The Mergers & Acquisitions Review: Costa Rica
Overview of M&A activity
Costa Rica is a development success story in many respects. There has been steady economic expansion for more than a quarter of a century, and a stable democracy has been in place since 1949, allowing the country to enjoy growth for several years thanks to a strategy of outward-oriented growth based on openness to foreign investment and gradual trade liberalisation.
Costa Rica is also a global leader with regard to its environmental policies and accomplishments, which have helped the country to build its green trademark by promoting forest and biodiversity conservation and the use of renewable energy sources.
The Costa Rican Investment Promotion Agency (CINDE) is a private, non-profit and non-political organisation appointed by the government to promote foreign investment. It has attracted hundreds of companies since it was formed more than 30 years ago, including worldwide leaders such as Intel, Hewlett-Packard, Procter and Gamble, to name but a few. More recently, Amazon, McKinsey & Co, Microsoft, Coca-Cola Company and Intel have announced that they intend to expand their operations in the country or have already done so.
The Social Progress Imperative global index ranked Costa Rica 37th out of 163 countries for 2021. Of all the Latin American countries included in the report, Costa Rica ranks first as the country with the greatest social progress in the region, well ahead of some of the major regional players like Brazil, Mexico or Colombia and only behind Chile.2
According to the Global Competitiveness Report of the World Economic Forum, Costa Rica was catalogued as an economy transitioning from Stage 2 (efficiency-driven economies) to Stage 3 (innovation-driven economies). The country was ranked 62nd out of 141 countries on the Global Competitiveness Index for 2019, fourth in Latin America after Uruguay, Colombia and Mexico, and ahead of Panama (no post-covid-19 pandemic data is available for Costa Rica yet in Global Competitiveness Reports or Indexes).3
Costa Rica's GDP per capita has tripled since 1960, and its growth averaged 4.5 per cent between 2000 and 2013, as compared to the regional average of 3.8 per cent for the same period. According to World Bank information, the country's GDP in 2020 was US$61.52 billion. Inflation for 2020 was at 0.4 per cent.
Costa Rica's economy is predominantly services-based. The services export industry includes business process offshoring (BPO), information technology offshoring and shared services. BPO itself covers a wide range of services. There are many large corporations with BPO operations in Costa Rica, including Hewlett-Packard, Intel, Bridgestone, Amazon, Procter and Gamble, Western Union, Emerson Electric and IBM. Some companies combine BPO services with manufacturing or repair facilities. Costa Rica's economy also has a thriving medical device manufacturing industry that includes Baxter, Covidien, Abbot, Boston Scientific, AbbVie and St Jude Medical.
According to data from the World Bank, in 2020 exports of goods and services in Costa Rica represented 31 per cent of the country's GDP. Also, the United States accounted for the biggest share of exports from Costa Rica (43 per cent), followed by the European Union (21 per cent), Central America (20 per cent), and Mexico, China, Japan and Dominican Republic (2 per cent each).
The Costa Rican M&A market in the first quarter of 2020 had very good indicators on a healthy and growing economy in several sectors. During the first months of 2020, the Commission on the Promotion of Competence (Coprocom) had more filings registered than during the first months of previous years. Consumer and service sectors were the main drivers.
As the pandemic effects started to show in early 2020, local companies started to be more focused on reorganisation and crisis management, as well as cost reduction and other trends brought on by the outbreak of the pandemic. Obviously, this had an immediate negative impact regarding M&A trends in Costa Rica, and there were no filings registered in Coprocom from April until October 2020.
Nonetheless, at the end of 2020 there was a restart in M&A activity as the pandemic had created favourable conditions for sales and alliances in certain industries and sectors to start flourishing. The economic crisis had weakened companies in key sectors, creating a buying opportunity for strong competitors and investors interested in diversifying and seeking long-term results. Companies are clearly acting in response to their experience and proactively preparing for a different market outlook.
Since then, there has been a gradual but steady increase in M&A activity, which has also been the trend in 2021. Latin America has great global potential to experience growth in M&A during 2021, and this phenomenon would have an impact on the Costa Rican market.
General introduction to the legal framework for M&A
Costa Rica is a civil law country. Case law is only relevant in the interpretation of the law.
The Commerce Code4 regulates mercantile (commercial) companies in general. From a corporate law standpoint, M&A are contemplated in the Commerce Code.
Costa Rican competition law is set out in the Law for the Promotion of Competition and Effective Consumer Protection (CR-LPC).5
Chapters 3, 6 and 7 of the First Book of the Commerce Code regulate the two most common corporate forms: corporations and limited liability companies. These chapters include company acquisition-related regulations, but there is no specific acquisition title or chapter. The regulations mainly concern the transfer of shares or equity participations and associated requirements.
The purchase of ongoing businesses is different from a company acquisition and is regulated in Chapter 3 (Title 1) of the Second Book of the Commerce Code (Articles 478 and 489). Chapter 3 establishes requirements for the transfer of ongoing businesses, including publication (for three consecutive days) in the official newspaper and giving notice to the enterprise's creditors so that they have an opportunity to oppose the acquisition or exercise their rights for a period of 15 days. Payment of the purchase price, according to Article 480, is not to be made before the 15-day period expires and until liquidation of accounts payable is made. Escrow of funds is commonly used for this purpose.
If the formalities established in Chapter 3 are not met, the transaction will be absolutely void (for any eventual rights of third parties or creditors of the acquired ongoing business) and payments made to the creditor will not be considered valid.
Regarding mergers, Chapter 10 of the First Book of the Commerce Code, 'Mergers and transformations', includes a very basic set of regulations regarding the legal nature of a merger and the formal requirements to complete it. Merging entities may either form a new company or be merged via absorption (acquisition), in which only one of the entities survives.
From a corporate law standpoint, the requirements to complete a merger are simple: a pre-merger project or agreement, approval via extraordinary shareholders' meetings (of all entities involved) and publication of an extract of the merger approval in writing or in a deed in the official newspaper. The merger will be effective a month after its publication and registration if no third party opposes it. In principle, recordable assets will be transferred to the resulting or surviving entity.
Competition law requirements to complete mergers, company acquisitions and purchases of ongoing businesses are described in Section III.
Developments in corporate and takeover law and their impact
As indicated, Costa Rican competition law is set out in the CR-LPC.
Preliminary merger control for transactions of a certain volume (over a threshold of US$15 million) or of special relevance to the national market is mandatory.
A merger or acquisition may be considered a concentration under Article 16 of the CR-LPC, so even though parties are free to consolidate a merger or an acquisition, they are required to file a notification or previous communication to Coprocom if meeting the criteria established in the CR-LPC.
M&A control in Costa Rica uses a short authorisation procedure. If the preliminary merger control notice is not sent, Coprocom may challenge a merger proven to qualify as a concentration by opening a penalising procedure.
Mergers or acquisitions involving regulated entities (banks, public companies, financial entities, pension funds, companies managing funds of third parties and insurance companies), in addition to the previous communication to Coprocom, must obtain the applicable approvals of the Securities Supervisory Agency (Sugeval), the Private Pension Funds Supervisory Agency (Supen), the General Insurance Supervisory Agency (Sugese), the General Telecommunications Supervisory Agency (Sutel) or the Financial Entities Supervisory Agency (Sugef), as appropriate.
According to the amended version of Article 16 CR-LPC, a concentration is defined as:
[a] merger, sale of business premises, or any other act or contract by which companies merge, form partnerships, acquire shares, share equity, form trusts, merge or combine management, representation or general assets; made between competitors, suppliers, customers or other operators who have been independent in respect to each other, and result in the acquisition of economic control by one over the other or others, or in the formation of a new economic agent under joint control of two or more competitors, and any transaction in which any natural or legal person, public or private, acquires control of two or more independent economic agents, actual or potential competitors.
The enactment of the Tax Collection and Management Act and the General Tax Procedure Regulations are discussed below. Although specific M&A regulations are not contained in either set of regulations, there are indirect applications or consequences to mergers, company acquisitions and the purchase of ongoing businesses.
Foreign involvement in M&A transactions
Acquisitions, expansions and ventures took place in Costa Rica in several sectors during 2020. While US companies and European multinationals were the main participants, Latin American groups were also involved.
Costa Rica continues to pursue high-quality foreign investment. CINDE and the International Commerce Promotion Agency of Costa Rica lead Costa Rica's investment promotion efforts. CINDE has focused on creating clusters of related businesses, successfully targeting potential investors in the areas of medical devices, services (shared services, BPO, global in-house centres) and advanced manufacturing.
The M&A market in Costa Rica had a gradual but steady growth pattern in late 2020 and early 2021, with key economic indicators reflecting a recovering economy. The country continues to attract the attention of foreign companies that see it as a stable emerging economy with potential for growth despite adverse pandemic effects. Costa Rica's value proposition with a proven track record, strategic location and business climate provides for an environment that attracts buyers and makes target companies appealing.
Notwithstanding outside factors or local political and fiscal trends, which include the implementation of the recently passed tax law reform, government debt and social situation appearing as obstacles, the M&A market should continue to be active following Latin American trends. The consolidation of consumer goods companies (wholesale and retail), lower commodity prices, in particular oil, as well as an inflow of South American groups owing to the country's logistic advantages should have a favourable influence in the M&A market.
Significant transactions, key trends and hot industries
The following is a summary of relevant 2020 and early 2021 transactions, expansions and projects in Costa Rica.
|Acquirer||Transaction||Target or targets||Sector||Year|
|GERSA||Acquisition||COMECA and Grupo Empresarial de Supermercados SA||Retail||2020|
|Banco BAC San José||Acquisition||51% of MB Créditos SA and MB Leasing SA from Multibank Inc.||Banking||2020|
|KKR and Telefónica Chile SA||Acquisition||InfraCo SpA||Telecom||2020|
|Portafolio Inmobiliario Internacional SA||Acquisition||Complejo Riverwalk RW SA||Real Estate||2020|
|Bain Capital Investors LLC and Cinven Capital Management (VII) General Partner Limited||Acquisition||Lonza Group AG and Lonza Specialty Ingredients (LSI)||Retail||2021|
|Compañía Arrocera Industrial SA||Acquisition||Comercios de El Barreal SA||Agriculture||2021|
|Almacenes El Colono SA||Acquisition||Ferreterías Comaco del Norte SA, Comaco de Huacas SA, Fun and Games SA, and Inversiones Maydeco del Norte SA||Retail||2021|
|Compañía de Galletas Pozuelo DCR SA||Acquisition||Belina Nutrición Animal SA, Belina Importaciones e Innovaciones Dos Mil SA and Industrial Belina Montes de Oro SA (Belina Group)||Animal Food||2021|
Financing of M&A: main sources and developments
Acquisition financing is available for transactions. The most common funding structures, regardless of the acquirer, are bank lending, corporate debt, capital increases (private placement of shares of stock) and securitisations or security trust agreements.
Withholding taxes are an important issue to take into account in establishing funding structures and schemes, as these may apply if interest is paid to a bank domiciled abroad.
M&A financing has mainly come from abroad. As has traditionally been the case, M&A are still financed in the acquirer's market or through regional or global banks. However, regional banks are becoming more involved in M&A transactions.
Post covid-19 pandemic, most buyers are acting on an opportunity to diversify and strengthen their position as well as preparing for a different market outlook using M&A transactions for such purposes.
On the other hand, sellers have had financing difficulties as the weakening of family businesses in the sectors with the greatest restrictions: tourism, hotels, restaurants, commerce, franchises, entertainment, education and real estate are the most sensitive areas under the current circumstances, making them attractive targets for investors and competitors.
At this moment, business leaders are focused on addressing the immediate impact that the covid-19 pandemic has had on liquidity, supply chains, revenues and profitability, whereas companies are reconfiguring and readjusting their response in real time as events evolve rapidly
No recent relevant amendments or modifications to Costa Rican labour regulations affecting mergers or acquisitions have been issued. The only applicable regulation in the Code of Labour Law is still the employer substitution rule, according to which both parties involved in an acquisition (or employer substitution) will be jointly liable for six months after the substitution is completed or verified regarding employees' termination rights and benefits. Once this period expires, the new employer remains solely liable for termination rights and benefits.
Except for a few exceptions discussed below related to tax auditing, the tax system has not been recently amended. The country's tax regulations establish that residents and corporations are taxed only on income earned in Costa Rica. The following is a summary of the main applicable taxes.
i Income tax
This applies to individuals as well as legal entities for income originating from a Costa Rican source. Taxable income is based on net income. Capital gains are generally not subject to income tax, except when the transfer activity is regular or when transferring assets that were subject to depreciation. In the latter case, the applicable rate is 30 per cent on the capital gain. Withholding taxes apply, inter alia, to dividends (15 per cent), interest (15 per cent), royalties (25 per cent) and fees (25 per cent).
ii Annual property tax
Property tax is rated at 0.25 per cent of the value of a property, and may be paid annually, by semester or by quarter depending on the procedures established by the local government (municipality).
iii Transfer taxes
There is a 1.5 per cent real property transfer tax and a 2.5 per cent vehicle transfer tax. This tax is based upon the higher of the registered value or the deed value at the time of sale.
iv Stamp duty
This applies to all contracts and agreements at a rate of 0.5 per cent of the documents' economic value.
v Sales tax/value added tax
This is imposed on certain taxable transactions at a rate of 13 per cent and is paid monthly.
After the enactment of the Tax Collection and Management Act in October 2012, the General Tax Procedure Regulations were approved. Although specific M&A regulations are not contained in them, the Regulations are broad and complex, and they contain stricter rules and new capacities for the Tax Administration that should orient acquisition or merger processes during due diligence and implementation.
The rule contained in the amended Code of Policies and Procedures Tax is that assets will be subject to companies' enforceable tax debts even after a transformation, merger or company acquisition process, or the transfer of ongoing businesses. For assets to be subject to companies' enforceable tax debts after a transformation, merger, acquisition process or the transfer of ongoing business process, the debt has to be enforceable prior to the process.
Also important to take into account is that the Tax Collection and Management Act also imposes transfer tax (as described above) on indirect transfers (when a company holds real properties and vehicles, and the company is transferred to a new group of shareholders as a whole). In principle, transfer tax does not apply to mergers: the application of transfer tax has not yet been interpreted by the tax administration in connection with acquisitions.
No other recent relevant amendments or modifications to the Costa Rican tax regulations affecting mergers or acquisitions have been issued.
As outlined in Section III, Costa Rican competition law is set out in the CR-LPC. Mergers, company acquisitions or the purchase of ongoing businesses may be interpreted by Coprocom as a concentration under Article 16 of the CR-LPC, so preliminary merger control for transactions of a certain volume or special relevance is mandatory.
Other agencies may also exercise control over mergers, acquisitions or other relevant transactions in connection with public companies, financial entities, pension funds, companies managing funds of third parties and insurance companies, based on the regulations issued by Conassif, the National Council of Supervision of the Financial System. These agencies are Sugeval, Supen, Sugese, Sutel and Sugef.
During late 2020, the M&A market in Costa Rica began to reactivate following adverse pandemic effects, with key economic indicators reflecting a recovering economy. The country presents a winning combination of skills and opportunities that are appealing to export and services-oriented foreign investment, and continues to attract the attention of foreign companies that see it as a stable emerging economy with potential for growth despite adverse pandemic effects. Costa Rica's attractiveness for foreign investment has begun to shift to emerging areas such as IT, knowledge processes, finance and accounting, which require sophisticated skills and technological infrastructure.
Experts consider recent developments in the Costa Rican services market to be part of its natural evolution.6 Other developments include the establishment of shared service centres and manufacturing facilities outside the Greater Metropolitan Area, as well as the establishment of energy, infrastructure and tourism projects, creating continuous M&A opportunities for sophisticated investors and investment banking firms.
Notwithstanding outside factors or local political and fiscal trends, which include the implementation of the recently passed tax law reform (2019), government debt and social issues appearing as obstacles, the M&A market should continue to be active following Latin American trends. The consolidation of consumer goods companies (wholesale and retail), lower commodity prices, in particular oil, as well as an inflow of South American groups owing to the country's logistic advantages, should have a favourable influence in the M&A market
The most dynamic sectors in the country on a pre-pandemic basis have been life sciences, services and distribution, hospitality, consumer, advanced manufacturing and industrials. These sectors are the main focus of foreign direct investment and should be the main focus for new potential M&A dealings in Costa Rica for 2021. Furthermore, as previously mentioned, the growth of collaborative businesses, e-commerce and technology may force companies in these sectors to develop a rapid strengthening in key markets, and M&A opportunities will be key for such achievements.
Costa Rica expects to continue evolving as a destination for investors with strong promotion and protection programmes and friendly policies once the effects of the covid-19 pandemic begin to cease. Even though the size of the Costa Rican and Central American market is not as significant as other countries in Latin America, in terms of retail operations, its pursuit of growth will continue drawing multinationals that feel comfortable with the above-mentioned mixture of skills and opportunities.
1 John Aguilar Quesada and Marco Solano are senior partners at Aguilar Castillo Love.
4 The Commerce Code (Law No. 3284 of 30 April 1964).
5 Law for the Promotion of Competition and Effective Consumer Protection (Law No. 7472 of 19 December 1994).
6 The World Bank. 'Costa Rica – Public Expenditure Review: Enhancing the Efficiency of Expenditures': https://openknowledge.worldbank.org/handle/10986/8122.