The International Comparative Legal Guide To

Mergers & Acquisitions 2011

A practical cross-border insight into mergers & acquisitions
Published by Global Legal Group with contributions from: Albuquerque & Associados Arzinger Ashurst LLP Bech-Bruun Boss & Young, Attorneys at Law Brando Teixeira Sociedade de Advogados Cardenas & Cardenas Abogados Cravath, Swaine & Moore LLP Debarliev, Dameski & Kelesoska Attorneys at Law Dittmar & Indrenius Elvinger, Hoss & Prussen Eubelius Fenech Farrugia Fiott Legal Garrigues Georgiades & Pelides LLC Gide Loyrette Nouel Goltsblat BLP Guyer & Regules Herbert Smith LLP Kalo & Associates Koep & Partners Lenz & Staehelin Mannheimer Swartling Advokatbyr AB Meitar Liquornik Geva & Leshem Brandwein Nishimura & Asahi Pachiu & Associates PRA Law Offices Schoenherr Selvam LLC Skadden, Arps, Slate, Meagher & Flom LLP Slaughter and May Steenstrup Stordrange DA Stikeman Elliott LLP SZA Schilling, Zutt & Anschutz Udo Udoma & Belo-Osagie uri i Partneri law firm

Chapter 45

Uruguay
Guyer & Regules

Alejandro Miller

Mara Noel Riotorto

1 Relevant Authorities and Legislation

1.1 What regulates M&A?

Uruguayan Law defines several procedures regarding M&A transactions such as, for example, the purchase of an ongoing concern or the merger of two stock companies or the acquisition of an ongoing concern within a bankruptcy procedure. Different specific laws regulate each of such procedures. We hereby outline the different rules and provisions for each such procedure as per each applicable law. A. Merger of corporations. Uruguay Corporate Law (law number 16,060 dated January 1, 1990) (hereinafter UCL) regulates the incorporation of all commercial companies, including personal companies or joint ventures (sociedades colectivas), limited liability partnerships (sociedades de responsabilidad limitada) and corporations (sociedades annimas). It further regulates all transactions involving any such companies, including mergers. Pursuant to UCL, mergers can be structured as one company absorbing another one or two separate companies becoming a third and new entity. As set forth in UCL, the main steps for the merger of companies are: (i) (ii) (iii) (iv) execution of a promise of merger, in which all the terms of the merger shall be set forth; resolution by the Shareholders Meeting of both companies approving the promise of merger; notice of the proposed merge to be published in a private newspaper and in the Official Gazette; a thirty-day term for any creditor of any of such companies to oppose to the merger or for any shareholder of each such companies to recede. Opposition of a creditor may be waived by the debtor company by means of paying the credit or guaranteeing the payment of the same; once opposing have been cleared or in the case no opposition has been raised, then the companies will enter into the deed of merger; and final approval by the Shareholders Meeting of each company of the deed of merger.

ongoing concern or commercial establishment (as opposed to the acquisition of shares). Uruguayan law has a specific legal regime for such transfers of ongoing business concerns (enajenacin de establecimiento comercial) which is mainly regulated by laws number 2,904 dated September 26, 1904 and 14,433 dated September 30, 1975, as amended. Such regime provides for a short and simple procedure to transfer assets from one company to another, with the legal guarantee that the purchaser will acquire the ongoing concern free of any prior encumbrances, liens or debts (including labour and tax debts of the seller). Under this procedure there is no legal transfer of contracts of any kind (including the labour agreements), except for lease agreements under certain conditions, unless negotiated and agreed with the counterparties of each of them. The above mentioned procedure basically implies the following steps: (i) (ii) Execution of a promise to sell by both parties. Publications for a 20-day term in two local newspapers, requesting all creditors to present their credits against the commercial establishment within 30 days as of the day following the first publication date. The purpose of these publications, as stated by law, is to limit the liability of the buyer regarding sellers debts. The obtaining of certificates from the tax authorities (DGI), the Social Security Authority (BPS), and the State Insurance Bank (BSE) to avoid buyers liability regarding taxes, since prior to the issuance of such certificates these Authorities will review the fiscal situation of the company selling its assets. Execution of the definitive purchase and sale agreement after having obtained the referred certificates. This agreement must be executed before a Notary Public in a public deed (escritura pblica). The agreement must be registered before the Commercial National Registry within 30 days as of its execution. Purchase of an ongoing concern of a company in bankruptcy.

(iii)

(iv)

C.

(v)

Law number 18,387, in force as of November 3, 2008, regulates all aspects regarding insolvency and business reorganisation. One of the main characteristics of this Law is the priority it gives to the sale of the business as a whole (still operative), to the highest bidder in an auction under the insolvency procedure, thus enabling the buyer to continue the business. The sale is entered into by the Judge on the debtors behalf. An outstanding feature of this law is that the buyer of the assets or of the whole enterprise of the debtor will not be held as successor, and hence not be made liable, for any pending commercial, labour, tax or any other debts. This enables a fresh start of the business

(vi)

In case the merger is structured as one company absorbing the other, then the absorbing company may need to amend its bylaws, increase its paid in capital and issue new shares to the shareholders of the absorbed company. This will call for further procedures of amendments of the bylaws. B. Purchase of an ongoing concern. An M&A may come to life also through the acquisition of an

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with a new owner, avoiding any chance of failure of the procedures on account of the old liabilities passing to the new acquirer. The procedure for acquiring the ongoing concern of a company in bankruptcy is by a tender offer. D. General Aspects. In addition to the abovementioned procedures, all M&A must comply with specific regulation regarding non-abusive market position. According to the Trade Freedom and Free Competition Preservation Law (law number 18,159 dated July 20, 2007) all mergers, acquisition of shares, quotas or participations, acquisition of business as ongoing concerns, total or partial acquisition of corporate assets, and any other type of legally valid agreements which imply transferring the control of all or part of the economic units or enterprises must be informed to the Commission of Promotion and Defense of Free Competition. Further, if the merger involves a public corporation, then the provisions contained in the Uruguayan Securities Law (law number 18,627 as of December 2, 2009) should be taken into account. Such law regulates all aspects of the stock market, including agents, stock exchange and other securities trading markets for public offering among other issues, including stock companies that go public and trade their shares in the stock exchange market. To this respect please bear in mind that Uruguayan stock exchange market is not significant and hence only very few companies trade their shares in the local stock market. Hence, on a de facto basis all M&A transactions are held among private or non-public stock companies and thus not involving the Securities Law. Our answers will be made taking this fact into account and therefore often responding that no M&A operations are held among public companies.
1.2 Are there different rules for different types of public company? 1.5 What are the principal sources of liability?

Uruguay

For example, if a share purchase agreement is executed, the buyer of the target company will be liable for all the contingencies, liabilities, rights and obligations previously assumed by said target company. In the case of a liquidated company there is no continuity and as a consequence the liability is not transferred to the buyer. On the other hand, labour liability must be taken into account because of the fact that in Uruguay any labour rights resignation is considered invalid.

2 Mechanics of Acquisition
2.1 What alternative means of acquisition are there?

Please refer to our response to question 1.1.

2.2 What advisers do the parties need?

Customarily, each party is advised by attorneys and fiscal advisors. Advisors to the buyer usually carry out a due diligence prior to entering into and executing any definitive agreement.
2.3 How long does it take?

There is no specific legal term. The extension of the procedure will depend on the chosen M&A procedure. Usually, the term is of approximately 180 days since there are some legal requirements such as publications that cause the term to extend.
2.4 What are the main hurdles?

No. As stated above, please note that on a de facto basis all M&A transactions are held among private or non public stock companies and thus not involving the Securities Law and therefore the rules will vary depending on the type of M&A procedure (please refer to our answer to question 1.1).
1.3 Are there special rules for foreign buyers?

The main hurdles are the following: (i) documentation filling; (ii) tax valuation; (iii) labour credits; and finally (iv) some information that has to be granted to the market.
2.5 How much flexibility is there over deal terms and price?

The Uruguayan Investment Law (law number 16,906 dated January 7, 1998) sets forth an equal treatment to all foreign and local investors as a general principle. This means that foreign investors may develop any activity in the same condition as local investors. However, regarding maritime and air transportation there is an exception to the general principle: such regulations call for the ownership of 51% of the share capital by Uruguayans (in the case of air transportation) and similar for maritime law (but in this case in order to obtain certain tax benefits).
1.4 Are there any special sector-related rules?

As a general principle, deal terms and price depend on what the parties agree upon. The only exception is in the case of transference price rules between inter-company deals.
2.6 What differences are there between offering cash and other consideration?

There is no difference between offering cash or other considerations.

2.7 Do the same terms have to be offered to all shareholders?

In some sectors, such as banking, insurances, communications and, transportation which are regarded as key sectors, the law requires a prior authorisation by the competent authority before any transfer of shares or quotas or ownership is made in such companies.

No, in a private transaction terms may vary. In addition, it is worth noting that shareholders agreements are valid under Uruguayan law, and in such agreements, drag along rights, or first refusal or tag along rights may be freely stipulated among the shareholders.

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Uruguay

The liability depends on the chosen procedure to carry out the M&A transaction (please refer to our answer to question 1.1), basically considering if the procedure has as a consequence the continuity of the line of business or not.

Guyer & Regules

Uruguay

2.8

Are there any limits on agreeing terms with employees?

3 Friendly or Hostile
3.1 Is there a choice?

Employees may not waive acquired labour rights and no agreement to the contrary is valid.

Uruguay

A buyer has two options regarding the employees of the target company: (i) to dismiss the employees, paying them the severance payment; or (ii) keeping the employees but acknowledging their previous seniority and amount of salaries and social benefits.
2.9 What documentation is needed?

Hostile takeovers are not regulated under Uruguayan Law.

3.2 How relevant is the target board?

Please refer to our answer to question 3.1.

3.3 Does the choice affect process?

The answer to this query depends on the alternative chosen to structure the M&A transaction. Please refer to our comments on these alternatives to question 1.1 above.
2.10 Are there any special disclosure requirements?

Please refer to our answer to question 3.1.

4 Information
4.1 What information is available to a buyer?

Disclosure requirements depend on the terms of the agreement between the parties. Customarily, when the seller does not provide information of certain debts or obligations the liability is not transferred to the buyer.
2.11 What are the key costs?

The buyer has access to the information that arises from public registries, in Uruguay that is limited to: liens; members of the board of directors; real estate; and balance sheets. As a consequence of the limited amount of information emerging from the registries is that most of the times a due diligence is required.
4.2 Is negotiation confidential and is access restricted?

Key costs are notarial fees, registration fees and publications. Moreover, depending on the selected procedure the transaction may be subject to the payment of certain taxes, such as 22% VAT in the case of the transfer of the ongoing business concern or a 12% tax in the case of the transfer of registered shares.
2.12 What consents are needed?

For a merger it necessary to obtain approval by the Shareholders. In the case of activities that are subject to specific governmental controls (such as, for example, those described in question 1.4 above) the prior authorisation by the controlling authority is necessary. Finally, in the case of liquidated companies the Judge and the receivers have to approve the transaction.
2.13 What levels of approval or acceptance are needed?

In public companies, all information that is considered confidential shall not be disclosed because of the fact that it may affect the shares market value. Under the Uruguayan Securities Law, insider trading is regarded as the use of the information obtained by reason of office or position, including those transmitted by a client regarding its own pending orders, that it is not public and that if made public may considerably affect the share market value including the information regarding operations of the transference of ownership of stocks in order to obtain advantages in the securities trading. Hence, as negotiation may affect shares market value it is considered confidential and as a consequence its access is restricted.
4.3 What will become public?

Usually a relative majority in the Shareholders Meeting is enough in order to approve an M&A transaction, although some by-laws may establish special majorities in order to carry out this type of operations. Full governmental approval is required, when applicable (please refer to our prior answer).
2.14 When does cash consideration need to be available?

All documents and information registered in the public registries will be public. Moreover, in the case of public companies, the securities issuers must disclose all the essential information regarding the offer and the stock that is offered to the shareholders.
4.4 What if the information is wrong or changes?

If the information provided by the target company is not accurate or if it changes or is not updated, the seller will be liable for the disclosure of the wrong information. This provision is customarily agreed in all contracts.

There is no legal regulation as to when to make cash consideration available in private transactions. It will depend on the terms agreed upon by the parties.

5 Stakebuilding
5.1 Can shares be bought outside the offer process?

Please refer to our answer to question 3.1.

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5.2 What are the disclosure triggers? 7.4 How can the bidder get 100% control?

Uruguay

Please refer to our answer to question 3.1.

5.3 What are the limitations and implications?

The bidder may get 100% control by acquiring the ongoing business concern or by purchasing 100% of the shares of the company.

Please refer to our answer to question 3.1.

6 Deal Protection
6.1 Are break fees available?

8 Target Defences
8.1 Does the board of the target have to tell its shareholders if it gets an offer?

In private agreements there is always the possibility of establishing penalties in case of non-fulfilment of the terms of the agreement.
6.2 Can the target agree not to shop the company or its assets?

Generally the offer arrives directly to the shareholders not to the Board of Directors. However, if a good offer is presented to the Board of Directors they shall act with the diligence of a good businessman and shall communicate it to the shareholders.
8.2 What can the target do to resist change of control?

Yes it can. The extent and conditions of this obligation will depend on the agreement reached by the parties which is usually contained in a MoU. Penalties for non-compliance with this obligation can be included.
6.3 Can the target agree to issue shares or sell assets?

The only mechanism in order to resist a change of control is to establish in a shareholders agreement a first right of refusal. In our country there are no poison pills or golden shares.
8.3 Is it a fair fight?

In Uruguay leverage buyout is not specifically regulated. Thus, the matter may be regarded as debatable. Certain doctrine understands that leverage buyouts are valid, while others understand that such procedure is not valid due to the fact that such procedure could harm the rights of prior creditors.
6.4 What commitments are available to tie up a deal?

This is not applicable in Uruguay.

9 Other Useful Facts

9.1 What are the major influences on the success of an acquisition?

As a general rule, parties can freely agree to standard conditions precedent.

7 Bidder Protection
7.1 What deal conditions are permitted?

Since it is a business decision, the most relevant issues that will lead to the success of a transaction will be, among others, the price, the terms and conditions agreed between the parties and the added value to the company.
9.2 What happens if it fails?

Deal conditions are generally established in a letter of intent, there are no restrictions regarding the terms of the negotiation.
7.2 What control does the bidder have over the target during the process?

The consequence of the transactions failure depends on the terms agreed between the parties. Generally there are fines and penalties as a consequence of the failure of the transaction.

10
Usually, in the mentioned letter of intent certain measures are established in order to allow the bidder to have some control over the target company during the negotiation process. Customarily it is agreed, for example that the target will manage the goods of the company in order to preserve them or that some limits to the Board of Directors powers will be established during this process.
7.3 When does control pass to the bidder?

Updates

10.1 Please provide, in no more than 300 words, a summary of any relevant new law or practices in M&A in Uruguay.

Control passes to the buyer with the execution and performance of the transfer.

The new Securities Law (law number 18,627 dated December 2, 2009) establishes that the Banco Central del Uruguay (the Uruguayan Central Bank) shall regulate all matters concerning tender offers of shares of public companies. Therefore, for the first time, this legal mechanism for the purchase of shares is introduced into our legal regime. The regulation, however, has not yet been approved by the Banco Central.

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Uruguay

Please note that we do not have a statute of public acquisition offer (including hostile takeovers).

Guyer & Regules

Uruguay

Alejandro Miller
Guyer & Regules Pza. Independencia 811 11100 Montevideo Uruguay

Mara Noel Riotorto

Guyer & Regules Pza. Independencia 811 11100 Montevideo Uruguay

Uruguay

Tel: Fax: Email: URL:

+598 2902 1515 ext. 128 +598 2902 5454 ext. 7128 amiller@guyer.com.uy www.guyer.com.uy

Tel: Fax: Email: URL:

+598 2902 1515 ext. 276 +598 2902 5454 ext. 7276 mnriotorto@guyer.com.uy www.guyer.com.uy

Alejandro Miller, partner, born in 1955, works in the banking and corporate department, specialising in corporate, bankruptcy, insolvency proceedings and maritime law. He is a Professor at the State University Law School on Commercial Law and at postgraduate level for Corporate Law. He is also Professor at the University of Montevideo. He has taught at ORT University and Catholic University. He has published several articles on his specialty and is author of the following books: Board of Directors and Internal Auditor (2005); Shareholders Agreements in Companies (2009) and next to be published: Corporate Social Liability and Non Executive Directors liabilities. Alejandro is member of the Commercial Law Institute University of Uruguay. He has spoken on corporate, franchising, leasing and community law in Uruguay and abroad.

Mara Noel Riotorto, lawyer, mainly works in the Banking and Corporate Department. Her practice includes banking and financing transactions, public and private offer of securities, mergers and acquisitions and investment structuring in various areas, including forestry. She has a Master in Commercial Law (March 2009). She is fluent in Spanish and English.

Guyer & Regules is proud to be considered as Uruguays blue chip firm and first choice for international and domestic complex legal, accounting and tax work. Such reputation finds its grounds on its solid team of internationally trained professionals and the largest and most experienced group of partners in the country, who has become its clients trusted adviser. Guyer & Regules has been recognised by Chambers & Partners as Uruguayan Law Firm of the Year for a second consecutive year, being ranked in Band 1 in every area in which it renders services and being the only Uruguayan firm in Band 1 in Banking & Finance, Corporate/M&A and Dispute Resolution. The firm has also been granted the award Uruguay Tax Firm of the Year 2010 by International Tax Review (Euromoney). Some of the main international areas of practice are: Corporate/M&A, Banking & Finance, Litigation, Labour, Accounting & Tax, Real Estate, Telecommunications, Energy, Aviation and Insurance.

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The International Comparative Legal Guide to:

Mergers & Acquisitions 2011

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