PUERTO RICO Law and Practice Contributed by: Fernando J. Rovira-Rullán and Andrés I. Ferriol Alonso, Ferraiuoli LLC
10. Litigation 10.1 Frequency of Litigation
10.3 “Broken-Deal” Disputes Related to one important justification to terminate a purchase agreement, a matter that has continued to gain importance and has made even the most sea - soned practitioners pause and ponder is the scope, carve-outs and other terms of a definition of material adverse change.
Given the private nature of companies in Puerto Rico, local M&A transactions are friendly in nature. Hos - tile takeovers or acquisitions are only possible in the context of publicly traded companies and, as already explained, Puerto Rico only has a handful of publicly traded companies. As a result, litigation in the context of M&A transactions in Puerto Rico is very limited, particularly with regard to disputes between the pur - chaser and the target company. This contrasts signifi - cantly with the pattern witnessed in mainland USA, where M&A litigation is much more common. Notwithstanding, given the complexity of Puerto Rico labour laws applicable to the sale of an ongoing con - cern, it is more common for litigation to arise in con - nection with severance payments, holiday pay and sick leave owed to retained and/or laid-off employ - ees. To avoid potential litigation between the parties to a merger or acquisition transaction, each party’s responsibilities in connection with labour matters are generally subject to extensive negotiation and are carefully addressed in the agreements. 10.2 Stage of Deal In the event that litigation does arise, it generally occurs following the execution and closing of the merger or acquisition agreement. It is important to note that litigation may also arise in stages prior to a contractual relationship since under Puerto Rico law the parties have a duty to act in good faith in the preliminary negotiations of a contract. This is known as the “ culpa in contrahendo ” doctrine, which is now codified in the Civil Code of Puerto Rico of 2020, as amended. It would be necessary to prove to the court the pre-contractual responsibility of the other party and the fault and bad faith of the party in such pre-contractual stage.
11. Activism 11.1 Shareholder Activism
For the most part, Puerto Rico companies are closely held, wherein the shareholders are actively engaged in the day-to-day management of the business. As a result, shareholder activism in the traditional sense is not commonplace, particularly as an investment strat - egy. Thus, shareholder activism is mostly non-existent in Puerto Rico. 11.2 Aims of Activists Activists are not common in Puerto Rico M&A trans - actions, due to the private nature of most business organisations. 11.3 Interference With Completion Since most local businesses in Puerto Rico are pri - vate in nature, activist investor presence is rare. Not - withstanding this, minority shareholders who are not actively involved in the management of the corpora - tion may attempt to interfere with a proposed M&A transaction based on alleged breaches of fiduciary duties and claims of dissenting rights, although such interference is also extremely rare.
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