As a result of the COVID-19 crisis, there was a significant slowdown in 2020 for our M&A market. Most transactions were placed on standby, due to the uncertainty caused by the pandemic. Until the second quarter of 2021, transactions started to reactivate. Transactions that used to take between 6 to 9 months to close were extended to 12 to 15 months, due to the challenges of the pandemic. Clear examples of the challenges faced were the quarantines and various operational and mobility limitations. Currently, the market is becoming more and more dynamic with greater interest from companies in executing transactions. Stronger companies, with healthier financial conditions, better profitability ratios and tighter cost controls that allowed them to realise that they could do the same with less expenditure, and supported by the use of technology, are allowing market players to be more aggressive in seeking M&A deals. 

There were several trends for 2021.

Financial institutions made continuous efforts, by refinancing transactions with their borrowers, to ensure they meet their financial obligations and survive the COVID-19 economic crisis.

Costa Rica’s political stability, geographic proximity to the United States and Europe, our highly skilled workforce, legal certainty, sustainability and competitive free trade zones have allowed our country to emerge for the nearshoring trend, and as a result to shorten and strengthen the global supply chain post-COVID-19. The past 12 months have set a record for over 100 new investments in different industries in Costa Rica, including Intel’s announcement to invest over USD350 million to restart assembly and testing of microchips in Costa Rica. This demonstrates a high level of trust by multinationals for our country. Life sciences continue to be an important generator of direct foreign investment, and should also increase in the near future.

There have been certain leading sectors in the domestic market during the past 12 months. The food and beverage industry has shown significant growth, followed by the agrochemical, retail (appliances, fashion, supermarkets), fintech, educational, hospitality and real estate sectors. The industries most affected were tourism, automotive, corporate real estate and entertainment industries, but even these are slowly picking up.

The main techniques for acquiring a company in Costa Rica are stock purchases, asset purchases and mergers. The acquisition of public listed companies is carried out by public tender offer (OPA). Costa Rica has a very limited exchange market with less than ten companies listed in its stock exchange market, and for this reason most of the M&A activity that occurs in our jurisdiction is performed as private transactions outside the stock exchange market with the limited participation of regulators.

Since most of the M&A transactions in Costa Rica are private, there is limited participation of government regulators. However, all acquisitions must comply with antitrust regulations, and if the transaction qualifies under the law as one that requires approval from the Commission for the Promotion of Competition (“Coprocom”), this authority must sanction it. Coprocom is a maximum-deconcentration body attached to the Ministry of Economy, Industry and Commerce, with technical, administrative, budgetary and functional independence. Its fundamental purpose is to comply with the precepts of the Law for the Promotion of Competition and Effective Defense of the Consumer No 7472, and the Law for the Strengthening of the Costa Rican Competition Authorities No 9736, through the protection and promotion of the process of competition and free competition, investigating and sanctioning monopolistic practices and other restrictions to the efficient functioning of the market.

All M&A transactions that involve listed companies in the stock exchange market must be authorised by the Superintendence of Securities and Stock Market (“Sugeval”). In the case of M&A of licensed telecommunications companies, the Superintendence of Telecommunications (“Sutel”) must authorise these transactions. Likewise, in the case of other specific industries, other authorities must be involved, such as the Superintendence of Finance Entities (“Sugef”) for transactions related to entities in the financial system, the Superintendence of Insurance (“Sugese”) for transactions involving insurance companies, and the Superintendence of Pension Funds (“Supen”) for the pension fund management industry.

Aside from this, if the target company has a public contract with the Government for the use of spectrum, the transaction must also be authorised by the Secretary of Technology and Telecommunications (“Micitt”) and the National Comptroller (Contraloria General de la Republica) of Costa Rica.

The are no restrictions on foreign investment in Costa Rica; nevertheless, companies that hold concessions in the Maritime Zone, as described under the Law on Maritime Zone No 6043, are limited to being owned by at least 51% of their capital stock by Costa Rican citizens.

In our jurisdiction, competition law is made up of a series of rules whose origins are constitutionally enshrined in freedom of trade, as a fundamental right of individuals and therefore as a permanent principle of the social, economic and political organisation of Costa Rica. All state action aimed at preventing monopolistic tendencies or practices is based on the competition legislation provided for in Law No 7472, Law for the Promotion of Competition and Effective Consumer Defense, and Law No 9736, Law for the Strengthening of Competition Authorities from Costa Rica. These laws set forth a mandatory merger control and notification regime for transactions that meet the current regulatory thresholds.

The primary concern in an acquisition regarding labour law regulations is compliance with social security obligations. According to our labour law, all employers and employees are required to contribute to the Social Security system (Caja Costarricense del Seguro Social), with the following percentages of the worker’s salary: employer 26.17%, worker 9.17%. The parties are free to agree on the amount of the salary over and above the minimum wage. Because the salary represents the remuneration for the services rendered by the employee, Costa Rican courts have established that any benefit received by employees and derived from the employment relationship (ie, bonuses, premiums and commissions) are considered part of the salary. All salaries must be reported to the Social Security system and be contributed accordingly, therefore in all acquisitions compliance with social security obligations must be verified.

Other than the authorities that review acquisitions to verify compliance of competition regulations, there is no other review.

There is one recent administrative decision that had an impact on M&A transactions, where Spanish telecommunications company Telefonica sold all its operations and assets in Central America. On February 2019, a Sale Purchase Agreement (SPA) with Luxembourg-based company Millicom was reached to sell the Costa Rican subsidiary along with the Nicaraguan and Panamanian branches. In order for the SPA to be effective in Costa Rica, all regulatory and government authorisations should have been obtained before May 2020. Since government authorisation was still pending on this date, Millicom cancelled the SPA and was therefore sued by Telefonica in a New York Court.

During 2020, Telefonica sold its Costa Rican subsidiary to Liberty Latin America. By the end of 2021, this operation was fully authorised by both the regulatory and government authorities.

There have been no significant changes to takeover law in the past 12 months, and there is no takeover legislation currently under review in the Costa Rican Congress.

In public listed companies, stake building strategies are usual. Prior to launching an offer, the bidder will try to build a stake in the target by addressing the main shareholders of the company.

Any acquisition that would allow the buyer to reach over 25% of the capital stock of a listed company requires a public tender offer (OPA).

Thresholds are defined by law and rules issued by the regulator for listed companies in the stock exchange market. Therefore, listed companies cannot introduce lower reporting thresholds.

Dealings in derivatives are authorised for supervised financial entities such as banks and brokers. There is no regulation regarding dealings in derivatives for M&A transactions. However, according to the Stock and Securities Market Law No 7732, derivatives are subject to the same regulations and conditions for securities.

Filing and reporting obligations for derivatives are the same under disclosure and competition laws as for other securities and financial instruments.

It is implied in public tender offers that the purpose of such a transaction is to control the target company. There is no specific obligation to disclose any further intentions regarding control of the target company.

If the M&A target is a listed public company the deal must be disclosed, informing the regulator and the market once the negotiations start. Companies can ask the regulator for a waiver to keep certain information confidential prior to the execution of the definitive agreements. Once the negotiations are over and an agreement is reached and authorised by the regulator, all the documents are considered public. For M&A transactions that involve private companies, competition regulations shall be considered for merger control, and notification regime for transactions that meet the current regulatory thresholds.

Market practice on timing of disclosure for listed public companies cannot be different from legal requirements.

The scope of the due diligence may vary depending on the transaction; however, it usually covers corporate matters, labour, environmental, tax, intellectual property, and regulatory matters, as well as litigation, shareholder and beneficial owner analysis. The due diligence analysis is carried out in three stages, which are detailed below:

• due diligence ‒ involves legal and financial review of the target;
• definitive agreements ‒ involves the preparation, negotiation and execution of the definitive agreements; and
• closing ‒ involves the preparation, negotiation and coordination of the closing documents for the transaction.

Due to the COVID-19 pandemic, some aspects of the due diligence process have raised issues of relevance that impact transactions, especially economic issues such as compliance with related legal obligations. Thus, the scope of due diligence has incorporated a detailed analysis of the potential risks of non-payment and non-performance of obligations, as well as the termination of contracts that ensues.

Exclusivity agreements are often demanded in M&A transactions. Standstills are not usual.

Tender offer terms and conditions must be documented in all definitive agreements to be rendered to the regulators.

There is no defined timeframe for a sale and purchase process, but depending on the complexity of obtaining governmental authorisations, and due to the challenges of the pandemic, it could take between 12 and 15 months. This will also depend on the requirements, documents and authorisations requested for the transaction.

Given the pandemic, some institutions have closed or take longer to grant certain permits and authorisations, since online processes are still limited. In this way, the processing and management of matters before public institutions has improved for some but worsened for others.

Public tender offers must be authorised or rejected by the regulator within ten business days after the offer is presented by the bidder. Once the offer is published, a period between 15 and 30 business days remains open to receive any potential competing tending offers. In case there are no competing offers, the tender offer is considered accepted.

There is no mandatory offer threshold for private companies. Any acquisition that would allow the buyer to reach over 25% of the capital stock of a listed company requires a public tender offer (OPA).

Generally, cash is the most common form of consideration for acquisitions. However, share exchange transactions are possible, or there may be a mixed consideration of cash and shares, in accordance with our current regulations.

According to local legislation, public tender offers for listed public companies can be made effective with both cash and shares. However, cash has been used in all registered cases.

Takeover offers for a public listed company must include the following conditions: a notarised copy of the bidder assembly agreement to make a bid, a notarised copy of the announcement for the shareholders meeting of the bidder company, and a notarised copy of the company bylaws, financial statements of the bidder company and its holding companies from at least one year prior.

The offer must detail the stock and other securities included in the bid, the amount of money or shares included in the offer and the guarantees rendered by the bidder.

The offer must also define a term in order to accept the offer by the company and a designation of the broker agencies authorised by the bidder.

The regulators cannot restrict the use of offer conditions.

In the case of listed companies in the stock exchange market, 25% or more of the total stock capital of the target company is considered a relevant control threshold.

In the case of listed companies in the stock exchange market, requirement to obtain financing cannot be a condition to launch a public tender offer. For private companies, there is neither a condition nor an impediment. Therefore, private transactions can be subject to conditions that the parties freely agree to.

Public tender offers must be guaranteed by the bidder, the guarantee must cover 100% of the offer, and must be accepted by Sugeval. In private transactions, the bidder and the target can freely negotiate and agree on the terms of the security measures, such as non-solicitation provisions. Regarding the effects of the pandemic, we haven’t observed any major contractual considerations. There have been no relevant changes to the regulatory environment that have impacted the length of interim periods.

There are no other governance rights involved in a public tender offer. Even if a bidder does not seek 100% of the ownership of a target, the purpose of the operation is to obtain control of the target. To date, all public tender offers in Costa Rica have targeted 100% of the company.

For private transactions, if a bidder does not seek to acquire 100% ownership of a company, the bidder may negotiate a shareholder agreement with the remaining shareholders, in which certain rights and obligations shall be regulated. This agreement must be executed by all shareholders.       

Shareholders can vote by proxy, granted to a third person or another shareholder, by filing the written proxy letter before the shareholders’ assembly, including the following information: the name of the shareholder, the name of the proxy, the date of the meeting, and the subject matter to be discussed at the meeting. 

There are no squeeze-out mechanisms for shareholders who do not accept a public tender offer.

It is common to obtain such irrevocable commitments to tender, though not to vote, by principal shareholders of the target company. Negotiations with shareholders can be conducted at any stages of the transaction. The nature of these commitments varies from case to case, but they usually include an irrevocable obligation to launch an offer, or to tender.

If the M&A target is a listed company on the stock exchange market, the bid must be previously filed with the regulator and become public once the bidder launches the offer.

In the case of listed companies on the stock exchange market, the issuance of shares in a business combination must be disclosed to the market, including the amount and type of shares, and any other relevant information.

In a public tender offer, the bidder must produce financial information for at least the preceding fiscal year. The same information must be produced for the holding company. All financial information is audited.

The transaction documents must be disclosed in full, once the transaction is closed, for listed companies in the stock exchange market. For M&A transactions that involve private companies, competition regulations shall be considered for merger control and notification regime for transactions that meet the current regulatory thresholds. Depending on Coprocom's decision, which may be determined case by case, such notification shall include disclosure of the transaction documents.

The main duties are to create value and ensure that all decisions taken by the shareholders are duly executed. Directors must always act for the benefit of the total shareholders and are prohibited from protecting the interests of specific groups of shareholders.

Business combinations are negotiated and agreed exclusively by the shareholders of the relevant companies. The role of the directors is limited to the preparation, negotiation and execution of the decisions taken by the shareholders. The board is able to establish certain committees, though this is not usual. The role of such committees is restricted and only for advisory purposes.

Our courts do not apply the business judgement rule. In order to review a board’s decision, a complaint must be filed.

Legal, financial, accounting and any other type of outside advice can be requested by the board, which does not waive or substitute for the duties and responsibilities of the board.

There are no recent precedents for this type of conflict of interest, however, this subject is widely regulated in our legislation, specifically in the Stock and Securities Market Law No 7732.

Hostile tender offers are not forbidden, but are not common. Usually, any M&A transaction involves a previous negotiation process between the parties in order to reach an agreement.

A board of directors cannot use defensive measures.

Defensive measures have not been used in Costa Rica.

Defensive measures have not been used in Costa Rica.

The shareholders are the main authority, and the board of directors must comply with and accept all decisions taken by the shareholders.

Litigation related to M&A is not usual in Costa Rica.

Our courts do not have experience in complex commercial transactions, such as M&A. Consequently, parties commonly agree on alternative dispute resolution clauses, through arbitration; or agree on penalty clauses in the respective agreements to enforce liability. 

Litigation usually arises at the end of the acquisition process, either due to non-compliance with some of the obligations subsequently established, or for reasons related to the price or the condition of the target and its contingencies, which are found after closing. However, as indicated above, it is not usual for litigation to arise, but rather to enforce the penalty clauses established in the definitive agreements.

There is an ongoing dispute between two global telecommunications companies since the operation involving the relevant Costa Rican branch was not completed. According to the bidder, Luxembourg-based company Millicom, they were entitled to cancel the SPA with Spanish company Telefonica since the government did not authorise the operation on the fixed deadline. The government has denied any responsibility and claims that the failure was a result of a misunderstanding between the two companies, which had to file a new contract in order to be authorised.

It seems that a lesson was learned by all parties involved in this previous transaction, since a new deal between Telefonica and Liberty Latin America subsequently took less time to be completed and authorised by the government and regulatory agencies.

Shareholder activism is not a relevant force, due to our shareholding structure. Minor shareholders are usually protected by shareholders' agreements and our legislation. 

Shareholder activism does not encourage companies to enter into any of the transactions described above.

Certain activists, not necessarily involved with the relevant companies, have interfered in some M&A transactions, especially when transactions are referred to consumer advocacy or environmental matters.