PUERTO RICO Law and Practice Contributed by: Fernando J. Rovira-Rullán and Andrés I. Ferriol Alonso, Ferraiuoli LLC
9.2 Directors’ Use of Defensive Measures As discussed in 8.1 Principal Directors’ Duties , the directors owe a duty of care and a duty of loyalty to the corporation and to its shareholders and they must always act for the benefit of the corporation, be it in negotiating the price for the acquisition of a target company, the sale of the corporation or implementing a defensive measure to prevent an acquisition. 9.3 Common Defensive Measures In Puerto Rico, the most common defensive measures are: • super-majority (ie, two-thirds of votes) voting requirements; • restrictions on transfer, including right of first refusal provisions that entitle other shareholders and/or the corporation to acquire the shares of a selling shareholder before that shareholder has the opportunity to sell them to a third party; and • the creation of a staggered board of directors. Additionally, directors could use “poison pills” as a defensive measure. However, this type of defensive measure remains rare in Puerto Rico. 9.4 Directors’ Duties Directors owe a duty of care and a duty of loyalty to the corporation and to its shareholders. As previously mentioned, currently there is no local case law inter - preting the applicability of the intermediate judicial scrutiny applicable to defensive measures executed by directors, as adopted by Delaware courts. 9.5 Directors’ Ability to “Just Say No” Under the General Corporations Act, the merger or acquisition agreement may provide that, at any moment before the certificate filed in the Puerto Rico Department of State becomes effective or before the closing of an asset purchase, the board of directors of any of the corporations involved in the transaction may terminate the agreement. This is so even if it has been approved by the shareholders of all or some of the corporations involved in the transaction.
mediate standard, courts evaluate the actions taken by the board of directors and the process for taking those actions. The directors must show that the deci - sions taken by them are reasonable and not merely rational under the business judgement rule. 8.4 Independent Outside Advice Generally, companies that are considering an M&A transaction engage outside counsel and financial advisers. Depending on a company’s particular indus - try, hiring other specialised consultants may be advis - able. Independent counsel for the purchaser is generally responsible for the preparation of the transaction documents and completion of the legal due diligence review. Financial advice is normally provided by certi - fied public accountants, since investment bankers do not often participate in Puerto Rico M&A transactions, unless it is a complex or cross-border transaction. 8.5 Conflicts of Interest Given that the number of M&A transactions that take place in Puerto Rico is a fraction of the number of transactions that occur in Delaware and in other parts of the USA, the quantity of conflict of interest suits due to an M&A transaction is very limited. Nonetheless, there have been judicial claims involving directors’, officers’ and majority shareholders’ conflicts of inter - est. Plaintiffs bear the burden of proof to show that the decision was taken by the directors who had a personal interest in the transaction. Once they prove so, the business judgement rule presumption is rebut - ted and the burden of proof is shifted to the directors, who must prove that the transaction was entirely fair from a process and valuation perspective.
9. Defensive Measures 9.1 Hostile Tender Offers
Although the General Corporations Act does not pro - hibit hostile tender offers, they are virtually non-exist - ent given the private nature of businesses in Puerto Rico and the fact that transactions are always volun - tarily negotiated transactions.
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