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Lexology Getting The Deal Through is delighted to publish the fifth edition of Private M&A, which is available in print and online at www.lexology.com/gtdt Lexology Getting The Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers.
Throughout this edition, and following the unique Lexology Getting The Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Latvia and Spain.
Lexology Getting The Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.lexology.com/gtdt. Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers.
Lexology Getting The Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise. We also extend special thanks to the contributing editors, Will Pearce and Louis L Goldberg of Davis Polk & Wardwell LLP, for their continued assistance with this volume.
Fabio J Guzmán Saladín and Pamela Benzán Arbaje
STRUCTURE AND PROCESS, LEGAL REGULATION AND CONSENTS
1) How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The Company Law establishes different business combinations, allowing companies to gain control over other companies via a direct acquisition, a spin-off or by joining forces with a competing company through a merger or special purpose vehicle. The timeline will depend on the agreement that the parties have reached regarding the valuation of the acquisition target or of both companies involved.
A typical transaction involves a preliminary agreement, such as a memorandum of understanding (MOU), a letter of intent (LOI) or even a promise of sale. After arriving at an agreement on the general valuation and other terms of the deal via an accepted offer letter, MOU or LOI, the parties may decide to start the due diligence process immediately, retain advisers and draft the necessary documents to execute the operation. The due diligence and preparatory process could take from 15 days to a month, depending on the complexity of the transaction and the companies involved. Once the documentation has been signed, the filing process to record the acquisition takes from two to five working days. Obtaining an updated tax ID from the tax authorities reflecting the new shareholders, however, can take up to three months.
2) Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
M&A is governed by several laws in the Dominican Republic. The main laws to consider in every M&A transaction involving private companies are:
The acquisition of shares in a company, a business or assets must be governed by local law so long as the company in question is Dominican or the assets are located in the Dominican Republic. If a transfer is executed in the parent company, only the registration of the transfer in the Dominican registries must comply with local law.
3) What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
The acquirer of shares or stocks becomes the new owner of those shares or stocks and will be named shareholder or stakeholder, respec- tively. This is a legal title prescribed by law. There are no automatic
transfers of legal title to shares in a company, a business or assets. Even if there are heirs, a legal process must be completed before the legal title is considered transferred. For the purposes of the Anti-Money Laundering and Terrorism Finance Law 155-17, there is a difference between legal and beneficial title. The legal title is given by the ownership documents, such as the certificate of title or share certificate, while the beneficial owners are those that exercise ultimate control over the company through direct or indirect participation in the company of over 20 per cent of the company or by effective control through decision-making.
4) Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
It depends on the type of corporate vehicle being sold (limited liability company, simplified stock corporation or stock corporation). Moreover, the articles of incorporation or by-laws of the company may include provisions that oblige sellers to obtain the other shareholders’ or stock- holders’ approval to sell unless a drag-along clause exists that could force the minority shareholder to join the sale.
Exclusion of assets or liabilities
5) Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Labour, environmental and tax liabilities will be the responsibility of the company, thus affecting the new shareholders, even if the liability was generated for acts or negligence before the transaction. However, the parties may agree on indemnification clauses to cover liabilities that affect the company after the acquisition. Consents and notifications are not required to effect the transfer of assets or liabilities in a business transfer, except for specific regulated companies.
6) Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
There are no indications in Dominican law that refer to the possibility of the government influencing or restricting the completion of business combinations or acquisitions other than for reasons of national security. Nevertheless, some industries are subject to consents from specific regulators or government bodies, including, among others, the following.
7) Are any other third-party consents commonly required?
Consent of the sellers is required unless drag-along rules apply that force the minority shareholders to join the sale of the majority shareholders.
8) Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Filing with the Mercantile Registry and Tax Authority is required. For regulated industries, additional filings are required. There are fees to be paid at the Mercantile Registry that are calculated based on the capital of the company resulting from the transaction. Moreover, stock, assets and real property transfer taxes and capital gain taxes will apply, which must be paid to the Internal Revenue Department. According to Tax Norm 07-2011, withholding tax at a rate of 1 per cent of the total income received for the purchase of stocks or shares
of a company must be paid by the purchaser to the Tax Authority as an advance payment of the applicable capital gain taxes to be paid by the seller. Other withholding taxes may also be imposed if the seller is a foreign company not registered in the Dominican Republic.
ADVISERS, NEGOTIATION AND DOCUMENTATION
9) In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Financial advisers and accountants are customarily appointed to assist in the transaction to perform legal, regulatory, tax and financial due diligence of the target. Typically, the party that appoints the adviser negotiates the fees and terms of appointment freely with the adviser.
Duty of good faith
10) Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction? The Civil Code establishes a general principle for all the parties to execute and negotiate agreements in good faith. The law does not impose any other obligation on the parties when negotiating a transaction.
11) What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
The documents that are normally executed at closing are: the transaction agreement; a closing checklist; attachments or exhibits; asset transfer authorisations; escrow agreements; consents and authorisations; waivers; and other additional documents, depending on the scope of the operation and sector requirements.
The documents for acquiring shares and business are very similar as they both involve a stock or share purchase agreement and minutes approving the sale, which must be registered both at the Mercantile Registry and the Tax Authority.
On the contrary, if assets subject to registration, such as real state and vehicles, are sold, the sale agreements will be registered at the Title Registry or the Tax Authority, respectively. In those cases, minutes from the seller approving the sale will also be required.
12) Are there formalities for executing documents? Are digital signatures enforceable?
The signatures on the sale agreements must be legalised by a notary. If the transaction involves foreign documents, they must also be apostilled and translated into Spanish. E-commerce law establishes equal value on electronic documents and hard copies. Judiciary precedents also establish equal value, provided that the electronic data is reliable and auditable.
However, companies must complete a process to register their digital signatures with a certifying entity, such as the Chamber of Commerce and Production of Santo Domingo, before signing the agreement for it to be considered electronically agreed and, therefore, binding and enforceable.
DUE DILIGENCE AND DISCLOSURE
Scope of due diligence
13) What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
The scope of due diligence depends on the sector of the M&A transaction. Nonetheless, standard due diligence for buyers involves corporate, tax, securities exchange (if a public company), intellectual property, labour and social security, litigation, finance and regulated sector compliance. Buyers usually perform their own due diligence based on documents provided by the sellers and others gathered from the public authorities. Sellers are unlikely to provide due diligence reports to prospective buyers in the Dominican Republic.
Liability for statements
14) Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Yes. A seller can be liable for pre-contractual or misleading statements. It is important that this possibility be included within the final contract. Parties can exclude this liability by mutual agreement.
Publicly available information
15) What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
The buyer has free access to the following documents:
A buyer will most likely perform all the above searches before entering into an agreement. Documents not publicly available will be requested from the seller. Impact of deemed or actual knowledge.
16) What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
A buyer’s actual or deemed knowledge at the time of entering an acquisition may preclude claims being brought against the seller in respect of relevant representations, warranties and covenants. Parties are generally free to modify this principle and set out the way in which actual or deemed knowledge of the buyer may or may not affect any claims afterwards.
PRICING, CONSIDERATION AND FINANCING
17) How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
The locked-box mechanism is more common. There is usually no price adjustment or true-up between the signature date and closing.
Form of consideration
18) What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Consideration is usually cash. Other forms are possible but not common. It is customary to pay multiple sellers under the same consideration and based on their participation on the company; however, there is no obligation to do so.
Earn-outs, deposits and escrows
19 Are earn-outs, deposits and escrows used?
Earn-outs are not common. Deposits and escrow are typically used whenever there is a pending payment, precedent condition or obligation.
20) How are acquisitions financed? How is assurance provided that financing will be available?
Acquisitions are usually financed by private investors, trust funds or banks. The closing and signing usually take place the same day of the payment, so the financing is usually already approved at the day of closing; therefore, it is not a pending issue unless a preliminary agreement is reached with a pending payment clause requiring finance. In that event, guarantees are usually provided to secure payment in case financing is not obtained.
Limitations on financing structure
21) Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
Sellers are not restricted from giving financial assistance to a buyer in connection with a transaction, and there are no limitations that impact the financing structure.
CONDITIONS, PRE-CLOSING COVENANTS AND TERMINATION RIGHTS
22) Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
It is customary to include closing conditions in the agreements, such as successfully completing a due diligence with positive results, such as the following:
23) What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
The term to complete the due diligence and the obligation on the seller to provide all required documentation to the buyer to complete such due diligence are usually established as closing conditions. If the subject of the acquisition is a regulated company, closing conditions usually include obtaining the corresponding approvals or certifications from the public authorities confirming the validity of the licences or authorisations
24) Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Pre-closing covenants are usually agreed by the parties in preliminary agreements. The scope of the covenants will be extensive and usually includes requirements to maintain adequate levels of insurance, requirements to supply audited financial statements, compliance with applicable laws, maintenance of the normal course of business and maintenance of proper accounting books and credit rating. Breaches usually entail the termination of the agreement, and remedies vary depending on the terms of the transaction. If down payments are made, an obligation to reimburse plus a penalty are usually included.
25) Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Owing to the nature of the agreements, termination by unilateral decision is usually restricted, and termination may only occur in the case of breach or common agreement. Termination clauses are usually included to cover unsuccessful due diligence for negative findings or non-cooperation of the seller.
26) Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Break-up fees are common in the Dominican Republic and usually apply if the sellers back out of the transaction without proper justification as it would be a breach from the buyer side to the terms of the preliminary agreements. There are no applicable restrictions on paying break-up fees.
REPRESENTATIONS, WARRANTIES, INDEMNITIES AND POSTCLOSING COVENANTS
Scope of representations, warranties and indemnities
27) Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
The seller usually gives representations, warranties and indemnities to the buyer regarding authorisation to sign the agreements, compliance with laws, absence of labour and tax liabilities, non-existence of antimoney laundering and bribes practices, environmental compliance and non-existence of litigation.
There is a legal distinction between representations, warranties and indemnities that refers to the scope, reach and effectiveness of the enforceability of the legal obligations. They are usually bundled together in the same section of a stock or share purchase agreement (SPA).
Limitations on liability
28) What are the customary limitations on a seller’s liability under a sale and purchase agreement?
Liability is usually limited to any acts performed by the company and its officials or non-compliance that may carry liability until the date of signature of the agreement or the date of possession by the buyer. However, most SPAs include extension of the seller’s liability, mostly in relation to non-compete clauses, continuance of collaboration and taxes.
29) Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Transaction insurance is not common in the Dominican Republic.
30) Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Post-closing covenants are common in the Dominican Republic. The scope usually includes confidentiality and non-compete clauses, litigation support and responsibility for cases involving the past administration of the company, tax liabilities, labour and environmental liabilities generated before the transaction and the timely provision of documents and information.
31) Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Yes. Asset transfer tax is 2 per cent, and real estate transfer tax is 3 percent. The acquisition of a business is considered to be an asset transfer and thus involves a 2 per cent transfer tax.
Corporate and other taxes
32) Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?Depending on the type of assets involved in the operation, tax considerations usually include:
Income tax, tax on assets and real estate tax are covered by the seller until the date of closing. Asset transfer tax and real estate transfer tax are borne by the buyer, while capital gains tax is borne by the seller.
EMPLOYEES, PENSIONS AND BENEFITS
Transfer of employees
33) Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
In an acquisition, the buyer must maintain the existing contracts with the employees or terminate their agreements and pay the legal severance packages. Employee credits are preferred over other credits owing to their nature. Where an employee union is involved and a collective bargaining agreement is in place, this may affect the transaction.
If the buyer is not interested in keeping the employees, the seller terminates the agreements and pays the corresponding severances before the signing of the final documents. This is usually included as a condition precedent to the signing of the final transaction documents or payment. The Labour Code provides that the terms and conditions of an employment agreement cannot be varied to the detriment of the employees under any circumstances. Furthermore, the resulting or remaining legal entity from a merger is responsible for all the employment agreements of the absorbed company since a continuation of the original employer–employee agreement is in effect.
Notification and consultation of employees
34) Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Transfer of pensions and benefits
35) Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
There are no obligations to notify or consult with employees or employee representatives on the pension rights of employees. Consent and filings are not required.
UPDATE AND TRENDS
36) What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
The M&A market in the Dominican Republic is mainly fuelled by its attractiveness to foreign investment. The recent legal framework concerning insolvency matters, movable assets warranty, competition law, anti-money laundering legislation, trust law and the new norms for mining and energy public procurement have produced a positive effect that will strengthen the country’s position in the sector and increase the number of M&A transactions.
New rules and regulations in the insurance and financial markets will attract new M&A activity in those sectors. In addition, the tourism industry continues to receive significant attention, considering the Dominican Republic’s strategic position and the regular increase of numbers in this market.
Finally, the inflow of new capital from Latin America in the consumer sector forecasts significant activity in this field. There are several bills in Congress that will have a positive effect on M&A activity in the Dominican Republic, namely:
37) What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?
Several relief programmes and other initiatives for families, workers and healthcare providers have been implemented in the Dominican Republic to address the pandemic; however, none of them directly affects the M&A practice area.
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We appreciate your interest in our services. If you wish to consult us, please fill out the form below with your personal information and send us your questions. We will answer you as soon as possible.