TerraLex Cross-Border Guide to Cross-Border Merger & Acquisition Guide

For regular commercial companies there are no regulations or restriction on foreign investment. Nonetheless, there are some sets of rules for particular industries. Three of the most significant ones are:

• Maritime land zones: Costa Rican law provides that only nationals can legally engage for these concessions. However, foreigners may invest if they comply with the following conditions: (i) have had legal residence in the country for a period of at least five years; (b) act throughout Costa Rican companies with legal domicile in the country, with a maximum foreign capital participation of 49%. Moreover, to commercially exploit a maritime land zone for touristic developments, only physical individuals and companies that are qualified to hold concession rights can request it, as well as foreign entities may participate therein, if they demonstrate that they are tourism companies whose capital investment towards the development is owned by Costa Ricans in a proportion of over 50%. A concession agreement is a type of administrative lease, executed by the corresponding Municipality and the concession applicant. Provided that all the requirements established in the Act are complied with, the concession agreement grants the applicant the use and enjoyment of land located within the Concession Area for periods of time that go from five to twenty years, subject to renewal.

• Free Trade Zone: Foreign investment may apply for a free trade regime, which grants exonerations or discounts in some local taxes, as long as the project fits into any of the categories defined by the Foreign Investment Ministry. If a regime is granted to a company, it must engage in an investment contract with the Government with a minimum investment and employment level commitment.

The Costa Rican legal tender is the colon, which is controlled by the Central Bank of Costa Rica, public office dedicated to issue monetary regulations and define the exchange control and rates.

None.

The general principle for listed companies is impartiality and non-interference on behalf the board of directors, without prejudice of the board giving an opinion on the transaction, but the target’s Board of Directors’ participation is not a requisite. The exception to this rule is the tender, where the participation of the target company is necessary but limited to the board advising the approval or rejection of the transaction.

In Costa Rica, there are different types of terminations of employment agreements. The type of termination depends on the circumstances surrounding the end of the employment relationship. Here are some common types of terminations:

1. Termination without cause: According to local law (article 85, section d) of the Labor Code), unless the employee is protected by a "special condition", the employer, under the similar rule of "employment at will" in the U.S., can decide to dismiss an employee with full severance payment, which means the payment to the employee of (i) Notice (based on seniority); (ii) severance (“cesantía”), which also varies depending on seniority, with a cap of eight years; (iii) vacation time (two weeks for every 50 weeks of continuous work), the employer would have to pay any outstanding vacation time not enjoyed by the employee; and (iv) Christmas bonus (one month’s salary for every year worked or a proportion thereof for work rendered between December 1 of the previous year and the effective termination date).

2. Termination with cause: An employer can terminate an employment agreement for just cause if the employee engages in any of the gross faults established in Article 81 of the Labor Code. In case of wrongful dismissal complaints, the employer must provide evidence to support the termination for cause. Under this option, the employee is only entitled to receive proportional compensation for vacation and Christmas bonus, since they are acquired rights for all employees regardless of the cause of termination.

3. Termination by mutual agreement: Both the employer and the employee can agree to terminate the employment contract by mutual consent, based on section d) of Article 86 of the Labor Code. Under this termination, the employee is always entitled to receive proportional compensation for vacation and Christmas bonus, since they are acquired rights for all employees regardless of the cause of termination, but not the so-called questionable rights, which are notice and severance payments and are mere expectations, which are generally negotiated through a mutual agreement with the employee.

4. Termination due to expiration of a fixed-term contract: If an employment contract has a specific end date, the contract will terminate automatically upon reaching that date without the need for notice or severance pay. However, ensuring that the fixed-term contract complies with the legal requirements in Costa Rica is essential. Under this termination, the employee is only entitled to receive proportional compensation for vacation and Christmas bonus, as acquired rights for all employees regardless of the cause of termination.

5. Termination due to the employee's resignation: An employee can voluntarily resign from their position by providing the notice period specified in the employment contract or labor laws. Failure to comply with the notice period may result in the employee being liable for compensation to the employer. Under this termination, the employee is only entitled to receive proportional compensation for vacation and Christmas bonus. It is important to note that specific procedures and requirements may apply to each type of termination under Costa Rican labor law.

There is no specific legislation that regulates redundancies, so that, if there is no objective reason for dismissal, the employer must apply the termination of employment relationships without just cause. According to local law (article 85, section d) of the Labor Code), the employer can decide to dismiss an employee with full severance payment, which means the payment to the employee of (i) Notice (varies depending on seniority); (ii) severance (“cesantía”), which also varies depending on seniority, with a cap o eight years; (iii) vacation time (two weeks for every 50 weeks of continuous work), the employer would have to pay any outstanding vacation time not enjoyed by the employee; and (iv) Christmas bonus (one month’s salary for every year worked or a proportion thereof for work rendered between December 1 of the previous year and the effective termination date).

If closed within Costa Rican borders, it will be subject to pay a tax of CRC 0.005 for every CRC 1000. Additionally, you must consider that indirect transfer of lands apply, therefore you will need an appraisel over the lands. Such indirect transfer tax is of 1.5% of the value of the land. If the seller is Costa Rican or legal resident, he/she must be subject to capital gains tax, or income tax due to the sale.

Authorization from the Competence Authority must be obtained anytime before the closing. Without the authorization, the closing cannot take place. The thresholds that trigger involvement on behalf of the Competence Authority are:

1. Parties have direct or indirect presence in Costa Rica.

2. The sum of assets or total sales of both parties and their subsidiaries in Costa Rica amount to 30.000 base salaries (around $20 million)

3. Individual party sales or assets in Costa Rica amount to around $1 million (depending on the base salary at the given moment)

The most frequent documents are:

• Share Purchase Agreement

• Purchase of the Commercial Establishment. A due diligence process is recommendable before the closing of any private M&A transaction, for the risks and liabilities found in the target company will be accepted by the buyer.

There are no restrictions regarding acquisitions. However, for some industries, additional steps may be required (banking, telecommunications, and others). Also, there is a stamp duty of 0.5% of the purchase price and payable when the purchase agreement is duly executed.

Tender for medium companies between signing the Offer and the Closing is 90 days, to carry out the due diligence process and filing of the approval request for the transaction before the Competition Authority. The effectiveness of a later on Closing will be conditioned to the approval of the transaction by the Competition Authority.

It is standard in the Costa Rican market to have the purchase price transferred to a Escrow while the transaction gets the final approval from local authorities (in antitrust matters) or finishes all of the precedent conditions agreed in the Closing documents associated to the transaction (including the payments of previous debts).

Yes.

For foreign individuals signing, they will need to identify themselves by means of their passport. Moreover, prior closing is advisable to have an incumbency certificate dully legalized of the company or entity being represented by such individual.

For the buyer: it is advisable to have a resolution of his respective body that approves the purchase and payment of the price.

For the seller: it is advisable to have a resolution of his respective body that approves the sale and receptance of the price. For the target: it is advisable to have a minute of stockholders’ meeting agreeing the selling of the company and any other particularity or condition to the sale (other than the precedent conditions) agreed in the negotiations.

None in particular, other than identifying themselves.

To have the incumbency certificate legalized and the signatory duly identified.

For the SPA: not advisable, standard or usual to have the agreement notarized.

For the Purchase of the Commercial Establishment: all the agreements related to the purchase of the ongoing business (not the shares) whether or not the business includes land, movables and vehicles, the client’s portafolio or the agreements, the purchase agreement shall be executed in notarized deeds.

As part of the Closing, it’s a standard to have a stockholder meeting appointing the new directors, and it’s minute shall be notarized and registered in the Mercantile Registry.

The Notary acts only to give public attestation to the agreements. The deal terms and conditions of the agreements shall be negotiated and agreed between the parties with the legal and financial advise they may seek separately.

In SPA: The fee does not correspond to the Notary, but to the legal counsel. Each counsel will define fees depending on the complexity of the transaction.

In Purchase of the Commercial Establishment: Apart from the fees of the legal counsel, the notary that notarizes the deed of the purchase agreement, shall be paid in accordance to the value of the transaction and the official tariff applicable at the moment. These fees are fixed by the tariff and should not be negotiated.

It will depend on the present conditions in which the Notary has to participate. Some may take 1 month, as some will take 5-6 weeks to be recorded in the Registry (for instance, transforming a “Sociedad anónima” into a “Sociedad de responsabilidad limitada”).

To change the stockholders, an entry in the stockholders’ Registry Book must be entered. To change officers and directors, a meeting of stockholders must be held and registered into the National Registry. Taxes and charges apply for such registration, in an approx. of $150. Once the stockholders are registered into the Registry Book, the company must file an ultimate beneficiary affidavit within the next 15 business days as of the Registry Book entry.

In Costa Rica, the Sociedad de Responsabilidad Limitada runs by quota participations instead of shares and must be issued in Costa Rican colones. The transfer of the quotas must be approved by at least three quarters of the stock capital of the company.

The signatory of the document must have enough authorization, or special powers of attorney can be granted.

The authorizations of every power of attorney must be reviewed previously to identify if any restrictions apply and define the means to solve such restrictions.

Faxed and email documents must be previously certified by a Notary Public in order to be admissible in Court. The requisite is not applicable for public documents or public deeds, because they are presumed authentic.

Under Costa Rican law, national certificates of signatures issued by our local Central Bank (as the legal issuer) are admissible and presumed authentic in private documents. For notarial deeds, the execution must be made by wet signature.

Yes, it is valid but not standard. The tradition is to have all parties signing simultaneously in the same place.

The parties must notify the Costa Rican Competition Authority for the approval of all transactions that involve a permanent change of control and comply with applicable thresholds. Additionaly, the sale of shares or assets could require additional regulatory approvals (insurance, financial, securities, securities markets, public tender-awarded companies).

Signing The document most commonly produced is the master agreement, which includes the conditions on closing, representations and warranties, and so on. There may also be separate individual agreements.

Closing The closing agreement is most commonly produced. It may be an addendum to the master agreement on which the parties state that the required conditions to closing have been fulfilled (for example, assignment of agreements with third parties, authorisation by the Competition Commission and so on).

An escrow agreement may also be produced for the transfer of assets that must be executed through a public deed.

The physical share certificates must be endorsed.

• The transfer of shales must be registered in the shareholder registry book of the company.

• Transfer of real estate, intellectual property and other movable assets require specific formalities which usually require a Notary Public to execute.

None.

The process usually starts with a Letter of Intent / Memorandum of Understanding after the negotiation process. With this document, the due diligence takes place and is usually ensured with a non-disclosure agreement, which could take around four weeks in general, depending on the complexity of the transaction and the amount of documents to be revised. Usually, parties begin negotiating both the purchase agreement and the other relevant transaction documents during the due diligence. The deal is closed with the signing of the transaction documents, which is usually about 30 days after the due diligence.

Non compete agreements are enforceable for a period usually not greater than 5 years. It is also common to establish penalty clauses as part of the non-compete.