In Panama, despite the COVID-19 pandemic, the M&A market remained active in 2021.

As a result of Panama’s increased investment, along with its geographic location and trade openness, Panama’s economy had been until recently one of the fastest growing in Latin America and among the highest in the world. In fact, the country was awarded an "investment grade" rating by all three major credit rating agencies. During the last couple of years Panama’s economy has slowed down, which was particularly highlighted by the COVID-19 pandemic. However, given Panama’s decades long capital investment, the International Monetary Fund (IMF) projected a short-term growth for 2021 of 12%, followed by a sustained 5% yearly growth rate once the COVID-19 Pandemic recedes.

Despite the COVID-19 pandemic, the M&A market was active in 2021, reflecting the gradual opening of economic activities. The largest transactions in 2021 were in the energy and telecommunications industry. This trend is expected to continue into 2021. The market is primarily driven by private M&A, however, in 2018 the sale of Inmobiliaria Don Antonio (Grupo Rey) to Corporacion Favorita, an Ecuadorian group was structured by way of a Public Bid (OPA).

The last year two years have seen the acquisition of Claro Panama by Cable & Wireless (pending closing), and the acquisition of a majority stake in Multi Financial Group, parent company to Multibank Inc, by Grupo Aval, solidifying Grupo Aval’s presence in Panama.

Although there are no specific driving factors behind an increase in M&A activity for the coming year, it is believed that the increase liquidity in the market will further develop M&A activity. Panamanian companies continue to be attractive targets for international bidders. Additionally, local companies are incentivised to consolidate when they operate in competitive industries. It is worth noting that transactions, particularly in the Central American region, tend to be structured with Panamanian holding companies who have operations in the region (such is the case of most Central American financial institutions). Further, since local banks had granted moratoriums with respect to payments of debts for affected companies, and said moratoriums have now been lifted, we believe this may lead to an increase of transactions of distressed assets.

It is expected that most of the M&A activity will continue to take place in the financial industry (banks, investment advisors, and insurance companies). Given the slower economic growth registered in the past two to three years, an increase in activity in the distressed asset market is also anticipated. This being said, the outbreak of COVID-19 (although seemingly coming to an end) provides a degree of unpredictability to the market and difficulty to make future predictions.

The telecom sector, which is dominated by four players, saw the acquisition (pending closing) of Claro by Cable & Wireless Panama. Further, in the energy sector there were significant transactions including the acquisition of Generadora Gatun, and various other smaller transactions.

Further, there were significant acquisitions by international players in the energy market approximately five to seven years ago and now those international players themselves are being purchased, which has led to the indirect change of control of several Panamanian entities.

The services sector (hotels, restaurants, tourism) has been particularly hard hit by the restrictions imposed by the Panama government due to the COVID-19 pandemic. It is likely there will be consolidation among players in these industries or the sale as distressed assets.

Cash offers and standard share purchase agreements and mergers are the most common means for acquiring a company in Panama. Acquisitions in the distressed asset market are typically structured as asset purchases. 

However, asset purchases in Panama are more challenging to document as the transfer of certain assets require specific formalities (public deeds, registrations, etc). Mergers are also quite common.

Panama does not have an M&A regulator per se. The primary regulator for M&A activity in Panama will depend on the nature of the business undertaken by the target company. For example, in the case of banks, the primary regulator would be the Superintendence of Banks of Panama, and in the case of broker dealers or investment advisory firms, the primary regulator would be the Superintendence of the Securities Market (formerly known as the National Securities Commission). In all cases that may result in an economic concentration, the antitrust authority (known as ACODECO) could play an important role.

It should be noted that the relevant Panamanian laws governing M&A include Law No 32 of 1927, as amended (the “Corporations Law”), Law No 4 of 2009 (the “Limited Liability Company Law”), the Commercial Code and the Civil Code. Additionally, industry specific regulations (banking, securities, mining, energy, etc) may come into play. As M&A activity tends to lead to taxable events, the Tax Code and its regulations are also applicable.

There are no restrictions on foreign investment in Panama. To amplify, there are no restrictions on the amount of foreign investment permitted or the nationality of said investor. There are, however, restrictions on investments in certain specified areas, such as: investments in the retail sector by non-Panamanian nationals (subject to certain exceptions), water and sewage services, radio services and transmission of electricity, among others.

The applicable antitrust legislation in Panama that applies to business combinations is Law No 45 of 31 October 2007 (as amended).

The submission of a transaction for review to the Authority for Consumer Protection and Defense of Competition (ACODECO), the antitrust regulator in Panama, is not mandatory. The economic agents interested in a “prior review” of any particular transaction may submit any transaction to the review of ACODECO, requesting their favourable opinion.

ACODECO Decisions

ACODECO must issue a decision within 60 calendar days after it has received all the information requested. If it does not respond in that timeframe, the approval is deemed to have been granted. ACODECO may request additional information within 20 days of the initial filing. ACODECO usually issues a resolution indicating that no additional information is needed, which triggers the 60-day countdown.

A list of documents and information must be submitted, including:

• the transaction documents, market, and industry studies of the respective parties to the transaction, corporate authorisations; and
• the background of the parties to the transaction.

Every document that is produced abroad must be legalised and translated into Spanish (if the documents are in a foreign language) by a licensed translator in Panama. A technical antitrust (economic/market based) analysis must be attached as part of the filing.

ACODECO Conditions

ACODECO may impose certain conditions to be complied with by the transaction or order partial or total unwinding, termination of control or annulment of acts. 

On the one hand, the law has a safe harbour provision and, if the transaction receives the “favourable concept” from ACODECO, the parties may carry out the economic concentration without the risk of the legality of the transaction being questioned. On the other hand, the economic concentrations that did not voluntarily submitted themselves to prior verification, may be challenged by ACODECO or third parties within the three subsequent years after the transaction is carried out. ACODECO has the authority to investigate and challenge economic concentrations which have not been submitted to prior verification.

Therefore, whether a concentration has the effect or potential effect of lessening, restricting, harming or impeding free competition and free access of the economic agents will be deemed to be legal or illegal depends on an analysis of its positive and negative effects on competition, production, competitiveness, among others, in each of the relevant markets.

In the case of Panama, acquirers should be aware that, as a general rule, under the Panama Labor Code, employment relationships may terminate in any of the following manners:

• by mutual consent if it is in writing and does not involve waiver of any rights accrued by the employee;
• upon expiration of the agreed term if the employment is for a definitive term;
• upon dismissal with just cause or the resignation of the employee; and
• by the unilateral decision of an employer, within the formalities and limitations established by the Labor Code, such as employees with indefinite period contracts with less than two years of continuous services.

In the context of an M&A transaction structured as an asset sale, it is more likely that the employment relationships would terminate either by mutual consent of the parties, or unilaterally by the employer. In the event that an employee is fired for just cause, and contests the termination, the cause would have to be proven in a labour proceeding, or the company will be ordered to reinstate the employee, with any applicable fees and penalties associated with the unjustified termination; or payment of indemnities, backpay, and surcharges if the company does not wish to reinstate them.

Termination Payment

In a transaction of this type, and in relation to those employees that will not be assumed/transferred to the acquirer’s entity(ies), it would be most ideal for them to be terminated by mutual consent (mutuo acuerdo) if there is no justified cause for termination. The likely components of the termination payment in this scenario would be:

• the payment for seniority bonus is equal to one week for every year of employment (prima de antiguedad);
• the 13th month salary (décimo tercer mes): under Panama law, employees are to be paid a 13th month every year, equal to one month’s salary, payable in three instalments, every four months;
• the employer must pay any accrued and unpaid vacation time (vacaciones); and
• although not mandatory and subject to negotiation, in order to induce an employee to agree to a termination by mutual consent, it is typical to pay a “bonus” or “indemnity” payment in addition to the accrued benefits listed above, roughly equal to one month for every year of employment.

An employee cannot waive payment of bullet points one to three. Bullet point four is subject to negotiation. In all cases, termination will be subject to a case-by-case analysis based on the particulars of each employment relationship.

Additionally, it is becoming more common to see golden parachute arrangements (both by way of the issuance of shares or cash), which typically include a premium for the CEO and certain key employees, payable upon the completion of a business combination. These arrangements require careful review at the moment of a business combination because depending on how they are structured may lead to labour liabilities going forward.

Generally, there are no national security review of acquisitions in Panama. Having said this, there are certain specific industries that cannot be held by foreigners, since ownership is limited to the State (for example, energy transmission, water, and sewage, among others). Further, there is a constitutional prohibition of foreigners purchasing land 10 km from the Panama border.

There have been no significant court decisions or legal developments related to M&A transactions in Panama in the last three years.

There have been no significant changes to takeover law in the past 12 months, nor is takeover legislation under review, in current knowledge, in a way that could result in significant changes in the coming 12 months.

It is not customary for a bidder in Panama to build a stake in the target prior to launching an offer.

As a general rule, there are no material shareholding disclosure schedules. However, in the case of regulated entities, in general terms, material shareholding disclosure thresholds and filing obligations are triggered whenever “control” is affected. Control may be construed as the direct or indirect power that allows the exercise of a determining influence over the administration, direction and/or policies of an entity, whether by ownership of shares with voting rights, contractual rights, or other means.

It is also considered “control” whenever a person, individually or by mutual agreement with other persons, is owner of exercise rights over no less than 25% of the outstanding social capital holding voting rights. It is understood to be "control" provided that a person(s) owning any other lower percentage of the social capital has a determining or decisive influence in the management of the entity, by itself or in agreement with others, whether directly or indirectly shareholders of the entity.

Corporate law does not provide for specific hurdles to stakebuilding in Panama; such hurdles, if any, are more likely the result of provisions in the articles of incorporation or bylaws of the relevant company but are not common in Panamanian corporations.

Dealing in derivatives are allowed in Panama, though they are not specifically regulated in a meaningful manner.

Filing/reporting obligations for derivatives under securities disclosure and competition laws are not specifically regulated in Panama.

Shareholders are not generally required to make known the purpose of their acquisition and their intention regarding control of the company in Panama, except in certain regulated industries (such as banking, insurance and financial services, among others) which require prior regulatory approvals.

A takeover offer of a public company must be made to all the shareholders, with equal terms and conditions and the purchase price must be paid to all shareholders who accept the offer.

If a bidder offers to purchase more than 25% of the shares of a public company, or offers to purchase any number of shares which, as a result of said purchase, would result in the bidder owning more than 50% of the issued and outstanding shares of the public company, the offer must be subject to the public tender offer rules under the securities laws.

If the tender offer will result in the bidder owning more than 75% of the issued and outstanding shares of the public company, the offer must be made for all shares of the target which are not owned by the bidder.

In the case of private targets, any disclosure will depend on the articles of incorporation or any applicable shareholder agreements.

Market practice on timing of disclosure does not materially differ from legal requirements.

The scope of due diligence usually conducted in Panama in a negotiated business combination is fairly standard, including tax, legal, financial, environmental, labour aspects, among others, depending on the nature and activities of the target entity. The COVID-19 pandemic has increased the necessity to review labour arrangements, particularly those in connection with the suspension of labour contracts, reactivation of employees which had been suspended, or decrease in hours. Further, since local banks had granted moratoriums with respect to payments of debts for affected companies, due diligence exercises are also including further review of communications between the clients and the banks.  The moratorium has been lifted, which could also increase transactions of distressed assets.

Standstill and exclusivity arrangements are becoming more common in M&A transactions in Panama.

It is permissible for tender offer terms and conditions to be documented in a definitive agreement.

The duration of an M&A process in Panama will vary greatly, mostly depending on the complexity of the transaction and whether it is in a regulated industry. The average process for a regulated entity would generally take between four to six months between signing and closing. 

Even though governmental offices were initially closed, fairly quickly governmental measures taken to address the pandemic have created more efficiencies in the regulatory approval process for M&A transactions. Local regulators have done a good job moving into a digital structure, which now allows for documents being filed exclusively online (with originals to follow) which has created efficiencies for the ultimate clients and decreased response times at the respective regulators.

In a public M&A structured through an OPA (Oferta Publica de Acciones), once a purchase is attempted of over 25% of the issued capital, or an amount of shares that would make the purchaser hold over 50% of the issued capital of a company, an OPA would be triggered, which would require that all shareholders are offered the opportunity to sell their respective shares. As soon as the OPA is launched, trading on the shares will be temporarily suspended.

Cash is more commonly used in Panama as consideration. Having said this, consideration can also be equity in a different entity or any other chattel property. The use of escrow agreements, holdbacks and earn outs are common tools used to bridge value gaps in these times.

There is no specific M&A regulator, however, in regulated entities such as banks, broker dealers, insurance companies, etc, the regulator will analyse the conditions included in takeover offers as part of its analysis when deciding whether to approve the transaction or not. With respect to public tenders, the offer has to be open for at least 30 days.

Public tenders can be conditioned on a minimum amount as a condition for the offer to be effective.

A business combination can be conditional on the bidder obtaining financing. It is not typical to see transactions conditioned on the bidder obtaining the required financing. In fact, it has become common that sellers request assurances that the bidder will have the required funds at closing.

M&A financing in Panama is typically carried out by local or international banks. In Panama, there is no limitation on international lending. Less frequently, M&A transactions are financed by way of local or international securities issuances. The Panamanian securities market has grown substantially in the past few years and is able to accommodate larger transactions that would previously have taken place outside Panama.

It has become more common to see break-up fees included in M&A transactions. In a public tender offer, any person can launch a competing offer. Additionally, any holder of shares can revoke its acceptance at any time while the tender is open.

Additionally, parties to M&A transactions are looking into the MAC and MAE definitions in detail in order to either include or exclude the effects of the COVID-19 pandemic in a transaction. It is certainly one of the most contested points in a negotiation as to whether further lockdowns, closures, changes to the labour regulations

There have been no changes to the regulatory environment.

If a bidder does not seek 100% ownership of a target, then the bidder can seek any additional governance rights with respect to a target that would not result contrary to law of public policy, including voting arrangements, management provisions, special majority decisions at the board and shareholders level, among others.

It is possible for shareholders to vote by proxy in Panama.

Squeeze-out mechanisms, short-form mergers or other similar mechanisms are not commonly employed to buy shareholders that have not tendered following a successful tender offer. The viability of these mechanisms is unproven and may be questionable under Panama law.

It is not common to obtain irrevocable commitments to tender or vote by principal shareholders of the target company.

In a public company, a bid is made public once a purchase is attempted of over 25% of the issued capital or an amount of shares that would make the purchaser hold over 50% of the issued capital of a company. This would only apply to shares that are registered at the Superintendence of Capital Markets (the “Public Bid”).

As a general rule, applicable to corporations, pursuant to Article 13 of the corporation’s law of Panama, to the extent the articles of incorporation of the company do not provide otherwise, each shareholder has a first right of refusal to subscribe to new shares issued by virtue of a capital increase of the company. in the same proportion of shares said shareholders' hold.

In light of this, if the company intends to increase its capital and issue new shares this must be disclosed to the existing shareholders of the company in order for them to be able to exercise their first right of refusal.

Relevant Events Communications

In respect of companies whose shares are registered with the Superintendence of Capital Markets (SCM), pursuant to Accord No 3-2008 on “Relevant Events Communications” (Comunicados de Hecho de Importancia), whenever there are mergers or consolidations that involve the issuer of the shares registered with the SCM, said events shall be communicated to the SCM and to the public.

This communication shall include certain preestablished items and published on the business day following the approval of the merger or consolidation by the Board of Directors or shareholder meeting, as applicable, of the company that is a registered issuer with the SCM.

Privileged Information and Criminal Provisions

Until the public communications have been made, all persons involved in the merger or consolidation process of a registered issuer with the SCM are subject to the privileged information provisions established in the Panama Securities Laws and to the criminal provisions that may apply.

Once the merger, consolidation or spin-off agreement has been registered with the Public Registry of Panama, a copy of it must be sent to the SCM within two business days from the registration date. 

Public Bids

Additionally, when a public bid is launched the SCM must be sent the following principal documents: prospectus or offering document, guarantee of the public bid, a draft of the announcement to be published, the contracts part of the offer, the corporate authorisation of the offeree and the financial statements for the previous three years of the offeree.

In a public bid, the bidder needs to provide audited financial statements for the previous three years. Listed companies and financial institutions are required to use IFRS or US Generally Accepted Accounting Principles (US GAAP), pursuant to regulations issued by the Superintendence of Banks and the Superintendence of Capital Markets. Insurance companies are required to apply IFRS.

If the bid in question is a public bid, then all transaction documents must be disclosed in full. All transaction documents need to be sent to the recipients of the offer as well as a document which summarises all aspects of the proposed transaction.

Panama’s Commercial Code, Article 444 (which applies generally to commercial legal entities, including Panamanian corporations), establishes that directors are, in general, not personally liable for the obligations of the corporation, but may incur personal liability for:

• the effectiveness of the payments made by the partners;
• the actual existence of any dividend payment agreed upon;
• correct accounting;
• improper fulfilment or performance of their commission [mandate], as corporate representatives; and
• violation of laws, the articles of incorporation (pacto social), by-laws, or agreements and resolutions of the shareholders’ assembly. If the violation of any of the foregoing occurs through the issuance of a resolution, those directors that were absent from the meeting or objected in due time, will be exempted from liability.

Directors duties are owed only to the company shareholders. However, if a dividend or distribution of assets is declared such that the value of the assets of the company is reduced to less than the amount of its debts, a director will be jointly and severally liable vis a vis the creditors of the company for any resulting harms, considering:

• its capital;
• if the amount of the capital is reduced; or
• if a declaration or a report is made that is false regarding a point of substance, the directors that have given their consent for such acts, with knowledge that with such the capital is affected, or that the declaration or report are false.

Depending on the size of a company and its board of directors, it is common to have committees whose role it is to assess business combinations, as a strategic matter, prior to the signing taking place. Additionally, it is common for integration committees to be formed between signing and closing in order to successfully integrate or transition the business.

There is no similar concept in Panama except that directors must act with the prudence of a bonus pater familias, which is analogous to the standard of care of a reasonable person.

Typically, tax, legal and financial advice is typically given to directors in a business combination. It is fairly common for companies to have corporate governance consultants which are also, typically, asked for advice in the context on business combinations.

There is no awareness of any conflicts of interests of the directors, managers, shareholders of advisers and, as such, none are the subject of judicial or other scrutiny.

Typically, the bylaws of Panamanian companies expressly allow that directors enter into business with the respective company whose board they sit on. Nonetheless, recently it has become more common for Companies to include in their bylaws that, in the event that a director has a conflict of interest, they should abstain from participating in the decision being taken.

Hostile tender offers are permitted in Panama. However, public tender offers are possible only with respect to shares registered with the Superintendence of Capital Markets. Current knowledge provides that all public bids that have taken place (which have not been many) have not been hostile.

The Securities Laws do not permit that the issuer, or anyone else, purchase shares while a public bid is open.

There is a poison pill mechanism in the Securities Laws of Panama, but it is only applicable in a particular set of circumstances that would make public bids of those companies near to impossible. This would only apply to companies:

• registered in Panama or abroad;
• that have their offices or are authorised to do business in Panama;
• that have more than 3,000 shareholders (the majority of whom must be domiciled outside of Panama); and
• that have permanent offices in Panama and investments of over USD1 million.

It does not appear that the prevalence of defensive measures has not changed due to the pandemic.

Local laws and regulations do not include any specific director duties when enacting defensive measures.

There is no provision for directors to be able to "just say no". In a public tender, the offer is made to each individual shareholder and, as such, the directors cannot control whether a shareholder decides to sell its shares.

Shareholder litigation is uncommon in connection with M&A deals and there has not, as yet, been any case in which a shareholder has intended to block a transaction. Having said this, shareholders are able to question the legality and validity of corporate acts approving the entering into of transactions, by way of an expedited proceeding (impugnacion). 

The Panamanian Commercial Code provides for a 30-day time frame in which this proceeding can take place, as a summary proceeding. In certain transactions, litigation brought by a third party with the intention to cause a material adverse effect that would impede closing has been seen. 

As mentioned in 10.1 Frequency of Litigation, litigation is uncommon, but if it were to occur, this would typically be once the transaction is completed. If the plaintiff can prove irreparable harm, they may be able to obtain an injunction, which could, in theory, prevent a transaction from going forward until the merits of the litigation are passed upon. Said injunctions may also be lifted.

To  the authors' knowledge, there have been no significant disputes relating to M&A transactions in 2020. Having said this, there have been a series of negotiated transactions, particularly in respect to MAE applicability with respect to COVID-19 mitigating measures.

Shareholder activism is not an important force in M&A in Panama. Trends have been seen that will likely make activism a more important factor in the future, as investors and shareholders are looking to exert greater control and minority rights with lower equity stakes.

Activist encouragement of companies to enter M&A transactions, etc, is not common in Panama, and as such there has been no impact due to the pandemic.

As mentioned, shareholder activism is not common and, as such, it is unlikely that activists will interfere in transactions prior to completion.