DUE DILIGENCE IN LATIN AMERICA RISK REDUCTION STRATEGIES

Dr. Enrique P. Prini Estebecorena

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DUE DILIGENCE DUE DILIGENCE IN LATIN AMERICA IN LATIN AMERICA

RISK REDUCTION RISK REDUCTION STRATEGIESSTRATEGIES

ABA INTLAW FALL MEETING


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TODAY’S SPECIALSTODAY’S SPECIALS

• DUE DILIGENCE LATAM WAYDUE DILIGENCE LATAM WAY

• HIDE AND SEEK-PLAY THE HIDE AND SEEK-PLAY THE GAME GAME

• DO NOT SEE YOU IN COURTDO NOT SEE YOU IN COURT

• ASK THOSE RUDE QUESTIONSASK THOSE RUDE QUESTIONS


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DUE DILIGENCE LATAM DUE DILIGENCE LATAM WAYWAY

• Each country it’s a world of its ownEach country it’s a world of its own

• Latin America is too big & diverseLatin America is too big & diverse

• Who run the showWho run the show

• Some Lat-Am ways. Lawyers out Some Lat-Am ways. Lawyers out

• Know the knots & bolts of the place Know the knots & bolts of the place

• StandardsStandards


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DUE DILIGENCE LATAM DUE DILIGENCE LATAM WAY WAY

Cont.Cont.• Management Due DiligenceManagement Due Diligence

– Plan AheadPlan Ahead

– Put up the right TeamPut up the right Team• Local lawyers, specialist in target industryLocal lawyers, specialist in target industry• Local experts, target industryLocal experts, target industry• Interdisciplinary exerciseInterdisciplinary exercise• Guarantee a swiGuarantee a swifft flow to closing docs t flow to closing docs

and decision makers and advisorsand decision makers and advisors

– Open your game. Worst case scenario: a Open your game. Worst case scenario: a million deal killer unfoundmillion deal killer unfound


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DUE DILIGENCE LATAM DUE DILIGENCE LATAM WAY WAY

ContCont• Legal Due DiligenceLegal Due Diligence

– It is not an end in itselfIt is not an end in itself

– Do not over Due Diligence.Do not over Due Diligence.

– One team sees an entire issueOne team sees an entire issue

– DD Minutes: Bigger is not betterDD Minutes: Bigger is not better

• Timing:Timing:– Most sellers and their representatives will push you to agree Most sellers and their representatives will push you to agree

to a 10-day due diligence investigation. This is completely to a 10-day due diligence investigation. This is completely ridiculous and totally unacceptable! There isn't a single ridiculous and totally unacceptable! There isn't a single business in the world where you can learn what you need to business in the world where you can learn what you need to know in 10 days.know in 10 days.

– 20 working days, a full calendar month 20 working days, a full calendar month could suit could suit


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Risks AssessmentRisks Assessment

• Identification of deal-breaking exposures. Identification of deal-breaking exposures.

• Quantification of the liabilitiesQuantification of the liabilities & claims & claims assumed. assumed.

• Projection of the future cost of insurance and self-Projection of the future cost of insurance and self-insured losses. insured losses.

• Coordination of the Coordination of the mmatters related to closing. atters related to closing.

• Recommendations for improvementRecommendations for improvementss after closing. after closing.

• Political RiskPolitical Risk

• Regulatory Framework of the TargetRegulatory Framework of the Target

• There is no such a Business like unregulated BusinessThere is no such a Business like unregulated Business


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RISK MANAGEMENTRISK MANAGEMENT

• Provides pre-acquisition risk assessment of Provides pre-acquisition risk assessment of potential merger or acquisition candidates potential merger or acquisition candidates by looking at the candidate’s operations by looking at the candidate’s operations and systems within the context of the and systems within the context of the stated goals and strategic vision. stated goals and strategic vision.

• Confirms fit or results in the identification Confirms fit or results in the identification of significant issues or challenges for of significant issues or challenges for further consideration prior to making the further consideration prior to making the final investment decision. final investment decision.


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RISK MANAGEMENTRISK MANAGEMENT(cont.)(cont.)1.1. Review the offering document. Review the offering document.

2.2. Examine the disclosure attachments (e.g. Examine the disclosure attachments (e.g. discussion of environmental impairment discussion of environmental impairment matters or matters in litigation. matters or matters in litigation.

3.3. Confer with Confer with yyour client (the buyer) our client (the buyer) concerning any issues that could have a concerning any issues that could have a material bearing on the value of the material bearing on the value of the transaction. transaction.

4.4. Prepare a list of additional information that Prepare a list of additional information that will be requiredwill be required..


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RISK MANAGEMENTRISK MANAGEMENT(cont.)(cont.)

5.5. Obtain and review prior years' schedules of insurance Obtain and review prior years' schedules of insurance and regulatory approvals or licenses (going back at and regulatory approvals or licenses (going back at least three years) depicting the limits of insurance, least three years) depicting the limits of insurance, deductibles & the names of the insurance companies.deductibles & the names of the insurance companies.

6.6. Obtain and analyze the workers compensation Obtain and analyze the workers compensation experienceexperience, severance packages, etc., severance packages, etc.

7.7. Discuss with the insurance & reinsurance broker(s) Discuss with the insurance & reinsurance broker(s) any preliminary findings and obtain from any missing any preliminary findings and obtain from any missing policiespolicies, claims , claims or other information. or other information.

8.8. Transfer income abroad and recover your Transfer income abroad and recover your investments- Local Central Bank rules.investments- Local Central Bank rules.


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HIDE AND SEEK-HIDE AND SEEK-PLAY THE GAMEPLAY THE GAME

1.1. Review the closing documents with focus upon any Review the closing documents with focus upon any indemnification wording and the indemnification wording and the risks foundrisks found. .

2.2. Prepare a concise due diligence memorandum that identifies Prepare a concise due diligence memorandum that identifies any deal breakers, quantifies the uninsured liabilities that any deal breakers, quantifies the uninsured liabilities that may be assumed, projects the future cost of insurancemay be assumed, projects the future cost of insurance and and liabilitiesliabilities and sets forth the activities that will be necessary and sets forth the activities that will be necessary before closing and after closing. before closing and after closing.

3.3. Assure that all of the documents required at closing are Assure that all of the documents required at closing are prepared, including certificates, scheduleprepared, including certificates, scheduless and additional and additional insured endorsements in favor of the lender/lessor/insured endorsements in favor of the lender/lessor/ mortgagemortgageee. .

4.4. Confer with buyer, the closing attorney and any other Confer with buyer, the closing attorney and any other stakeholders in the transaction. stakeholders in the transaction.


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• Financials:Financials:– TThey all looked so good on paper...hey all looked so good on paper...

– Just part of the movie.Just part of the movie.

– US GAAP reconciliation. Apples & US GAAP reconciliation. Apples & OrangesOranges

– Historical Data. Inflation accounting.Historical Data. Inflation accounting.

– Assets valuation.Assets valuation.


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• Look for:Look for:

– Generous settlements, severance agreements, Generous settlements, severance agreements, parachutesparachutes

– Sweetheart considerationsSweetheart considerations

– Tax moratoriums or payment agreementsTax moratoriums or payment agreements

– PardonsPardons//Compensations of DebtsCompensations of Debts or Covenants or Covenants

– Related party transactions on non-arms length termsRelated party transactions on non-arms length terms

– Suppliers long term AgreementsSuppliers long term Agreements

– Consulting servicesConsulting services

– Software upgrade exclusivitySoftware upgrade exclusivity

– SOX implications,15(d)SOX implications,15(d) SEAct, Certifications SEAct, Certifications 906 906 && 302302


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DO NOT SEE YOU IN DO NOT SEE YOU IN COURTCOURT

• Legal Opinions:Legal Opinions:

– Are they usefulAre they useful in the LatAm in the LatAm landscape?landscape?..

– What is really important to be included What is really important to be included there.there.

– Take advantage of the local insightTake advantage of the local insight

– DD findings must be the base for DD findings must be the base for Target’s Legal Opinions.Target’s Legal Opinions.


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• Jurisdiction and Venue:Jurisdiction and Venue:– New York LawNew York Law

– Local jurisdictionLocal jurisdiction

– Importance of paper agreement, save Importance of paper agreement, save the trees!!!the trees!!!

– Insolvency Proceedings.Insolvency Proceedings.

– Section 304 of US Bankruptcy Code.Section 304 of US Bankruptcy Code.


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• Due Due diligence investigation diligence investigation must bemust be so so complete that you leave no stone unturned. complete that you leave no stone unturned.

• How to interpret all contracts, leases, How to interpret all contracts, leases, agreements in place and evaluate the long agreements in place and evaluate the long term viability of each and any possible term viability of each and any possible liabilities they may present for you in the liabilities they may present for you in the future.future.

• CrisisCrisis

• Investment Protection Treaties- CIADI-Investment Protection Treaties- CIADI-


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ASK THOSE RUDE ASK THOSE RUDE QUESTIONSQUESTIONS

• A structured process should be used to make A structured process should be used to make the data gathering and analysis fast and the data gathering and analysis fast and efficient. An experienced, two-to-three person efficient. An experienced, two-to-three person team should visit the candidate company and team should visit the candidate company and gather data first-hand on its business system. gather data first-hand on its business system. • • Business processesBusiness processes

• • Structure, jobs and skillsStructure, jobs and skills

• • Information systemsInformation systems

• • Culture, norms and beliefsCulture, norms and beliefs

• • Systems for managing the performance of employees Systems for managing the performance of employees


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• Many DD Many DD failfailss because the up-front rigorous analysis because the up-front rigorous analysis that was applied to the financial and legal aspects of the that was applied to the financial and legal aspects of the evaluationevaluation was not applied to the organizational aspects was not applied to the organizational aspects of the union. An "organizational due diligence" is a key of the union. An "organizational due diligence" is a key requirement for the success ofrequirement for the success of integration and integration and any new any new alliance. alliance.

• First interview Lower Staff on one on onesFirst interview Lower Staff on one on ones

• Who, Where, Why Skeletons are in the Who, Where, Why Skeletons are in the ClosetCloset

• Senior StaffSenior Staff


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• CEOCEO

• BOARD OF DIR.- INDEPENDENT DIR.BOARD OF DIR.- INDEPENDENT DIR.

• AUDIT COMMITTEEAUDIT COMMITTEE

• EXTERNAL AUDITORSEXTERNAL AUDITORS

• REGULATORSREGULATORS

• VERY IMPORTANT: DD ON YOUR OWN VERY IMPORTANT: DD ON YOUR OWN CLIENT!CLIENT!


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• Most of these professionals are compensated, and Most of these professionals are compensated, and many quite lavishly, when the deal is consummated. many quite lavishly, when the deal is consummated. However, However, generally generally nowhere on the team is there an nowhere on the team is there an organizational specialist whose job is to perform a organizational specialist whose job is to perform a due diligence on the fit of the two organizations, due diligence on the fit of the two organizations, their business processes, and their cultures.their business processes, and their cultures.

• Repeatedly, companies learn that despite the best-Repeatedly, companies learn that despite the best-developed financial plans, it is the people who make developed financial plans, it is the people who make the alliance succeed or fail. the alliance succeed or fail.


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• Experience has shown that the real Experience has shown that the real deal-killerdeal-killer is the is the failure to effectively integrate the two merging failure to effectively integrate the two merging organizations. Good integration rarely makes a truly bad organizations. Good integration rarely makes a truly bad deal work, but failure to integrate well almost always ruins deal work, but failure to integrate well almost always ruins the chances of even the most financially promising union. the chances of even the most financially promising union.

• Most often, the responsibility for implementation is virtually Most often, the responsibility for implementation is virtually "thrown over the fence""thrown over the fence" for the two companies to sort out. for the two companies to sort out. Sometimes a transition leader or team is appointed, however, Sometimes a transition leader or team is appointed, however, most times themost times theyy are inexperienced are inexperienced && unschooled in many of unschooled in many of the skills so critical for an effective and efficient integration.the skills so critical for an effective and efficient integration.


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ConclusionConclusion• KEEP YOUR EYE ON THE BALLKEEP YOUR EYE ON THE BALL

• ALIGN YOUR INTEREST TO THE ONE of DD ALIGN YOUR INTEREST TO THE ONE of DD TEAMTEAM

• WHAT ARE YOUR CLIENT DEAL KILLERS?WHAT ARE YOUR CLIENT DEAL KILLERS?– Hide liabilitiesHide liabilities

– Integration culturesIntegration cultures

– People to do it People to do it IDEA * ACT LOCALLY THINK GLOBALLY

*COMUNICATE WITH THE DECISION MAKERS


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Conclusion(Cont.)Conclusion(Cont.)– License or Govt. Related franchiseLicense or Govt. Related franchise

– No magic recipes- no one size fits allNo magic recipes- no one size fits all

– Include DD findings in the Closing DocsInclude DD findings in the Closing Docs

– Not just reps, real relief to your painNot just reps, real relief to your pain• Conditions to closingConditions to closing• IndemnitiesIndemnities• NotNot us us boilerplate materiality boilerplate materiality

– WhoWho’ll ’ll pay the checkpay the check if the if the

Deal went down the drainDeal went down the drain??

IDEA Remember to PLAN AHEAD/

BE PREPARED/ ASK THOSE QUESTIONS

Documents

DUE DILIGENCE IN LATIN AMERICA RISK REDUCTION STRATEGIES