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International Corporate / M&A - Costa Rica

posted 1 year ago


Ana Sáenz-Gammans



+506 2*****
Ana Sáenz-Gammans
EY Law

EY Central America renders a wide range of services necessary to assist any business organization in their legal needs, based on three pillars: (i) multidisciplinary capabilities, (ii) geographic footprint, (iii) sectorial knowledge and expertise. As a Senior Manager in EY Law’s Corporate and M&A Division I have been involved in numerous cases including mergers and acquisitions, joint ventures, foreign and domestic investments, due diligence processes, complex research, review of agreements and collaboration in the drafting and preparation of opinions and final transactional documents, such as Share Purchase Agreements, Business Combination Agreements, and Trust Agreements, among others. Additionally, I have worked closely in the phase of regulatory approval with competition or sector regulatory authorities and also in post-merger integration matters.

My experience in foreign investment, corporate, commercial, and transactional issues has expanded my ability to advise and solve complex legal structures as well as business planning for potential merger or acquisition of companies. Additionally, my economics and business degrees have enabled me to better understand the needs of the clients with a business mind-set, allowing me to become their commercial ally in any given deal. Finally, my use of digital solutions, especially during the Due Diligence phase of a deal, has allowed me to increase efficiencies for my clients, both in time, coverage and money.

to any special commercial law that is enacted, as well as to any customs, usages, and general principles of law that might be applicable, which together with an ample network of trade treaties which normally contain investment protection provisions, encompass a comprehensive, although not always up to date legal framework within which to provide legal counsel to my clients. Therefore, corporate legislation in Costa Rica is not only robust but frequently subject to updates given the constant changes imposed by new market practices. It should be noted that in civil law systems, such as in Costa Rica, where the rule of law is primarily based on laws and statutes, customs and usages have always been the predecessor to the creation of such legislation.

The difference between Costa Rica’s regulatory approach and neighbouring jurisdictions is not substantial, given that Latin American countries have civil law-based systems. Consequently, the regulation of corporate legislation prioritizes the enactment of laws and statutes to regulate commercial and corporate practices, but secondarily accepts customs and usages as a source of law.

Common legal structures implemented in M&A transactions, such as, Mergers (including cross-border mergers), Trust Agreement, Stock Purchase, and Bulk Sale, are expressly regulated in the Commerce Code. Whereas other frequently used figures such as the Escrow Agreement and the Spin-Offs, are of atypical nature, meaning that they are based on well-established commercial practices instead of laws, but are still accepted as valid and binding agreements, often used in M&A transactions.

Costa Rica is one of the least bureaucratic countries in the region, being in the 17th place out of 19 analysed countries in Latin America and the Caribbean, meanwhile globally it occupies the 45th position out of 77 analysed countries in the Global Complexity Index of 2022. Costa Rica has several legislations regarding corporate matters, such as the Commercial Code, the Competition and Consumer Protection Law, Labour Code, Tax Code, Income Tax Law and Real Estate Tax Law, all of these including different provisions of corporate matters.

My current workflow is demanding given my responsibilities to oversee and review new business opportunities, due diligence processes, the drafting and reviewing of transactional documents (including corporate governance issues), and regulatory matters, as well as post-closing restructuring and day to day advice. My workflow is primarily focused on Corporate and M&A matters; therefore, assisting in the management of this area of EY Law can be challenging, however very rewarding.

Currently, clients with an interest and/or need for legal counsel (including, but not limited to, clients in M&A transactions), are looking for leaner corporate structures; this is driven, primarily, by the need to increase tax and corporate governance efficiencies. Additionally, there are many clients that are looking to invest in real estate and hospitality projects; this is driven by the effects of the pandemic, which left a great deal of these types of projects in distress, thereby lowering the potential price or premium that buyers offer and sellers are willing to accept.

It is interesting to note that the sectors that clients are considering for investment purposes in our country or region are ample in scope, which forces one, as a legal counsel, to improve capacities and become familiar with different economic sectors, such as education, logistics, telecommunications, hospitality, health, food and beverages, vehicles dealerships, commercial real estate, among others.

During the COVID-19 pandemic, I had the opportunity to provide legal counsel to Liberty Latin America in their acquisition of a telecommunications company (Telefónica / Movistar) in Costa Rica, a transaction with a purchase price or value or about US$500,000,000.00. Our services included a complete due diligence process, the review and modification of the framework agreements, schedules, exhibits, and other accessory documents, in addition to the lead and obtainment of the regulatory approvals. This particular case study or project was quite challenging for several reasons, including the fact that we had to complete the due diligence of such a complex business in a sixty-day period, while simultaneously reviewing, modifying, and negotiating the closing documents, as well as preparing the documents required for the regulatory approval, some of which were extremely technical. In addition to the limited timeframe, this project was challenging given that all negotiations, communications, work sessions, and such, were virtual, given that the negotiation and closing of the deal was done during a critical time of the COVID-19 pandemic.

Notwithstanding the foregoing, we were able to provide the same (high) quality level of service to the client, complete the due diligence and drafting of the closing documents and regulatory approval materials, within the tight deadline. This goal was reached was due to the effective and efficient use of technology by all parties, including the regulatory authorities in Costa Rica, as well as a highly-efficient team which was working closely with the client’s US counsel, as well as the client’s business, technical and commercial teams. Our use of technology was key, and this included, among others, the use of AI as supporting tools in several phases of the project, particularly in the due diligence phase; these tools added efficiency, security, and speed in our ability to de render services and liver results to Liberty Latin America in this particular deal.

COVID 19’s impacts on M&A activity were substantial in our region. There was a generalized reduction of transactional volume, and even complete standstill in some sectors such as real estate and hospitality. Nonetheless, the real estate sector has been consistently increasing its activity, to the point where important investment firms are seeking opportunities to acquire real estate and hospitality businesses that were in distress throughout the pandemic and have possibly not seen an upswing in their activity to levels similar to those of pre-COVID. On the other hand, during the pandemic, there was increased M&A activity in specific sectors, such as the telecommunications and pharmaceutical industries, given the obvious and increased demand of services in such sectors. Another sector in which there was increased activity was the education, specifically higher-education, industry; as they chose to, or rather were forced to, increase their online capabilities. In this sense, higher-education companies that were founded as online education enterprises, were highly benefited.

The generalized uncertainty about the unfolding of the pandemic, including what would be the “new-normal”, affected M&A transactions, both those that were on-going at the start of the pandemic, as well as those in which the parties were starting to negotiate potential deal terms through non-binding documents and conversations. On a positive note, as of today, there has been a relatively quick rebound to the pre-pandemic levels in M&A deals in most industries.

In a globalized context, where there are economic and cultural systems that are highly integrated, economic agents have been greatly affected by the intricate and uncertain nature of the current global developments. Historically, M&A activity tends to correlate with the economic growth of the markets. In a time where there has been generalized uncertainty and market volatility, M&A activity has been affected and reduced across many sectors.

The market’s uncertainty was further accentuated by Russia’s invasion of Ukraine, which resulted not only in political instability world-wide, but a widespread disarray on energy supply channels that would trickle down to the cost of water, food, and greater dependency on fossil fuels; this in turn, affected the timing and certainty of M&A deals in Costa Rica. The convergence of supply chain issues, a widespread sentiment of political uncertainty, disruption in the access of raw materials and commodities, as well stagnant political monetary measures taken by many governments around the world (including Costa Rica), set the stage for the highest inflation to be recorded in many countries in the past 40 years. All of the previously mentioned factors, have consequently increased the volatility of the markets, thus incrementing the associated risks with business transacting in the current global markets.

Following the lead on how goods and services change hands between countries and specially among commercial trade regions in this new and unstable scenario, provides a good indicator for how and where private investment capitals will move, which of course yields a great opportunity for M&A. Nonetheless, the current world turmoil, in a market awash in US dollars, caused by governments pumping currency to cater for their huge budget deficits, should offer an opportunity for well positioned law and investment companies, to help in the process of capital allocation and/or relocation. The near shoring US strategy is a good example.

On another note, in my experience, the presidential elections during the pandemic created a certain degree of political uncertainty in Costa Rica, which in turn influenced decisions taken by the parties in on-going M&A deals, specifically regarding closing and regulatory approval. For example, given the changes in the administration of the government, the buyers were highly unsure of the regulatory approval processes and the timeframes established for the granting of such permits for closing.

Alongside telecommunications sector, real estate and hospitality has experienced lately a considerable amount of activity. The main drivers of these are the increasing use of digital technologies in all areas of business, and the positioning of Costa Rica as a destination of digital nomads and pensioners, as a response to the new challenges posed by the COVID-19 pandemic. We are also seeing increasing activity in the food and beverages field, life sciences and medical devices, information technology, in particular cyber security related business and in the retail industry. It is also important to stress that we are seeing new players showing interest in our region, such as private equity funds and family offices, which are very much sector focussed.

The COVID-19 pandemic was a world-wide health crisis, but this did not necessarily cause a financial crisis, such as those that have occurred in the past. Therefore, investors were still in possession of great quantities of capital, which they were willing to use in the acquisition of and investment in companies and industries that were flourishing during the pandemic, and also those that were starting to recover at the tail-end of the pandemic (e.g. real estate and hospitality). Therefore, and in line with the foregoing, the increase in M&A activity in real estate and hospitality was potentially driven by the desire of investors with substantial capital funds to invest in distressed companies (hotels), with the goal of offering low prices and bid premiums.

Lately, I have worked more with large firms rather than SMEs; we have advised Liberty Latin America in the acquisition of two large telecommunications companies in Costa Rica in the past few years. We continue to provide legal assistance in corporate and regulatory matters to the resulting enterprise. In these transactions we have worked alongside large legal firms, such as Greenberg Traurig, Morrison Foerster, Consortium Legal, Arias Law, and BLP Legal.

EY Central America has a practice area specifically dedicated and catered to entrepreneurs, which is called SEED by EY. At SEED, the professionals create a relationship with the entrepreneurs from day one, by understand their business project, as well as they short and long terms goals. SEED professionals provide legal counsel to entrepreneurs in many ways, including on matters such as corporate structure, the agreements the founders / shareholders will potentially execute with investment and venture capital firms, intellectual property matters, employment matters, and of course compliance issues, among others. SEED professionals have worked closely with our M&A team in particularly complex deals, where there is a mature start-up whose founder is looking to divest or even attract additional, more sophisticated investors.

EY is a world-wide leading firm with extensive presence across many jurisdictions, which permits the integration of multinational working teams to comprehensively assist the needs of clients located overseas. The firm incorporates substantial informative content to provide well-informed global advisory for clients located abroad. This comes in the form of newsletters, bulletins, and flash alerts to ensure that EY professionals who have profound knowledge of world-wide developments, can share such information with clients and the general public. Additionally, EY hosts events, both virtual and in-person, for both General Counsels, clients, potential clients, and the general public; these events are aimed at providing the participants with new (legal) information that may be valuable for their businesses, including, among others, material changes in key pieces of legislation.

Additionally, EY professionals participate in important conferences and events around the world, such as those of the International Bar Association, the American Bar Association, the New York State Bar Association, among others. EY professionals also participate in local organizations, such as AmCham, the Costa Rican Bar Association, among others. This ensures that EY professionals are up-to-date in current trends and topics involving the M&A practice.

The Costa Rican legislation has included noteworthy regulations to meet the new and always changing requirements of the corporate law.

In the first place, the Costa Rican Government’s steadfast commitment to effectively control the fight against tax fraud, money laundering and the financing of terrorism led to the disclosure of Directive No. 41040-H on the “Regulation of the Ultimate Beneficial Owner”, which obliges all corporations, trusts, and non-profit organizations to declare their ownership structure up until the physical shareholders.

By means of Statute No. 9691 on “Framework Law on Factoring Contracts”, the Costa Rican Legislative Assembly provided a comprehensive regulation for any transfer agreements of present and/or future credit and collection rights to a third-party factor, including factoring companies supported on electronic platforms.

In response to the COVID-19 pandemic, the Costa Rican Legislative Body proposed by means of the bill No. 22.111, “Law that Authorizes to Hold Shareholders’ Meetings Virtually in light of COVID-19 National Emergency”. The bill was ultimately ruled negatively, for it referred to Public Limited Companies alone, excluding all other trading companies, and it failed to include the possibility to hold virtual meetings for the Board of Directors, amongst other flaws.

The Costa Rican National Registry of Legal Entities lead the way in regulating virtual meetings that suited the most pressing corporate needs. In August 2020, they issued the Directive No. D.P.J.-001-2022 entitled “Holding of Assemblies and Board/Administrative Meetings using Electronic Media”, which enabled Shareholders and the Board of Directors to hold virtual meetings, provided that their articles of incorporation did not state otherwise.

Other requirements are that the technological means used must allow for the meetings to comply with the principles of simultaneity, interactivity and comprehensiveness, and for the participants to identify themselves – this must be proven in the meeting’s minutes, which need to be signed. Finally, all deliberations carried out and decisions adopted must be recorded and guarded by the company’s legal representatives.

Following the digitalization of securities, Statute No. 10.039 entitled “Law to confirm the enforceability of the electronic invoice and to make it a negotiable instrument”, clarified a long-discussed topic on the legal nature of electronic invoices. Electronic invoices, whether commercial or service, acquire the characteristics of an enforceable title and may be recorded by its holder before an authorized central securities authority, in which case it shall be considered as an individual security for all legal purposes.

Most recently, the release of Statute No. 10.225, “Law for the Re-registration of Dissolved Companies” in May 2022, allowed to revive trading companies dissolved for disregarding their obligation to pay corporate taxes, at the request of the company’s legal representatives. The Statute’s regulatory decree No. 43742-H-J was issued by the Costa Rican Presidential Office, and published on the October 14th, 2022, which states that the request to re-register the dissolved companies must be filed within the period of no more than three years after its registered dissolution, finally enforcing the long-awaited law.

It is also important to stress that Costa Rica has recently joined the OECD and this has brought along the need to update or adopt legislation to bring the country up to par with the best practices fostered by this organization.

I would like to refer to three of four additional aspects of our M&A practice that add value to our clients:

1. Integrated solutions: Our Legal M&A practice is highly integrated with our Tax and Investing Banking / Finance practices, insofar as we have created a project called “Transaction House”. Through Transaction house we offer a one-stop shop advisory to our clients in these three areas, which gives us a 360° vision of the business (Target); this in turns, allows EY professionals to discuss and validate the areas wherein the transaction should focus and how to manage those contingencies from different perspectives.

2. Geographic footprint: In Latin America North, EY Law’s practice covers 13 countries, from Mexico to Bolivia. This allows EY professionals to provide international clients with a consolidated service, both in their day-to-day business needs as well as within the scope of an M&A deal. This extensive, consolidated practice is unique to EY, in comparison to other legal competitors. Moreover, EY is currently working on the integration and consolidation of a unique Latin America practice that will include the countries in the Southern cone integrating with our Latam North practice group under a single organization, undoubtedly a turning point and unprecedented step in the legal market. We strongly feel this will provide added value to clients to the extent we can really provide one-stop shop solutions in a market that is integrating vigorously in response to global and Latin American clients’ business strategies.

3. EY Network: EY Law Central America is part of the EY Global Network, which means that it is connected and has the capability to act as a global firm with presence in 95 countries around the world. Through this EY Global Network, our America’s practice, and specifically our M&A practice, is able to readily and easily access technology and information in order to provide a top-tier service to clients.

4. Legal Operations Services: At EY, we have a specific practice focused on analyzing and improving the functions, services, and processes of in-house counsel of our clients. Our EY professionals focused on Legal Operations Services (LOS), not only provide strategic solutions to business needs, from the legal point of view, but also support in-house legal teams in the analysis, design, and implementation of their own initiatives by optimizing the internal processes of the in-house legal services (teams), through the adoption of innovative methods and the investigation and implementation of digital solutions that increase the efficiency and effectiveness of these teams. Our LOS team focuses on tree main aspects in order to achieve the foregoing: (i) a strategy for legal transformation; (ii) optimization of the operating model of the in-house legal team; (iii) implementation of legal tech (digital / technological solutions for legal processes and functions).

As a closing note, I would like to add that a particular feature that characterizes our M&A practice is the variety of deals and industries that we have participated in; we have represented both sellers and buyers in industries such as telecommunications, real estate & hospitality, agri-business, consumer products, education, automotive industry, health, construction, among many others.

Additionally, our M&A generally advises buyers, although we have and so advise sellers as well with great success, and it is not unusual for our team to continue to provide day-to-day legal services to the resulting Target of the deal. In this sense, our team has assisted in the integration and reorganization, along with other practice areas, such as Tax, Labor & Employment, Consumer Protection, Compliance, and many others. Our goal is to create a long-term relationship with the Target entity and its owner in order to add value, not only by acting as their legal counsel, but more importantly as a business and strategic ally who understands their business.

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