- 1.What are the most common types of private equity transactions in your jurisdiction?
It is important to bear in mind that approximately 5 per cent of the transactions on Ecuador’s stock exchanges are for equity securities, meaning the amount of stocks traded is quite low. Within the category of fixed-interest securities, the most commonly traded negotiable instruments, besides bonds, are a type of debenture that Ecuadorean legislation allows stock companies, limited liability companies, and branches of foreign companies domiciled in Ecuador to issue for acknowledging or creating a debt for the issuer and which, under certain conditions, can later be converted to stock.
Although there have been LBO transactions in Ecuador, these have been very few. First, the Ecuadorean stock exchange is not that dynamic and, second, long-term financing by financial institutions or for commercial entities operating at the local level is quite scarce compared to other countries.
- 2.What types of investors are most active in the private equity market of your jurisdiction?
The most active types of investors are the government of Ecuador, acting through the Ecuadorean Social Security Institute (which invests mainly in debentures), banks, and local equity funds trailing way behind. International equity funds are hardly ever traded on the Ecuadorean stock exchanges. As mentioned above, the private equity market of Ecuador is growing sluggishly.
- 3.What historically have been the main target industries and what trends were noticeable throughout 2010? What trends do you expect to see in the next 18 months?
During 2010, stock market transactions have included the issue of securities by the financial sector, construction industry, tourism industry, car marketing industry, and the business industry in general. With respect to securitisation, the food industry and real estate industry and, within the public system, second-tier banking and the financial sector have been involved in significant transactions.
Despite these transactions, which have been made in previous years, it is important to point out that the most sought-after securities are government bonds, followed by bank bonds, and lagging behind are debentures issued by the commercial and industrial sectors. There are no legal or tax reasons for this distribution, however, this could be because the majority of Ecuadorean companies from both the commercial and industrial sectors have closed capital. Apart from a very few exceptions, this factor discourages entry by most companies into the stock exchange. We do not expect to see any trends in the next 18 months.
- 4.Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of such funds? Have any begun to participate significantly in transactions out of their local jurisdiction?
Although the securities market in Ecuador is regulated by specific legislation issued in 1992, the limited number of stock market transactions and the small size of the market have resulted in the slow development of local private equity funds. Consequently, the limited progress of local private equity funds is down to market reasons rather than restrictions on the development of such funds in Ecuador.
Local Private Equity Funds basically focus on closed investments, mostly investments in real estate, although securitisation processes account for a large share. This kind of investment, however, is viewed as relatively small compared to other investments at the international level.
- 5.Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?
Based on the information issued by the Superintendency of Companies, there are approximately 36 local private equity funds listed in Ecuador, carrying a small volume managed by the so-called fund managers and trusts. The fundamental requirement of these funds is registration with the Securities Market Registry, which is an organ dependent on the Superintendency of Companies (equivalent to Companies House in the United Kingdom).
There is now a Bill of the Securities Market Law that seeks to further regulate the obligation of private equity funds to reveal to the market and truthfully, sufficiently and timely disclose all relevant information about them, the securities offered, and the offering itself.
Furthermore, the bill of this law creates mutual investment funds, classified into:
- open-end mutual funds;
- closed-end mutual; and
- international funds.
These mutual investment funds have to meet the information requirements, which will be stipulated in the law.
Although private equity funds are regulated, they may be described as currently in their initial stages and, therefore, not yet fully developed. Investments are made mostly in the form of bank instruments.
- 6.What are the main issues in connection with the liability of fund managers?
The main issues connected with the liability of fund managers have not been completely engineered. There are general concepts regarding the fiduciary duty of a fund manager, meaning they must act in the best interests of the investors represented by their funds, and they are also bound by the duty of acting prudently and loyally. Additionally, under the fiduciary liability existing in Ecuador, managers and funds commonly resort to the argument that their duty constitutes a means and not an end. In other words, their duty consists of managing a fund the best way possible and obeying general and specific legal rules applicable to their activities. They are not, however, liable for the outcome of any bona fide decision they make.
- 7.What are the main remuneration schemes for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?
Due to the reduced size of the market, no parameters have been designed. Private arrangements are made for remunerating fund managers. The trend is to give performance bonuses in addition to the agreed remuneration; however, currently there is no bill of law or regulation aimed at defining the parameters for the remuneration of fund managers.
- 8.Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.
In practice, there are few leverage buy-outs or like strategies in Ecuador, because the market is very restricted. Ecuadorean legislation does, however, address convertible debentures, which are amply used in practice. As its name indicates, this kind of corporate debenture represents a company’s debt and may be used by the creditor (or debenture holder) for repayment in cash or in exchange for the company’s stock.
With respect to upstream guarantees, it is the view of the Superintendency of Companies that a company’s affiliates or related companies cannot guarantee its debt, following the criterion that each company is liable for its own debt in accordance with its own objectives.
- 9.What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?
In light of the scarcely cultivated Ecuadorean stock exchange, the most commonly used form to channel an investment In Ecuador is the performance of due diligence on a specific company. Normally, due diligence pinpoints and identifies the target company for a pre-determined group of investors.
Furthermore, investment funds have not been consolidated as a mechanism for advising and channelling private equity investments. For this reason, many investments in Ecuador by investors in securities listed at the stock market are made directly as well as through closed transactions in certain companies.
- 10.What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?
All of the different types of companies, except banks and insurance companies, fall under the watch of the Superintendency of Companies, which is the specialised public entity that oversees and supervises the organisation, business, operation, dissolution and liquidation of companies. Furthermore, the law prescribes that stock companies are required to hold annual general meetings (AGMs) once a year within the first three months following the close of the fiscal year. At AGMs, the company’s balance sheet, and the reports by the managers, internal auditors and professional auditors, form in general the basic mechanism for shareholders to check and obtain information on the company’s business. Companies may also hold extraordinary general meetings.
Although few rules of the Companies’ Act address good corporate governance mechanisms, we may point out those related to appointing professional auditors and internal auditors and minority rights. The institution of the board of directors, as a corporate administration organ of a company, is optional and not yet broadly implemented.
The Organic Code of Production, Commerce and Investment just entered into effect in December 2010, establishing a series of tax incentives for fresh corporate investments. One of the more appealing incentives is that companies organised outside the urban areas of the cities of Quito and Guayaquil could be exempt from income tax for five fiscal years if they make new investments in sectors such as:
- the production of fresh, frozen and processed foods;
- forestry and agroforestry chain;
- metalworking;
- petrochemistry;
- pharmaceutical industry;
- tourism industry;
- renewable energy;
- foreign trade logistics services;
- biotechnology and applied software; and
- sectors engaged in the strategic substitution of imports and the fostering of exportation.
Another incentive is a 100 per cent deduction of income tax for five years when investments are made in depressed or border areas, and the residents from such areas are hired to work.
- 11.Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?
The liability of shareholders in stock companies and of partners in limited liability companies is limited to their contributions to capital. In general terms, the corporate veil is lifted when partners or shareholders act fraudulently or wrongfully. In such cases, shareholders incur civil and even criminal liability, depending on the case. With regard to management, the general principle is that management staff are subject to a fiduciary duty and a duty of loyalty, and are not personally liable for the acts or omissions of management except when they act ultra vires, meaning beyond the activities authorised by the company’s objectives.
- 12.What are the most common minority protection rights, whether granted by operation of law or contractual agreement ? Are there any special issues to be considered under the laws of your jurisdiction?
According to the Ecuadorean Companies’ Act, each shareholder has the right to vote in shareholders’ meetings, pursuant to the company’s by-laws; to elect and be elected for management positions based on the law and the company’s by-laws; and to oppose resolutions by the general meetings of shareholders and other corporate bodies in the cases and manner provided in articles 215 and 216 of the Companies’ Act. These articles grant minority shareholders the right to oppose resolutions issued by the company’s administrative bodies or management when such resolutions are inconsistent with the law or the by-laws, or when they jeopardise the interests of the company in benefit of one or more shareholders. Only shareholders holding at least 25 per cent of capital stock may exercise this right. Oppositions are filed with the superior court of the principal place of business of the company within 30 days from the date of issuance of the resolution in question. No statute of limitations applies to oppositions against resolutions that are contrary to the law. The judgment issued by the superior court may be subject to cassation action at the Supreme Court of Justice. Other minority shareholders’ rights are:
- if within the first three months of the year the shareholders fail to pass a decision on the company’s balance sheet or fail to discuss the allocation of profits, then any shareholder may request the company’s officers or any of the internal auditors to call a meeting for such purpose. If a notice of meeting is not issued within 15 days thereafter, then any shareholder, documenting its capacity of a company shareholder, may request the Superintendency of Companies to call a meeting of shareholders.
- one or more shareholders, when holding together at least 25 per cent of capital stock, may request at any time in writing that the company administrator or management call a general meeting of shareholders to discuss the requested matters. Should such administrator or management refuse to call a meeting or fails to do so within 15 days after receiving the request, then the shareholder or shareholders may request the Superintendency of Companies to make the call.
- a shareholder may report in writing to the company’s auditors any administrative action it considers unusual. The internal auditors must include the action, together with observations and possible solutions, in their reports to the shareholders;
- Companies’ Act, article 221, declares null any clause or provision of the by-laws which eliminates or reduces the statutory rights of minority shareholders;
- shareholders representing at least 10 per cent of paid-in capital stock may oppose any action of the shareholders placing responsibility on, or agreeing to reach a settlement with, corporate officers;
- when there are three or more auditors, and if a minority consisting of at least 25 per cent of capital stock disagrees with the appointment of an auditor, then the minority shareholders are entitled to replace him or her; and
- at least 50 per cent of the annual net profits must be allocated to dividends in favour of the shareholders unless a general meeting of shareholders unanimously resolves otherwise. In companies whose shares have been sold in a public offering, at least 30 per cent of the net and realised profits obtained in the corresponding fiscal year must be distributed.
In addition to the rights established in the law for minority shareholders, minority shareholder rights may be enhanced by signing private agreements among the stockholders of the company.
- 13.What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the enforceability of exit arrangements? Have you seen a shift away from or towards certain exit strategies over the past year?
The main exit strategies in Ecuador are IPOs and sales to other investors. We have not yet seen a shift away from exit strategies in this field over the past year.
- 14.What are the key legal issues to be considered when appointing or replacing directors and officers?
In accordance with the Companies’ Act, the general meeting of shareholders is the supreme corporate body with powers to resolve the company’s business aspects and to adopt the decisions it deems necessary. Under Ecuadorean legislation, the existence of a board is not a requirement for a stock corporation or a public limited company to operate, and the Companies’ Act regards the board of directors as an administrative body of the company as long as its by-laws establish and regulate it.
The Companies’ Act, however, does set forth that companies organised in Ecuador must appoint an individual to represent them in and out of court. Pursuant to article 251 of the Companies’ Act, such representation may be entrusted to managers, administrators, directors or other agents. Representation and the daily management of a company may be exercised by a board and, if that is the case, such corporate body will exercise the representation of the company through its chairperson. Ecuadorean legislation does not proscribe foreigners or directors who are not residents in Ecuador from forming part of a company’s board. When a company’s by-laws do not address the existence of a board, and the company is managed by its president and general manager, the latter represents the company legally, judicially and extra-judicially. If a board holds the legal, judicial and extra-judicial representation of a company and its chairperson is a non-resident of Ecuador, then a conventional representative has to be appointed to comply with article 6 of the Companies’ Act. Article 6 stipulates that all national or foreign companies doing business or contracting obligations in Ecuador are required to appoint an attorney-in-fact or representative in the country to answer claims and perform obligations on their behalf.
An important amendment to the Companies’ Act has been enacted. The amendment stipulates that foreign companies with capital stock represented solely by equity interests or registered stock, with shares in Ecuadorean companies, but that do not carry on any business activity in the country must have an attorney-in-fact or representative in Ecuador.
Additionally, the Companies’ Act stipulates that company administrators may be appointed only for a temporary term and their appointments may be revoked. This does not mean, however, that a representative, director or officer cannot be re-elected once the term of the appointment is over.
- 15.Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.
On this point, it is of utmost importance to emphasise that the right to freely trade shares does not allow for restrictions under Ecuadorean legislation. This right has been interpreted by the Superintendency of Companies in the sense that any agreement, regardless of whether in the form of a private covenant or an agreement, which in any way restricts the free transfer or disposal of shares is devoid of value and is null. Note that this does not apply to limited liability companies where, on the contrary, the shares in the company cannot be transferred without the consent of the company’s other partners.
The possibility of Ecuadorean courts being able to apply foreign law may crystallise in two cases. First, when there is a relevant foreign element in the legal relationship and this is determined in the Ecuadorean rules of conflict or the norms contained in bilateral or multilateral international treaties signed by Ecuador; second, when the parties to a contract agree to subject their legal relationship to the substantive law of another jurisdiction. In any event, in order for a contract enforceable in Ecuador to be subject to foreign laws, the general recommendation is that it be signed outside the country.
- 16.Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?
The most common alternative dispute resolution mechanisms employed in Ecuador either for purchase, shareholders’ and principal private equity agreements, are mediation and arbitration, whether national and international, when legally possible. In any case, these options are not broadly asserted. When an arbitral award is issued, the trend is to file disputes with the ordinary justice system, alleging the nullity of the arbitration proceedings or award in question.
- 17.What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?
The most common funding structures are capital increases and bank loans. Notably, a recent tax reform establishes a debt restriction on companies where a company’s debt cannot exceed 300 per cent of its subscribed capital. If surpassed, the company will not be able to deduct paid interest from its income tax.
Premised on the Organic Code of Production, Trade and Investment, companies with at least 5 per cent of their stock capital transferred without cost to at least 20 per cent of their workers, may defer paying income tax and making advance payments on income tax, up to five fiscal years, as long as such stock remains under the ownership of their workers.
- 18.Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?
Considering the reduced and specific nature of the Ecuadorean stock exchange, the advantages and disadvantages of using debt or equity as sources of funding will depend on each particular investor.
A very general rule is to prefer bonds over stock. However, in light of the funding structure of the Ecuadorean economy, businesses resorting to outside funding basically seek short-term credit in the form of cash. There are hybrid options, such as convertible debentures, referred to in question 1.
- 19.What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?
There are no special rules on the principal accounting considerations that arise in private equity transactions. Amortisation terms are calculated in accordance with general rules. Generally, up to 31 December 2007, the Ecuadorean Accounting Standards (NEC) were applied. As of 1 January 2009, the International Financing Reporting Standards (IFRS) apply.
In 2008, the process of implementation of or transition to the IFRS was supposed to take place; however, an extension was granted. The IFRS started to be implemented during 2009 and 2010 for companies trading their shares on the stock market and for auditing firms. All other companies have to implement the IFRS by 2012.
- 20.Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?
The limits on investment funds: Investments in instruments or securities issued, accepted, secured or guaranteed by the same entity cannot exceed 20 per cent of the fund’s total assets, while investments in instruments or securities issued, accepted, secured or guaranteed by related companies cannot exceed 30 per cent of each fund’s equity.
Investments in securities issued by the Central Bank of Ecuador and the Ministry of Economy and Finances are not subject to these limits.
In the case of investments in the stock of stock corporations registered in the Securities Market Register, the fund cannot possess more than fifteen per cent of the shares subscribed and paid by the same company, and the total investments in securities issued or secured by the same kind of company cannot exceed 15 per cent of the issuer’s total assets.
In the case of investments in the stock of unlisted stock corporations, the collective fund cannot possess more than 30 per cent of such company’s subscribed and paid-in stock, unless the company’s main investment, as determined by the Superintendency of Companies, is one or more specific immovable assets or productive projects. The total investments in securities issued or secured by the same company, which is not registered in the Security Market Register, cannot exceed 30 per cent of the issuer’s total assets.
The only disclosure requirement affecting private equity investments concerns the transfer and purchase of shares (equity securities), whether directly or indirectly or through third parties, worth 10 per cent or more of the subscribed capital of a company listed on the stock exchange. In addition, this requirement affects private equity investments when, as a result of a stock purchase, a stockholding exceeds the 10 per cent limit. Furthermore, depending on the case and regardless of the number of shares they hold, the legal representatives and managers of companies listed on the stock exchange are required to disclose to the Superintendency of Companies and stock exchanges any purchase or transfer of shares they will make in such a company, at least five business days in advance of the transaction or transactions at issue.
Natural or legal persons who directly or indirectly purport to takeover a company listed on the stock exchange that is subject to oversight by the Superintendency of Companies or the Superintendency of Banks, whether by way of one or various acquisitions that separately or jointly imply the takeover of the company, are required to disclose to the company, the public and each stock exchange the transaction they purport to make, at least seven business days prior to the date on which the deal will be made. The National Securities Council is the entity in charge of regulating the content and form of information to be disclosed.
- 21.Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.
Foreign investors are subject to the same treatment as national investors. Generally, there are no restrictions applicable to them and they must fulfil the same requirements as other investors. There are certain exceptions to this general rule, basically with regard to investments in strategic and national security areas.
Based on a recent amendment, foreign companies constituting stock or limited companies must accredit their legal existence, provide a list of shareholders, and must be companies with capital represented solely by registered shares or equity interests, issued in favour or in the name of their shareholders, partners or members, i.e, not to the bearer.
Interest on debt obtained for running a business, as well as the expenses incurred for creating, renewing or repaying such debt, as long as such expenses are properly documented in the form of sales vouchers compliant with the requirements established in applicable regulations, are tax deductible. Interest exceeding the tax rates authorised by the board of directors of the Central Bank of Ecuador is not deductible. In addition, when a foreign loan has not been registered with the Central Bank of Ecuador, the interest thereon and the financial costs thereof are not tax deductible.
In addition to the above, in order for interest paid on foreign loans granted directly or indirectly by non-arm’s-length parties to be deductible, the total amount of such loans cannot exceed 300 per cent of the borrower’s capital in the case of companies; for individuals, the total amount of foreign loans cannot exceed 60 per cent with respect to their entire assets.
Interest paid with regard to the excess over the percentages mentioned above cannot be deducted.
For purposes of the deduction, registration with the Central Bank of Ecuador is required of both the loan per se as a well as of offshore repayments on the loan, until the entire loan has been repaid.
Additionally, the 2 per cent money outflow tax should be considered when investing in the country.
- 22.Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?
There are no special requirements for investing in specific industries or any industry-specific regulatory schemes that can affect private equity investments
- 23.Please describe any antitrust approvals or other competition law requirements that may apply in connection with private equity investments.
No antitrust approvals are needed and there are no other competition law requirements that may apply in connection with private equity investments.
- 24.Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle?
The regulations for anti-money laundering (law for the deterrence of asset laundering) or other similar financial regulation can be found in the criminal law ambit). Nonetheless, that law does not contain specific rules with respect to investments in the securities market. However, the Quito Stock Exchange issued a resolution referring to this matter, providing the guidelines for disclosing the identity of investors and introducing transparency policies, such as ‘know your customer’ procedures.
- 25.Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?
There is no entity which oversees remittances of investments. As of December 2009, a 2 per cent tax is in place for money remitted abroad. The only circumstances when this tax is not charged is when Ecuadorean citizens and foreigners leave the country with cash in an amount equal to the exempt basic proportion of income tax for individuals; anything over that proportion will be taxed.
- 26.What are the basic tax issues affecting private equity investments in your jurisdiction?
The basic tax issues which apply to private equity investments in our jurisdiction are as follows. VAT is not paid unless shares or securities are transferred within the normal course of the transferor’s business. The ICE excise tax does not apply either. Only income tax is paid on the gains or profits from selling securities and is calculated at the end of the fiscal year. Occasional gains from the sale of stock are exempt from income tax. Payment of dividends is exempt from income tax when made to shareholders that are companies not domiciled in fiscal havens or to individuals who are not residents of Ecuador, except for the income tax paid by the company on its taxable earnings. In the case of shareholders who are persons residing in the country, dividends are taxed; however, the income tax paid by the company can be used by the shareholder as a tax credit in proportion to the shares the individual owns in the company. In addition, the 2 per cent capital outflow tax applies to offshore remittances. The capital outflow tax paid on the importation of raw materials, capital goods and inputs for production can be used as a tax credit, to be applied when paying income tax on the fiscal year in course. The goods in question, however, must be zero-rated for ad-valorem with respect to the national tariff on importations in effect, when filing the nationalisation customs declaration.
- 27.What impact are recent and projected macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?
The macroeconomic impact on the Ecuadorian economy is an increase in the country risk, causing investors to hold back on investments at the national level until certain legal and commercial issues are clearly defined.
- 28.Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.
The Organic Code of Production, Trade and Investment, in effect as of 29 December 2010, reforms the Internal Tax Regime Law and establishes that revenue from investment funds and supplemental funds is exempt from income tax. In order to benefit from this exemption, at the time of distributing proceeds, earnings or profits, the fiduciary or fund manager must necessarily have withheld income tax at the source from the beneficiary, settlor or participation of each investment fund or supplemental fund.
This exemption also applies to the proceeds reaped by individuals or companies from investments in fixed-income securities traded at the country’s stock markets, and the earnings or proceeds made by individuals and companies, distributed by commercial investment trusts, investment funds, and supplemental funds, as long as the investment is in the form of a fixed-time deposit or fixed-income securities traded at the stock exchange. In any of these cases, the investment or deposit must have been originally issued for at least one year.
- 29.Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.
There have not been any recent trends observed in Ecuador regarding how private equity transactions are being conducted.
An important amendment to the Companies’ Act, recently enacted, establishes that national companies may be the founders or shareholders of stock companies incorporated in Ecuador. Foreign companies, however, can participate only if their capital is represented solely by registered shares or equity interests, meaning, that they must have been issued to their partners, members or shareholders as opposed to bearer stock.
Furthermore, in the case of a foreign company that is the founder of a stock company, the public deed of organisation must include a certification on the legal existence of the foreign company in its country of origin and also must attach a complete list of all of its members, partners or shareholders, together with their personal data. When a foreign company is a shareholder in an Ecuadorean stock company and trades its shares on one or more foreign stock exchanges, then instead of a complete list of its partners, shareholders or members, it must submit an affidavit of its listings at such stock exchanges and declaring that its entire capital is represented exclusively by registered shares or equity interests.
It is the obligation of the legal representative of the stock company to submit to the Superintendency of Companies in January each year, a list of any foreign company holding shares in the company, indicating their name, nationality and address, together with the lists of the partners, shareholders or members forming part of the foreign company.
The obligations mentioned above, which are stipulated in the recent amendment to the Companies’ Act, also apply to limited liability companies.
On 14 March 2009, the president of Ecuador signed Executive Decree No.1614 containing the rules for implementing Decision 608 of the Commission of the Andean Community of Nations, with respect to the Protection and Promotion of Free Competition in Andean countries. These rules apply automatically to the Ecuadorean market until the National Assembly passes a law on Economic Competence.
The rules of Decision 608 seek to protect and promote free competition while prohibiting and punishing any behaviour restricting free competition or any abuse of a dominant position in the market.
The proceedings for hearing and resolving any violation of the competition rules (mentioned above) may be initiated by way of an official letter, a request by another administrative authority or a request by the aggrieved party, or by any individual or corporate or private body deeming that they have been injured. The proceedings may conclude by imposing a fine of up to 10 per cent of the gross income of the offender, with regard to the year preceding the date of the court’s final pronouncement.
Additionally, Executive Decree 1614 determines that the Ministry of Industries and Competitiveness (MIC) is the authority that applies Decision 608, while the Competition Undersecretariat, which is also created within said Ministry by way of said Decree, is the authority in charge of promoting competition, investigating claims and punishing anti-competitive practices. This Decree does not establish specific provisions for reporting merger processes among local companies. We also believe that the country’s political conjecture also bears an impact on private equity funds.
- 30.Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.
From a legal perspective, the Ecuadorean securities market will mature when corporate standards are set higher and the financial culture pervading the country migrates from the trend of funding by way of short-term bank credit to a scheme involving public offerings of securities. Companies and prospective investors should seek to improve corporate governance, to appropriately present companies to the public, and to inform the public adequately of private equity investments.
On 14 March 2009, the president of Ecuador signed Executive Decree No.1614 containing the rules for implementing Decision 608 of the Commission of the Andean Community of Nations, with respect to the Protection and Promotion of Free Competition in Andean countries. These rules apply automatically to the Ecuadorean market until the National Assembly passes a law on Economic Competence.
The rules of Decision 608 seek to protect and promote free competition while prohibiting and punishing any behaviour restricting free competition or any abuse of a dominant position in the market.
The proceedings for hearing and resolving any violation of the competition rules (mentioned above) may be initiated by way of an official letter, a request by another administrative authority or a request by the aggrieved party, or by any individual or corporate or private body deeming that they have been injured. The proceedings may conclude by imposing a fine of up to 10 per cent of the gross income of the offender, with regard to the year preceding the date of the court’s final pronouncement.
Additionally, Executive Decree 1614 determines that the Ministry of Industries and Competitiveness (MIC) is the authority that applies Decision 608, while the Competition Undersecretariat, which is also created within said Ministry by way of said Decree, is the authority in charge of promoting competition, investigating claims and punishing anti-competitive practices. This Decree does not establish specific provisions for reporting merger processes among local companies. We also believe that the country’s political conjecture also bears an impact on private equity funds.
Contributing Authors
Contributing Editors
Questions
- 1.What are the most common types of private equity transactions in your jurisdiction?
- 2.What types of investors are most active in the private equity market of your jurisdiction?
- 3.What historically have been the main target industries and what trends were noticeable throughout 2010? What trends do you expect to see in the next 18 months?
- 4.Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of such funds? Have any begun to participate significantly in transactions out of their local jurisdiction?
- 5.Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?
- 6.What are the main issues in connection with the liability of fund managers?
- 7.What are the main remuneration schemes for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?
- 8.Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.
- 9.What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?
- 10.What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?
- 11.Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?
- 12.What are the most common minority protection rights, whether granted by operation of law or contractual agreement ? Are there any special issues to be considered under the laws of your jurisdiction?
- 13.What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the enforceability of exit arrangements? Have you seen a shift away from or towards certain exit strategies over the past year?
- 14.What are the key legal issues to be considered when appointing or replacing directors and officers?
- 15.Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.
- 16.Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?
- 17.What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?
- 18.Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?
- 19.What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?
- 20.Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?
- 21.Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.
- 22.Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?
- 23.Please describe any antitrust approvals or other competition law requirements that may apply in connection with private equity investments.
- 24.Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle?
- 25.Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?
- 26.What are the basic tax issues affecting private equity investments in your jurisdiction?
- 27.What impact are recent and projected macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?
- 28.Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.
- 29.Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.
- 30.Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.
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