PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
agreements will come into question. However, with the Final Rule being challenged across the country, the regulatory landscape is unclear, with the FTC’s author - ity to enact the Final Rule being called into question. Non-competes that involve a senior executive and upper management will also still be valid if certain compensation and policy-making thresholds are met. PEFs that adopt non-competes with upper manage - ment may therefore be covered by the exception provided by the Final Rule if all the requirements are met. Regardless, despite the uncertainty surrounding the validity of non-compete agreements, the situation should be monitored in the near future and beyond. 8.5 Minority Protection for Manager Shareholders Management typically does not have rights under minority protection provisions. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights The most common control mechanisms awarded to limited partners in the PEF for specific portfolio invest - ments are board appointment rights and information rights. However, most of the board appointment rights and information rights are granted at the PEF level and not at the portfolio investment level. Neverthe - less, there have been instances where limited part - ners/members of the PEF actively negotiate and are granted these board appointment and information rights at the portfolio investment level, but this is not the norm. 9.2 Shareholder Liability It would be extremely difficult for a PEF that is a major - ity shareholder/member of a portfolio company to be held liable for the actions of its portfolio company, as two corporate veils would have to be pierced. How -
ever, these corporate veils may be pierced by a court of law in an extreme case where both the PEF and the portfolio company are part of a scheme to com - mit fraud.
10. Exits 10.1 Types of Exit
In Puerto Rico, the typical holding period for private equity transactions is between three and six years. The most common exit route is a trade sale, which allows all management and institutional investors to be entirely cashed out and focused on new ventures. Dual-track exits are uncommon in Puerto Rico. There has recently been an interest in rolling on investment into a follow-on fund, as opposed to an exit, once the term to commence winding down of the fund is close. Private equity sellers typically reinvest upon exit, depending on the given term of the PEF and any rein - vestment restrictions. Where the investor reinvests the entire gross income generated in a Puerto Rico private capital fund within 90 days of the sale, the capital gains realised by the investors of those funds will not Drag rights are agreed to in private equity invest - ments. The typical drag threshold for any person(s) selling is more than 50% ownership. Tag rights are also typical in private equity invest - ments. The typical tag threshold for any person is holding more than 50% ownership. 10.3 IPO Because of the limited number of IPOs in the Puerto Rico market, exit by means of an IPO is not a common practice. However, the trends affecting lock-ups and relationship agreements would likely follow those on the US mainland. be subject to any income tax. 10.2 Drag and Tag Rights
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