2019 M&A Report: Panama

Eloy Alfaro B and Rita de la Guardia, Alemán Cordero Galindo & Lee

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The environment for M&A transactions is favourable. The 12 months of 2018 proved to be an active year for the M&A market in Panama.

The M&A market was very active in 2018 and included acquisitions of important companies in the food services, telecom, retail and financial services industries. Although there are no specific driving factors behind an increase in M&A activity for the coming year, it is certainly the case that Panama's economic growth makes local companies attractive targets. We expect most of the M&A activity will take place in the financial industry (banks, investment advisors and insurance companies) and the energy industry (mostly power generation).

The market is primarily driven by private M&A. However, in 2018 there was a sale of a large publicly listed company that included a purchase mechanism through the Panamanian Stock Exchange.

In the financial services sector, regulatory costs are leading to the consolidation of market players. Recently, we have seen a number of financed transactions in which the closing of the transaction is conditioned upon obtaining the required financing. This has not been very typical in Panama as we are used to seeing cash offers.

We are seeing an increase in activity by financial investors interested in the purchase of distressed companies or companies in which they believe additional efficiencies can be obtained. With respect to financial investors, we have mostly seen them in the energy sector and find that this trend has not permeated into other sectors.

Various recent distressed M&A transactions have elicited a debate with respect to the new Reorganisation and Insolvency Law and the relationship between distressed companies and their creditors. To our knowledge, this has not been tested.

M&A transactions in Panama are impacted by the provisions of the Commercial Code, the Civil Code, and depending on the nature of the target company, by Law No. 32 of 1927, as amended (the Corporations Law), Limited Liability Company Law and industry-specific regulations (banking, securities, mining, energy, etc.). As M&A activity tends to lead to taxable events, the Tax Code and its regulations are also applicable.

The primary regulator for M&A activity in Panama will depend on the nature of the business undertaken by the target company. So, 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.

There have been no recent changes to regulations or regulators during 2018 that would specifically impact M&A transactions or activity in 2019 and beyond, and none are expected to be adopted.

To our knowledge, there are no rules, legislation or policy frameworks under discussion that may impact M&A in Panama in the near future, and none in relation with most regulated industries (telecom, energy, banking, securities and mining, among others).

The most common misconception about standard market practice is that there are no economic concentration regulations in place in Panama that need to be considered in an M&A transaction. In reality, M&A transaction in Panama can be directly affected by Law No. 45 of October 31 2007 (Consumer Protection and Competition Defence Law), Executive Decree No. 8-A of January 22 2009, which regulates Title I (Monopoly) and other dispositions of Law No. 45 of October 31 2007 and Resolution No. A-31-09 of July 16 2009, through which the Consumer Protection and Competition Defence Authority (Acodeco) approves the Guide for the Control of Economic Concentrations, even though these regulations do not establish a specific threshold for review of particular transactions.

The types of transactions caught are all transactions that fit into the economic concentration concept, as established by Law No. 45 of 2007, which includes any merger, acquisition of control or any other act by virtue of which corporations, partnerships, associations, shares, social parties, trusts, establishments, or assets in general that are grouped together, that takes place between suppliers or potential suppliers, customers or potential customers and other competitors or potential competitors.

Certain sectors, such as energy, have specific thresholds.

Internal restructurings or reorganisations are not included in the concept of economic concentration.

Prior notification of a potential economic concentration is voluntary. If parties decide to voluntarily notify in advance, they must do so before the merger has taken effect; that is, before there has been a change in control. Parties typically file prior notifications of an economic concentration when there are circumstances surrounding the transaction (ie market share) that increase the risk of an investigation by Acodeco.

Given that it is a voluntary prior notification, there is no prohibition of closing before clearance, but a transaction may be challenged by Acodeco or third parties within three years if it is not cleared before it takes place. If the prior notification is filed, Acodeco must review within 60 days of the date in which the prior notification is filed or additional information requested by Acodeco is provided. If the Acodeco does not issue a response within that 60-day timeframe, the concentration is deemed to be approved. If Acodeco reviews the transaction directly, it has up to three years to complete its review of the transaction. Acodeco will have the authority to investigate and challenge economic concentrations which have not submitted to prior verification, within a three-year period from the date on which change of control occurred. Acodeco would only have jurisdiction to review and impose penalties in case there is an economic concentration in Panama.

Additionally, common mistakes are made in transaction structuring as to whether capital gains taxes are payable in Panama in connection with the sale of company incorporated in Panama. As Panama follows a territorial system of taxation, only Panama-sourced income is taxable. Panama-sourced income is generally defined as income and capital gains realised in connection with a trade, business or real estate transaction in Panama.

Typical doubts have to do with the filing of a prior no-objection request from Consumer Protection and Competition Defence Authority, and in the case of M&A transactions in regulated industries like financial services (banking and securities), questions dealing with the requirements and timing for applicable prior authorisations.

A takeover offer of a public company must be made to all of 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 Panama, buyers can make conditional offers. However, in the context of public tender offers, the securities law requires committed funding and the posting of a guarantee (for example cash or bond) to cover the tender offer.

There is no market standard. The parties in an M&A transaction are free to agree to any preferred break fees, if any. Public M&A transactions have been rare in Panama.

In private M&A transactions in Panama, the use of escrows and earn-outs are perhaps the only current trends with regard to consideration mechanisms. Completion accounts are still the most popular consideration mechanism, but we are seeing more locked-box mechanisms in order to provide sellers certainty over the consideration. Warranty and indemnity insurance is not used in Panama.

There are no specific conditions, above and beyond the standard, that are attached to a private takeover offer in Panama.

It would typically depend on the home jurisdiction of the purchaser and the size of the transaction. Domestic business combinations are typically governed by Panama law. Large transactions with foreign purchasers tend to prefer New York law and jurisdiction. Having said this, Panamanian law and jurisdiction are increasingly being chosen even for large transactions.

From a legal perspective, the exit environment is quite flexible. Having said this, in practice, it is not common to see exits in the form of IPOs, trade sales or sales to financial sponsors. The typical exit strategy for financial investors has been simple sale transactions. Given that the growth of financial investors is fairly recent, we do not have sufficient data to establish a trend with respect to exits for strategic or financial investors.

Our prediction is for the M&A market to remain stable over 2019 in comparison to 2018. Panama's economy is expected to continue to lead the region in growth and that should ultimately translate into continued M&A activity. We do not expect an increase given that 2019 is an electoral year.

About the author
		Eloy Alfaro B Partner, Alemán Cordero Galindo & Lee Panama City, Panama T: +507 269 2620 F: +507 264 3692 E: ealfaro@alcogal.com W: www.alcogal.com Eloy Alfaro B joined Alemán Cordero Galindo & Lee as an associate in 2004 and became a partner in 2011. His professional practice focuses on banking, finance and capital markets, corporate and M&A, public bids and concession contracts, and real estate law. Eloy has been active in M&A, assisting clients such as Citibank, the Bank of Nova Scotia and BBVA in banking acquisitions, mergers and dispositions in Panama, in addition to assisting several other international banks and companies in cross-border financing transactions. Eloy has also advised Panamanian and international clients in important public bid projects. Eloy has a juris doctor from the University of Pennsylvania Law School and a bachelor of arts in political science from Columbia University. He is a member of the National Bar Association of Panama. He is fluent in Spanish and English.

About the author
		Rita de la Guardia Associate, Alemán Cordero Galindo & Lee Panama City, Panama T: +507 269 2620 F: +507 264 3692 E: rdelaguardia@alcogal.com W: www.alcogal.com Rita de la Guardia joined Alemán Cordero Galindo & Lee in 2014. Her professional practice focuses on banking, finance and capital markets, corporate and M&A. Rita has been active in M&A, assisting clients such as Citibank and Celsia SA. Rita has a JD from Cornell Law School and a bachelor of science in foreign service from Georgetown University. She is a member of the National Bar Association of Panama. She is fluent in Spanish and English.