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Takeover Guide


Ana Teresa Rizo, Arias & Muñoz- Nicaragua
Contents                                    Page


    REGULATORY MAP                             1


    CONCLUSION                                 3

   2080652_1_takeover guide - nicaragua
         Central America has witnessed a remarkable development in its economy due to the
         commercial opening of the early nineties. This phenomenon has given rise to new
         commercial relations with strong economies and potential developing markets.
         Nowadays, private investments and financial institutions play a fundamental role in the
         stability of our countries, allowing for sustainable development and economic growth.

         As a result, the institutional and legal structures in the region have been subjected to
         dramatic and deep reforms. In Nicaragua, for instance, a great number of economic laws
         have been approved in order to encourage foreign investment and pave the way for
         globalisation. However, the institutional and policy framework for corporations is still
         governed by a Commercial Code promulgated in 1917, with few amendments. That
         being said, it is clear that the regulations governing local corporations and their business
         are, in some instances, inadequate in sustaining the economic relations posed ten years

         Moreover, it must be taken into consideration that most of the companies in Nicaragua
         are close companies; there were only two companies that initially traded their shares in
         the stock market, but those shares are not traded in the secondary market. Nonetheless,
         on 26th October 2006, the Nicaraguan Congress passed the Law No. 587 “Ley de
         Mercado de Capitales”, hereinafter referred to as the Capital Market Law, introducing
         novel methods into the Nicaraguan legal system to regulate the capital market, the
         individuals or entities intervening in the market, the acts or agreements related to the
         capital market and the securities traded in order to promote transparency, competition
         and disclosure of information to protect investors.

         Despite the Capital Market Law, this guide will provide an overview of the poor regulatory
         framework applicable to takeovers of shares in companies organised under Nicaraguan

   Commercial Code

         As mentioned, there are no provisions in the Nicaraguan Commerce Code for regulating
         takeovers. Usually the shareholders of a corporation in Nicaragua include in the
         incorporation document and bylaws, any restriction or regulation relating to takeovers by
         one or more of the shareholders or any third party in order to keep the same or similar
         proportion of ownership, whether there is an increase of capital or transfer of shares.

   Capital Market Law

         The current Capital Market Law was passed recently, establishing the minimum
         requirements to follow for the acquisition of shares in a listed company and for a public
         tender offer. It is established in the law that specific regulations should be issued by the
         Board of the regulatory entity. Those regulations have not been issued yet. However, we
         expect that the regulatory entity will follow some concepts already developed in the
         Nicaraguan Banking Law.

   Notification obligation for acquisition

         The new Capital Market Law establishes that any person who will acquire shares in a
         listed company allowing such person to control 20% or more of the total paid shares, will
         be obliged to inform that situation to:

                     the affected company; and

         2080652_1_takeover guide - nicaragua                                                   page | 1
                    the stock exchange where the shares are traded; and

                    the regulatory entity (Superintendent of Banks and other Financial Institutions).

        In addition, any individual member of the Board of Directors or the management team of a
        listed company is obliged to notify any intent to acquire any percentage of shares or any
        operation related to their shares in the company, no matter the volume or the amount of
        the transaction.

   Public Tender Offer

        Any person, who intends to acquire any volume of shares or any other security of a listed
        company in order to obtain a significant participation in the capital share of the company,
        must promote a tender offer addressed to all the shareholders of that company.

        The law mentions the minimum aspects that must be included in the regulation that will
        be prepared by the regulatory entity. Among others, these include:

                    the meaning of a significant participation;

                    the terms of the offer, whether it should be irrevocable or with certain conditions
                    or the offer of certain securities, depending on the consideration of the offer
                    (cash, shares, etc.);

                    the procedure by which the tender offer will be regulated;

                    limitation of the activities of the Board of Directors during the tender offer;

                    determination of the minimum price for the tender offer;

                    the operations exempted from the regulation;

   Voting Power Right

        If any person acquires any significant participation of shares or any other security of a
        listed company without following the procedure described herein, they will not be entitled
        to exercise the voting power right attached to the acquired shares and all the agreements
        taken with the votes of those shares will be null and void.

   Banking Law

        Nicaraguan Banking Law establishes the obligation to request authorisation from the
        Superintendent of Banks in the case that any current shareholder or any third person
        acquires 5% or more shares of the bank or financial institution.

        Under Nicaraguan legislation there are other methods to achieve control in a close
        corporation, which are typically used, such as:

   Shareholders Agreement

        In these agreements, the shareholders establish some rules in order not to allow the one
        holding a major participation in the company to make essential decisions by itself. In this
        case, minority shareholders allow themselves to have more voting powers and to be
        heard in important decisions such as election of members of the Board of Directors,
        transfer of shares, increase of capital, and modification of the incorporation documents.

        2080652_1_takeover guide - nicaragua                                                          page | 2
   Share Purchase Agreement

         In general, shareholders in a company could achieve control by acquiring the remaining
         shares of a company, because according to Nicaraguan legislation, it is not possible for a
         sole shareholder to have 100% of the shares; therefore, one shareholder could have
         100% of the shares minus one share.

         Usually this type of agreement is negotiated freely by the parties, establishing the terms
         and conditions of the purchase, including the price. However, on certain occasions there
         are restrictions established in the incorporation documents of the company, which must
         be followed in order for the purchase agreement to be valid and enforceable.

   Increase of Capital

         Another method to achieve control is to increase capital in a company, trying to dilute the
         other shareholders. When the incorporation document of a company does not include
         any restriction to avoid this method to achieve control, the majority shareholder(s) could
         authorise an increase of capital and pay the shares with the purpose of diluting the other

         These methods are usually used in Nicaragua in order for shareholders in a close
         corporation to achieve control of the company. However, as mentioned, there are no
         specific provisions in Nicaraguan legislation regulating takeovers and its process.

         Most of the economic relations in Nicaragua are being carried out under the command of
         obsolete commercial legislation. In this regard, we must highlight the strong presence of
         the “will of the parties” element within the governance of corporations. The different
         methods and legal processes to assume control or management of companies, such as
         an increase of capital, shareholders agreements and share purchase agreements,
         depend on the negotiations freely conducted by the parties while reaching agreements.
         Nicaraguan legislation, therefore, does not regulate nor expressly refer to takeovers.

         Nonetheless, the different political and economic steps taken toward the participation in a
         global society presents significant challenges to the Nicaraguan legal system. The new
         commercial activities have imposed the need to protect investors in a developing market.
         Both the Banking Law and the Capital Market Law provide an innovative legal framework
         that ensures certainty to investors and plurality within financial institutions and listed
         companies. These important legal precedents should be taken as an example, in order to
         encourage private investment and guarantee security and stability in general economic
         relations in Nicaragua.

        2080652_1_takeover guide - nicaragua                                                   page | 3

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