EL SALVADOR Law and Practice Contributed by: Héctor Torres, Annette Herrera, Daniel Leiva and Raquel Santos, Torres Legal
4. Sale as a Liquidity Event (Sale of a Privately Held Venture Capital- Financed Company) 4.1 Liquidity Event: Sale Process In El Salvador, if the sale of a company is chosen as a liquidity event, the sale process is most likely to be a bilateral negotiation with a chosen buyer. The Salvadoran financial market is still somewhat small; therefore, a large number of the transactions that take place within it are based on trust among the involved parties. Individuals with capital to invest are not very numer- ous in El Salvador. However, with new regulations and business models attracting foreign investors, this is changing. Additionally, local investors are increasingly seeking to bring in foreigners to participate with them in their businesses. 4.2 Liquidity Event: Transaction Structure The sale of a privately held technology company with a number of VC investors can be structured as an asset sale, where the buyer acquires specific assets and liabilities of the company, or as a share sale, where the buyer acquires ownership of the shares in the com- pany. A share sale is more common for VC companies as it allows for a simpler transition of ownership. The decision to sell the entire company or only a por- tion of its equity largely hinges on the underlying moti- vations for the sale. If the primary goal is to secure additional capital for growth, it may be more strategic to sell minority stakes, allowing the founder to main- tain a significant ownership interest while still attract- ing the necessary investment to drive expansion. In the case of an established company where the sell- er no longer wishes to remain involved, it is logical for the entire business to be sold. This approach allows for a clean transition of ownership and can provide the seller with a complete exit strategy. Private alternative funds authorised under the PAIF Law may act as buyers or co-investors in minority or control deals, potentially increasing competitive ten- sion in sale processes.
example, as start-ups expand their operations, they often need more complex structures, like a corpora- tion in Delaware, to attract investment. Investors may prefer to invest in entities with a more familiar corpo- rate structure, and companies may also face stricter regulatory requirements, prompting re-evaluation of their corporate structure. 3. Initial Public Offering (IPO) as a Liquidity Event 3.1 IPO v Sale Investors in El Salvador looking for a liquidity event are more likely to pursue a sale process rather than a public listing, given the developing nature of the local market. Acquisitions are seen as a more reliable and strategic way to achieve returns. Most investors prefer running a sale process because it generally provides quicker returns and involves less regulatory complex- ity compared to an initial public offering (IPO). 3.2 Choice of Listing If the company decides to pursue a listing, it is more likely to opt for foreign exchange rather than a home country exchange. This is primarily due to the small local market, which is predominantly focused on debt securities, such as debt issuances and financing for projects, rather than equity offerings. The limited scope of the domestic exchange makes it challeng- ing for companies to achieve the visibility and capital- raising potential that foreign exchanges can provide. Therefore, seeking a listing on a foreign exchange may offer greater opportunities for growth and inves- tor interest. 3.3 Impact of the Choice of Listing on Future M&A Transactions In El Salvador, there is no mechanism as such to squeeze out minority shareholders following a suc- cessful tender offer. Thus, the listing of a company on a foreign exchange could impact a future sale in the internal market.
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