- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
The current level of M&A activity (moderate) and existing conditions remain the same as 2011. We are continuing to see two types of M&A transactions: regional or worldwide M&A transactions, which include the purchase of subsidiaries in Venezuela, and the purchase of companies by the Venezuelan government. We foresee that the level of activity during 2012 will remain moderate and increase with respect to regional or worldwide M&A transactions that include the purchase of Venezuelan companies.
- 2.Which industries do you expect will see the most M&A activity in 2012?
We believe that the industries that may have the most M&A activity this year will be the manufacturing, financial and oil and gas industries.
- 3.What types of deals do you expect to see?
We expect more purchases or takeovers of Venezuelan companies by the
Venezuelan government. We also foresee some acquisitions of Venezuelan companies by investors or multinational companies with a strong cash position and a long-term strategy to increase their market share in specific sectors or industries in Latin America or worldwide. We may also see minority investments by oil and gas companies (either private or state-owned) in joint ventures with the Venezuelan government, provided that the government offers such investors adequate levels of legal protection (including settlement of disputes by international arbitration). In any event, the existing exchange control restriction and the political environment and prospects will continue to affect the level and type of future M&A activity.
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.The level of M&A activity during 2011 for domestic deals was moderate, and mainly fueled by purchases of local companies by the Venezuelan government. We expect this trend to continue during 2012.The level of M&A activity during 2011 for deals involving a domestic target and a foreign acquirer from Latin America, or a foreign target outside of Latin America, was moderate, and we expect this activity to increase during 2012 with respect to regional or worldwide M&A transactions that include the purchase of Venezuelan companies. The level of M&A activity during 2011 involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America was very low, and we do not expect this to change in 2012.
- 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
We have seen the participation of several international private equity firms in private auctions of Latin American companies (or Latin American divisions of multinational companies) having a presence in Venezuela. We have not seen domestic private equity firm activity.
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
There is very little financing available for deals as a result of existing current local conditions.
- 7.Do you expect more M&A activity involving financially troubled companies?
There has not been M&A activity involving financially troubled companies in Venezuela, and do not expect that this will be an active area during 2012.
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
Venezuela’s bankruptcy law is too outdated and inadequate to permit either the reorganisation of the debtor as a going concern and the acquisition of entities out of bankruptcy. Under Venezuelan bankruptcy laws, insolvent companies that file for bankruptcy or reorganisation generally lose control of their businesses and assets, and become controlled by a receiver and the bankruptcy judge; creditors have less control in the process compared to bankruptcy proceedings in other jurisdictions. Therefore, there is a big incentive for debtors and creditors to seek to restructure the companies out of bankruptcy proceedings and to agree on private standstill agreements to allow for such restructurings.
- 9.What other types of activity are resulting from the economic situation?
We expect to see M&A transactions by investors or multinational companies with strong cash positions and with a long-term strategy to increase their market share in specific sectors or industries in Latin America or worldwide.
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
There has not been an increase in hostile takeover activity. There are very few publicly listed companies in Venezuela. Several of these companies have implemented (or, from time to time, continue to implement) traditional defences against hostile takeovers in line with existing international standards, such as repurchases, poison pills and supermajority provisions, among other measures.
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
Directors of Venezuelan companies have become increasingly aware of the importance of conducting themselves, in M&A transactions, in compliance with existing Venezuelan tender offer rules. Such rules are in line with international standards. For example, the rules require a decision by the board to recommend, discourage or express no opinion on the tender offer, along with the preparation of a statement explaining the reasoning behind such decisions and supplying other information. Directors of Venezuelan companies have been particularly involved in the defence process against hostile takeovers. The most typical response of Venezuelan target companies has been the implementation of repurchase plans to seek to increase the price offered by the unsolicited bidder. This occurred in the tender offer of AES for EDC, in the tender offer of AES for CANTV and in the tender offer of Telmex/America Movil for CANTV.
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
In general, M&A transactions in Venezuela are conducted in a fashion similar to those in other jurisdictions, namely, the signing of confidentiality agreements or non-binding letters of intent, due diligence investigation, negotiation of stock or asset purchase agreement, signing of the agreement, disclosure of the transaction, tender offer process (in case of publicly listed companies) and closing of the transaction.
The purchase agreement generally contains representation and warranties, indemnification and closing conditions customary for M&A transactions in other jurisdictions. The conditions for closing are frequently the subject of lengthy negotiations between seller and purchaser given the rapidly changing regulatory environment.
One particular difference from other countries is that, in Venezuela, the purchase agreement is generally signed between the purchaser and the shareholder or shareholders of the target company, instead of the target company itself. On the other hand, there is no procedure in Venezuela that allows the squeeze-out of shareholders of a Venezuelan company.
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
Firstly, implement strict rules and precautions to ensure the confidentiality of the preliminary negotiations involving the potential purchase of a Venezuelan company. Secondly, properly address Venezuelan legal and non-legal issues, including PR and social issues. And thirdly, work closely with the applicable Venezuelan authorities from the outset to address any legal, tender offer, regulatory, consumer protection, social or other issues that the proposed transaction may raise.
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
The implementation of exchange controls in Venezuela has impacted on M&A activity in Venezuela. Pursuant to the existing exchange control regulations, foreign exchange approvals are required to repatriate dividends and other proceeds of investments. This creates investment regulatory and devaluation risks for prospective purchasers, in the event that the foreign exchange approvals are delayed or not granted. On the other hand, the acquisition must be structured in a manner that allows the investor to be in a position to request such foreign exchange approvals. In addition, existing exchange control regulations make it difficult to finance acquisitions with bank debt denominated in foreign currency.
Contributing Author
Contributing Editor
Paul Schnell
Skadden, Arps, Slate, Meagher & Flom LLP
Questions
- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
- 2.Which industries do you expect will see the most M&A activity in 2012?
- 3.What types of deals do you expect to see?
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America. - 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
- 7.Do you expect more M&A activity involving financially troubled companies?
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
- 9.What other types of activity are resulting from the economic situation?
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
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