Paraguay
Nestor Loizaga, Beatriz Pisano and Federico Silva
- 1.What are the most common types of private equity transactions in your jurisdiction?
Most common types of private equity transactions are corporate acquisitions and joint ventures and in a lesser degree minority investments and LBOs.
Convertible debt or hybrid instruments remain unusual.
Usually the transactions involve either a financial sponsor or a strategic buyer acquiring 100 per cent of the target’s stock. Sometimes, acquisition comprises a controlling interest in the target. In either case, the acquiring company brings in new management retaining, in some cases, key managers of the selling party.
Special purpose vehicles (SPVs) are normally used in order to act as the acquisition vehicle and avoid exposing other companies to the targets liabilities.
- 2.What types of investors are most active in the private equity market of your jurisdiction?
International PE investors from Europe, North America and Latin America are very active. Also, PE funds formed by multilateral institutions or development agencies have been active. To a much lesser degree, purely regional PE funds can be found in low-profile PE transactions.
- 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?
Mainly, banking, retail, construction and agribusiness-related industries. We expect the trend to keep steady in construction and agribusiness-related industries and expanding into real estate.
- 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?
Local PE funds are not common, are not listed and have no special structures. The few local PE funds are state-related and invest outside of Paraguay.
There are no regulatory restrictions or incentives and their development is restricted due to the size of the local market, which makes it unattractive.
Pension funds are rare, and most of the time investment is in bonds, or other low-risk financial products.
- 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?
Most important PE funds are from abroad therefore liability issues are not solved in Paraguay. Further to this, the case law related to the liability of fund managers mainly deals with public pension funds.
- 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?
Considering that most funds are from abroad, remuneration schemes are set by international standards. Fixed fees and profit-sharing arrangements are not uncommon.
- 8.Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.
From a legal point of view, LBOs are not restricted by Paraguayan laws. However, shareholders approval is required especially because most of the times the target’s by-laws are unclear with regard to the use of company’s asset to finance this type of transaction.
Shareholders are not held liable for a company’s bankruptcy absent wrongdoing. Therefore, extension of bankruptcy normally is not an issue.
- 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?
The most common organisational form is a stock company (sociedad anonima) and on rare occasions an LLC (sociedad de responsabilidad limitada). There should be no change in the future with regards to the type of organisation used.
Setting up a stock company or LLC requires at least two shareholders, but no minimum participation, thus one shareholder can own all of the shares but one. Incorporating a company can take 30 to 45 days therefore sometimes PE funds purchase off-the-shelf companies and then restructure them to suit the transaction requirements.
LLCs cannot be used for certain types of transactions due to regulatory reasons, or when equity must be in the form of negotiable titles, or when fast exit provisions are required.
- 10.What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?
With regards to shareholders meetings, a power of attorneys or a proxy is required. If granted abroad, they must be legalised by the Paraguayan Consulate, which can be expensive and time consuming.
In most of the situations, PE funds are required to appoint directors when taking over the target company. Normally, these directors are not Paraguayan. The current interpretation by government authorities is that directors must be Paraguayan nationals, or non-nationals who hold a residence permit. The process of obtaining resident status requires filing certain documents, and takes three to four months. However, the director does not have to reside permanently in Paraguay. Therefore, this is especially important when designating new management. In many cases, the acquiring party has to retain certain managers or grant powers of attorney to their own managers until resident status is obtained.
Stock companies must designate an internal control office, or ‘sindico’. This must be run by an independent third party and must also be Paraguayan national, or a non-national holding resident status. This person acts as a representative of the shareholders, and must participate of board of directors meetings and shareholder meetings. Their duties of care and loyalty are strict, and jointly and severable liable with the directors to the shareholder and third parties for breach of said duties due to wrongdoing. The law does not allow companies to serve as board members or sindicos.
With regards to labour issues, board members are not held liable. Board members can be held personally liable in tax matters and criminal matters, among other limited matters.
- 11.Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?
Save for the tax and criminal matters mentioned previously, limitation of the liability of board members is respected. With regards to shareholders, they can be held liable for approving corporate decisions that were against the by-laws or laws.
- 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?
By law, most common minority protection rights are information, appraisal, opposition to resolutions passed by a shareholder meeting, anti-dilution, and for nominal shares the law allows for the inclusion in the by-laws conditions related to the sale of shares, such as rights of first offer, rights of first refusal, tag-along rights, pre-emptive rights and anti-dilution provisions.
- 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 most common are puts. However, activity is fairly recent and the market is growing steadily so most investments have not reached this point.
- 14.What are the key legal issues to be considered when appointing or replacing directors and officers?
The key issues are resident status requirements, liability and limitations in their duties, and labour laws. Liability and limitations are especially important because our Civil Code establishes that a director will be held personally liable to the company, the shareholders and third parties due to wrongdoing, gross negligence or gross neglect of duty. Also, directors cannot participate in board meetings when they might have a personal interest or an interest in behalf of a third party. This is important when a PE fund is acting as a strategic partner in a joint venture and the target company does business with one of the purchaser’s company. If the appointed director is also director of one of the acquiring company, he may be pre-empted by the other joint venture partners to participate in said meeting, which could lead to a board meeting where the PE fund has no participating director.
The requirement to perform their obligations personally, including participating in board meetings, restricts the ability to grant proxies.
Directors are expressly excluded from labour laws. However, in certain cases where the local company is part of an international structure, courts have found that the director was not acting with independence and discretion but was acting as a de facto employee of the corporate structure. Hence, he was entitled to severance payment and other labour benefits.
- 15.Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.
Since most PE transactions are made by foreign funds, it is normal that purchase and shareholder’s agreements resort to a foreign law and forum under arbitration. Furthermore, purchase and shareholders’ agreements are not regulated by a specific provision.
Notwithstanding the above, they are incorporated by reference in some by-laws admitting shareholders to regulate their relations by executing shareholders agreements and communicating this to the company by providing a copy.
- 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?
In the context of arbitration, parties may choose the applicable law and forum. However, this is not the case when law and forum are outside arbitration since Paraguayan laws are restrictive in that sense.
Currently, common courts experience a sensitive backlog and lack of predictability since case law is not abundant on this matter, therefore the trend is to resort to arbitration in spite of the costs.
- 17.What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?
The most common funding structures in Paraguay are issuance of bonds through the stock market that are purchased by PE investors. To a lesser degree, the purchase of equity with a put option.
- 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?
The domestic market for private equity deals is shallow and new.
- 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?
Paraguay has an incomplete, fragmented and loosely enforced statutory framework for accounting and auditing. Outside of the financial, cooperative and, to a lesser extent, state-owned sectors, (referred to as supervised sectors) there are no legally sanctioned standards and no enforcement mechanisms. Only about one-fourth of the largest 200 companies in the country belong to one of these sectors. Enacted tax law empowers the Ministry of Finance (MoF) to adopt standards for accounting and auditing. Base on this, the ministry may impose International Financial Reporting Standards (IFRS) or other generally accepted accounting principles (GAAP) on Paraguayan taxpayers, provided they would not conflict with tax regulations.
The law also mandates external audits for companies with revenues above 6, 000, 000, 000 guarani (approximately US$1.5 million). The auditors must be registered as external auditors before MOF’s tax office.
- 20.Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?
There is no need for licensing. Disclosure or registration may be required depending on the target (ie, if it is a regulated industry) or the SPV used.
- 21.Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.
Paraguay has protection investment treaties in place with several countries that may be applicable depending on the domicile of the fund. Also, Law 117/91 on the protection and promotion of foreign investments adopts the concept of national treatment and non-discrimination between nationals and foreign investors.
A restriction is applicable to foreign shareholders, who must pay an additional 15 per cent tax when repatriating dividends.
- 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?
Most of the restrictions and regulations affect both foreign and local investors. The most relevant restrictions and regulations affecting foreign PE funds and investments are:
- land ownership: rural property with a ‘security area’ (50 km) from the border cannot be owned by nationals of the neighbouring countries nor can they have a controlling interest in companies owning rural property within that area. However, the law does not get down to the beneficial owner limiting its reach to the shareholders of the company. The company can be non-Paraguayan company.
- utilities: these services are state-owned;
- banking: sale of shares requires prior disclosure to the Central Bank along with the filing of documents.
- 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?
AML in Paraguay is mainly regulated by Law 1,015/97, which “prevents and represses illicit acts aimed to legitimate money or goods” and Decree 4,561/10, which sets up its regulations. The former created a financial analysis unit (UAF) within the Secretaria de Prevencion de Lavado (SEPRELAD).
Under this law, all ‘suspicious transactions’ must be reported to SEPRELAD. Particularly those that are highly complex; unusual; of a considerable amount; those that even when their amount is not high, are performed regularly and without economic or legal reasons; those that because of their nature or volume do not correspond to a customer’s activity, or to the transactions that the person usually performs, according to the records; and those that lack a cause that justifies them; or those that are paid in cash, and performed by a large number of persons.
These regulations apply to transactions that exceed US$10,000 and to transactions of a minor value that may lead to infer that they are part of a single transaction that surpasses such amount. All transactions have to be duly recorded, and these records have to be kept for five years after the operations have concluded. All suspicious transactions have to be notified to SEPRELAD.
SEPRELAD is the lead investigative agency on money laundering issues and is responsible for the enforcement of Law 1,015/97. The UAF is charged with receiving, analysing, and processing disclosures of suspicious transactions. When the UAF determines that there are reasonable grounds to warrant an investigation, its findings are forwarded to the Anti Drugs National Secretariat’s (SENAD) Financial Crime Investigation Unit (UIDF). The latter entity actually performs investigations regarding transactions that give rise to reasonable presumptions of offences.
- 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?
Corporate income tax is levied on a territorial basis on business income obtained from activities performed, property located or economic rights used in Paraguay regardless of the domicile, residence or nationality of the parties or place of execution of the contracts. Carryback and carryforward of losses is not permitted. Corporate income tax is 10 per cent. Distribution of dividends is levied at a rate of 5 per cent, and if the shareholder is domiciled abroad, an additional 15 per cent is levied on to the sums credited, paid or transferred.
Anti-avoidance rules such as transfer pricing and thin capitalisation, among others, are not specifically regulated.
Interest and commissions paid to a non-resident are subject to a 30 per cent withholding tax levied on 50 per cent of the sums paid. If interest is paid to a financial institution, the 30 per cent withholding tax is levied on 20 per cent of the sums paid. Additionally, 5 per cent VAT is levied on the interests and commissions paid.
- 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?
Last year, Paraguay’s economy grew by 14 per cent with its economy depending largely on soy and meat exports. Therefore, commodity prices have an impact. Two other issues that are affecting the macroeconomic scenario are a strong local currency, a depreciated dollar and historically low interest rates. These factors have led the Central Bank to take measures to increase interest rates in lieu of slowing down economic growth.
- 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.
The regional growth of Latin America has brought a lot of attention to this area of the world and Paraguay is not an exception. This has an effect on the increase in PE transactions in Paraguay. This increase will come with the implementation of more complex structures.
- 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.
Paraguay will open up to concessions of public services and utilities which will require capital investments that the government cannot fulfil. This will certainly present opportunities for private equity funds to invest.
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