Private mergers and acquisitions in Panama 2020

By Maria De Lourdes Marengo and Nadya Price


Q&A guide to private mergers and acquisitions law in Panama - published by Thomson Reuters.

The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues. This Q&A is part of the global guide to private mergers and acquisitions law, published by Thomson Reuters.

Corporate entities and acquisition methods 1. What are the main corporate entities commonly involved in private acquisitions? The corporate entities most commonly involved in private acquisitions are companies (sociedades anónimas) constituted under Law 32 of 2017 (Corporations Law). Foreign companies can act as buyers in private acquisitions.

2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?

Restrictions on share transfer The Corporations Law allows a company's articles of incorporation to contain provisions restricting the transfer of its shares, but any restriction that absolutely prohibits the transfer of shares is null. Rights of first refusal are frequently included in the articles of incorporation. Some regulated activities in certain sectors impose special requirements on shareholders, and therefore restrict the transfer of shares to parties that do not meet the requirements.

Foreign ownership restrictions The Corporations Law does not restrict the foreign ownership of shares. However, under the National Constitution of Panama, retail sales can only be undertaken by Panamanian nationals. Panama aviation laws require at least 51% of the shares of Panamanian air carriers to be held by Panamanian nationals. Professional activities, including the practice of law, engineering and architecture, are also restricted to


Panamanian nationals. 3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)? Share purchases: advantages/asset purchases: disadvantages The main advantage in a share purchase is that the buyer acquires the company as it is, with all its assets, licences, contracts and experienced staff. The buyer does not have to go through the process of executing new commercial and labour contracts, paying transfer taxes and complying with formalities for the transfer of titles. Except for in certain regulated industries such as banking, insurance and trust services, a share purchase can be completed privately without the need for public filings or authorisations. In an asset purchase, the buyer must:

  • Negotiate new commercial and labour contracts.

  • Complete formalities for the transfer of assets.

  • Pay transfer taxes.

The seller may have to:

  • Sell unpurchased assets.

  • Cover pending liabilities.

  • Terminate any unwanted contracts.

Share purchases: disadvantages/asset purchases: advantages The main disadvantage of a share purchase is that the buyer acquires the company with all liabilities, which may have not been fully, properly or accurately revealed or evaluated. This can result in the buyer taking over liabilities that arose before the acquisition. Indemnities for these events are generally included in the share purchase agreement.

In an asset purchase transaction, assets are generally acquired free of liens and liabilities. However, Panamanian labour laws provide that when all or the majority of the assets of a company are sold, the seller and the buyer remain jointly and severally liable for a period of one year after the acquisition for labour liabilities that arose before the acquisition (see Question 31).

4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply. Sales of companies by auction are not common. There are no regulations on the sale of companies by auction.

Preliminary agreements 5. What preliminary agreements are commonly made between the buyer and the seller before contract?

Letters of intent The acquisition process starts with a letter of intent or memorandum of understanding whereby the parties express their mutual interest in pursuing the transaction. A letter of intent must be in writing but is typically non-binding. It typically includes:

  • The nature of the business.

  • Conditions that must be fulfilled for the completion of the transaction.

  • Whether the parties wish to pursue an asset purchase or a share purchase, or are open to explore both.

  • A confidentiality agreement.

  • A term of validity.

Exclusivity agreements Panamanian law allows parties to freely agree on contractual terms, unless those terms are contrary to the law or public policy in Panama. The parties can therefore validly agree on the exclusivity of an agreement. An exclusivity agreement must be in writing and is typically granted for a limited period. Remedies for breach of an exclusivity agreement include the right to claim either:

  • Compliance with the obligations contained in the agreement plus indemnification for losses, damages and interest.

  • Termination of the contract plus indemnification for losses, damages and interest.

Non-disclosure agreements Non-disclosure agreements are generally executed to maintain confidentiality before the release of information on a transaction. These are binding and must be in writing. They typically include:

  • A description of the information in question and its scope.

  • Exclusions, if applicable.

  • A commitment by the recipient to protect and maintain the confidential information.

  • Dispute resolution provisions, applicable law and indemnifications in case of breach of confidentiality.

The parties often include provisions to the effect that the execution of the non-disclosure agreement does not result in an obligation to complete the acquisition. Remedies for breach of the exclusivity agreement include:

  • Indemnification for losses, damages and interest.

  • The right to claim termination of the contract plus indemnification for losses, damages and interest.

Asset sales 6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?

Panamanian labour laws provide that when all or the majority of the assets of a company are sold, the seller and the buyer remain jointly and severally liable for a period of one year after the acquisition for labour liabilities that arose before the acquisition (see Question 31).

Assets are generally transferred subject to existing tax liabilities and liens or encumbrances. The buyer must ensure that all taxes on the assets are paid before transfer. A tax clearance certificate (paz y salvo) is required for the registration of the transfer of title of assets that are subject to registration, such as real estate property and certain movable assets. The Public Registry only registers the transfer of title after receiving evidence that the payment of the relevant taxes is up to date.

Assets subject to liens or encumbrances such as mortgages can only be transferred with the prior written consent of the creditor.

7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale? Creditors holding registered liens on assets must be notified of any proposed transfer, as the lien must be either cancelled or assumed by the buyer before the transfer of title. The secured creditor's consent is required if the buyer assumes the seller's obligations. There is no requirement for notification of an asset sale to non-secured creditors, except where there is a contractual agreement requiring this, or in mergers.

Share sales 8. What common conditions precedent are typically included in a share sale agreement? A share sale agreement generally includes the following conditions precedent:

  • The seller holds clean and legal title to the shares, free of any liens or charges.

  • The seller has complied with all its obligations under the share purchase agreement.

  • There are no orders issued by any governmental authority preventing the completion of the transaction.

  • There are no pending proceedings initiated by any governmental authority seeking an order and no other pending proceedings nor any applicable law or order that prevents, restrains or prohibits the transaction, or that makes it illegal.

  • The representations and warranties made by the parties are true and correct.

Seller's title and liability 9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?

The seller's title to the shares is contained in a share certificate stating the number of shares held. The ownership of shares becomes effective for the company when the share issuance or transfer is registered in the register of shares, which is a private registry generally kept by the company's secretary. Before closing, the buyer must request:

  • A copy of the share certificate.

  • An updated certified copy of the register of shares.

  • An officer's certificate confirming ownership by the seller.

There is no specific wording required for the transfer of shares. The seller must state its intention to transfer title to the buyer. Share transfers are generally mad