Authors
In the dynamic business world, mergers and acquisitions represent a powerful tool for the growth and consolidation of companies. However, the complexity and challenges inherent in these transactions can create uncertainty and anxiety. In this context, we firmly believe that knowledge brings calm. Our mission is to provide clarity and understanding, allowing actors in the Costa Rican market to navigate this process confidently and effectively.
We have prepared this guide to contribute a legal perspective from our trenches, offering detailed and updated information on mergers and acquisitions in Costa Rica. From legal and regulatory aspects to best practices and key strategies, we intend to facilitate more successful transactions and strengthen the local market. Our comprehensive approach addresses the various facets of these processes, providing an essential tool for entrepreneurs, lawyers, consultants, and all those involved in the business ecosystem of our country.
How do you know if this type of transaction is right for you/your company?
After years of dedication and effort in building their businesses, founders usually aspire to monetize their work at some point. There are various strategies to achieve this objective. One option is to open the company’s capital to third parties, which can be done through an initial public offering (IPO), enabling the company to go public and attract a wide range of investors. Alternatively, one can opt for a private offering, where shares are sold to selected investors, maintaining greater control and confidentiality over shareholders.
For some entrepreneurs, the objective is not only immediate monetization but also obtaining capital or strategic knowledge that drives the growth of the business. In these cases, a capital injection can provide the resources necessary to expand, innovate, or access new markets. The selection of strategic investors can also provide valuable experience and specific knowledge, helping to improve the management and competitiveness of the company.
On the other hand, some entrepreneurs face difficult situations in which the business loses value. In such a case, selling the company can be a strategy to safeguard the remains of its worth, as finding a buyer who can integrate the company into its existing operations and create synergies can be the key to rescuing and revitalizing the business. These synergies can result in greater operational efficiency, access to new markets, or a combination of resources that increase the acquired company’s value.
In any case, mergers and acquisitions (M&A) offer varied and flexible solutions. Whether capitalizing on success, seeking support for growth, or finding a strategic exit, M&A provides entrepreneurs with an avenue to achieve their goals and secure a brighter future for their companies.
Regardless of the reasons that lead an entrepreneur to opt for this type of transaction and despite the advantages it may entail, the process can be complex and overwhelming. In our practice, it is common for a successful entrepreneur with many years of operating a business to feel disconcerted by the prospect. This guide seeks to familiarize a founder with what to expect when embarking on this journey.
How such transactions materialize
In Costa Rica, an outside capital infusion to achieve business objectives is increasingly common. Proof of this is the sustained increase in transactions whose parties have requested concentration authorization before the authority to promote competition in the country (the Commission to Promote Competition: COPROCOM). According to data from said authority, 2023 saw an impressive number of 41 concentration requests.
Although this may, at first glance, not seem like a high number, the reality is that concentration transactions that require authorization from COPROCOM are only those in which the parties involved reach a significant threshold of turnover or assets. Therefore, the actual volume of concentrations for Costa Rica may be much higher than that recorded by COPROCOM. Moreover, SUTEL must approve the transactions of companies it regulates, not counted in the COPROCOM total.
Given the many business realities, merger and acquisition transactions may take many forms. To make it easier for business owners to understand the menu of alternatives they have at their disposal and to structure an eventual infusion according to their business needs, the authority to promote competition in Costa Rica has classified the concentrations under the following categories, making it easier to structure an eventual transaction according to the needs of the business:
1.Merger: This occurs when two or more companies combine into one. There is the merger by absorption, where one company integrates another which legally disappears, and a merger by integration, where companies combine to form a new entity. Mergers can be legal (formally combined) or de facto (where they maintain legal autonomy but lose economic independence).
2.Acquisition of share capital: This combination occurs when a company gains control over another company by purchasing shares or participations. Control can be obtained with the majority of the capital, but even minority participation can constitute a concentration if it enables influence over the company’s management.
3.Asset acquisition: This involves the transfer of assets from one company to another. If such a transfer generates income, it can be considered a concentration. It is important to consider that Costa Rica’s regulation contemplates the process of Purchase and Sale of a Commercial Establishment, which is configured in certain cases of asset sales to protect creditors of the selling company. Not following this procedure in cases where regulation requires it, carries risks.
4.Strategic alliances (joint ventures): These can be cooperatives, where companies maintain their independence, or concentrative, in which a new legal entity with shared control is created. A concentrative alliance performs all the functions of an independent entity and is considered a concentration by law.
5.Other acts of concentration: All acts that result in the economic integration of companies are considered concentrations, even if they do not involve the direct transfer of shares or assets, including interdependent operations, successive transactions, share exchanges, hostile takeovers, and capital increases or reductions.
Preparation for a transaction
As mentioned, M&A can be complex and exhausting, with many interests at stake to be protected. Apart from the technical complexity, personal feelings are often involved, adding difficulty to the process. For this reason, obtaining adequate advice and having extensive knowledge about the generalities of the alternatives and their implications are not only of great value but can mean the difference between a successful transaction and a failed one.
Usually, investment bankers with knowledge of the market and the process seek an infusion. At other times, legal advisors serve as consultants. In any case, choosing advisors with proven experience in the field is vital for a transaction’s success since, without a doubt, knowledge of the market makes success more likely and less exhausting.
The mergers and acquisitions market has developed for years outside of Costa Rica. Recently, a market with a certain degree of maturity has emerged within the country, suggesting that market standards already meet expectations in this type of transaction. Unfortunately, it is not unusual to hear anecdotes of deals falling through due to poor advice from advisors. Some brilliant consultants who lack the knowledge to handle and advise during this type of procedure approach transactions simplistically or legally, making them, in many cases, unsuitable intermediaries for more sophisticated buyers.
What are the phases of a transaction?
It would be easy to advise if all transactions followed the same logic, but due to the countless possible structures, they do not Many factors influence the process of an M&A transaction. Without prejudice to the above, certain fundamental and recommended lines to follow in any transaction are detailed below:
1. Initial agreement: As the parties begin informal negotiation, they should commit their understanding to writing. This understanding may be a binding or non-binding offer or a memorandum of understanding. Regardless of its form, this agreement must contain the issues and conditions essential for the parties to be willing to proceed with the negotiation. This preliminary agreement should also include provisions related to confidentiality and exclusivity. Having a basis for later negotiations can facilitate the bargaining process and avoid misunderstandings about the initial and primary elements discussed at the outset. In addition, it makes the work of advisors easier when drafting contracts.
2. Due diligence: Usually, before entering a business, it is necessary to do a due diligence study. From the buyer’s perspective, clarity about the issues they want due diligence to review is indispensable. In an acquisition, the buyer speaks with the seller and explains how much due diligence detail is required, enabling the seller to prepare and generate the information. In mergers, this process can become much more complex. However, due diligence helps to avoid significant wear and tear during the preliminaries. The required information must be made available to the other parties in the manner and at the time agreed upon. Specialized information storage and management platforms for this type of transaction enable visualization of who has processed the information, which documents and data were made available, and follow-up on pending information and requests for additional clarification. Proper due diligence management helps to avoid reprocessing, which incurs more costs for the parties.
3. Negotiation of definitive contracts: Once one understands the business, the risks, and the potential, drafting the definitive agreements can ensue. The type of contract drawn up depends on the type of transaction envisioned. However, such agreements usually include provisions related to the following topics:
- What is acquired or to be developed together?
- How much is the consideration and will be adjusted for debts or for changes in working capital and cash? These transactions are made for ongoing concerns, which, unlike asset purchases, change every day. It is usual to regulate how the value of the business will be adjusted based on these changes, as agreed between the parties.
- Who is responsible for the business risk before the transaction and how the party not assuming the risk will be compensated if it materializes? This is usually done through representations about the condition of the business.
- Additional fundamental obligations may include non-compete obligations, transition agreements, and conditions of certain employees, among others.
- Authorizations and conditions precedent: It may arise that the parties cannot close or consummate the transaction by signing the definitive contracts. Instead, one or both, or certain standards may have to be met before the closing. Such conditions precedent include regulatory approvals, such as the authorization of COPROCOM, contractual authorizations of third parties, and necessary post-closing events.
If, as a result of the transaction, there is a plurality of partners in the resulting company, it is also advisable to negotiate a shareholders’ agreement that regulates decisions on issues relevant to the business and operation of the entity, the procedures for the departure of partners, and agreements on the representation of the company, among others.
4. Closing: Once the conditions are met, or if they do not exist concomitantly with the signing of the definitive agreements, the necessary legal acts must be carried out to formalize or consummate the transaction. Here the legal formalities must be complied with to carry out the agreed transaction. As an example, equity purchases may require corporate or contractual authorizations to be effective and enforceable against third parties. The transfer of shares of corporations, on the other hand, requires compliance with the certificate endorsement requirements. In the case of sales of a commercial establishment, the transfer document must be signed in a public deed, and the price must be deposited as established by law. Adequate advice allows the parties to determine the steps required to formalize the transaction, according to the desired structure, and avoid nullities in this process.
5. Activities Post-Closing: Actions to take after closing will need to be analyzed on a case-by-case basis, such as updating appointments in legal entities and notifying clients, contractual counterparties, or authorities about the changes, including municipalities and other types of entities.
The previous sections seek to synthesize the very varied ways to realize mergers and acquisitions in Costa Rica and provide a basic outline of the minimum steps that all those involved in the business ecosystem of our country should follow when approaching a process of this type. Although the heterogeneity of businesses and forms of transaction structuring prevent applying the same mold to every process of this type, it is clear that there is a rule that must be followed in all cases, regardless of their nature: look for experienced advisors, who understand the business and know how to design the merger, acquisition or concentration in a way that suits the needs of all parties involved.