PUERTO RICO Law and Practice Contributed by: Fernando J. Rovira-Rullán and Andrés I. Ferriol Alonso, Ferraiuoli LLC
6.2 Mandatory Offer Threshold There are no mandatory offer thresholds under Puerto Rico law. However, as with most US juris - dictions, shareholders do have statutory appraisal rights that they may enforce in local courts when they are “squeezed out” as part of a merger. In the event that certain statutory requirements are met, a court of competent jurisdiction will determine whether the price per share received by a dissenting shareholder is fair in light of the circumstances. 6.3 Consideration Cash is the most typical form of consideration, fol - lowed by equity, given that many of the transactions in Puerto Rico involve privately held companies with valuations below USD50 million. The tools most commonly used in this jurisdiction to bridge the gap between the parties when there is valuation uncertainty are seller financing, earn-outs and structuring the transaction to make it more tax- efficient for the seller. Earn‑outs are generally tied to financial milestones and business results. Rollover equity is also frequently used in private equity trans - actions. 6.4 Common Conditions for a Takeover Offer Due to the private nature of companies in Puerto Rico, local transactions are typically negotiated and not hostile in nature. Hostile acquisitions are only pos - sible in the context of publicly traded companies, and Puerto Rico has only a few publicly traded companies. As discussed, there are no local regulations address - ing takeovers of privately held companies other than the appraisal rights that dissenting shareholders may have. 6.5 Minimum Acceptance Conditions Given that tender offers are made in the context of publicly traded companies, they are not usually used in Puerto Rico, and there are no usual minimum acceptance conditions for tender offers. 6.6 Requirement to Obtain Financing There is no impediment to making business combina - tions conditional on the bidder obtaining financing. Therefore, a business combination or transaction may be subject to a financing contingency. In reality, sellers
often seek to limit or narrow financing‑out clauses, by requesting evidence of committed financing (commit - ment letters) or reverse break‑up fees. 6.7 Types of Deal Security Measures Typically, when purchasers wish to lock down a poten - tial transaction, they may execute a term sheet or let - ter of intent that is partially binding on the parties. Typical binding provisions may include: • exclusivity provisions whereby sellers may not look elsewhere within a certain period of time; • break-up fees and expense reimbursement if sell - ers fail to close; • non-solicitation provisions; and/or • non-disclosure provisions. Match rights are not generally used in this jurisdic - tion but are sometimes requested and many times rejected. Force-the-vote provisions are not well known in Puerto Rico. There have been no changes to the regulatory environ - ment that have impacted the length of interim periods. 6.8 Additional Governance Rights Purchasers that acquire less than total ownership in a target company typically require the following rights: • drag-along rights whereby all equity holders are forced to sell their holdings in the target company pursuant to the affirmative vote of a predetermined threshold; • restrictions on transfers of equity, which can be absolute or subject to a right of first refusal; • reserved board seats to be filled only by persons appointed by the purchaser; • reserved approval rights for material decisions – eg, amendments to charter documents, asset sales, dividends or future offerings of securities; • pre-emptive rights of subscription for any future securities offerings by the target company; and • non-compete and non-solicitation provisions. 6.9 Voting by Proxy Shareholders may vote by proxy in Puerto Rico, but the term of such proxies is limited to three years unless the proxy expressly provides for a longer term.
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