PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
6.8 Allocation of Risk Transactions where the seller is a PEF and the buyer is another PEF are not common in Puerto Rico at this time, but the market is likely to develop and require these types of transactions. 6.9 Warranty and Indemnity Protection A private equity seller normally provides typical title, no liens and authority warranties to a buyer upon an exit. The management team provides business rep - resentations to a buyer on exit. It is customary for a cap to be placed on liability for business warranties, but fundamental warranties are either uncapped or capped at the purchase price. Full disclosure of the data room is typically not allowed against the war - ranties. Typical limitations on liability for warranties in Puerto Rico include baskets, caps and sunsets. 6.10 Other Protections in Acquisition Documentation Indemnities are generally the only protection provided to private equity buyers and sellers. Insurance is not common, and escrows are only considered when a corporate buyer is involved. 6.11 Commonly Litigated Provisions Litigation is not common in connection with private equity transactions in Puerto Rico. However, in the limited scenarios where there have been some litiga - tion proceedings, these revolved around certain war - ranties and representations regarding funding that were in dispute. 7. Takeovers 7.1 Public-to-Private Public-to-private private equity transactions are not common in Puerto Rico. 7.2 Material Shareholding Thresholds and Disclosure in Tender Offers Under the PR IRC, partnerships (including funds) must file an “informative income tax return for pass-through entity”, and their income flows through and is taxed to the partners. The partnership must also make estimat - ed tax payments equal to 30% of any taxable income that is subject to tax at regular rates (if any). The fund
• cancellation of any prior mortgages or liens, cover - ing the investment in which the fund will invest; • regulatory approvals, as may be required; • the approval of certain contractual counterparties; • the conversion of convertible instruments; and • corporate resolutions approving the transaction. Material adverse effects provisions are very common in private equity transactions, particularly when the transaction is not designed as a simultaneous sign and close. Third-party consents are generally requested for clos - ing a private equity deal when material contracts that require consent for assignment are involved, or when a change of control occurs. This is more common in industries such as distribution, services, etc. Specific consideration must be given by PEFs when investing in entities that hold preferential tax grants. Subject to the amount of ownership being purchased by the PEF, prior consent from the OI may be required to avoid the risk of having the tax grant of the portfolio company revoked. 6.5 “Hell or High Water” Undertakings “Hell or high water” provisions are not usually accept - ed by a private equity-backed buyer. The burden is usually placed on the seller’s side. Additionally, the new EU FSR regime does not feature in negotiations of these types of undertakings. 6.6 Break Fees Break fees are not common in Puerto Rico but may be agreed to in certain scenarios involving publicly traded buyers. 6.7 Termination Rights in Acquisition Documentation A private equity seller or buyer can usually terminate an acquisition agreement in the following circum - stances: • when the deal has not closed by a certain “drop- dead” date; • when third-party or required government consents are not granted or obtained; or • for reasons stemming from the due diligence.
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