Global trends, Latam and Peru.

Peru stands out as the only market in Latin America to achieve a 12% growth with regards to last year in transaction volume with 109 deals year-to-date to August, according to TRR Data. Although there was a 55.6% decrease in reported transaction amounts. Despite the abovementioned, in Latin America, there was a negative trend in M&A activity during the first half of 2024, with a 22% drop in volume and 16% drop in value reported in the year-to-date to August, according to TTR Data. Up to that date, there were 1763 transactions, between announced and closed, with a capital mobilization of USD 45,7 billion. On the big picture, the global M&A market, according to Boston Consulting Group, has been slower than anticipated, although financial conditions have improved, there are still challenges ahead due to inflation, interest rates and geopolitical risks. In what appears to be a difficult environment, the first interest rate cut announced in years by the Fed in the United States and the market's adaptation to new forms of financing will drive a further recovery in global transactional activity towards the end of the year, according to several financial analysts.    

Grounding in Peru’s comparative deal flow 2023 vs. 2024

So far this year, Peru has maintained a positive trend in the dynamism of M&A activity, continuing the good performance of the transactional market in 2023. Although the Peruvian economy experienced recession last year, the country continued to position itself as one of the main M&A markets in the region and achieved significant growth with an increase in transaction volume of 25% and in capital mobilization a growth of 166%, compared to 2022, reported TTR Data. According to the same source, 140 transactions were carried out, of which 89% were completed, for a reported value of USD 6,9 billion. Banking & Investment, Metal & Mineral Resources, Industry-Specific Software and Other Financial Services were the most prominent industries, the latter two showed substantial growth over 2022 (100% and 225%, respectively). To August 2024, the country has shown an outstanding performance in the region despite a slower start to the year, with double-digit growth (12%) in the volume of transactions year-to-date, in a context of an improving macroeconomic situation. The capital mobilized was USD 2,2 billion, with disclosed value in 41% of the 19 transactions carried out to date. Although this is a significant decrease from year-to-date (55%), 3 large value transactions were reported in August, exceeding USD 100 million. So far this year, TTR Data reports that the most important industries are Industry-Specific Software (44%), Banking & Investments (83%) and Agriculture, Fishing & Hunting (75%), which grew significantly compared to the year-to-date. Metal & Mineral Resources continues to play an important role in the transactional activity in the country but decreases 27% over the same period.    

Peru 2024 – in depth:

Peru's economic situation has shown recovery so far this year in comparison to last year’s recession. A major risk was dissipated with the unraveling of the ‘El Niño’ phenomenon, which was ultimately weaker than initial predictions had suggested and therefore had less social and economic impact. Thus, previously hit sectors, by ‘El Niño’ phenomenon in 2023, such as fishing, and agriculture showed a substantial improvement. In April the National Institute of Statistics and Informatics (INEI) announced that the country achieved 5.3% growth, the highest figure in almost two years. Among other highlighted actions of 2024, the Central Reserve Bank of Peru (BCRP) adjusted its GDP growth projections to 3.1% for this year and there is a decrease in inflation, which reached its target range in August: 2%. In relation to this, the BCRP reduced its referential interest rate from 5.50% to 5.25%, and private investment also showed a recovery in the first half of the year with a 1% growth, mainly driven by transportation infrastructure, as reported by the Peruvian Institute of Economics (IPE). According to the same entity, high export prices could boost the positive trend for the rest of the year. 2025 will be a pre-election year, but there are several important projects in the pipeline, some of the most important of them are, but not limited to the transportation sector. These large investments allow for an optimistic outlook for the future due to their impact on economic reactivation.    

Major Projects:

The Port of Chancay, whose first stage will be inaugurated towards the end of this year and has projected investment of USD 1.3 billion, as reported in El Peruano, will become the most important port in South America due to its strategic location and infrastructure. According to the BCRP, this project could contribute up to 0.9% to the GDP in its final stage. Along the same lines, the state awarded the contract for the New San Juan de Marcona Port Terminal in the Ica region. The project, which is a public-private partnership, will have an investment of USD 405 million to become the third largest port in the country in terms of size and will also contribute to foreign trade in the southern region, according to the Peruvian Private Investment Promotion Agency (Proinversión). Air transportation will also benefit from the construction of the New Jorge Chávez International Airport, which will have a USD 1,9 billion investment, according to economic consultants Apoyo Consultoria. According to the same source, it will triple the current size, double the number of passengers and will be the first airport city in South America. Works will be completed in its entirety by 2030, but the first phase will be operational by the end of the year. The Lima Peripheral Ring Road (“Anillo Vial Periférico”), a public-private partnership initiative, has recently been awarded. According to the Ministry of Transportation and Communications, it will involve an investment of USD 3,4 billion to build a 34.8 km highway that will connect 12 districts of Lima and Callao, reduce the infrastructure gap by 13% and generate 70,000 jobs during the construction phase.    

M&A Peruvian Legal Framework

The Peruvian legal framework of Peru provides a stable and safe investment environment within freedom of enterprise, making it very attractive to foreign investors. The majority of economic activity is not held to limitations on foreign investments. Peru's constitution provides equal treatment without discrimination and ensures the protection of private investment, both local and international. Our constitutional framework facilitates the repatriation of dividends in foreign currencies by investors. Furthermore, Peru offers effective dispute resolution procedures, frequently via arbitration, which gives international investors hoping to conduct business in Peru an extra degree of security and assurance.    

Foreign Investment

The Peruvian Constitution ensures legal stability for foreign investors and the entities hosting these investments, Legislative Decree 662 and Legislative Decree 757, establishes a regime that allows to foreign investment to gain predictability on the regulation conditions it invests through the execution of agreements that hold the status of “law-contracts”, by guaranteeing the intangibility of the legal frameworks of particular regimes (e.g. taxation, labor, among other). These are some of the right that foreign investors have in Peru: (i) the right to receive non-discriminatory treatment; (ii) freedom to conduct commercial and industrial activities and to perform any import and export operations; (iii) the right to expatriate profits or dividends, previous payment of the applicable taxes; (iv) the right to use the most favorable exchange rate existing in the market for any exchange operation; (v) the right to free repatriate the invested capital, in case of sale of shares, reduction of capital or total or partial liquidation of investments; (vi) non-restricted access to domestic loans, under the same conditions as the national investors; (vii) free acquisition of technology and free remittance of royalties; (viii) freedom to acquire shares of national investors; (ix) the possibility to acquire insurances for investments; and (x) the possibility to execute Legal Stability Agreements with the State for securing their investment in the country. (Doing Business in Peru – Hernández & Cía.).    

Corporate Legal Framework

The Peruvian General Corporations Law (Law No. 26887) is the main normative body to regulate corporations. It prioritizes agreements between parties, making sure that these shareholder agreements are enforceable. The General Corporations Law allows great freedom in the structuring of these agreements that address crucial elements of the company partnership, such as voting rights, future departure plans, and the obligations and functions of shareholders. These regulations allow a flexible transaction framework, enabling the seamless incorporation of shareholder agreements and other contractual arrangements. These agreements are readily enforceable, instilling in shareholders a sense of assurance that their rights would be upheld. The combination of adaptable corporate legislation, the simplicity of transaction structure, and the presence of efficient dispute resolution processes have all enhanced Peru's attractiveness as a site for international direct investment. Peru has established itself as a pivotal center for multinational investors seeking expansion in Latin America by implementing a comprehensive legislative framework that facilitates corporate operations and safeguards investments.    

Corporations

The General Corporations Law regulates the different types of companies that can be incorporated by entities or individuals in Peru. The main and most used are corporations (sociedades anónimas), but other structures such a partnership (sociedad commercial de responsabilidad limitada), and other structures to channel foreign investment such as branches and joint venture are available. For corporations and partnerships, the General Corporations Law establishes a limited liability regime, in which the shareholders will not expose their personal equity to the company’s debts, they will only be liable for the value of the contributions they made to the company. Also, regulations do not impose restrictions on the appointment of foreign individuals to the board of directors or as the CEO of a company. This permits foreign investors to appoint trusted executives to critical positions.    

LBO’s

Leveraged buyouts are allowed in Peru, provided they meet certain conditions, particularly regarding the protection of minority shareholders and creditors. To avoid the restrictions on financial assistance set by the General Corporations Law, it is essential to evaluate the specific circumstances of each transaction. Mergers are an option to carry out these transactions, as they offer protective measures for shareholders and creditors, such as separation or opposition rights. However, notwithstanding the mechanism chosen, it is important that the transactions have a solid economic rationale and financial prudence to prevent any allegations of fraud under legal scrutiny.    

Regulators

In Peru the main regulators of the transactional activities are: (i) the Superintendence of Banking, Insurance, and Private Pension Fund Administration (Superintendencia de Banca, Seguros y AFP - SBS ), which obliges companies under their supervision to obtain authorization prior to any change of control under the corresponding financial regulations; (ii) the Superintendence of Capital Markets (Superintendencia de Mercado de Valores - SMV), that grants authorization to operate on the relevant market to entities under their scope, and is the supervising agency for public tender offers (detailed under the public tender offers heading); and, (iii) the National Institute for the Defense of Competition and Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual - INDECOPI) that is in charge of merger control law (Law No. 31112) and its regulations (detailed under the merger control regime heading). Nevertheless, transactions are not reviewed for purposes of national security or neither are agencies similar to CFIUS (Committee on Foreign Investment in the United States) in Peru.    

Public Tender Offers

The Securities Market Law (Legislative Decree No. 861) regulates a Public Tender Offer, which is necessary for the direct or indirect acquisition of: (i) 25% or more of the shares with voting rights of a publicly listed company; or, (ii) in a percentage that enables the acquiror to (a) remove or appoint a majority of the directors; or, (b) amend the bylaws of the company, subject to certain exceptions. The purpose of this mechanism is to ensure that all shareholders receive identical acquisition terms and to ensure transparency. The offeror must provide a guarantee to the designated brokerage firm executing the Public Tender Offer to assure compliance with the responsibilities arising from the offer. If the consideration is cash, the guarantee must include the whole amount of the offer and may be provided in cash, a letter of guarantee, or any form of unconditional, irrevocable, and instantly enforceable guarantee, in compliance with financial rules. If the consideration is securities, their availability must be ensured, either by restricting them in the brokerage firm's account or by another way. If the consideration is the issuance of securities by the target firm or the offeror must be guaranteed under same conditions as cash considerations.    

Merger Control Regime

In Peru, Indecopi serves as the authoritative body for merger regulation. The Antitrust Commission of Indecopi is the sole authority responsible for assessing merger control requests in the initial administrative phase, while the Tribunal for Defense of Competition serves as the adjudicative body that addresses appeals against the Commission's administrative decisions in the subsequent and conclusive administrative phase. The objective of the merger regime is to implement a merger control framework for company concentration transactions, fostering competition and economic efficiency in markets for consumer welfare. Up to June 2024, 55 operations have been reviewed by Indecopi since the merger regime came into force in 2021. Only two operations have been held to conditions and one has been denied by the Antitrust Commission of Indecopi. This regime applies to acts of business concentration that produce effects in Peru, and economic agents that offer or supply goods or services and undertake acts of concentration that actually or potentially produce anticompetitive effects in the Country. The acts of business concentration specifically contained in the law include:

• merger between two or more independent parties;
• the direct or indirect acquisition of rights that allow exercise control over an entity (including shares, membership interests, among others);
• the incorporation of a joint venture or any other contractual form of acquisition of joint control over an entity; and,
• the acquisition of productive assets.

In order to determine which transactions are subject to review, the Peruvian Merger Control Regime establishes two conditions:

• the relevant transaction must produce a change of control in the target; and,
• the individual and combined thresholds must be met:
  1. the sum of the gross income, revenue or value of assets in Peru of all parties involved in the transaction, during the previous fiscal year, exceeds 118,000 Peruvian Tax Units (approximately USD 156,2 million); and,
  2. the gross income, revenue or value of assets in Peru of any of the parties involved in the transaction, during the prior fiscal year, exceeds 18,000 Peruvian Tax Units (approximately USD 23,8 million).

Control is defined in the law as “the possibility to exercise a decisive and continuous influence over an economic agent through: (i) property or use rights over the entirety or part of the assets of a company, or (ii) rights or agreements that provide influence in the composition, deliberations or decisions of the governing bodies of a company, directly or indirectly determining its competitive strategy”. Therefore, control is emphasized on decisions related to the company strategy, pricing policies, customer interaction initiatives, and the nomination of the general manager or other officials accountable for commercial decisions, among others. Finally, the Peruvian merger control regime permits Indecopi to conduct ex officio reviews of deals that, although not meeting the requisite criteria, may adversely affect the market at Indecopi's discretion. This faculty may be utilized within one year following the completion of the transaction.    

Dispute Resolution:

In the context of M&A, it is market practice to establish an arbitration agreement clause in each contract, and subject them to an institution such as the American Chamber of Commerce, Lima’s International Chamber of Commerce or even the International Chamber of Commerce (ICC). This is particularly helpful as many complex or technical issues can be addressed in a faster way than going through the traditional judiciary path. Although the general rule for all conflicts is to resolve them before the judiciary, arbitration in Peru is also dispute resolution system constitutionally recognized as an alternative to judicial litigation, if parties agree to such alternative through an arbitration agreement clause. Arbitration is a one instance procedure, so the award is final unless it has a procedural/formal defect that could make it void (i.e. if it lacks adequate explanation or fails to address all claims presented by the parties), rather than for the legal deliberations of the awards, or ways to interpret the law. An arbitration award will have the same status as any final judicial resolution; nevertheless, in order to enforce awards, judicial relief must be pursued. Timewise, this is a brief procedure before the judiciary where the plaintiff will ask for the execution of the award.    

Conclusion

Peru has established as a durable and appealing market for M&A activity in Latin America, with consistent growth amid larger regional and global downturns. Its friendly-to-investment legal framework and upcoming economic circumstances make it an attractive market for international investment. Peru remains an attractive market due to its strong macroeconomic policies that hold a stable inflation and economic growth. M&A activity has reached pre-pandemic figures and has the presence of major projects that will further drive economic growth. As Peru’s macroeconomic situation continues to improve, we anticipate transactional activity may continue unfolding positively in the coming months.    

Authors:

Partner Juan Luis Hernández [email protected]   Senior Associate Luciano Rebagliati [email protected]