LATIN COUNSEL Insights: "Next generation issues for structuring M&A transactions in Latin America in 2024"

Rodolfo Papa,  December 15, 2023

We are pleased to share a series of reflections related to the analysis of certain "state-of-the-art" legal and regulatory issues, which - in our view - should be observed by Latin American corporate lawyers responsible for the design and negotiation of M&A deals in their respective local jurisdictions, in view of the imminent beginning of the year 2024.

It is evident that the M&A transactions market in our region continues to be dynamic, challenging and highly sophisticated, not only due to the economic and political "ups and downs" that have been evidenced (in several of its countries) in recent years, but also due to the emergence of new issues that "local lawyers" should carefully evaluate (and manage) in order to provide adequate standards of legal certainty and predictability.

In this regard, we will now set out certain issues that have recently arisen, and which should be incorporated into the content of the "agenda" that usually governs this type of deals, even though, obviously, -at the end of the day- they should be reasonably interpreted (as regards their scope), under the prism of the "local law" applicable to the projected operation.

In the first place, it should be pointed out, especially from the perspective of foreign investors who decide to "sink" a foreign direct investment (and, of course, a long-term one) in one of the leading sectors of the economy of a Latin American jurisdiction, the need to have access to adequate protection mechanisms, This would make it possible for them to benefit from coverage against potential risks that they have historically faced when entering our region, such as that of a (possible) sovereign decision decreeing the "expropriation" of such an investment, without granting fair and equitable "compensation" to compensate for such dispossession, in accordance with the guiding principles that govern this matter in the sphere of international law.  

It should be borne in mind that this type of acts detrimental to private property could be externalised (by a State receiving such foreign investment), either "directly" (with an impact on the title to shares or assets with which the investor was legitimately vested), or indirectly, through a breach of certain guarantees conferred, for example, in the event of a possible "loss of value" of such investment, which the investor would have suffered as a result of the commitments undertaken.

In this regard, and as one of the main legal instruments designed internationally to protect the position of foreign investors who decide to invest in companies or assets with situs in Latin America, we highlight the so-called "Treaties for the reciprocal promotion and protection of investments", signed by the National States, The provisions of these treaties provide adequate and effective protection mechanisms to protect these investors against the risk of "expropriation", enabling them to have recourse to a neutral international arbitration body, competent to settle potential disputes that may arise between the host state and the foreign investor making the claim.

Therefore, it would be necessary that among the "macro" issues that should be included as part of the due diligence work to be carried out by the international investor that decides to enter into an M&A operation with an impact on a Latin American country, would be to evaluate (but fundamentally choose) the law of incorporation of the vehicle under which said foreign direct investment would be instrumented.

In such a way as to be covered by the provisions of a Treaty for the reciprocal promotion and protection of investments that would meet such particularities, providing protection against potential disputes that a foreign investor could face in the medium and long term, as a result of the "regulatory changes" (or "political risks") that, in certain segments of the local economy, could materialise in our region, for example, due to changes in government administrations, elected through free and democratic elections.

On the other hand, we cannot fail to note the existence of new litigation scenarios that could arise in the execution of certain "contractual blocks" of the SPA, which, although our corporate practice at the regional level has adopted its content structure from the traditional Anglo-Saxon format, their interpretation should be regulated under the rule of the "local law" that is (totally or partially) applicable to them.

In this respect, one issue that has become more topical, especially since the beginning of the pandemic, has been how to distribute and allocate risks between the contracting parties during the period of time that elapses between the signing of the SPA and the closing of the transaction, under the protection of the "material adverse change" clause, known in common law practice as "MAC" ("material adverse change").

It is certain that, following the disruptive impact caused - on a global level - by this pandemic, the parties to an M&A transaction involving Latin American shares or assets, have proceeded to re-examine (as part of the negotiations) the scope and content of the aforementioned clause, in view of the possible irruption of other disruptive events (comparable, in essence, to that of a "pandemic"), which, during the course of this period, could eventually lead to an abandonment (or "walk away") on the part of the buyer, or else to a "good faith" renegotiation of its essential terms.

Another issue that could be qualified as significant, especially from the position of litigation lawyers, in the face of conflicts caused by a breach of the seller’s "representations & warranties", whose tendency, currently followed in Latin America, is to resort to a commercial arbitration instance (whether local or international, as the case may be), for its solution, would be that of its framing, Either under traditional standards, such as that of a "breach of contract", which would require - for the purposes of its configuration - as presuppositions, to meet the attributive elements of civil liability (subjective factor, unlawfulness, damage and causal link), as opposed to its classification as an objective mechanism of allocation and distribution of risks between the contracting parties.

Obviously, we would not reasonably find a univocal answer to such a dilemma, and the adoption of one or the other would depend on a series of factors, among them, in practice, the one that would be more consistent and adequate to the interests at stake of the protagonists of such a controversy.

Another clause that would usually give rise - in the practice of this type of transaction - to various conflict scenarios resulting from the execution of an M&A contract (whether of shares or assets), which could ultimately lead to complex commercial litigation, would be that arising from a (possible) self-regulation of the "knowledge" to which the buyer had or should have had access, in accordance with the provisions of the SPA or, as the case may be, in addition to the provisions of the applicable local legislation, could result in the buyer assuming (or not) liability for such risk and, in the latter case, attempting to be indemnified.

In order to establish certain interpretative guidelines aimed at settling disputes, the source of which would be based on how the contracting parties behaved during the due diligence, judicial or arbitral precedents that, according to the particularities of the case, would be applicable, should obviously be analysed in a complementary manner.

It should be noted that, what should normally be evidenced (and externalised) - as standards of conduct to be complied with by the parties during due diligence - on the seller’s side, the duty to provide relevant information, and very modernly - in accordance with a trend established by comparative case law - the obligation to "self-inform", in this sense, adopting measures of diligence, investigation and care, under the protection of the guiding principle of "good faith", of imperative application from the pre-contractual stage, unlike what happens in Common Law practice, in which its scope would be, in such an instance, available to the parties.

Likewise, as one of the "best practices" adopted by certain leading jurisdictions in the conclusion of this type of deals in Latin America, we highlight the efforts made, through the contributions generated at the doctrinal and jurisprudential level, to specify (under the scope of "local law") the legal nature of a contract whose object (at least formally) was the purchase and sale of goods, The economic reality of this contract goes beyond a transaction on the "thing sold", and should be extended to the assets and liabilities of the target company or "issuer" of such negotiable securities.

In this sense, it would be appropriate to argue - at least preliminarily - that, with regard to the legal consequences resulting from the transfer of such shares whose ownership impacts on the "control" (and management of the business) of a corporate entity, it is of the essence of this type of agreement, and this has been recognised by the case law of some jurisdictions in our region, that the contracting parties, under the protection of the pacta stipulation of the "stipulation of the contract", should be able to agree on the "control" (and management of the business) of the company, under the protection of pacta sunt servanda, have the power to negotiate and conventionally self-regulate the regime of responsibilities and assumption of risks derived from the situation of the target company’s assets, crystallised at the time of the closing of the transaction, with the only limitation of the observance of certain mandatory rules that would be applicable, under the rule of the "local law" governing the SPA.       

Finally, and in view of the forthcoming conclusion of the year 2023, we are also pleased to share some of the achievements of LATIN COUNSEL, both in terms of content generation and participation in international events of excellence, related to the practice of corporate law in Latin America, especially on current issues inherent to the conclusion of M&A transactions.

In this regard, we have had the opportunity to coordinate (and prologue) at the beginning of this year, the publication of a Q&A Report, entitled: "Perspectives for the structuring of M&A transactions in Latin America during the year 2023", whose contents were prepared by 10 corporate lawyers belonging to recognized leading firms in Ibero-America (including a global firm from New York, with active presence in the arrangement of transactions in our region).
We hope to replicate this initiative in 2024.     

On the other hand, LATIN COUNSEL has participated (in person) during this year in several international events of excellence and networking, linked to the practice of corporate law.
We highlight, by way of example, the "Biennial Latin America Regional Forum Conference", organized by the International Bar Association (IBA), which took place in the city of Cartagena de Indias (Colombia), from 22 to 24 March, and more recently, in the annual meeting of this entity, which was attended by more than 5000 lawyers and leading firms from around the world, held in the city of Paris (France), from 29 October to 3 November, among other events.

Finally, I take this opportunity to invite you to participate in a new edition of our training and professional development course "Structure of an M&A Deal", which I will be teaching (in remote format), during the 23rd to 26th of January 2024, organized by the Continuing Education Center of SIJUSA (Panama).

This training product, which has been attended by more than 300 corporate lawyers from 13 Latin American countries, is ideal for those legal professionals who are starting their practice in the structuring of this type of transactions, as "local lawyers".

In addition, the course has been successfully delivered in-house for the benefit of leading law firms in Costa Rica, Nicaragua, Guatemala and Uruguay, respectively.  
For more information on the modalities and contents of this product, please contact me directly at the following email address.
We wish you all the best wishes for the coming New Year 2024, and look forward to keeping in touch with you through LATIN COUNSEL.  

Rodolfo G. Papa
LATIN COUNSEL Argentina Correspondent
Email: rodolfo.papa@latincounsel.com