PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
7.4 Consideration Cash is the most common form of consideration used in Puerto Rico. However, securities and in-kind con - tributions have recently also started to be used as compensation. 7.5 Conditions in Takeovers Takeovers are not common in Puerto Rico. 7.6 Acquiring Less Than 100% Squeeze-out mechanisms are not common in Puerto Rico. 7.7 Irrevocable Commitments It is not common to obtain irrevocable commitments to tender or vote from the principal shareholders of a target company. 8. Management Incentives 8.1 Equity Incentivisation and Ownership Equity incentivisation of the key management team is a common feature of private equity transactions in Puerto Rico. The key management team is usually provided equity depending on their expertise and their role in the company and industry sector. 8.2 Management Participation Management participation is typically structured as sweat equity subject to vesting. Managers will usually subscribe for ordinary equity or a tracking phantom equity that will follow the performance of a particu - lar metric. A cliff and/or vesting schedule will also be included in the management equity (see 8.3 Vesting/ Leaver Provision s). 8.3 Vesting/Leaver Provisions Leaver provisions for key management shareholders are typically included in Puerto Rico to attract and retain top talent in many PEFs, especially in the tech sector. The typical leaver provisions for management shareholders are: • death; • permanent disability or permanent incapacity through ill health;
must also make the tax payments that correspond to the income that is subject to the preferential tax rate applicable to any taxable income that is subject to a preferential tax rate under the PR IRC. The estimated tax payments may be claimed by the partners as a credit on their annual Puerto Rico income tax return. Accordingly, the estimated tax payments are not an additional tax, but merely a prepayment of the partner’s income taxes. The fund must also provide each of its partners with an informative return detailing all the information required by the partner for the purposes of completing their income tax return. The income tax return must include audited financial statements, including certain supplementary informa - tion established by law, prepared by a certified public accountant who is licensed to practice in Puerto Rico. This requirement only applies to funds with a gross income exceeding specific thresholds provided in the PR IRC. Furthermore, funds that operate with a tax grant must provide audited annual reports to their partners, including audited financial statements prepared under the generally accepted accounting principles (GAAP), as well as an unaudited report on the performance of individual portfolio companies and a compliance certificate that confirms the PEF’s compliance with the terms and conditions of the tax grant. Quarterly unaudited financial statements must also be provided to partners. 7.3 Mandatory Offer Thresholds PEFs that do not operate under the rules of the Incen - tives Code do not have a mandatory offer threshold. However, those PEFs that elect to request a tax grant under the Incentives Code must continually maintain a minimum of USD10 million in capital and/or duly documented legal commitments of capital contribu - tions, even if not yet received. Any PEF that elects to request a tax grant under the Incentives Code must secure the capital and/or legal commitments within 24 months after the first issuance of the fund’s securities.
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