10 things to know about M&A in Colombia

The two main corporate structures preferred by both national and international clients are Simplified Stock Corporations (“S.A.S.” or “Sociedad por Acciones Simplificadas”) and the Stock Corporations (“S.A.” or “Sociedad Anónima”). Liability in both structures is fully limited. The S.A.S. structure offers shareholders more flexibility in matters of corporate governance, paid-in capital and incorporation. The S.A. is more demanding for shareholders and management, but some types of businesses can only be carried out by this type of company, including certain financial activities. Foreign investors may also conduct business in Colombia by establishing Colombian branches; these are deemed extension of the foreign company, who is liable for the obligations of the branch.

The S.A.S. corporate structure can be incorporated with a sole shareholder, whereas the S.A. structure requires at least five. In both cases, shareholders may be national, foreign or legal persons. Foreign shareholders are required to obtain a Colombian tax registration number (NIT). There is generally no minimum share capital for the incorporation of a S.A.S. or S.A. However, S.A. shareholders have to subscribe at least 50% of the issued capital and pay at least one third of the value of those subscribed shares at the time of incorporation. For the S.A.S., the only capital requirement is that the subscribed capital must be paid within a 2-year period after incorporation.

Foreign loans, capital contributions and share acquisitions in Colombia need to be registered before the Central Bank.

The management structure of a S.A.S. is flexible and it is possible not to have a board of directors, just a sole legal representative (akin to an executive director). An S.A., on the other hand, requires a board of directors with at least three members and at least one legal representative. The members of the board of directors and legal representatives can be foreign individuals.

Legal due diligence is essential in every transaction. Special attention must be paid to labour matters, as employment regulation in Colombia is very rigorous and contingent labour liabilities can have high values. Tax, social security, corporate and data processing, and environmental matters should also be thoroughly reviewed. Potential risks can be mitigated in M&A transactions through enforceable contractual protections and guarantees

Rather than covering risks through standard indemnity policies or putting aside funds in escrow accounts for any required cover, buyers (or sellers) transfer risks of losses to the underwriters. In these deals, with the support of legal and financial advisors, insurers carry out due diligence processes to determine if the representations given by the sellers (in buyer-side deals) or buyers (in seller-side deals) have sufficient due diligence and identify those risks that can be transferred by the proposed insureds to the underwriter through R&W insurance (or W&I insurance in the UK market) structures. This practice is very common in M&A transactions under the laws of a State of the United States of America, such as New York or Delaware, when having a Colombian underlying asset. Additionally, a new trend has emerged in M&A transactions under the laws of Colombia, in which such transactions are also being supported by R&W insurance. The focus of these deals has mostly been around energy, oil and gas, renewable energy and infrastructure sectors, although it has started to be implemented in transactions of other industries and lesser amounts.

The transfer of shares in Colombian corporations can be made through a private agreement. Although the private agreement creates a binding transfer as between the parties, new shareholder must be registered in the stock ledger of the target for the transfer to have effect before third parties. Share transfers in Colombia are generally subject to a right of first refusal of the other shareholders, which should be waived or complied with.

When two combining companies are engaged in the same economic activity or participate in the same value chain in a vertically considered market, are not part of the same corporate group and together have assets or operative income superior to an amount designated by the Superintendency of Industry and Commerce (“SIC”) (currently around 18 million USD), they must notify, or in some cases be authorized by, the said Superintendency before completing the transaction, regardless of its legal form. Also, if the company is supervised or under the control of the Superintendency of Corporations or any other superintendency, prior consent of the relevant superintendency is required.

Dispute resolution is better left to national or international arbitration, which allows the application of foreign governing law in transactional documents. Colombian courts tend to be slower and unpredictable, although the Superintendency of Corporations has a court specialized in corporate matters, which we recommend using where disputes relate solely to corporate law matters.

Ancillary restrictions doctrine has been the basis for acknowledging the lawfulness of non-compete clauses, by the SIC. Those covenants are commonly used for 2–3-year periods, although 5 years period has been enforced. They should be necessary and accessory to a main contract, and sufficiently limited in scope and time. SIC has set out criteria to assess whether such covenants may impose an excessive restriction: (i) relevant market as to the product and region, (ii) number of agents in the supply-side, (iii) and market shares held by the parties to the contract.