September 24, 2012 11:31 AM
NEW YORK - Latin Lawyer brought together professionals from all corners of the private equity industry at its Private Equity Conference in New York on Thursday. This is the first in a series of articles in which we take a closer look at what was discussed, beginning with merger control.
The evolving private equity environment in Latin America brings a changing set of rules with it, and one conference panel discussed how lawyers should handle merger approval systems, and the associated risks.
The panel consisted of Luis Nicolau of Mexico’s Ritch Mueller SC, Paulo Larraín of Chile’s Noguera, Larraín & Dulanto and Andrés Hoyos of Colombia’s Gómez-Pinzón Zuleta Abogados, and was moderated by David Silk of Wachtell Lipton, Rosen & Katz.
Throughout Latin America, merger control rules differ, and Larraín spoke of some of the variations in the region. In Brazil, pre-merger control was introduced very recently, while in Chile companies do not have to submit for approval pre-closing, although authorities can decide to investigate transactions – even if they have already. In Argentina, too, the merger approval stage starts post-closing. If authorities decide already closed deals do adversely affect competition, this could lead to mitigation measures, fines and sanctions imposed on the company, as well as the complete reversal of deals. On top of financial risk, companies would also have to deal with potential damage to their reputation, Larraín said. In Mexico, merger control has existed for over a decade now said Nicolau, but he noted that the competition authorities’ activity is heavily scrutinised.
Colombia also saw a new competition law come into force this year, although as Hoyos said the country already had an antitrust approval system. He noted, however, that companies and investors can often end up “in limbo” because there is no set time frame for the authorities to make a decision, causing “an interim period where everybody knows the company will be acquired but that the new buyer is not yet in control,” which means lawyers have to be extra diligent in negotiations, and building in measures to deal with this sort of risk. “You have to negotiate different types of scenarios if the deal fails, and [work out] who will bear the cost of what is to happen to the company immediately thereafter,” said Hoyos.
Another topic the lawyers discussed was whether they see a difference in activity in controlled and non-controlled environments, and if there is a difference when the buyer is a foreign or local investment firm. In Mexico, while the trends can still vary, investors are more willing to take minority stakes nowadays due to specific minority provisions introduced with the new securities law not too long ago, said Nicolau.
Larraín agreed that private equity firms do not always want a majority stake, and added that he sees a trend where the asset at stake will be further developed through a partnership between the buyers and the former business owners, generally either local entrepreneurs or family groups. As, he said, “they prefer to keep a stake in order to also participate in the benefits of the company”.
Investors, however, spend in return for control to increase (future) profits, and Silk asked the panel to elaborate on the sort of corporate governance rules that are agreed on in instances of partnerships, and how they decide on strategy to achieve the desired kind of growth.
Explaining how it is done in Mexico, Nicolau said a lot of time is spent on tax consequences, as the company becomes more institutionalised, but also spoke of the need for clear veto rights and the freedom of controlling shareholders to make the decisions, to which Larraín added that he has seen cases where a company’s management is kept on board in Chile.
Speaking of his experience in Colombia, Hoyos said that more recently parties create structures that will safeguard their strategic objectives without exactly knowing what the path towards those objectives will look like. He asserted that a clear shareholders agreement, clear terms and a way to resolve potential deadlocks should be set out to avoid problems, but that exit options can be left open to accommodate for the reality of the markets at that point.
A next topic introduced by Silk was the options for the law used to govern transactions, as well as the available arbitration forums preferred by clients.
Larraín mentioned that it very much depends on who you are representing. “A US company will be more comfortable with NY law and courts, and that can be challenging for the local company to be sued in a foreign court. If you are representing the local family or fund, if the transaction is in a particular country, say Chile, then it probably makes more sense to make the deal subject to local law and courts, and local arbitration.”
The Latin Lawyer Private Equity Conference was held in New York on 20 September, and also discussed the trends in funding and deal volume in the region, the prospects for private equity in the region, activity in the regulated industries, the situation in Brazil and the opportunities available to investors in Venezuela, Argentina, Ecuador and Bolivia, versus those in more stable countries such as Chile, Colombia and Peru.