Enrique Rodriguez-Burchard and Juan José Alcerro-Milla of Aguilar Castillo Love assess the regulatory landscape for mergers and acquisitions in Honduras
1. Regulatory Framework
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Code of Commerce is the main regulation for Honduran corporate and commercial law. It contains the main principles and regulations regarding corporations and companies as well as commercial contracts and agreements. As for the regulatory bodies, the primary regulator for M&A activity in Honduras is the Competition Agency (Comisión para la Defensa y Promoción de la Competencia, (CDPC)). The Agency is responsible for granting authorisation for mergers to take place. Without its permission, M&A cannot be carried out. For specific sectors, other regulators may be relevant, such as: the National Banking and Insurance Commission (Comisión Nacional de Bancos y Seguros, (CNBS)), and the National Telecommunications Commission (Comisión Nacional de Telecomunicaciones, (CONATEL)).
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
The Competition Agency enforces takeover regulation. It can authorise takeovers, authorise them under certain conditions, deny a takeover or order divestment.
2. STRUCTURAL CONSIDERATIONS
2.1. What are the basic structures for friendly and hostile acquisitions?
There are three principal ways to acquire a business in Honduras: shareholding, management control, and merger and acquisition of any rights on shares.
2.2. What determines the choice of structure, including in the case of a cross-border deal?
Choosing which structure to use involves many factors. Buyers and sellers often have competing interests. Before choosing a structure, it is essential to understand each factor and impact on the parties.
These factors include: transaction-related issues (dealing with small or large numbers of shareholders or directly with the directors); liability issues (all the target's business liability or specific assets); labour matters; commercial issues; governmental approvals or consents; and, tax-related aspects.
2.3. How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
It may depend on the circumstances and the complexity of the transaction and if it falls within regulated sectors or not. But it ranges from six to nine months, or nine to 12 months.
2.4. Are there restrictions on the price offered or its form (cash or shares)?
There are no restrictions in Honduras regarding the price offered or its form.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
There are no effective mechanisms or conditions in Honduras that allow the squeeze-out or elimination of minority shareholders.
A peculiarity of the Honduran legal system that deserves to be mentioned is that, in the case of acquisitions or takeover involving stocks of a Honduran entity, it is not possible for a single legal or natural person to acquire 100% of the shares of the target company, as legislation stipulates that any company must have at least two shareholders. However, it is allowed to purchase 100% of equity in the acquisition of assets.
Under Honduran corporate law, shareholders that represent 25% of the share capital are defined as minorities. They have the rights that the Commercial Law grants: one third of board of director members; the right to request the meeting of the general stockholders' assembly; and in the event that the corporation has more than three observers (corporate officials who keep check on management in the interest of all stockholders), minorities may appoint one of them. The stockholders of the merging companies who become stockholders of the new incorporated corporation will receive stock or partner interests in the amount agreed upon in the merging resolution; at that time, minorities may shift or may be squeezed out in the new corporation composition, if their interest drops below the 25% threshold.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Honduran corporate law does not provide for specific protection to minority shareholders against the payment of control premiums, preferential pricing for select shareholders, or partial acquisitions.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
For listed companies, offers cannot be subject to the condition of the buyer obtaining financing.
For privately held companies, no legal provisions prohibit an offer from being conditional on the buyer obtaining financing, or the absence of material adverse changes or truth of representations.
3. TAX CONSIDERATIONS
3.1. What are the basic tax considerations and trade-offs?
As for taxes, in a share sale, capital gains tax is payable at the rate of 10%. The gain per share is the difference between the sale price and the net book value of the share (articles 33 and 34, Honduran Income Tax By-Law; article 14 of Decree 113-2011 and Resolution SEFIN 01-2011, of the Secretary of State of Finance). Capital gains tax is payable on a share sale only if the sale qualifies as a Honduran-source transaction.
In an asset deal, the transfer of real estate is subject to a transfer tax Impuesto sobre tradición de bienes inmuebles) at the rate of 1.5% of the transaction price. No transfer taxes are payable on the transfer of other assets, or the transfer of shares.
3.2. Are there special considerations in cross-border deals?
On cross-border deals where the seller is a non-resident entity, the buyer is to withhold four percent of the purchase price on capital gains tax.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Typical regulation take-over defences are: antitrust laws; national security or protected industry review; foreign ownership restrictions; and, at a lower level, employment regulation.
Honduran Constitution and the Competition Law provide for monopolies, monopsonies and any other similar practices in business to be prohibited. Applicable antitrust regulations are found in the Competition Law (Decree number 357-2005) and its by-law (Accord 1-2007).
In foreign ownership restrictions, except for the aviation and transport sector, there are no restrictions on foreign investments in Honduras. The Law for Promotion and Protection of Investments (Decree Number 51-2011 – Ley para la Promoción y Protección de Inversiones) provides that no limitations should apply to access markets for individuals or corporations that establish their investments in Honduras.
As for labour matters, the transfer of ownership of a company cannot affect existing employment agreements. The previous employer will be held jointly liable in relation to any obligations arising from agreements made before the date of transfer, for a term of up to six months after the transfer, after which the new employer will assume full responsibility under the agreements.
4.2 How do targets use anti-takeover defences?
Honduran law does not allow for directors to use defensive measures.
However, the typical anti-takeover defence mechanism is the golden parachute: high compensation to directors.
4.3 Is a target required to provide due diligence information to a potential bidder?
Sales of companies by auction from bidders are not common in Honduras. Therefore, a target may provide information to a purchaser upon a previous negotiation towards a sale, but not in general to potential bidders.
4.4 How do bidders overcome anti-takeover defences?
As mentioned, sales of companies by auction from bidders are not common in Honduras. On private sales, when overcome by a potential purchaser, particularly in golden parachute provisions, this may normally be handled through negotiation strategies to lessen or distribute the impact on compensations.
4.5 Are there many examples of successful hostile acquisitions?
Hostile acquisitions are not common in Honduras.
SECTION 5: DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal form a hostile interloper?
As mentioned in 4.4, hostile takeovers are not common in Honduras.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
To protect a potential acquisition, a buyer may seek non-solicitation provisions and force the vote provisions, as deal security measures.
SECTION 6: ANTITRUST/REGULATORY REVIEW
6.1 What are the antitrust notification thresholds in your jurisdiction?
According to the Resolution 04-CDPC-2014-AÑO-IX issued by the Competition Agency, only the economic concentrations included in one of the following scenarios need to be notified to the Competition Agency for the purpose of verification:
6.2. When will transactions falling below those thresholds be investigated?
The Competition Law states that any M&A transaction that falls into the thresholds established by the Competition Agency, must be notified for its clearance and approval before entering into effect.
6.3 Is an antitrust notification filing mandatory or voluntary?
The notification before the Competition Agency for any M&A between Honduran entities that may fall below the thresholds listed above is mandatory.
6.4. What are the deadlines for filing, and what are the penalties for not filing?
Under Article 14 of the Competition By-Law, prior to entering into effect, parties must file for clearance before the Agency. Prior to entering into effect means:
The Competition Agency has imposed penalties of around $3,000 for late filings.
6.5 How long are the antitrust review periods?
From the date the Competition Agency receives all information and documents it requires to support the economic concentration, it has a period of 45 business days to issue the corresponding decision. If such period elapses without a decision, the transaction is deemed to be approved.
Fast-track processes are provided by articles 13 of the Competition Law Regulation, and decision 14-CDPC-2012 states that a 15-business day review period applies.
6.6 At what level does your antitrust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
The Competition Agency has the authority to verify mergers that take effect in the Honduran market or, if held or closed abroad, that have an effect on the Honduran market in any way.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
As for protected industries or foreign ownership restrictions, except for the security, aviation and transport sector, there are no restrictions on foreign investments in Honduras. The Law for Promotion and Protection of Investments (Decree 51-2011 – Ley para la Promoción y Protección de Inversiones) provides that no limitations should apply to access markets for individuals or corporations who establish their investments in Honduras.
On labour law issues, as mentioned, the transfer of ownership of a company cannot affect existing employment agreements. The previous employer will be held jointly liable in relation to any obligations arising from agreements made before the date of transfer, for a term of up to six months after the transfer, after which the new employer will assume full responsibility under the agreements.
7. ANTI-CORRUPTION REGIMES
7.1. What is the applicable anti-corruption legislation in your jurisdiction?
The Honduran legal system has important laws on anti-corruption. These are: the National Anti-Corruption Council Law (Decree 7-2005), which regulates the operation, functions and powers of the National Anti-Corruption Council; the Law on the Administrative-Officials Audit Tribunal (Tribunal Superior de Cuentas) and the Law of Transparency and Access to Public Information (Decree 170 – 2006), which guarantees the right of access to information, transparency and redemption of the accounts of administrative governance.
7.2. What are the potential sanctions and how stringently have they been enforced?
The Administrative-Officials Audit Tribunal has initiated investigations against government officials, and, in some cases, has determined fines and sanctions, and in a few other cases, has begun action for felony.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
Other than recent tax-related provisions and regulations that may have some further impact on local and cross-border transactions, there are no other material issues that might affect a deal.
8.2 What are the key recent M&A developments in your jurisdiction?
The most recent M&A related regulation change has been the modification of the threshold amounts by the Competition Authority after decision 04-CDPC-2014-AÑO-IX enacted in July 2014. The changes to the threshold amounts are described in 6.1.
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Aguilar Castillo Love
About the author
Rodriguez-Burchard graduated from the university of Honduras in 1988. He attended Boston university, where he gained a masters in international business law. He also completed the programme of instruction for lawyers at Harvard Law School in 2003. He also attended Georgetown University/ the central American institute of business administration to study legal aspects of international business in 2000 and the university of Salamanca, Spain to study banking law in 2002. He is a former judge for the civil court of Tegucigalpa and was head professor of civil procedure law at the university of Honduras. He is vice-president of the Honduran Bar Association and vice-president of the National Industrial Association. He speaks Spanish, English and Italian.
Juan José Alcerro-Milla
Aguilar Castillo Love
About the author
Alcerro-Milla graduated from the university of Honduras in 1994. He gained his masters from the Instituto de Empresa in Madrid. He is the author of Influence of DR-CAFTA on IP Law in Honduras. He is an arbitrator for the Honduran Chamber of Commerce and a member of the Honduran Bar Association and the International Bar Association. He speaks Spanish, Italian and English.