entities are received in shares, quotas or participations in the resulting entity or entities.
Note that the thresholds depicted above depend on the type or reorganisation: that is, whether the merger or spin-off is reorganisational (between related parties) or acquisitive (between unrelated parties). These two categories were also introduced by Law 1607 and apply exclusively for tax purposes.
In addition to the above, current laws state that even if the requirements above are met, the shareholders of the merged or spun-off entities will have an additional 30 per cent tax on profits from the sale of the shares in the resulting entities if they sell such shares within two years after the year of the merger or spin-off. Furthermore, the law provides for rules and limitations on the sale of assets received as a result of the reorganisation within the aforementioned period of time. In the first case, the 30 per cent tax is additional to the income tax determined on the profits from the sale of the shares or the assets, respectively. In the case of a sale of assets, there is a limitation as to the use of fiscal losses (NOLs) against income derived from such sales.
Other structures, such as asset or share purchases, do not benefit from this tax neutrality. This is one of the first issues to be considered by M&A practitioners when structuring transactions, and explains why many transactions are structured as mergers or spin-offs, both in Colombia and abroad. By doing so, the parties mitigate adverse tax consequences or at least defer the payment of taxes until they effectively receive payment for the sale of their shares or assets.
Nonetheless, note that the aforementioned Law 1607 allows for tax-neutral contributions into Colombian companies. These contributions (in-kind) allow taxpayers, both foreign and domestic, to contribute assets into Colombian companies at tax basis in exchange for shares (not necessarily at fair market value anymore) without recognising a gain. This is optional, as contributions can still be made at market value if parties are willing to recognise the taxable gain (typically the shareholder) as required to step up the basis in the shares (for the shareholder) and the assets (for the company). This option presents investors with interesting structuring alternatives for both initial investments and tax-efficient exit strategies.
It is worth noting that Colombia has enacted certain tax benefits for the purchase of capital goods and the sale thereof, such as a 10 per cent tax rate on capital gains. For this reason, it is foreseeable that in certain cases the buyers in M&A transactions might want to structure their acquisitions as asset deals.
To fully understand the foregoing, it is important to understand the nature of corporate taxation, as it relates to income tax, VAT, industry and commerce tax and registration tax as follows.
ii Income tax
As no sale occurs in a merger or spin-off, no income is deemed to be generated for any party to the transaction and, therefore, no income tax accrues in connection therewith. Treating a given transaction as a non-recognition event will depend on it meeting specific requirements.
According to the Colombian Tax Code, tax losses (net operating losses and capital losses) of a company undergoing a merger or a spin-off are allocated between the absorbing and absorbed companies in mergers and the new company created in the spin-off, based on the ratio of the capital of each company over the total equity. Thus, in general terms, the losses do not expire as a result of the spin-off, which is an additional advantage when considering M&A transactions. This is particularly so if the losses are obtained in the absorbing company in the event of a merger. Conversely, the use of tax losses could be limited if the losses were obtained by the absorbed entity.
iii Income tax for equality (CREE)
Only Colombian companies, branches and permanent establishments are liable to CREE. This tax shares the same basic features of the income tax, but differs as regards to specific items of income and items of deductions that are considered for the purposes of assessing the tax liability. However, note that the rules for CREE in respect of M&A transactions are basically identical to the rules for income tax. Non-resident foreigners are not liable to CREE.
iv Sales tax (VAT)
As a general rule, and subject to statutory exemptions, VAT is levied on the sale of tangible moveable goods, on the import of tangible moveable goods and on the rendering of services within Colombia.
Since, as indicated, mergers and spin-offs are not deemed to be sales for tax purposes, there is no VAT. For VAT neutrality to apply, the merger or spin-off needs to meet all of the requirements explained above for reorganisational and acquisitive mergers and spin-offs.
v Industry and commerce tax
Industry and commerce tax is a municipal tax assessed on the gross sales and receipts of a company at a rate established by each municipality. Since no sale should be deemed to take place in the event of mergers and spin-offs, no gross sales and receipts are obtained therefrom, and thus there is no industry and commerce tax in such events.
vi Registration tax
Registration tax is triggered by the registration of documents containing acts, contracts or any legal matters with the commercial registry held by the chambers of commerce.
Tax is levied based on the price involved in the corresponding document, unless no such price is involved, in which case the registration tax will be levied at the minimum statutory rate established by the public record office or chamber of commerce where the document is to be registered.
The documents instrumental in mergers and spin-offs must be registered in the commercial registry and are, therefore, subject to registration tax. However, as they qualify as legal acts without value, the tax is calculated based on the minimum statutory rate (as opposed to the peso value of the transaction). Registration tax rates applicable to documents without value range between two and four times the legal daily minimum wage (i.e., between approximately US$15 and US$30).
vii Stamp tax
Public instruments and private documents granted, accepted or that have effects in Colombia, as well as the extension or assignment of the same, are subject to stamp tax. Since mergers or spin-offs are subject to registration tax, stamp tax will not be accrued. In any event, this tax has been reduced to zero per cent as from 2010.
viii Treaties to avoid double taxation
Colombia has several treaties to avoid double taxation in force with Spain, Canada, Chile, Mexico, India, Portugal, Switzerland, Korea, the Czech Republic, and the Andean Community of Nations, which includes Bolivia, Peru and Ecuador. Additionally, Colombia is in the process of negotiating treaties with various other countries.
The main benefits for shareholders under the treaties to avoid double taxation relate to capital gains, dividends, interests and royalties. The concept of permanent establishment, which has only recently been introduced into our domestic legislation, is typical in treaties to avoid double taxation and has important implications for foreign investors in Colombia.
IX COMPETITION LAW
Colombian competition law subjects M&A, regardless of their form, to the prior authorisation of the Colombian antitrust authority (which, except for some specific exceptions, is the Superintendency of Industry and Commerce (SIC)).
Antitrust and competition issues are becoming increasingly important in the Colombian marketplace. While some years ago antitrust approval was perceived as a mere ‘red tape’ process, it is now a critical matter and certainly one that every party involved in an M&A transaction has to seriously consider before embarking on a transaction. The antitrust authority has become increasingly sophisticated, and it is conducting thorough reviews of transactions, rejecting or imposing conditions on those that do not meet the requirements established by law.
All transactions that might result in a market player controlling a competitor (horizontal integration) or a significant customer or supplier (vertical integration) must be notified, provided that the relevant thresholds (as described below) are exceeded. In its final decision, the SIC may object to, conditionally authorise or unconditionally authorise the transaction.
None of the transactions that must be informed may be closed before the SIC issues its decision. The SIC recently introduced a non-mandatory procedure by which the parties submit transitional hold-separate arrangements for approval while its decision is pending. The SIC may impose fines on the parties and their directors, officers and auditors for breaching the information duty. Transactions that are not informed and unduly restrict competition may be challenged as null and void before ordinary courts, and the SIC may order the reversion of the transaction.
Law 1,340 of 2009 comprehensively regulates the requirements and conditions under which antitrust notification of economic integrations must take place. The following are some of the major developments:
- a unified competition authority: with very limited exceptions, the SIC is now the unified competition authority in Colombia – the Civil Aviation Authority and the Superintendency of Finance retain certain specific powers in connection with merger control in their specific areas;
- b cease-and-desist agreements: cease-and-desist agreement requests will only be admitted by the SIC prior to the end of the discovery stage of the proceedings, significantly reducing the options available to those being investigated by the SIC and promoting a fuller disclosure when cease-and-desist agreements are requested. Any breach of the terms of a cease-and-desist agreement will be regarded as a stand-alone anticompetitive practice and will be subject to the same penalties;
- c leniency and whistle-blowers: the SIC is now authorised to grant benefits (to forgo or reduce the amount of any potential fine) to companies or individuals that report anticompetitive practices and identify their participants, even if such practices are already being investigated by the SIC. The benefits will be graded in accordance with the usefulness and timing of the cooperation; and
- d new antitrust thresholds and procedure – all entities that are either devoted to the same manufacturing, distribution or consumption activity or part of the same value chain in the production of a certain product, raw material, good or service, must file a report with the SIC in connection with any transaction that implies a merger, consolidation, acquisition of control or economic integration in Colombia.
To determine if there is a market presence in Colombia, the SIC takes into account whether the parties hold a market share in Colombia, whether directly or via subsidiaries, affiliates or branches incorporated and domiciled in Colombia; distributors or agents appointed for the Colombian territory; or imports into the Colombian market.
Pursuant to Colombian law, no filing is required in transactions where the following two conditions are met:
- a when the combined annual operational income of the parties (including all other related companies dedicated to the same economic activity or active in the same value chain within the Colombian territory) as of 31 December of the year immediately preceding the transaction is less than 100,000 times the minimum monthly wage (as such threshold has been recently modified by means of Resolution 82040 of 26 December 2014) (currently, approximately US$26 million); and
- b when the value of the combined assets of the parties (including all other related companies dedicated to the same economic activity or active in the same value chain within the Colombian territory) as at 31 December of the year immediately preceding the transaction is less than 100,000 minimum monthly wages for that year (as such threshold has been recently modified by means of Resolution 82040 of 26 December 2014).
Where the conditions mentioned in (a) and (b) above are met but the parties to the relevant transaction have a combined market share of less than 20 per cent, the integration is deemed authorised. However, in this event, the parties must submit a notice to the SIC at any moment before closing describing the parties involved in the transaction and the reasons why the parties consider that their market share is less than 20 per cent of the relevant market. The transaction is deemed authorised on the date on which the notice is filed, and no waiting period applies.
The SIC recently issued Resolution 12193 of 2013, whereby it changed its method of controlling business integrations. Pursuant to the new merger control procedure, the calculation of operating income and total assets of the parties (for purposes of meeting the above-mentioned legal thresholds to determine if any filing or notice shall be required) must take into account not only the values of the merging parties, but also those of all other related companies dedicated to the same economic activity or active in the same value chain in Colombia. If the parties have no local corporate presence, worldwide income or assets are to be taken into account. By Resolution 5545 of 2014, the SIC also included the possibility of reviewing and approving common control exercised by minority shareholders due to private agreements such as shareholders’ agreements, and thus the SIC expanded the scope of jurisdiction over business integrations. The aforementioned twist is expected to significantly increase the number of transactions that shall require notice or filing before the antitrust authorities.
The M&A market in Colombia continues to grow and to occupy a privileged position in the M&A market in Latin America.
Local and foreign private equity funds are consolidating as significant players in the M&A market, with considerable cash available to invest. Colombian companies are also consolidating both as local and regional significant players in the Latin American M&A market. Latin American companies are consolidating as key players in the region. As an example, Brazilian and Chilean companies represent some of the highest shares of FDI in Colombia.
Infrastructure, construction, transportation, and telecommunications are expected to be the main drivers of M&A activity in the next year. A significant increase of M&A activity related to infrastructure development is expected, as investment in this sector is expected to increase. The International Finance Corporation is expected to participate in the government’s plans for investment in infrastructure. The implementation and consolidation of 4G technology is expected to represent an investment of more than 40 billion Colombian pesos.29 Furthermore, Colombia is expected to invest around 3.1 per cent of its GDP in infrastructure projects.30
Venture capital investments are also expected to have an increasing role in Colombia’s M&A market in the next few years.
The outlook for the Colombian economy is encouraging, and Colombia may be moving towards becoming one of the most attractive M&A markets among emerging economies. The predictions of Michael Geoghegan, president of HSBC, reflect a general perception. In a speech on 27 April 2010 at the Chamber of Trade of Hong Kong, Mr Geoghegan said that in the decade beginning in 2010, the world should keep an eye on a group of emerging economies that includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, saying that, similarly to the economies of the BRIC countries some years ago, ‘each has a large, young, growing population. Each has a diverse and dynamic economy. And each, in relative terms, is politically stable’.
1 Sergio Michelsen Jaramillo is a partner at Brigard & Urrutia. Special mention and thanks to Darío Laguado (partner), Andrés Hernández, Nicolas Cardona and Andrés Vargas at Brigard & Urrutia who collaborated in the preparation of this chapter.
2 Standard & Poor’s rating services, Republic of Colombia, www.standardandpoors.com, 16 May 2016.
3 ‘Agencias calificadoras Moody’s, Fitch y Standard & Poors ratifican confianza en Colombia’: www.inviertaencolombia.com.co, 28 April 2015.
5 ‘Colombia: Balance 2015 y Perspectivas 2016’, www.andi.com.co, June 2016.
6 ‘Los TLC hacen más atractiva a Colombia’, www.portafolio.co, October 2013.
7 ‘Mercado de Fusiones y Adquisiciones para Latinoamérica 2016, Deloitte’, www2.deloitte.com May 2016.
8 ‘De enero a mayo, se registraron 27.800 sociedades nuevas. Pueden impulsar la economía y afectarla’, www.portafolio.com, July 2012.
9 Mainly included in Law 964 of 2005, Resolution 400 of 1995, Resolution 1200 of 1995 and the Organic Statute of the Financial System.
10 Law 226 of 1995.
11 Superintendencia de Sociedades. Sentence No. 80100016. Proedinsa Calle & Cía S en C v. Inversiones Vermont Uno S en C, Inversiones Vermont Dos S en C, Inversiones Vermont Tres S en C and Colegio Gimnasio Vermont Medellín SA.
12 See Concept No. 2012006183-004 of 8 May 2012.
14 ‘Reporte Trimestral de Inversión Extranjera’, www.procolombia.co, June 2016.
17 www.inviertaencolombia.com.co, June 2016.
19 ‘Corpbanca escogió a Itaú’, www.dinero.com, January 2014.
21 ‘Neustar adquirió la totalidad de las acciones de .co Internet’, www.eltiempo.com, March 2014.
24 ‘Tras inversión de US$720 millones, Argos queda de segundo en el sureste de Estados Unidos’, www.la republica.co.
25 Catálogo de Fondos de Capital Privado. Bancoldex.
27 LAVCA Scorecard – The Private Equity and Venture Capital Environment in Latin America 2014 update, 4 June 2016.
28 Catálogo de Fondos de Capital Privado. Bancoldex.
29 ‘¿Qué viene para la infraestructura colombiana en 2014?’, www.circulodeinversionistas.com
30 ‘Colombia se prepara para la inversión más grande en infraestructura de transporte: Santos’, www.elheraldo.co.