Ecuador: Mergers & Acquisitions

In the Ecuadorian legal context the term merger means the process by which (i) two or more companies combine into a new single entity, or (ii) an entity absorbs another entity which ceases to exist. While a merger requires regulatory approval, the acquisition of one or more entities that is effected through the transfer of shares issued by the acquired entity is not subject, in general, to any regulatory approval.

For the purposes of this questionnaire, M&A will be used as a generic reference to either mergers or acquisitions effected by way of a share transfer; merger will be used in its specific legal definition and SPA will designate share transfer transactions.

Regarding private companies, mergers are regulated in the Companies Law and the regulatory authority is the Superintendence of Companies, Securities and Insurance (SCSI), which must approve them. Acquisitions of assets and liabilities are not subject to approval by the SCSI.

Mergers of publicly traded companies are regulated by the Securities Market Law and  the regulatory authority is the SCSI.

Mergers of companies that are part of the financial sector are regulated by the Organic Financial Code and  the regulatory authority is the Financial Policy and Regulatory Board.

Regarding antitrust and competition, there is a mandatory M&A notification regime when the economic operations exceed the thresholds established by law. The authority is the Superintendence of Control of Market Power (SCPM).

The minimum thresholds that require mandatory notification are:

1. If the sum of the total volume of sales in Ecuador of the participants in the transaction exceed the amount determined by the Regulatory Board of the Competition Authority (currently US$ 85,000,000);
2. In case of concentrations involving economic operators engaged in the same economic activity and, as a consequence of the concentration, an equal to or greater than 30 percent quota of the relevant market of the product or service is acquired or increased within the country or in a geographic market defined within it.

There is no information regarding the number of mergers approved by SCSI. According to Lexlatin, between January and August 2021, at least 14 transactions were completed in Ecuador, with a value of US$3,836 million.

In the SCPM, in 2019, 23 mergers were notified; in 2020, 10 mergers were notified and in 2021, up to September, 12 mergers were notified.

We have seen and participated in significant activity in the production of cut flowers for export, energy, mining and food and beverages.

1. Business climate. Since May 2021, Ecuador is the only country in the latinamerican region that combines investment opportunities with a pro-business political climate. The Ecuadorian government has taken concrete steps and legal reforms aimed at promoting private investment as the key economic priority. Decreasing country risk indicators are also translating in better and cheaper access to the capital markets. At the same time, the political and investment climate is deteroriating elsewhere in the region, facing instability and increased political turmoil, creating a trend of investors looking to Ecuador with renewed interest. are
2. The resource potential of the Country. Ecuador is becoming the new mining frontier, with most of its territory largely unexplored and available for mining permits. Abundant water sources and geological conditions are also promoting a new wave of investments in PPP projects for renewable energies.
3. Distressed companies up for grabs. The Covid Pandemic has hit hard many sectors and companies, many of which have good value but weak financials, making them good acquisition targets.

M&A transactions for publicly traded companies are very uncommon in Ecuador. The vast majority of transactions involve only private companies. In any case, the takeover of public companies listed on the stock exchange is carried out through public tender offers that are regulated in the Securities Market Law and is applicable for the acquisitions of shares or debentures convertible into shares that allow taking control of a company, in a single act or in successive acts, or that allow a person or group of people to directly or indirectly acquire a significant share of the securities with voting rights in a certain company.

Significant participation is one that alone allows decision-making in the management of the company.

If the transaction implies a market concentration, the M&A  requires notification and approval by the SCPM. The responses to Q1 refer to the thresholds and criteria to determine whether  a particular transaction may result in market concentration.

Ecuadorian companies are registered in the SCSI. Complete corporate information is publicly available, including its corporate structure and its annual financial reports.

Publicly available information includes the names of shareholders and their participation in the company, financial statements, bylaws and corporate acts such as capital increases; certificate of compliance with the SCSI.

Regarding other public entities, available information includes compliance and good standing statuses, particularly as they related to social security, corporate regulatory and tax compliance. Claims filed by or against a company are also available on-line.

There are no specific legal provisions that require the target company to disclosediligence related information, so disclosure standards are mainly governed by well established contractual principles, including the principle of good faith, standard of care, formation of consent, amongst others. In this regard, careful consideration should be given in the preparation of a thorough due diligence information checklist and in drafting of key SPA provisions, including reps & warrants, risk allocation, indemnities and limitation of liabilities.

The level of due diligence will depend on several factors compounding a risk assessment at the outset, such as industry sector,  size of the company, financials, complexity of operations, corporate ownership and governance, among others. Usually, in a first stage, a high level (red  flags) due diligence is undertaken, and a deeper and comprehensive due diligence is performed if warranted by the initial findings.

The key decision-making organs of a company are: the General Shareholders’ Meeting and the Board of Directors.

Only the general shareholders’ meeting has the power to approve a merger. This approval can be decided by simple majority, however the company’s bylaws may require a qualified majority.

Creation of the Board of Directors is optional.

The administrators of the company have the duty to comply with the laws, regulations, bylaws and other applicable regulations, with the diligence of an orderly businessman, taking into account the nature of the position and the functions attributed to each of them. For such purposes, the administrators shall have the appropriate dedication and shall adopt the necessary measures for the good management of the company.

In accordance with the rule of discretion, in the area of strategic and business decisions, the standard of diligence of an orderly businessman shall be deemed to be met when the administrator has acted in good faith, without personal interest in the matter being decided, with sufficient information and in accordance with an appropriate decision-making procedure.

They must also comply with the duty of loyalty which obliges them to:

1. Not to exercise their powers for purposes other than those for which they have been granted.
2. To keep secret the information, data, reports or background information to which he/she has had access in the performance of his/her duties, even when he/she has left office and for up to one year from the date of leaving office, except in those cases in which the law permits or requires it.
3. Refrain from contracting or negotiating, directly or indirectly, with the company he/she manages, except for the exceptions provided by law;
4. To perform its functions under the principle of personal responsibility with freedom of criteria, judgment and independence with respect to instructions and links of third parties; and,
5. Adopt the necessary measures to avoid incurring in situations in which their interests may conflict with the corporate interest and with their duties to the Company.

There is no approval, consultation or other special rights granted by law to employees or other stakeholders.

Conditionality is indeed an accepted market feature depending on the industry sector,  risk profile, governance considerations, regulatory roadblocks, material contracts that may be impacted and other factors. SPA terms and conditions are mainly subject to party autonomy.

Exclusivity is usually included in the Letter of Intent or any other preliminary document of the transaction.

An indemnity for the non-closing of a transaction is often included in Letters of Intent and other preliminary documents, as well as break-up fees.

The most frequent consideration is cash. In any case, consideration with shares or other assets may be accepted, without any limitation in this respect (i.e. party autonomy).

The Superintendency of Companies and the Stock Exchanges must be informed five business days prior to any share acquisition transaction:

• Shareholders who directly or indirectly or through third parties hold ten percent or more of the capital of a company registered in the Public Registry of the Stock Exchanges, or who as a result of an acquisition of shares come to hold such percentage;
• The administrators of such companies, whatever the number of shares they acquire.

In a process of M&A involving private companies, the negotiation and closingis usually confidential.  Public disclosure is discretionary and driven by market considerations mainly.

Regarding public companies, transfers of shares registered in the Public Registry of the Stock Exchanges originating in mergers, spin-offs, inheritances, legacies, donations, contributions among other cases which are not made through the stock exchanges must notify the stock exchanges of such transaction within 24 hours after the transfer of ownership of the registered securities is completed. The stock exchanges must immediately release such information to the entire market.

Whether for private companies or public companies listed on a stock exchange there is not a legal limitation, and due diligence period are subject to freedom of contract.

Regarding due diligence, it usually lasts between 30 and 90 days, depending on the company. Normally a Letter of Intent or a Memorandum of Understanding is signed, after which the due diligence begins and at its conclusion the closing of the transaction takes place.

In public companies, the shareholder who has taken control of a company may not, within twelve months from the date of this operation, acquire shares of the company at a unit price per share lower than that paid in the takeover operation.

If within the thirty-day period prior to the effective date of the offer, the offeror has acquired the same shares included in the offer, at price conditions more beneficial than those contemplated in the offer, the shareholders who sold them prior to the tender offer will have the right to demand the difference in price or the benefit in question.

There is no prohibition that prevents the target company from giving this assistance to its shareholders, however it is not usual and we do not consider it advisable either. There is a risk of a conflict of interest between the directors of the target company and its shareholders.

While the merger process, the transfer of shares, regulatory notifications or approvals and other aspects of an M&A process are naturally governed by Ecuadorian laws, the transaction as a whole (i.e. SPA agreements, preparatory contracts, NDAs, other transaction documents) may be subject to the laws chosen by the parties. The choice of foreign laws, typically of the laws where the buyer has its main place of business, is frequent.

The Securities Market Law does not establish the minimum information necessary in these cases.

The transfers of shares are made through a letter of assignment signed by the assignor and the assignee, which must be accompanied by the titles of the shares that are transferred. The signing officer of the target company must register the transfer in the Company’s Corporate Books, cancel the share titles and issue new titles in favor of the new owner of the shares. Technically, the transfer of shares is enforceable vis a vis third parties upon registration of the transfer in the corporate ledger.

Stock transfers can generate capital gains tax that must be paid by the seller. However, when the seller is a foreign company with no tax residence in Ecuador, tax laws impose on the target company the obligation to file the tax forms and pay the capital gains taxes in substitution of the seller. Tax indemnities and escrow arrangements are therefore a common feature in SPA agreements.

No, hostile takeovers are not usual in Ecuador.

Since there are no hostile takeovers in Ecuador, there are no protections for directors from hostile approaches.

No.

In addition to other rights that may be recognized in the bylaws or shareholder agreements, some of the rights granted by the law to shareholders are:

• Minority shareholders who own at least five percent of the share capital may request, only once, the inclusion of matters on the agenda of a general meeting that has already been called, to deal with the points indicated in their request.
• The shareholder(s) representing, individually or jointly, 5% of the share capital may initiate, on behalf of and in defense of the company’s interest, the corporate liability action when it has not been filed within one month, counted from the date on which the general meeting agreed to exercise the corresponding action. The shareholders may directly exercise the corporate liability action when it is based on the breach of the duty of loyalty, without the need to submit the decision of the general meeting.
• For the shareholders representing at least 15% of the share capital, they may request, by any means, whether physical or digital, and at any time, the administrator or statutorily corresponding body, the convening of a general meeting of shareholders. to deal with the issues you indicate in your request.
• A minority representing no less than twenty-five percent of the total paid-in capital may appeal the decisions of the majority.
• Shareholders representing at least 20% of the integrated capital may request the Superintendency of Companies to intervene by appointing an expert to verify the truth of the balance sheet and other documents presented by the administrator.
• The SCSI may declare the intervention of the company and will designate one or more intervenors for it: If requested by one or more shareholders representing at least 10% of the company’s paid capital, stating that they have suffered or are at risk of suffering serious damage due to noncompliance or violation of the Law, its regulations or the company’s bylaws, incurred by the company or its administrators.
• In Simplified Stock Companies (SAS), the clauses in relation to the restriction to the trading of shares, authorization for the transfer of shares or for the resolution of corporate conflicts through mediation or arbitration, may only be included or modified through the unanimous resolution of the holders of one hundred percent (100%) of the capital stock.

Mechanisms to compulsorily acquire minority stakes may be included in the bylaws or shareholder agreements.