I OVERVIEW OF M&A ACTIVITY
Although the Peruvian economy has shown considerable robustness in the past few years, managing to grow to 6 per cent in 2012 and 5.8 per cent in 2013, because of the contraction of the mining, fishing and manufacture sectors, in 2014 it managed to grow only 2.4 per cent2 (even with this low percentage, Peru remained one of the strongest economies in the region). However, Peru closed 2015 with a GDP growth of 3.3 per cent,3 due mainly to an increase in domestic consumption, the beginning of operations of one big mining project4 and the sustenance provided by public investment. Under that scenario, 2016 started with a GDP growth estimate of 3.7 per cent.5
Even though the international financial scenario has just begun recovering, Peru has preserved its position as one of the most attractive investment destinations in Latin America, maintaining a country risk index that ranks among the lowest in the region (its foreign currency debt is rated investment grade by Fitch Ratings, Moody’s and Standard & Poor’s).
Despite the slowdown in Peru’s economy, regarding the M&A market, 2014 was one of the most productive years ever recorded by the amount of transactions, with a total of US$11 billion as the aggregate deal value. This marker was (and remains) one the hardest to beat for the M&A market in the country. However, this number may be quiet deceiving since, of this US$11 billion amount, US$7 billion corresponds only to the sale of the ‘Las Bambas’ mining project in south Peru. Nevertheless, 2014 was not only a great year for the M&A market in terms of value, but in terms of the diversification of the sectors involved in M&A deals. Energy, retail and microfinance were the main sectors in which M&A transactions took place in 2014.
Despite a decrease in commodities prices and the international financial situation, and with 2014 as a background, the M&A market entered 2015 with a high expectation regarding the growth of transaction numbers, and these exogenous situations did in fact affect the M&A market. However, some financial newspapers in Peru considered 2015 as a relatively good year for the M&A market, with a total of US$1.5 billion as the aggregate deal value closed. The most relevant characteristic of 2015 in this market was the participation of new foreign players, showing that there is still interest in investing in Peru.
One of the important factors was the consolidation of the new sectors in which the transactions took place. If 2014 showed the start of a change of the sectors in the M&A market, 2015 confirmed that trend. Although the mining, energy and infrastructure sectors remained strong, investors showed increased interest in sectors with strong potential, such as the retail, agricultural activities, energy and microfinance sectors.
It is expected that growth in the M&A market will continue during 2016, with strong interest in the development of M&A transactions in the mining, oil and energy sectors, where foreign new players are showing great appetite and where some of the usual investors and developers are selling their stakes in big projects. According to some experts, projects in these sectors are the kind that ‘yield in the long term and create opportunities for those who have the financial backing to withstand a bad period, using the context of loss of funds by the smaller players’.6
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
i General framework
The Companies Act and the Civil Code constitute Peru’s basic legal framework for corporate acquisitions, mergers and other types of corporate reorganisations.
This establishes the general rules governing pre-contractual and contractual relationships (obligation to negotiate in good faith, rules regarding rights over real and moveable property, etc.). It is worth noting that although the Civil Code provides parties with certain flexibility to agree on the terms and conditions of a contract, it imposes several mandatory restrictions (e.g., a limitation on any liability arising from wilful misconduct or gross negligence is void and invalid, an implied warranty against latent defects rules).
This sets forth the basic rules for corporate governance, organisation and business combinations of different types of corporate entities (including matters related to share capital, shares, quorum and majorities for fundamental corporate decisions). The Companies Act also regulates corporate reorganisations such as mergers, spin-offs, and block transfers of assets and liabilities.
We should highlight that M&A transactions in Peru are structured under a wide array of deals, including share purchase agreements, asset transfer agreements, mergers or spin-offs, which commonly follow the structure used by common law countries (e.g., representations and warranties, covenants, conditions precedent, termination, indemnification). The use of shareholders’ agreements to set forth certain basic corporate governance provisions is also a common practice (e.g., management and operation of the business, share transfer rights and restrictions, deadlock mechanisms, put and call options, drag-along and tag-along).
ii Securities law and takeover laws
Companies whose voting shares are listed in the Peruvian Stock Exchange are also subject to the Securities Market Law and other related regulations, including takeover laws.
General securities regulations
The Securities Market Law regulates, inter alia, the issuance and transfer of securities, public offerings, takeovers, transactions related to listed securities, mandatory disclosure obligations and other provisions related to listed companies. Listed companies are also subject to the supervision of SMV, the Peruvian securities market regulator, which controls compliance and penalises violations of the Securities Market Law and its regulations.7
Peruvian securities regulations include mandatory takeover rules applicable to the acquisition of control of a listed company. Subject to certain conditions, such regulations generally establish the obligation to make a tender offer when a person or group of persons acquires ‘a relevant interest’ in a listed company.
According to Peruvian law, a person acquires a relevant interest in a listed company when such person holds, or has the power to exercise directly or indirectly, 25, 50 or 60 per cent of the voting rights in a listed company; or has the power to appoint or remove the majority of the board members, or to amend its articles of association.
In general, the tender offer must be launched prior to the acquisition of the relevant interest. The tender offer may be launched after the relevant interest is acquired if it is acquired:
- a by means of an indirect transaction;
- b as a consequence of a public sale offer;
- c in a single transaction from the holder of the relevant interest; or
- d in no more than four transactions within a three-year period.
It is worth noting that the minimum price to be offered and the minimum amount of shares that shall be subject to the ex post tender offer shall be calculated with specific formulae established in the above-mentioned regulations.
Peru has only witnessed at most a handful of unsuccessful hostile takeover attempts. In general, hostile takeovers are rare and, provided that several listed companies have a concentrated ownership structure, the possibility of success for a hostile takeover is remote.
iii Insolvency law
There are no specific provisions under Peruvian bankruptcy law related to the acquisition of a company. However, considering that in Peru’s bankruptcy system the powers and privileges of the general shareholders’ meeting and board of directors of the debtor are suspended during bankruptcy, and such powers are exercised by the creditors’ meeting, it is common practice to proceed with the acquisition in the following manner:
- a by acquiring the credits against the debtor, which will give a majority in the creditors’ meeting that will decide the future of the debtor and approve its reorganisation plan. Such a reorganisation plan includes the reduction of the share capital to zero and the capitalisation of part of the bankruptcy credits, hence eliminating the existing shareholders and providing control to the acquirer; and
- b by acquiring both the credits against the company and the shares from the shareholders. This is a less hostile strategy that allows the acquirer control over the creditors’ meeting during bankruptcy, as well as over the general shareholders’ meeting once the credits have been repaid.
A noteworthy example of this practice in Peru is the acquisition of a controlling package of creditors’ rights in Compañía Peruana de Radiodifusión SA by Plural TV Group, allowing them to acquire control over the company, which had US$100 million in liabilities to be restructured.
iv Other relevant regulations
The M&A framework also comprises laws and regulations dealing with, inter alia, tax, employment, administrative and regulatory issues, and the granting of security interests over moveable assets (including shares).
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
In 2011, through the enactment of Law 29566, starting a micro or small business in Peru became easier because the requirement to deposit start-up capital in a bank before registration was eliminated. The protection of investors was also strengthened, allowing minority shareholders (holding at least 5 per cent of the capital stock) to request access to non-confidential corporate documents.
Additionally, a system for the electronic filing and payment of major taxes was implemented, thus making the payment of taxes easier for companies.
In 2012, a bill of law was in the process of elaboration that refers to the promotion of fair competition through the control of M&A transactions between companies in the same line of business. According to such bill of law, these companies will need to obtain prior approval from the National Institute for the Defence of Competition and Protection of Intellectual Property (INDECOPI) to proceed with the transaction. This measure has also been accepted in many other countries to prevent monopolies in various industries. However, there has been no progress regarding its approval due to the fact that it might generate uncertainty among investors. During this period of uncertainty, some operations might accelerate to avoid the new regulation, while others might delay until they gain certainty of how the new regulation would work. In any case, if such bill of law is approved by Congress, it will represent an additional requirement for M&A transactions, but it should not cause any substantial damage to foreign investment.
Finally, according to Law 30354 (enacted on 4 November 2015) which modified the Peruvian Companies Act, all directors of companies, being principal directors or alternate directors, must expressly accept their appointment through a communication issued to a company with a legalised signature (made by the notary or a judge).
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
As shown in the World Bank’s ‘Investing Across Borders’, except for a maximum 49 per cent limit on foreign capital participation in the air transportation industry, all other economic sectors covered under ‘Investing Across Sectors’ are completely open to foreign equity investment.
Peru’s openness towards foreign investment as well as its competent macroeconomic policy consolidate its position as a favourite choice for foreign investors. As reported by the Economic Commission for Latin America and the Caribbean (ECLAC) in its latest publication, in 2014, Peru was the fourth-highest recipient of foreign direct investment inflows in Latin America, recording US$7,607 billion. However this represented a decrease of 18 per cent since 2013.8 According to the World Economic Forum, Peru remains one of the most competitive economies in South America.9
Furthermore, as previously mentioned, the participation of foreign investors in M&A transactions during 2015 was the year’s most relevant characteristic. Even though the total value of the results for 2015 was considerably lower compared with 2014, this sign of foreign companies’ interest in investing in Peru remained its tendency, having new target sectors, such as retail, microfinance and, especially, energy, in their sights.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
The following provides a description of our perspective regarding M&A activity in Peru at the end of 2015 and going forward (provided that the government maintains the country’s economic foundations and openness towards foreign investment):
- a as before, traditional sectors such as mining, energy and infrastructure played a key role during 2015, while sectors such as retail, real estate, agriculture, energy and microfinance (consumer business) had a larger participation than in previous years;
- b foreign investors continued to have strong presence in the M&A market, participating in the majority of the most important deals during 2015;
- c following successful experiences, consolidated Peruvian economic groups are expected to continue to grow through foreign acquisitions, particularly in the Latin American and Caribbean region;
- d we are seeing the consolidation of the financial and retail sector (pharmacies, malls, supermarkets, etc.) through M&A transactions. For 2016, we similarly expect that deals in the fishing, infrastructure, mining and oil sectors will recover their growth; and
- e domestic and international private equity activity has significantly increased, with firms consolidating their position as key players in Peruvian M&A activity, especially in the infrastructure and microfinance sectors.
Examples of noteworthy 2015 domestic deals include the acquisition of participation in Gasoducto Sur Peruano by Graña y Montero, and the acquisition of the retail business of Citibank in Peru by Scotiabank del Peru.
Foreign acquirer deals
Examples of noteworthy 2015 M&A deals that include a foreign acquirer include the acquisition of Corporacion Lindley by Arca Continental for US$760million; the acquisition of a participation in Transportadora de Gas del Peru by Enagas; and the increased participation in the private equity industry in Peru by Carlyle Group (including through the acquisition of Hermes and the consolidation of Nuevo Mundo and Condor Travel).
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Although it is common to find that deals are mostly self-financed by the acquirer, acquisition financing is generally available in Peru from either domestic or international sources. In general, international sources are used in the case of more significant financing (specially through a direct bank financing).
It is worth noting that private equity funds are emerging as a means of channelling capital held by Peruvian institutional investors, for instance, into infrastructure projects. Through investment funds, Peruvian private pension funds are able to participate in equity investments they would otherwise not be able to perform. Another example is insurance companies in Peru.
It has also become increasingly common for foreign private equity funds to seek funding from Peruvian pension funds by registering their funds before SBS, the Peruvian banking, insurance and pension funds authority. Subject to certain conditions, the registry of such funds shall generally enable private pension funds to acquire such securities by means of a private offering.
VII EMPLOYMENT LAW
There are few labour regulations addressing the consequences of M&A transactions in Peru. Most of the eventual issues raised during these processes have been dealt with directly via court rulings. Only collective bargaining dispositions have specific regulations, and prevent collective agreements from being overruled or annulled by a takeover or a spin-off, extending its benefits even after the target company has been controlled or absorbed.
Nevertheless, court rulings have provided additional insight into criteria applied in cases where these transactions compromise workers’ conditions. Judges have stressed the importance of protecting labour rights and existing benefits by enforcing the principle of ‘labour continuance’, which sets forth the right of any worker to retain employment and the conditions agreed with the previous employer or management. As for the consequences of this principle, M&A transactions should be preceded by a comprehensive analysis of the existing labour conditions and agreements prior to the takeover, and should consider the possibility of negotiating individual agreements where certain existing benefits exceed the acquiring company’s policies or standards.
In July 2010, a new Labour Procedural Law was enacted allowing for expedited proceedings and authorising unions to participate as plaintiffs representing their affiliates in individual claims. These schemes grant worker organisations more power to act in the protection of labour rights that might be threatened by an M&A transaction.
VIII TAX LAW
Capital gains that may arise from a transfer of securities issued by a Peruvian legal entity are subject to the following rules:
- a resident individuals: the capital gain will be levied with a 5 per cent effective tax rate;
- b resident legal entities: the capital gain will be considered as any other business income; the net business income accrued during the fiscal year (i.e., taxable income less costs and expenses allowed by law) are subject to a 28 per cent tax rate for the 2015–2016 period, and will decrease to 27 per cent for the 2017–2018 period, until it reaches a set point that will be established at a tax rate of 26 per cent from 2019 onwards; and
- c non-resident individuals and legal entities: the capital gain will be taxed at a rate of 5 per cent if the transaction is carried out within Peru and at a rate of 30 per cent if it is carried out outside Peru.
A transaction is deemed to be carried out within Peru if two requirements are met: the securities are registered before the Securities Public Registry and the transaction is settled through the Lima Stock Exchange.
To support the acquisition cost (i.e., tax basis) of the security to be transferred and to be subject to tax only on the capital gain that derived from the transaction, the non-resident individual or legal entity shall file with the Peruvian Tax Authority a request for an ‘invested capital recovery certification’ prior to any payment of the securities’ price. Otherwise, said price will be deemed as the taxable capital gain without any deduction. The proceeding to obtain this certification lasts 30 working days. Notwithstanding, this is not necessary if the transaction is performed through the Lima Stock Exchange.
A major change was introduced by Law 29663. Pursuant to said norm, in force since 16 February 2011, capital gains stemming from the transfer of shares in a non-resident entity that, in turn, directly or indirectly owns shares or a participant interest issued by a Peruvian company, will be subject to a 30 per cent income tax rate provided that within the 12-month period prior to the transfer, the market value of the shares issued by the Peruvian company represent at least 50 per cent of the market value of the non-resident shares; and during any given 12-month period, shares representing 10 per cent or more of the foreign entity’s capital stock are transferred.
A critical point regarding tax matters refers to the fact that the Peruvian company will be jointly and severally liable to tax with the non-resident transferor if the latter does not pay its own tax debt, an issue that has been harshly criticised by local scholars and practitioners.
Moreover, Legislative Decree 1120 introduced an additional modification to the capital gains rules. As a general principle, in Peru, corporate reorganisations are not levied with capital gain or VAT taxation, provided that no revaluation of assets is carried out under such corporate reorganisation. Nonetheless, the Legislative Decree establishes that a spin-off carried out by a Peruvian domiciled entity is subject to 30 per cent capital gains taxation – with regard to the net value of the assets and liabilities transferred under such spin-off – provided that the shares issued under the spin-off procedure are transferred by their holders and such shares represent more than 50 per cent of the shares issued under said spin-off, and the transfer of shares takes place before the closing of the fiscal year following when the spin-off is effected.
Interest on loans paid to non-resident third-party legal entities remains subject to a withholding tax rate of 4.99 per cent, provided that the funds are channelled through the Peruvian financial system and the interest rate (including expenses, fees, premiums and any other amount) does not exceed LIBOR plus 700 basis points. When the loan is granted by a non-resident related party, the withholding tax rate will rise to 30 per cent. It is noteworthy that in this case, the loan will also be subject to the Peruvian transfer pricing regime and thin capitalisation rules.
Due to Law No. 30296, dividends paid by a Peruvian company to individuals or to non-resident legal entities are now subject to a withholding income tax at a rate of 6.8 per cent. This tax will remain until the end of 2016. During subsequent years, the withholding income tax will continue to rise, up to 8 per cent for the 2017–2018 period, and finally increasing to a rate of 9.3 per cent, which will be in force from 2019 onwards.
IX COMPETITION LAW
Competition law in Peru does not contain general merger or concentration control rules. INDECOPI is in charge of enforcing the Competition Law, and imposing sanctions on practices that restrict competition (e.g., price-fixing agreements and cartels) and abuses of a dominant position in the marketplace.
Note, however, that Law 26876, against oligopolies and monopolies in the electricity sector, regulates vertical or horizontal concentrations occurring in the electricity market. Such antimonopoly regulation establishes the obligation to solicit an authorisation to INDECOPI’s Antitrust Commission for the performance of any act that qualifies as a concentration act (provided that such act surpasses certain limits established by law).
Although not a concentration rule per se, prior regulatory authorisation is required in connection with the acquisition of certain regulated businesses (e.g., banking and insurance).
Peruvian markets continue to offer great potential for M&A transactions, even though the economic commodities crisis during 2014 and 2015 has diminished the economy. Actually, such crisis has generated new opportunities for M&A transactions, as prices are low and developers still need to pursue their projects. Likewise, the international crisis has driven many investors to sell their stakes in big projects, which will certainly give volume to the M&A market. All of this enabled Peru to remain as one of the most attractive economies in the region.
Peru’s potential, its economic achievements and particularly its business environment are helping the country to consolidate its position as one of the most sought-after investment destinations in Latin America. Foreign investors have played, and will continue to play, a key role in Peruvian M&A activity.
As previously mentioned, M&A activity will likely continue to grow at a steady pace. Classic M&A sectors, such as mining and oil, are expected to commence a new period of transactions propelled by international conditions. Activity in other sectors, such as construction, retail and real estate, will keep increasing its participation on the Peruvian M&A market.
1 Carlos Arata is a partner at Rubio Leguía Normand.
2 According to GDP official data published by the Peruvian Central Bank, available at www.bcrp.gob.pe/estadisticas/cuadros-anuales-historicos.html.
4 The ‘Las Bambas’ mining project started operations during December 2015.
5 According to estimates of the International Monetary Fund.
6 Opinion of Sergio Álvarez, senior manager in the transactions and corporate finance area of Ernst and Young Peru.
7 It should be noted that open stock corporations are subject to certain mandatory restrictions – for example, such corporations are not bound to share transfer limitations and higher quorum and majorities agreed between shareholders.
8 ECLAC, repositorio.cepal.org/bitstream/handle/11362/38215/S1500534_en.pdf?sequence=4.
9 World Economic Forum, reports.weforum.org/global-competitiveness-report-2015-2016/economies/#economy=PER.