18-06-2021
In the past few years, the economies of Latin America have grown steadily, making the region one of the world’s most important emerging markets. The rapid growth of Latin American markets presents acquirers with attractive business opportunities from across the global. While investment in the region is hitting new highs, there remains an inescapable perception that transactions in Latin America come laden with risk. How can it be combated by pre-deal due diligence?
Regardless of the risk environment, due diligence should be an integral part of any deal. If a proper analysis is made of the company, its assets, activities, and how the country regulates these, the potential risks may be properly assessed and the corresponding rates of return required for the investment may be calculated. Due diligence should always include accounting due diligence performed by an audit firm, which should also review the practices and routines of the target, in order to identify potential hidden liabilities. It should also involve legal due diligence, which will analyse risks associated with contracts and litigation, including civil, tax and labour litigation. Environmental due diligence is a must, giving acquirers the chance to analyse the site where the company is located and asses any potential liabilities associated with its activity. Going beyond the target, it is also critically important to learn as much as possible about the local market, including potential partners and competitors.
Acquirers should also monitor any legal developments in target countries, in order to ensure that they can comply and even benefit from the respective M&A regulatory frameworks, which, again, are characterised by their diversity. Countries including Venezuela, Argentina and Ecuador are considered among the most challenging regulatory environments, while Brazil, Mexico and Colombia are seen as conducive to dealmaking. Chile has, for the past few years, drawn plaudits as the most favourable regulatory environment.
Disclosure schedules are instrumental in the allocation of risk between the parties. Some sections to the disclosure schedules are exceptions to representations and warranties and other sections include information (usually in the form of lists) with respect to which certain representations and warranties are made. The seller will usually want the former to be broad and over-inclusive, to shift the risk to the buyer, and to limit the latter to what is strictly necessary, to keep the representations as narrow as possible.
The structuring and preparation of the disclosure schedules is often far from routine for the target representatives involved in the process, and in the case of family-owned targets, it may prove challenging to gather all information necessary for the disclosure schedules to be completed accurately. On the one hand, the seller’s counsel normally aims to be over-inclusive in the disclosure schedules (in which the seller discloses and acknowledges the existence of certain risks) to avoid liability for breach of representation, or worse, concealment or failure to disclose, but without affecting the price of the transaction and without assuming unnecessary commercial exposure. On the other hand, buyers will advocate for certain disclosure schedules (especially those that are exceptions to representations and warranties) to be limited in scope, specific in wording and contain only disclosures of known contingencies, as opposed to generic risks (it is common for the buyer to require the seller to disclose all issues required on each schedule, and not allow a disclosure in a single schedule vis-à-vis a specific representation and warranty, to be considered as a disclosure with regard to all other representations and warranties). In any case, the review of the disclosure schedules prepared by the sellers are an invaluable tool to confirm any findings of the due diligence review, and to point to possible liabilities or contingencies which may not have been detected.
The disclosure schedules may be overlooked by some and considered as low value, routine and irritating work. In practice, their importance lies in the fact that they may reverse terms included in the face of the transaction agreement, may shift the allocation of risks among the parties for known and unknown issues, and can alter the damages and degree of liability of the parties. The disclosure schedules’ impact on the bring down of representations and warranties may also affect the certainty of closing (especially when the agreement allows for the disclosure schedules to be updated during the period between signing and closing).
A key technological tool for the due diligence process has been the use of virtual data room platforms, which allow the buyer and its advisers to conduct a remote review of all relevant documents, and allows the seller to keep track of the documents reviewed, set up specific confidentiality and security restrictions for sensitive documents and promptly answer any questions though the Q&A features. The use of this tools is widespread in Latin America, and the physical review of documents has become the exception.
Due diligence findings will vary by target, by country, by industry and by level of thoroughness of the due diligence process and access to information. However, certain areas tend to yield a higher number of issues upon a rigorous review, including taxes, labour and employee benefits and compensation, competition regulation, anti-bribery and corruption compliance, and environmental.
Sellers and targets may choose to invest in internal processes to identify their own operational risks and weaknesses in order to address them prior to a due diligence review by a potential buyer (known as a vendor’s due diligence), and they may also choose to conduct a due diligence of the buyer to analyse the buyer’s creditworthiness and reputation, the risk of not obtaining required regulatory approvals, Anti Bribery and Corruption and Anti Money Laundering compliance by buyer, etc., all of which will ensure that there are no surprises at the moment of closing or post-closing, and thus avoid costly litigation.
Countries across the region are currently reforming their legislative frameworks, bringing them into line with global norms. While some Latin American countries carry certain risks for businesses, the larger economies are much safer, and almost all regions are taking measures to improve their legal and regulatory structures in a bid to stamp out fraud and corruption. In the meantime, firms can take steps to protect themselves when entering into a deal, and perhaps the most important measure is thorough due diligence prior to closing the transaction.
Lawshi lawyers work across sectors and countries in Latin America to deliver advice to you wherever you operate. Our focus is on helping you mitigate risk and benefit from innovation, enabling your business or organization to thrive. If you have any queries about the business opportunities in your country of interest or anything to do with a specific Latin American industry, do not hesitate to get in touch with us at service@lawshi.com.