Typical due diligence issues

In Colombia, regulatory noncompliance is not uncommon, particularly when the target is a family-owned business. Examples of noncompliance include breaches of statutory corporate obligations, underpayment of social insurance or violation of overtime policies for employees, breaches of tax law, data privacy law, intellectual property and environmental law. Often such noncompliance means additional costs for rectification and operations post-closing.

As these issues may erode deal value, a thorough due diligence process is recommended to define a plan for both the negotiation of the acquisition agreement and a post-closing plan. A deep understanding of the local practice and practical risks involved is required to create an appropriate solution. It may be advisable to seek protection through a reduction in, or holdback of, the purchase price. Escrow arrangements are also increasingly common in Colombia.

Pricing and payment

There are no special considerations regarding pricing and payment in Colombia. Parties may freely negotiate the terms considering foreign exchange controls (see below) and antitrust and other governmental authorizations (see below).

Foreign exchange control

Colombia has a floating exchange regime that operates as part of a wider economic policy targeting inflation. The Colombian Central Bank monitors currency flows and purchases foreign currency to ensure stability, but, in general, does not restrict the free-flowing exchange market. While businesses are not restricted from moving foreign currency into or out of the country in principle, they must comply with the related reporting and regulatory requirements.

The rule is that payments for goods or services between Colombian companies or individual residents must be made in Colombian pesos. This means that foreign investors will frequently need to exchange foreign currency into Colombian pesos to make payments and conduct business in the country. Exceptions to this rule include payments made from offshore accounts registered with the Colombian Central Bank and payments with respect to certain companies in the oil, gas and mining sectors.

Most business transactions that require an exchange of foreign currency into pesos (or vice versa) are regulated and the exchange must be made through an authorized channel, such as a foreign exchange market intermediary (i.e., financial entity).

Signing/closing

Whether signing and closing is simultaneous, or there is a gap between signing and closing, will depend on the conditions of each transaction. Both mechanisms are common. When a merger control or regulatory approval is required for closing the transaction, the parties typically agree on a deferred closing, subject to obtaining the applicable authorization.

Foreign investment restrictions

Colombia does not have a foreign investment screening procedure, but there are some narrow, sectoral rules that should be considered on a case-by-case basis. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Colombia has a mandatory and suspensory merger control regime, which means that any transaction resulting in the concentration of one or more markets in Colombia (i.e., between parties that are engaged in the same economic activity or in the same value chain in Colombia), that meet the relevant turnover thresholds needs to be notified to the competition authority and be cleared before the deal can be closed and complete. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

For acquisitions in certain sectors, such as the financial industry, private surveillance and security services and healthcare, approval from the relevant industry regulator is required.

For mergers, administrative authorization may be required if any of the merging companies are subject to government oversight (i.e., by the Financial Superintendence or the Superintendence of Health) or meet certain conditions, such as having liabilities on their balance sheet or having registered goodwill — pending amortization.

Upon authorization from the relevant authority, if required, the companies must incorporate the agreed-upon merger into a public deed (or into a private document, if the absorbing entity is a simplified stock corporation and there is no transfer of real estate), together with the financial statements and other documents related to the merger, and amend the surviving company's bylaws. This must be registered with the Chamber of Commerce, and all pertinent notifications to other government entities must be made.

Share sales: When a business is transferred through a stock purchase, the transaction will not involve a change of employer (employer substitution). Therefore, employee conditions, benefits and entitlements are unaffected. Consent from employees or labor unions is not required for the transfer, unless otherwise defined in the collective bargaining agreement (which, in any case, is not common).

Asset sales: If the transaction is structured as an asset purchase that entails the automatic transfer of personnel that are directly linked to the assets subject to the purchase, it would be considered an employer substitution if the parties have not previously assigned or terminated the employment agreements. The transfer of personnel by means of an employer substitution would operate automatically, by virtue of law, upon execution of an asset purchase agreement.

The transferred employees will not be legally entitled to refuse the change of employer or to demand payment of any social benefits (except for unemployment aid) or redundancy or severance pay due as a result of the employer substitution, as the employment agreement is not terminated, suspended or modified. If they do not wish to work for the new employer, they can resign, as any employee is legally entitled to do.

Foreign investors that have transferred assets located in Colombia are required to file an income tax return with the Colombian Tax Office (CTO) within one month of closing. For that purpose, the foreign entity or individual needs to be registered in the Colombian Tax Registry ((RUT) its acronym in Spanish) and have an electronic signature registered with the CTO. In such cases, stamp tax does not apply.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.