Private mergers and acquisitions in Panama | Preliminary Agreements

Authors:

María de Lourdes Marengo

Nadya Price


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 1: Preliminary Agreements

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 made through a share purchase agreement. This entails the:


  • Execution of the agreement.

  • Endorsement of the share certificate in favour of the buyer.

  • Request by the buyer to the board of directors of the company to note the transfer of shares in the register of shares.

  • Annulation of the share certificate being transferred.

  • Issuance of a new certificate in the name of the buyer.



10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?


Seller

Panama civil law recognises contractual and tortious liability. There are no express provisions under Panamanian law imposing liability on a seller for pre-contractual misrepresentations, misleading statements or similar actions. However, if a seller has acted with negligence or fault causing damage to a buyer, it can be liable in tort.

Advisers Similarly, if the seller's advisers have acted with negligence or fault, they may be liable in tort for the damages caused.


Main documents

11. What are the main documents in an acquisition and who generally prepares the first draft?


Sale purchase agreements are typically prepared by the seller's advisers.

The main documents in an asset purchase agreement are:


  • Deed of title to the asset.

  • Certificate confirming the asset is free of liens, encumbrances and charges.

  • Tax clearance certificates issued by the corresponding authorities.

  • Insurance policies, where applicable.

  • Purchase and sale agreement.

  • Corporate authorities of the parties approving the transaction and appointing attorneys for the execution of the transaction documents.

  • Evidence of identity and authority of the parties.

  • Legal opinion of counsel in the parties' jurisdiction of incorporation confirming their legal capacity and authority.


The main documents in a share sale acquisition are:


  • Articles of incorporation of the company and the amendments to them.

  • Evidence of payment of annual franchise tax.

  • Financial statements up to the year before the sale.

  • Purchase and sale agreement.

  • Certificate of the secretary or other officer of the company in respect of the shareholding.

  • Certified updated register of shares.

  • Share certificate in the name of the seller.

  • Letters of resignation of all directors and officers.

  • Shareholders' resolution accepting resignations of directors and officers and appointing new directors and officers, and new registered agents, when applicable.

  • Corporate authorities of the parties approving the transaction and appointing attorneys for execution of the transaction documents.

  • 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.


Acquisition agreements

12. What are the main substantive clauses in an acquisition agreement?


The main substantive clauses in an acquisition agreement are:


  • Identification of the parties.

  • Definitions.

  • Object.

  • Purchase price.

  • Form and time of payment of purchase price.

  • Time and place of completion.

  • Conditions precedent.

  • Deliveries by seller and buyer.

  • Confidentiality and announcements.

  • Causes and effect of termination.

  • Representations and warranties of the parties.

  • Covenants of the parties.

  • Conditions to completion.

  • Tax matters.

  • Indemnifications.

  • Responsibility for expenses and fees.

  • Governing law.

  • Notices.

  • Effects of variation and waivers.

  • Miscellaneous.

  • Date and place of execution.

13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

Panamanian law recognises the principle of freedom of contract and accordingly parties are free to agree on the law that will govern their relationship. Provisions of foreign law will be recognised and upheld by Panamanian courts unless they are contrary to the law or public policy in Panama.


Warranties and indemnities

14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?


In a share sale, the seller's warranties typically include:


  • Existence and good standing of the company and the seller.

  • Power and authority of the seller to enter into the agreement.

  • No requirement for the consent, approval or authority of any other person to execute the agreement.

  • Obligations under the agreement are valid, binding and enforceable against the seller.

  • Legal, valid and clean title on shares.

  • Compliance with laws.

  • No encumbrances or restriction on the transfer of shares.

  • Due execution and compliance with laws and contracts by the company and the seller.

  • Payment of taxes.

  • Payment of labour liabilities and compliance with labour laws.

  • Accuracy of inventories.

  • No litigation pending.

  • No insolvency.

  • Accuracy of financial statements.

  • Compliance with environmental laws.


In an asset sale, the seller's warranties typically include:


  • Existence and good standing of the seller.

  • Power and authority of seller to enter into the agreement.

  • No requirement for consent, approval or authority of any other person to execute the agreement.

  • Obligations under the agreement are valid, binding and enforceable against the seller.

  • Legal, valid and clean title to the asset.

  • Compliance with laws.

  • No encumbrances or restriction on the transfer of the asset.

  • Due execution and compliance with laws by the seller.

  • Compliance with laws.

  • Payment of taxes.

  • Payment of labour liabilities and compliance with labour laws.

  • No pending litigation that affects the asset.

15. What are the main limitations on warranties?


Limitations on warranties There are no limitations on warranties. Parties are free to agree on the warranties provided.


Qualifying warranties by disclosure The parties can qualify the warranties by schedules of disclosures.


16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?

Remedies Remedies for breach of a warranty include the right to claim either:

  • Compliance with the warranties, where feasible, plus indemnification for losses, damages and interest.

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


Time limits for claims under warranties The statute of limitation for claims under warranties is three years from the date on which the warranty is due.



Next chapter: Consideration and acquisition financing



First published in Thomson Reuters - Practical Guides.

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