The Mergers & Acquisitions Review: Colombia

Overview of M&A activity

The Colombian economy experienced a major setback as a result of the covid-19 outbreak, the global crisis and the social protests that took place in 2021. This directly affected Colombian M&A activity, which was down overall in 2020. However, it is expected that as the world recovers, and as confidence in private consumption and investment recovers, the economy and M&A activity in Colombia will strengthen in the upcoming quarters. For instance, during the second quarter of 2021 the economy grew 17.6 per cent compared to the same period in 2020.2 In addition, according to the latest JP Morgan projections, Colombia's GDP will grow 9 per cent in 20213 and the Organisation for Economic Co-operation and Development (OECD)'s 2021 Economic Outlook projects real GDP to rise by 7.6 per cent.4 In the second quarter of 2021, foreign direct investment in Colombia reached a value of US$2.092 billion, with a growth of 62 per cent compared to the same period of the previous year.5

Between January and September 2021, 120 M&A transactions were registered in Colombia, 27 more as compared to the same period of 2020. Regarding the total amount of transactions, the 72 transactions that reported their values in 2021 amounted to US$13.641 billion, while 54 transactions that reported amounts between January and September 2020 reached a value of US$3.712 billion.6

Despite the challenges presented by the pandemic and the social protests, Colombia remains attractive for foreign investment. Set forth below are some of the key factors that will foster M&A activity in Colombia in 2022:

  1. investors seeking to purchase assets at a discount price;
  2. lower valuations owing to the effect of the currency exchange rates of strong foreign currencies as compared to Colombian pesos, which result in cheaper targets;
  3. buyers and sellers looking for business restructuring, partnerships and strategic alliances in a post-pandemic era;
  4. favourable regulatory environment, including a flexible foreign investment regime and tax benefits for investors;
  5. strong rule of law and increasingly sophisticated M&A market in Colombia, which provides confidences to foreign investors in the Colombian M&A market;
  6. the Colombian government, seeking to raise funds to recover the country's economy, by means of the sale of certain state-owned companies (i.e., in the energy sector);
  7. since last year the Colombian government has launched the fifth generation (5G) infrastructure programme. Investments are expected to reach an estimated US$5.9 billion. This will attract foreign investors willing to invest in Colombian infrastructure and energy projects; and
  8. international businesses that continue to expand their operations in the country, highlighting Colombia's positioning as an export platform.

However, it is worth highlighting that the presidential elections that will take place in 2022 in Colombia may play an important role that could affect the M&A market. The social and economic crises faced in Colombia during the pandemic and a disapproval rating above 77 per cent of President Duque could pave the way for a candidate from the left wing to win the elections.

General introduction to the legal framework for M&A

The Colombian Commercial Code is the principal legal framework that sets forth the legal vehicles that are available to foreign investors in Colombia and the rules related to corporate governance of Colombian companies, such as quorums, veto rights, fiduciary duties of directors and officers, and general rules applicable to foreign investors aiming to conduct businesses in Colombia.7 Nonetheless, the Colombian government8 presented a new bill to improve the applicable framework for companies, with the intention of recovering the economy, promoting flexibility to entrepreneurs and investors, and most importantly to modernise the legal regime and align it with international standards and practices. Said bill includes new protections to minority shareholders, a new regime applicable to directors and officers, and introduces new mechanisms to facilitate the day-to-day operations of the companies, such as the right of the shareholders to conduct virtually their right to inspection and the abolition of the prior approval by the Superintendence of Corporations for mergers, issuance of bonds and diminution of capital.

Many features of Colombian M&A are familiar to global businesses and are similar to international standards of other jurisdictions, especially to New York law and English standards. Over the past years, the common law contractual model has influenced the way acquisition agreements are drafted and negotiated in Colombia. It has become common in the legal market that shareholders' agreements, asset purchase agreements and share purchase agreements are drafted in a manner similar to New York law-governed agreements, sharing similar provisions.

For instance, in the past couple of years, local arbitrators have recognised the right of buyers to be indemnified via share purchase agreements as a result of a breach of sellers' representations and warranties of the sellers and of the target company. In fact, a recent arbitral award has recognised the possibility of qualifying the representations and warranties with standards such as materiality and relevance. In this case, the tribunal concluded that considering Colombian Law or case law does not provide a definition of materiality and relevance, US and English Law would be applicable because of an analysis of comparative law.9 Also, local arbitrators and case law have accepted pro-sandbagging provisions under Colombian law, although they have recognised that, if the parties remain silent, the anti-sandbagging rule would be applicable.10 Additionally, local arbitrators have recognised that failure to comply with the procedure set forth in the acquisition agreement to initiate a claim under the indemnity clause could relieve the indemnifying party from its obligation to indemnify.11

In summary, such judicial decisions by local arbitrators12 have clarified that concepts arising out of share purchase agreements, although not expressly regulated under Colombian law, do have a legal reasoning and support under Colombian corporate principles and rules. Therefore, the increasingly sophisticated M&A market in Colombia is another trend and reason for foreign investors to have confidence in the Colombian market.

Some key provisions that are frequently incorporated into the Colombian agreements that are common to New York-style provisions are as follows: purchase price adjustments, locked box mechanisms; qualification of the representations and warranties to MAE, knowledge qualifiers and to the virtual data room, indemnity package including de minimis, baskets, caps, and survival periods, pro-sandbagging and anti-sandbagging provisions, special indemnities, non-compete and non-solicitation provisions and holdbacks.

Additionally, it has become increasingly common to leave Foreign Corrupt Practices Act or anti-bribery carve outs as fundamental representations and uncapped, especially when private equity funds are involved in deals and for infrastructure deals.

In connection with shareholders agreements under Colombian law, provisions for minority rights protections, such as the appointment of directors, information rights, veto rights13 with respect to key legal and business matters at the board and shareholders assembly, the appointment of executive officers of the company, pre-emptive rights, right of first refusal and tag-along rights are heavily negotiated between shareholders. In addition, controlling shareholders often negotiate strongly for drag-along rights and control of the day-to-day management of the company.

In the past, the enforceability of tag-along rights and drag-along rights under Colombian law were widely discussed, as this was not clear among arbitrators, judges and legal academia. According to a thesis by the Superintendence of Corporations and the flexibility of the simplified stock corporation form, these rights are increasingly common under Colombian shareholders' agreements.

Law and jurisdiction – disputes resolutions

The Colombian arbitration statute14 sets out provisions for domestic and international arbitration and includes flexible and modern regulations for the benefit of foreign investors. Also, Colombia is a party to the New York Convention which facilitates the Recognition and Enforcement of Foreign Arbitral Awards. With respect to dispute resolutions, it is increasingly common that when an international party is involved in a deal and the assets are located in Colombia, the international arbitration has Bogota as the seat of arbitration. The advantage to this is that an award issued within an international arbitration seated in Bogota is treated as a national award and is enforceable without any recognition procedure. By contrast, when an award is issued outside Colombia, recognition is required prior to enforcement. It is also possible to have Bogota as the venue and for hearings to be held in a neutral place.

In addition to having Bogota as the seat of arbitration, foreign investors might choose as the rules of arbitration either the rules of the International Chamber of Commerce or the rules of the Bogota Chamber of Commerce, which allows the choosing of international arbitrators instead of local arbitrators.

Developments in corporate and takeover law and their impact

i Tax reform 15

After the tax proposal was withdrawn as a result of the social protests, in late July the Colombian government presented a new proposal before Congress, which was ratified as law on 14 September 2021. This new reform increases the corporate income tax rate and does not incorporate a presumptive income rate or a new wealth tax.

Furthermore, the following matters, which are particularly important in the M&A area, remained the same:16

  1. rules applicable to indirect sales of shares;
  2. rights or assets located in Colombia as taxable events as if such shares rights or assets were sold directly;
  3. general rule to determine the fair market value (FMV) of direct sales of assets to include special rules designed to prevent tax avoidance;
  4. a withholding tax of 7.5 per cent applicable to the dividends payable to national legal persons, transferable to a foreign investor or to a local individual shareholder;
  5. a withholding tax of 10 per cent, according to the amount of dividends payable to individuals; and
  6. a special Colombian holding regime (CHC) to grant certain tax benefits to companies created with the purpose of investing in other companies.

Withholding tax: dividends

A special 7.5 per cent withholding tax rate applies to dividends distributed as non-taxable income to resident companies. The withholding tax is payable only when an initial distribution is made to a resident company, and is treated as an imputed tax credit on a subsequent distribution to a Colombian resident (individuals) or an investor resident abroad. Dividends paid out of profits that were not taxed at the corporate level are subject to the general income tax rate (35 per cent for taxable year 2022). In this last case, the 7.5 per cent withholding tax also applies after deducting the tax paid at the general rate, resulting in an effective rate of 39.8 per cent for taxable year 2021. These rates also apply to dividends distributed to non-resident individuals and foreign entities, subject to certain exceptions.17

Indirect transfers

The indirect transfer of shares or assets in Colombian entities are taxed in Colombia as if the underlying Colombian asset had been directly transferred. If a seller fails to report the deemed income arising out of an indirect transfer as taxable income or capital gain on the income tax return, the subordinate Colombian company would be jointly and severally liable for such applicable tax, as well as for any associated interest and penalties. The purchaser also would be jointly and severally liable if the purchaser becomes aware that the transaction constitutes abuse for tax purposes. These rules do not apply where:

  1. the underlying Colombian assets are shares that are listed on a stock exchange recognised by a governmental authority, and no more than 20 per cent of the shares are owned by a single beneficial owner; or
  2. where they represent less than 20 per cent of both the book value and the FMV of the total assets held by the foreign entity being transferred.

These measures will certainly discourage indirect transfers of shares. However, if an indirect transfer of shares were to be performed, the following contractual measures shall be taken into account from the M&A perspective as per joint and several liability:

  1. a representation and warranty, probably on the seller's side, shall be included in the share purchase agreement stating that the transaction does not constitute abuse for tax purposes. This representation shall survive as per the applicable statute of limitations and shall not be subject to any limitation of liability included in the share purchase agreement (i.e., cap, basket, de minimis); and
  2. a covenant on the seller's side shall be included in the share purchase agreement stating that the seller will comply with the obligation to report the deemed income arising from the indirect transfer.

Tax incentives for potential investors

During the few past years, the Colombian government has incorporated several tax benefits (tax exemptions, tax credits, special deductions, among others) that seek to encourage priority sectors for the national economy, improve infrastructure and assets of the country's companies.

Mega investments

Companies with qualified investments (investments of more than US$280 million and which create at least 400 new jobs), will have the following tax benefits:

  1. preferential income tax rate: 27 per cent (as opposed to 35 per cent);
  2. depreciation of fixed assets in a minimum period of two years;
  3. not subject to presumptive income tax (for taxable year 2022, the presumptive income tax has been eliminated);
  4. not subject to dividends tax;
  5. the application of these benefits during the 20-year term is ensured through the execution of legal stability agreements; and
  6. holders of this benefit must pay a premium equal to 0.75 per cent if the value of the investment made each year during the five-year investment period.

CHC regime

The CHC regime is introduced for resident companies whose main activities are holding securities, investing in foreign or Colombian shares, or administering such investments, and that comply with certain additional requirements. The following rules apply under the CHC regime:

  1. dividends received by a CHC from a non-resident entity are exempt from tax in Colombia;
  2. dividends distributed by a CHC to a non-resident individual or foreign company are considered foreign-source income and therefore not taxed in Colombia (but dividends distributed by a CHC to a resident individual or Colombian entity are taxed at the normal rate, and are subject to the general income tax regime); and
  3. the distribution of premiums for the placement of shares is subject to the same treatment as ordinary dividends: that is, as exempt income when the beneficiary is a CHC, as foreign-source income if distributed by the CHC to a non-resident, or as taxable income if distributed to a Colombian resident.

Private equity funds

The rules for the realisation of income by capital funds have been amended so that in certain cases, and subject to the fulfilment of strict conditions, income from those funds will be deemed to arise or to be realised for income tax purposes when the profits are effectively distributed or paid to the beneficiary.

ii Foreign exchange rules18

Applicable foreign exchange regulations have aimed to increase Colombia's competitiveness in foreign markets, internationalise the domestic economy and increase the investment of Colombians abroad. Decree 117/2017 sets forth the rules governing foreign investments in Colombia and Colombian investments overseas, alongside the secondary legislation issued by the Colombian Central Bank. Highlights of these include the following.

Financial investments and investments in assets abroad made by Colombian investors do not need to be registered if the investment was paid with cash that does not need to be transacted through Colombian financial intermediaries (except for investment in shares). However, the rule requiring registration when cash is remitted from Colombia remains in place.

While not directly related to foreign investments in companies, applicable law regulates in a clear manner the purchase of local, Colombian peso-denominated A/Rs by non-Colombian investors seeking to become creditors of Colombian obligors under commercial transactions. This included rules on the acquisition of A/Rs held by local oil and gas companies subject to the special foreign exchange regime. These new regulations solved the controversy of whether Colombian peso-denominated A/Rs could be converted into foreign-currency assets held by offshore creditors.

The Central Bank's rules do not require Colombian financial entities to enter into credit default swaps with foreign counterparties only whenever there was a related foreign investment operation. However, the Central Bank has maintained the provision mandating that local financial entities may only act as protection buyers and not as protection providers.

Local financial entities may enter into commodities derivatives with foreign counterparties. Furthermore, the Central Bank has removed the limited list of derivatives products that local counterparties may enter into. In addition, restrictions on the settlement (delivery or non-delivery) have been lifted.

Finally, a new regulation took place as of 1 September 2021, setting out that all declarations of foreign investment will be presented through a new system set out by the Central Bank, having an expedite register or cancellation of the investment in Colombia.

iii Private equity regulation and updates to the legal framework19

In 2018, to boost the development of the private equity funds industry in Colombia and attract new investors, the government issued Decree 1984 of 2018, which is aligned with international standards and best practices. The most important developments of the Decree are as follows:

  1. allowing private equity funds to issue bonds (the issuance of bonds is restricted to private equity funds that grant credits);
  2. allowing private equity to grant credits to individuals and corporations and to buy receivables;
  3. units of private equity funds can be negotiated in the secondary market;
  4. private equity funds and their compartments are able to merge or spin-off, and are able to be assigned to an authorised manager;
  5. new rules related to corporate governance were introduced. For instance: principles related to management; the prevalence of the interest of investors in all the decisions to be made by a manager;
  6. private equity funds shall have the obligation to prepare a conflict of interest policy; and
  7. the investment committee shall meet at least once every three months.

During 2020, with the aim of broadening the scope of investors in private equity funds, the government issued Decree 1291/2020. Its most salient features are: the minimum amount of investment in private equity funds was eliminated. Under the previous regime, investors had to fund up to approximately US$150,000. This requisite was replaced by the following: retail customers may not invest amounts in excess of 20 per cent of their annual income or net worth. There is no requisite for wholesale investors.

The definition of wholesale investor was also modified by substantially reducing the standard to be considered as such. This provides even more flexibility for attracting investors to private equity funds, and consequently it is expected that it will increase the possibilities of raising capital.

In July 2021, the Colombian Congress enacted legislation to promote local entrepreneurship and direct pension plan resources towards national investments. Law 2112 of 2021 mandates that no less than 3 per cent of the funds administered by private pension plans must be invested in local private equity funds or local private debt funds, provided that the resources invested are thus channelled into local companies or projects, except those in the extraction energy and mining sector, and those that are part of the same conglomerate as the pension fund administrators. The objective of this is to strengthen local companies.

This legislation is to be further regulated by the President by means of a decree establishing the specific conditions of such channelling of funds. The mandatory investments will be gradually implemented within the next 24 months.

Although this reform has significantly improved governance standards within the private equity funds, it is unclear whether it has had any effect on the development of the industry, particularly in attracting new types of investors to increase the number of funds. The Colombian economy has experienced a major setback as a result of covid-19 measures, and perhaps other areas of regulation – such as reintroduction of lost tax incentives – could better serve to increase appetite for these investment vehicles.

Foreign involvement in M&A transactions

US-based companies were the ones that made the most acquisitions of Colombia-based companies during the year to date. Venture capital and technology companies were the most attractive for investors.20 Among the main transactions that took place in 2021, the following rank as some of the biggest deals.

Dutch paint and coating company AkzoNobel was advised by Baker McKenzie in the acquisition of Colombian Grupo Orbis. The deal signed on 29 June 2021 is subject to regulatory approvals in various jurisdictions. It is expected to close by the end of the year. The deal includes several Grupo Orbis subsidiaries, such as paint and coating business Pintuco, resins companies Andercol and Poliquim in Colombia and Ecuador, respectively, and Mundial, a distribution company. With a presence in 10 Latin American countries, Grupo Orbis has a revenue of US$309 million.21

Swedish hygiene and health company Essity acquired approximately 45.8 per cent of the Colombian hygiene company Productos Familia SA. Essity now owns 95.8 per cent of Familia. The purchase price amounts to US$1.540 billion for 100 per cent of the company on a debt-free basis.22

Tekni-Plex, a globally integrated company, has signed a definitive purchase agreement to acquire Grupo Phoenix in a deal that will bolster Tekni-Plex's ability to deliver market-focused, customer-driven packaging solutions, especially in food and beverage markets.

Enel Américas launched a Colombian electricity supplier through a merger agreement with Grupo Energía Bogotá (GEB), worth US$673 million. The transaction was signed on 27 July 2021. Enel Colombia's portfolio of renewables and utilities assets is projected to be 56 per cent larger after the merger. GEB will boost its portfolio of energy assets in the region with an additional equity value of some 5.5 trillion Colombian pesos (US$1.4 billion). The transaction also sees GEB entering the renewable energy industry.23

Union Acquisition Corp II announced execution of a definitive business combination agreement along with a fully committed private investment in public entity financing agreement with Procaps Group, a leading integrated international healthcare and pharmaceutical company, its newly created subsidiary Procaps Group, SA, and the Cayman Island subsidiary.24

Significant transactions, key trends and hot industries

i Energy sector – non conventional sources

According to the World Economic Forum's 2020 Energy Transition Index,25 Colombia ranks second in the Americas and 25th out of 115 countries worldwide in terms of its capacity to supply quality energy in a self-sustaining, accessible and environmentally friendly manner.26

Colombia has a high potential to generate energy from non-conventional renewable energy sources because of its availability of resources such as the sun (4.5kWh/m2 daily average solar radiation, higher than the global average of 3.9kWh/m2), the wind (potential to implement wind power plants of more than 25GW, with wind speeds in La Guajira twice as high as the world average), and biomass (enough potential to supply 46 per cent of the national energy demand – more than 500,000TJ per year).27

Additionally, the Colombian government has issued regulations28 to foster investments in non-conventional renewable projects in the country, to support sustainable growth and to promote efficient energy management. Some of the incentives are the following:

  1. deduction for income tax of up to 50 per cent of the total amount invested in plant expansion projects, efficient energy management projects, new projects and research and development in connection with non-conventional renewable energy for 15 years;
  2. energy generation and efficient energy management equipment imports are excluded from VAT and exempt from custom duties;
  3. acquisition of solar panels and solar generation equipment is excluded from VAT; and
  4. deductions of up to 33.3 per cent of the tax basis of the assets, as a depreciation deduction, which could be claimed over five years (accelerated depreciation).

In fact, the largest deal of the year so far has to do with Energy. Colombia's largest state-owned oil company Ecopetrol29 was advised by Baker McKenzie, in the acquisition of the Ministry of Finance and Public Credit's 51.4 per cent stake of the outstanding shares of power transmission group Interconexión Eléctrica SA (ISA). The purchase price was approximately US$3.61 billion.30 This transaction responds to Ecopetrol's strategy to consolidate the company in the Colombian and American Energy Sector. According to Ecopetrol, this investment represents an important step towards the company's energetic and decarbonisation strategy, which will generate value to the group considering the growing demand for energy, the advance in renewable sources and the rise in electrification.31

Also, Colombia has recent experience with renewable energy auctions. On 26 October 2021 the government announced that nine companies were awarded with 11 different projects in the third auction of renewable energy.32

The above-mentioned framework bolsters the investments in this sector and we expect to have, in 2022 and in the years to come, a lot of interest from local and foreign investors in non-conventional renewable sources.

ii Health care and pharmaceutical sectors

Throughout 2021 there has been an increasing interest from strategic investors and private funds in the healthcare sector. This could be attributed both to the pandemic and favourable regulatory conditions.

Colombia's healthcare system stands out for its wide and stable coverage. Significant regulatory progress has improved service quality, enhancing response times, and creating a globally renowned system.33 Some of the factors that result in this industry being attractive are: (1) the establishment of healthcare free trade zones, health clusters; (2) the large number of healthcare providers (IPS, as per their Spanish acronym); (3) the Colombian healthcare system's coverage is higher than the global average; (4) Colombia's public spending on healthcare is high compared to the rest of the region; (5) there are investment opportunities in healthcare services sales; and (6) Colombia has qualified medical staff and health infrastructure to meet the demand for healthcare services.34

The above-mentioned frameworks shows high potential for M&A transactions in this sector.

iii 5G infrastructure programme

The Colombian government launched the 5G infrastructure programme. The first wave of 5G projects embraces 12 initiatives in road network, railway, airport and fluvial infrastructure. The investments will reach an estimated value of US$5.9 billion and will create approximately 90,000 jobs.35

We expect M&A infrastructure activities to continue to grow in Colombia, primarily for the following reasons:

  1. the sale of the participation interests of some of the concessionaires of the 4G infrastructure projects;
  2. the appetite of international investors (Chinese, Brazilian, Spanish and Canadian investors, among others) in infrastructure projects; and
  3. the government's promotion of foreign investment and the development of the country's infrastructure.

Public–private partnership regulation

Because of advances in the regulation and the strengthening of institutions for public–private partnership (PPP) initiatives in the infrastructure industry, Colombia is considered the second most favourable country in the region to develop such businesses. Reassurances provided by Law 1882 of 2018 include an enhancement of transparency in public procurement, and an increase of the possibilities for regional and municipal governments and state-owned companies to engage in PPPs. As regards the adequacy of the Colombian PPP agency's staff, the National Infrastructure Agency received an award for its performance in 2018. Furthermore, the President has promoted transparency mechanisms as a response to the Odebrecht corruption scandals. Recently, Decree 438 of 2021 was issued with the purpose of promoting private investment flows into infrastructure projects and to strengthen the legal framework for PPPs. This decree reflects the best international practices on the subject, in addition to actions resulting from Colombia's experience in the structuring and execution of PPPs.36

iv Internet, technology and e-commerce industry sectors

Finally, another sector that shows high potential, as a result of the change in consumer habits caused by the pandemic, is the internet, technology and e-commerce industry sectors. In fact, the technology sector is the sector that grew the most during the past year, as it increased 87 per cent compared to September 2020.37

Colombia is characterised by having one of the largest and best qualified workforces in the region. Also, its connectivity and technology infrastructure make Colombia an attractive destination for this type of project. Some sub-sectors that belong to this sector are: (1) audio-visual and entertainment; (2) data centres; (3) shared services centres; (4) outsourcing of services (business process offshoring); and (5) software and IT services.38

Employment law

Legislation relevant for M&A

The39 labour legislation relevant for M&A in the Colombian jurisdiction varies depending on whether a transaction is conducted as an asset transfer, merger, spin-off, sale of a business unit or as a purchase of shares. When a business is acquired by means of a stock purchase agreement, the transaction will not involve a change of employer. Therefore, employees and their conditions, benefits and entitlements are unaffected.

However, if a deal is structured as an asset deal, merger, spin-off, sale of a business unit that involves the transfer of personnel, and if the parties involved in the transaction do not previously assign or terminate their employment agreements, this would be considered to be an employer substitution. Pursuant to Colombian law, this would operate automatically upon the transfer of personnel.

The main effects of employer substitution under Colombian law are the following:40

  1. employment agreements of employees are not modified, suspended or terminated, and all risks, duties and liabilities will be transferred to the buyer;
  2. the buyer must therefore match the salaries and benefits that the employees are already receiving;
  3. if the incoming employees have enjoyed different employment benefits compared with those of the purchaser's existing employees in similar job roles, the purchaser might be forced to match these by offering all employees the most favourable conditions (unless otherwise agreed with all the employees, both old and new);
  4. all employees' seniority must be preserved for all legal purposes;
  5. the pension liabilities of the seller will be transferred to the buyer; and
  6. the former and new employers would be considered jointly and severally liable for all labour obligations relating to the employment agreements existing at the time the employer substitution takes place, and the new employer will be responsible for the obligations that come into effect after the substitution occurs. If the new employer assumes payments regarding labour obligations that the old employer was forced to recognise, then the new employer can recover them from the old employer, unless agreed otherwise.

Under Colombian labour legislation impacting M&A matters, it is also relevant to review the existence of the company unit when the transaction involves a purchase of shares. The company unit consists of the extension of salary scales and benefits implemented in the parent company to its affiliates or subsidiary companies once these conditions are fulfilled between parent, affiliate and subsidiary companies:

  1. the parent company must purchase or reach 50 per cent plus of the shares in the affiliate or subsidiary company;
  2. the activities performed by the companies involved must be considered as similar, related or complementary; and
  3. all companies involved must be located in Colombia and in the same or in a similar economic region within the country.

The company unit does not operate automatically. It must be officially declared by a Colombian labour authority. If the declaration is from the Ministry of Labour, the company unit shall have a general effect over all employees of affiliates and subsidiaries involved. In contrast, when declaration derives from a labour judge ruling, the effect applies only between plaintiff and defendant.

Tax law

See Section III.i.

Competition law

i Competition 41 law relevant for M&A

As per the Colombian competition rules,42 M&A are subject to antitrust clearance by the Superintendence of Industry and Commerce (SIC) when the following criteria are met:

  1. objective criteria: total assets or joint operating income of the parties involved in the transaction during the fiscal year prior to the closing date, individually or combined, exceed the annual thresholds established by the SIC. For transactions undertaken in 2021, the threshold is equivalent to 60,000 minimum wages43 which is approximately US$13.6 million; and
  2. subjective criteria: the parties involved in the transaction are engaged in the same economic activity and therefore establish a horizontal relationship (horizontal mergers); or participate in the same chain of value,44 establishing a vertical relationship (vertical mergers) in one or more markets in Colombia regardless of the legal structure used for such purpose.

However, if the subjective criteria set forth above are met but the combined market share of the parties involved in the transaction is under 20 per cent, the parties can apply for a fast-track (implied) approval by submitting a simplified form (notice) before the SIC. The SIC, however, does not issue any opinion or ruling confirming such approval, and the notice is answered by a letter whereby the SIC acknowledges receipt of such notice, within 10 business days counted from the day of the filing before the SIC. Nevertheless, if the combined market share of the parties is equal to or above 20 per cent, the parties must obtain clearance from the SIC through a full filing from which the SIC has the right to approve, or oppose the proposed transaction, or to impose remedies on the proposed transaction. The time frame for clearance depends on the complexity of the competition issues triggered by a transaction, and usually takes from four to eight months.45 In January 2021, by means of Resolution 2103 of 2021, the SIC fixed for the first time the rates that the entity will charge because of a merger control procedure. The rates vary depending on: (1) the type of procedure that will be carried out; and (2) the total amount of assets and joint operating income.46

ii Gun jumping

During the past year, the SIC has become increasingly active in regulating pre-closing behaviours and transaction structures, and this is a trend we expect to continue. Gun jumping relates to the unlawful coordination between the parties of an M&A deal pre-acquisition or pre-merger. Specifically, gun jumping may occur during the negotiation or due diligence process, between signing and closing, or before the closing of a transaction when:

  1. the parties take (or participate in) concrete decisions in relation to the other party's business affairs, customer relationships, marketing programmes, pricing, price setting, price-related decisions, suppliers or supply-related decisions, or any other commercial decision;
  2. the parties exchange competitively sensitive information between the parties involved in the transaction, absent additional safeguards;
  3. one party intervenes in another party's business decisions or operational management decisions (e.g., by way of a consent mechanism as part of the share purchase agreement covenants);
  4. one party provides access to another party's IT systems or other support functions; and
  5. there is any other action that could be construed as contributing to one party having control over the activities of the other or others before gaining clearance by the antitrust authority and before the transaction is closed.

Clean teams

To mitigate the risk of gun jumping, it is advisable to take certain measures and implement them until closing, especially in the due diligence and negotiation phases of a transaction.

Such measures include designating specialised teams in each of the parties involved, with such members being the only individuals on each side of the negotiation with access to the other parties' competitively sensitive information. Clean team members should only have access to this information to the extent they do not have influence over the commercial decisions of the company that they represent and pursuant to certain confidentiality protocols.

Parties may also agree on interim operating covenants that do not grant them any decision-making power or control over the other party (including veto powers) but that reflect the purchaser's interest in preserving the value of the investment. Parties should implement these covenants through clean team protocols.

Clean team covenants should avoid situations where either party can:

  1. influence the appointment of the senior management of the other party;
  2. influence the other party's pricing policies;
  3. influence commercial decisions of the other party (e.g., through vetoing of tax filings);
  4. influence the target while entering into, terminating or modifying commercial contracts or agreements; or
  5. access commercially sensitive information of the other party during the period before signing and closing.

The design of the protocols should guarantee that should the transaction not close, the parties will continue to act as independent competitors within the relevant market.


1 Alexandra Montealegre is a senior associate and Maria Camila Pineda is a middle associate at Baker McKenzie.

7 Acquisitions of public companies (public takeovers) have special regulations under Colombian law, and are regulated primarily by, inter alia, Law 964/2005, which is the general statute regulating the Colombian securities market, and Decree 2555/2010, which regulates public takeovers.

9 Arbitrator's award dated 24 September 2020 (Galezaramba y CIA SCA y Gabriel Hernán Rafael Echavarría Obregón as the buyers and claimants v. Muñoz Merizalde & CIA S en C y Fernando Daniel Muñoz Merizalde as the sellers and plaintiffs).

10 ibid.

11 ibid.

12 Arbitrator's award dated 1 September 2011 (Baclin Investments SL, Altra Inversiones Ltda, Mauricio Camargo Mejía and Dario Duran Echeverry as the buyers and claimants v. Jairo Gutierrez Robayo, Jimena Gross Mejía, Carlos Andrés Torres Robayo, Nelson Andrés Beltrán Algarra and Monserrat Gross Mejía as the Sellers and Plaintiffs).

13 Some of the most important veto rights for the minority shareholders are the following: (1) CEO/CFO appointments; (2) approval of annual business plan, budget and capital expenditures; (3) capitalisations; (4) making any loan or advance or give any credit; (5) giving any guarantee, indemnity or security to secure the liabilities or obligations of any person; and (6) mergers and spin-offs.

14 Law 1563 of 2012.

15 The author extends a special thank you to Carlos Gómez and Valeria Osorio, associates in the tax team at Baker McKenzie Bogotá DC, for their contributions to this section.

16 Doing Business in Colombia: A Guide to the Legal Issues. Published by Baker McKenzie in 2017.

18 The author extends a special thank you to Juan David López, senior associate at Baker McKenzie Bogota DC, for his contributions to this section.

19 The author extends a special thank you to Sebastián Boada, senior associate in the banking and finance team at Baker McKenzie Bogota DC, for his contributions to this section.


27 ibid.

28 Law 1715 of 2014; law 1955 of 2019, Decree 829 of 2020 and Law 2099 of 2021.

29 Ecopetrol is the largest company in Colombia and one of the main integrated oil and gas conglomerates in Latin America, with more than 13,000 employees. It accounts for more than 60 per cent of hydrocarbon production in Colombia, and it owns the largest refineries and most of the country's oil pipelines and multi-purpose pipelines network. It also participates in the distribution of gas.

34 ibid.

36 Some of the changes introduced by the Decree are: (1) PPP structure must be aligned with national and local infrastructure priorities; (2) since the structuring phase of the projects, a liquid mechanism will be created to provide the monetary resources to meet contingencies; (3) promote and ensure transparency through the provision of information on both public and private management; (4) promote competition in the selection process of private initiative projects; and (5) strengthen the evaluation and review of projects.

39 The author extends a special thank you to the labour team at Baker McKenzie Bogotá – Maria Cecilia Reyes, senior associate, and Juan Castaño, junior associate – for their analysis and contributions to this labour law section.

40 Global M&A Handbook, Volume 1. Baker McKenzie, 2015.

41 The author extends a special thank you to the antitrust team at Baker McKenzie Bogotá – Carolina Pardo, principal partner, Angélica Navarro, senior associate, and Mariana Camacho, junior associate – for their analysis and contributions to this competition law section.

42 Law 155/1959, Law 1340/2009 and Decree 2153/1992 (among others).

43 Decree 77896 /2020.

44 A chain of value is a performed set of activities whose product provides the input for another product.

45 Global Public M&A Guide, 2nd edition. Baker McKenzie, 2018.

46 According to Resolution 2103 of 2021, the notice procedure will cost 2.62 million Colombian pesos (US$687.30). With respect to the full filing, the pre-evaluation phase I, will cost 14.2 million Colombian pesos (US$3,725). The pre -evaluation phase II will cost between 26.16 million Colombian pesos (US$6,862) and 37.38 million Colombian pesos (US$9,805), depending on the amount of assets and joint operating income.

The Law Reviews content