Private mergers and acquisitions in Panama | Consideration and acquisition financing
Q&A guide to private mergers and acquisitions law in Panama.
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.
Chapter 2: Consideration and acquisition financing
Consideration and acquisition financing
17. What forms of consideration are commonly offered in a share sale?
Forms of consideration
Cash and non-cash consideration (including stock-for-stock) are acceptable for the purchase of shares, but cash is most commonly used.
Factors in choice of consideration
The choice of consideration is often influenced by the type of company that is being acquired, and the parties' liquidity and the value of the transaction.
28. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?
The interested party must file a registration request through a qualified lawyer. The request consists of two parts:
The first part containing the information required for the prospectus.
The second part containing the information and documents required for filing with the Superintendence of the Securities Market (Superintendencia del Mercado de Valores) (Superintendence), such as material contracts, incorporation documents, and so on.
Consents and approvals
The following are subject to registration with the Superintendence:
Securities, in a public offering that is subject to the approval of the Superintendence.
Shares of issuers domiciled in Panama that, on the last day of the fiscal year, have 50 or more shareholders domiciled in Panama that are the effective owners of 10% or more of the paid in capital of the issuer (excluding affiliates and employees, directors and officers).
Securities listed on any Panamanian Stock Exchange.
The issuer cannot negotiate the securities subject to the offering before approval from the Superintendence.
In addition, under the Panama Securities Law, an issuer must notify the Superintendence of any tender offer that either:
Is for more than 25% or more of the issuer's issued and outstanding stock.
Would result in the acquisition by the offeror of over 50% of the issuer's issued and outstanding stock.
This notice must also be delivered to the issuer and to the stock exchanges in Panama where the shares subject to the tender offer are listed.
The following offers, sales and transactions are exempt from registration with the Superintendence:
The offer and sale of government securities or government-backed securities, including securities issued by international institutions in which the government participates.
Private placements, which are offers of securities made by the issuer or any affiliate of the issuer to no more than 25 persons with no more than ten buyers within a one-year period.
The offer and sale of securities to institutional investors.
Corporate transfers, including:
offers, sales, distributions, transfers and exchanges of securities between an issuer and holders of its securities in connection with the payment of dividends from shares or other securities of the issuer;
reorganisations, dissolutions, liquidations or mergers of the issuer;
the exercise of rights or options granted by the issuer; and
offers of shares to increase the capital of the issuer that are made exclusively to its existing shareholders.
The offer and sale of securities by an issuer exclusively to its employees, directors or officers, or to the employees, directors or officers of its affiliates.
Requirements for a prospectus
Prospectuses must contain financial statements and information on the issuer, its operations, business and securities as required by the Superintendence, as well as any additional information that the issuer wishes to include, as long as it is relevant and not otherwise legally prohibited.
There are no statutory requirements for private offerings.
19. Can a company give financial assistance to a potential buyer of shares in that company?
There are no restrictions on companies providing financial assistance to a potential buyer.
There are no exemptions, as Panamanian law does not restrict financial assistance to a potential buyer.
Signing and closing
20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?
The documents commonly produced and executed on signing in a private company share sale are:
Certificate issued by the relevant authority evidencing the existence of the parties.
Evidence of payment of annual franchise tax.
Secretarial certificate confirming the shareholding of the company.
Copy of the resolution of the board of directors of the buyer authorising the purchase of the shares and the transactions contemplated by the share purchase agreement, certified by the secretary of the company as validly adopted and in full force and effect.
Written resignations signed by each officer and director of the company, including revocation of all powers of attorneys granted to them by the company.
Shareholders' resolution accepting resignations of directors and officers, and appointing new directors and officers, and registered agents, when applicable.
Copy of the resolution adopted by the seller's shareholders authorising the sale of the shares and the transactions contemplated by the share purchase agreement, certified by the secretary of the company as validly adopted and in full force and effect.
Written confirmation that none of the warranties set out in share purchase agreement have been breached.
Articles of incorporation of the company and any amendments to them.
Financial statements up to the year before the sale.
Purchase and sale agreement.
Evidence of the identity and authority of the parties.
Legal opinion of counsel in the parties' jurisdiction of incorporation confirming their legal capacity and authority.
The documents are commonly produced and executed at closing in a private company share sale are:
Certificate(s) representing the shares, duly endorsed in the name of the buyer by the seller.
Updated register of shares evidencing the share transfer.
Delivery of endorsed share certificates is not required for asset sales. Instead, a deed of title for the assets, together with tax clearance certificates and insurances policies if applicable, must be produced in addition to the sale and purchase agreement.
21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?
Commercial contracts are not normally subject to special formalities for validity. Whatever the form and language of the contract, the parties are subject to the terms agreed on between them. Good faith and the parties' real intentions prevail. Any commercial obligations exceeding USD5,000 must be in writing or filed technologically.
The transfer of real estate property requires the execution of a public deed before a notary public in Panama, where the terms and conditions of the sale are recorded. The seller must provide evidence of payment of property transfer taxes, including tax clearance certificates and confirmation of utilities and condominium fees (if applicable). These are reviewed by the notary public.
The notarial public deed must be filed and registered at the Public Registry. Title to the property is effectively transferred on registration.
Documents executed abroad must comply with the formalities of the place of execution. It is advisable to have the documents notarised by public notary in the place of execution as, in the event of enforcement in Panama, submission in evidence may be easier as authenticated documents are presumed to have complied with all the legal formalities of the jurisdiction where they are executed.
22. What are the formalities for the execution of documents by foreign companies?
(see Question 21).
23. Are digital signatures binding and enforceable as evidence of execution?
Under Law 51 of 2008, modified by Law 82 of 2012 and regulated by Executive Decree 40 of 2008, digital signatures are binding and enforceable as evidence of execution provided that the signature is:
Unique to the person using it.
Under the exclusive control of the user.
Linked to the information or message.
24. What formalities are required to transfer title to shares in a private limited company?
Registered shares in a private limited company are transferred by endorsement and a corresponding annotation in the company's share register book.
Under the provisions of Law No. 47 of 2013, as modified by Law 18 of 2015, which regulates the custody of bearer shares, for a transfer of bearer shares to be perfected, the authorised custodian of the shares must be notified in writing of the transfer and the buyer must issue a sworn declaration confirming the contact details.
Tax 25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?
Capital gains derived from a share sale are subject to a 10% tax, of which 5% must be withheld by the buyer as an advance and paid to the authorities. The seller can choose to consider this advance as the definitive capital gain tax or request the return of the surplus when it considers that the amount withheld is greater than the tax on the profit obtained at the 10% rate.
Transfer of movable goods and services tax (Impuesto de Transferencia de Bienes Muebles y Prestación de Servicios) (ITBMS) of 7% is payable on transfers of moveable chattel assets.
Capital gains tax at 10% is payable on profits made on the sale of real estate property. The seller of the property must pay 3% on the sale price or the registered property value, whichever is higher, as an advance on the income tax payable on seller's capital gains and has the option to consider the 3% tax payment as the definitive income. If the sum withheld exceeds the amount resulting from the application of the 10% rate to the gain obtained from the sale, the seller can file a special tax return to credit the sum retained and claim the excess resulting as a credit in their favour.
26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?
There is no tax payable on the transfer of shares if the company has not engaged in commercial activities in Panama.
If a transfer results from a merger or corporate re-organisation or consolidation and the shareholder only receives other shares in the surviving entity or its affiliate, the transfer of shares is exempt from capital gains tax.
Food, medicine, medical services and crude oil are exempt from ITBMS in Panama.
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?
No corporate taxes are payable on a share sale.
Corporate tax is only applicable if the asset sale is part of the company's ordinary business activities. Sales giving rise to gains as part of the company's ordinary business are subject to a corporate tax rate of 25%.
28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?
No corporate taxes are payable on a share sale.
Corporate tax is only applicable if the asset sale is part of the company's ordinary business activities.
If any of the parties is a national of any of the nations with double-taxation agreement with Panama, it may be possible to reduce the applicable taxes.
29. Are other taxes potentially payable on a share sale and an asset sale?
Under the general stamp tax provisions, tax of USD0.10 per USD100 fraction of value of the document or transaction applies to all contracts that refer to acts that are subject to Panamanian jurisdiction and that are not subject to a special tax.
There is an exception to this general provision for documents that refer to matters that do not generate taxable income in Panama, unless those documents are used, or filed before Panamanian courts or administrative authorities, in which case the stamp tax must be paid.
30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?
Companies in the same group are not able to surrender losses to each other for tax purposes.
31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?
Panamanian labour laws provide that when all or the majority of the assets of a company are sold causing the substitution of the employer, 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.
The substitution of the employer must be notified in writing to employees and their unions no later than 15 days after the date of transfer. Failure to give notice will maintain the joint and several liability between old and new employer until notice is given and the one-year period lapses.
Under the Panamanian Labour Code, changes to the legal or economic structure of the company or the substitution of an employer must not affect the employment relation to the detriment of the employees. The employees and respective unions must be notified of the substitution of the employer in writing within 15 days following the date of substitution. The seller is jointly liable with the buyer for the obligations derived from employment contracts or Panamanian law that arose before the date of substitution, for a period of one year from the date of notifying the employees of the substitution. Once this period is concluded, the responsibility remains solely that of the buyer. A failure to notify maintains the joint liability of the sellers and the buyers until the notification is made.
32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?
The substitution of the employer in a business sale must not affect existing employment relationships in a manner prejudicial to employees.
The replaced employer remains jointly and severally liable with the new employer for obligations under the labour agreements or imposed by law that arose before substitution one year from the notice given to employees of the substitution. After this term, the new employer has sole liability.
In a share sale, the company remains liable for obligations under the labour contracts. The share sale must not affect existing employment relationships in a manner prejudicial to employees.
Transfer on a business sale
See above, Asset sale.
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First published in Thomson Reuters - Practical Guides.