Pellerano & Herrera The Pellerano & Herrera Foundation

Private Equity 2013 – Dominican Republic

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1 What are the most common types of private equity transactions in your jurisdiction?

Currently, the most common types of private equity transactions in the Dominican Republic consist of the acquisition of controlling interests in local companies. Although less common, some of the most important transactions during the past few years have been structured as LBOs. Additionally, it is worth noting that some forms of PPPs have experienced a recent boom in the past few years, particularly in infrastructure projects such as the construction of highways. Transactions involving convertible debt and hybrid instruments are not common in the Dominican Republic.

2 What types of investors are most active in the private equity market of your jurisdiction?

Foreign funds, mainly from the United States, are the most active players in the private equity market in the Dominican Republic. Multilateral institutions such as the IFC have also been fairly active over the past couple of years. In addition, although to a lesser degree than foreign funds, local private equity funds are having an increasing presence in local private equity transactions. In the case of pension funds, although they have a lot of capital to be invested, due to local regulations, they currently do not participate in the private equity market.

3 What historically have been the main target industries and what trends were noticeable throughout 2012? What trends do you expect to see in the next 18 months?

Historically, the main target industries have been diversified in many sectors including infrastructure, insurance, food and beverages, and energy and power. In the next eighteen months, we expect more investment in the renewable energy and movie industries due to the enactment of laws promoting the investment in such areas by means of tax incentives. Additionally, more investment is expected in infrastructure and construction due to the recent enactment of the Law for the Development of the Mortgage Market and the Creations of Trusts and its regulations, which main purpose is to dynamise housing and construction in the Dominican Republic.

4 Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of any such local funds? Have any begun to participate significantly in transactions out of their local jurisdiction?

Private equity funds in the Dominican Republic have historically been incorporated by high net worth families and important economic groups as corporate vehicles or trusts in foreign jurisdictions. Offshore entities were the vehicle of choice as prior to the 2012 tax reform, the distribution of dividends by permanent establishments to their parent companies abroad was not subject to withholding taxes. Although offshore entities have remained the structure of choice, today private equity funds are more frequently established as local companies, which are not subject to express regulation except for the company by-laws and the General Law on Corporations and Individual Limited Liability Companies.

With the recent enactment of the Law for the Development of the Mortgage Market and the Creations of Trusts and its regulations, and consequently the express legal regulation of the separation of “pools of assets” from the companies or trusts that manage them, private equity funds may also be structured as trusts or as investment fund management companies (Sociedades Administradores de Fondos de Inversión) under Securities Law No. 19-00. Such companies have the sole purpose of managing open-end or close-end investment funds, are regulated by the Superintendence of Securities and in order to operate must obtain the prior approval of the National Securities Council. As investment fund management companies are regulated entities, they have to comply with periodic reporting requirements and have a formal structure consisting of fund manager, investment committee, internal control body and general assembly of investors. Unlike traditional corporate vehicles, they provide the advantage that they can manage one or more funds, whose assets and operations are separate from those of the management company.

5 Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?

There are currently no private equity funds listed in the Dominican Republic. Securities Law No. 19-00 and its regulations regulate the public offering of securities in the Dominican Republic. In order to publicly issue securities, funds must be registered as issuers in the Superintendence of Securities’ Stock and Commodities Market Registry and obtain the prior authorisation of the National Securities Council. Private equity funds have to comply with requirements similar to those imposed on typical corporates.

6 What are the main issues in connection with the liability of fund managers?

As there are no specific regulations applicable to private equity funds and their managers, they shall be subject to the same standards applicable to directors in our General Law on Corporations and Individual Limited Liability Companies. Managers and directors are subject to fiduciary duties and owe investors a duty of loyalty and duty of care. The law refers to the behavior of a “buen hombre de negocios”, the common law equivalent of which could be a “reasonable businessman”. Managers have the obligation of acting on an informed basis and in the best interest of the investors, abstaining from transactions where there are conflicts of interest and having the duty to disclose any conflicts if they exist. Please note that these liability standards have not yet been examined by the courts of the Dominican Republic.

7 What are the main remuneration schemes and related features for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?

The main remuneration schemes are similar to those in other jurisdictions. Generally, the remuneration will be in the form of an annual management fee varying depending on the type of industry and the investment made.

8 Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.

Some of the most important recent transactions over the past couple of years have been structured as leveraged buyouts. There are no local restrictions on these types of transactions as they are not specifically regulated in the Dominican Republic. The main consideration to take into account in LBOs financed by foreign financial institutions is the withholding tax of 10 per cent applicable to interest payments made to foreign lenders.

9 What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?

Private equity investments in the Dominican Republic are generally channeled through corporations or trusts incorporated in foreign jurisdictions. To a lesser degree, they are channelled through local companies. When incorporated locally, investors have the option of electing any of the following vehicles:

• Corporations (Sociedades Anonimas): Corporations require a minimum of two shareholders and have a minimum capital requirement of RD$30 million pesos (approximately US$750,000) represented by negotiable shares, of which 10 per cent must be paid-in upon incorporation. Corporations have a complex corporate governance regime and are managed by a board of directors of at least three members and require the mandatory appointment of vigilance officer or statutory auditor.

• Simplified corporations (Sociedades Anonimas Simplificadas): This type of corporate vehicle offers a more flexible corporate governance regime and has lower capital requirements than corporations. They must be incorporated by at least two shareholders and have an authorised capital of at least RD$3 million of which 10 per cent must be paid in. Simplified corporations can be managed by a board of directors or a president administrator. The appointment of a vigilance officer is optional.

• Limited liability companies (Sociedades de Responsablidad Limitada): This vehicle is the US equivalent of an LLC. SRLs must be incorporated by at least two partners and have a minimum capital of RD$100,000 represented by social quotas (cuotas sociales), which in principle are not negotiable. As in other corporate figures, at least 10 per cent of the authorised capital must be paid in. In order to transfer ownership interests to third parties, the consent of three-quarters of shareholders is required. These companies may be managed by a manager or two managers.

• Trusts: with the enactment of the Law for the Development of the Mortgage Market and the Creations of Trusts in 2011, Dominican trusts, which were previously not regulated in the country, are now alternative vehicles for making private equity investments.

• Investment management companies: Under our Securities Law No. 19-00, investment management companies provide an alternative for those looking to manage one or several of open or close-end investment funds. Investment management companies regulated by the Securities Superintendence must be incorporated as SAs and shall be authorised by the National Securities Council in order to operate as such in the Dominican Republic.

• Partnerships: Although partnerships are contemplated under our General Corporations Law, they are rarely used in the Dominican Republic because they do not offer the advantage of limited liability as corporations do.

10 What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?

The governance of local companies will to great extent be governed by the provisions of the company by-laws as well as our General Law on Corporations and Individual Limited Liability Companies. Public companies, although there are none currently, shall also be subject to the rules and regulations issued by the Superintendence of Securities. It is important to point out that all corporate processes, including amendment to company by-laws, must be registered with the Mercantile Registry of the Chamber of Commerce. In order for transfer of shares to be effective, they shall be registered in company’s book of shares and for enforceability vis-à-vis third parties, filed at the Mercantile Registry and notified to the tax authorities. Directors may be either Dominican or foreign individuals or companies, except in the case of the President of the board of directors and managers of SRLs who shall always be an individual. Shareholders may vote by proxy in the Dominican Republic. Sociedades Anónimas have the obligation of appointing a statutory auditor (this is optional in the case of SAS and SRLs) and are the only corporate form required to have a board of directors. Public companies must notify all relevant changes to the Superintendence of Securities and have reporting obligations that they shall comply with on a periodic basis. Local companies must hold yearly general shareholders’ meetings within the four months of the closing of the last fiscal year.

11 Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?

In principle, under Dominican corporate law, the liability of shareholders of local corporations and limited liability companies is limited to the amount of their investment. However, local courts may disregard the corporate veil, and therefore, shareholders may be obliged to respond with their personal assets when a company is used for fraudulent purposes, to violate public policy or in fraud and prejudice of shareholders or third parties. It is important to point out that unequivocal evidence must be provided to a court of law in order for a company’s veil to be pierced.

12 What are the most common minority protection rights, whether granted by operation of law or contractual agreement? Are there any special issues to be considered under the laws of your jurisdiction?

The General Law on Corporations and Individual Limited Liability Companies provides for the protection of basic minority rights in the Dominican Republic. These rights include pre-emptive rights in the event of subscription of new shares; information rights; the right to file derivative lawsuits against the directors of the company, among others.

In addition to these legally assured rights, the parties may establish others in the by-laws of the company as well as contractually in shareholders agreements. These contractually protected rights commonly include right of first refusal in share sale transactions, tag-along and drag-along provisions, veto powers, right to appoint members of management, anti-dilution provisions, exit rights and dispute resolution mechanisms, among others. Shareholders agreements are valid in the Dominican Republic provided they do not violate public policy laws, the company’s by-laws and social interest and are established for a determined period of time.

13 What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the availability, effectiveness or enforceability of exit arrangements that are commonly used in other jurisdictions? Have you seen a shift away from or towards certain exit strategies over the past year?

The most common exit strategy used by private investors in the Dominican Republic is the sale to strategic investors, and in second place, secondary sales to other private equity funds. Due to the lack of development of Dominican capital markets, including the fact that there are currently no public companies in the country, IPOs are not used as exit strategies. Companies also frequently include put options and call options in their shareholder agreements but due to the fact that there is no specific performance under Dominican laws, these clauses may be unenforceable.

14 What are the key legal issues to be considered when appointing or replacing directors and officers?

Directors of companies in the Dominican Republic may be both individuals and legal persons, except for the president, the board and managers, who must be individuals. The directors owe fiduciary duties to the company and its shareholders as explained in question 6. They are jointly liable vis-à-vis the shareholders and third parties for the accuracy of the subscription and payments listed as made by the shareholders during the life of the company; the actual existence of distributed dividends; keeping the books and records they are statutorily obliged to maintain on behalf of the company; implementation and execution of the resolutions adopted by the general meeting of shareholders and fulfillment of their other obligations under the law and company by-laws. Directors are liable, individually or jointly, as the case may be, vis-à-vis the company or third parties, for breaching:

• legal provisions applicable to companies;

• company by-laws;

• their duties and obligations; and,

• faults committed during their management, being subject to both prison and monetary fines.

15 Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.

Dominican law allows parties to freely choose the governing law and forum for resolution of disputes in the agreements they execute provided public policy provisions are not violated. In general terms, these agreements are usually governed by New York or English law and follow international standards. However, there are some aspects that will necessarily depend on and will be governed by Dominican laws. With respect to shareholders agreements, they will be valid and enforceable provided they do not violate public policy and company’s by-laws and are executed for a determined period of time. However, enforceability is limited only vis-à-vis contracting parties if not registered in Mercantile Registry.

16 Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?

Foreign investors rarely agree to resolve disputes through Dominican courts. Submission to New York courts or selection of arbitral tribunals (generally abroad) are the most common dispute resolution mechanisms selected by investors in private equity agreements. In the case of arbitration, foreign awards are recognised under the New York Convention of 1958. Notwithstanding the foregoing, both arbitral awards and foreign judgments have to undergo a validation procedure before the local courts called “exequatur”. In principle, Dominican courts do not evaluate the merits of the case, but review the process undertaken in foreign courts in order to ensure basic procedural aspects were complied with and that the judgment does not violate Dominican public policy. However, in practical terms, the exequatur may constitute a second trial on the merits of the case. The main inconveniences with said validation process is that the decisions rendered by the First Instance Court (local trial court level), which is the one with jurisdiction over these matters, may be appealed before the corresponding Court of Appeals; and subsequently, the decisions rendered by the latter may as well be brought before the Supreme Court of Justice (not to be retried on the merits but to review the application of law). As a result, obtaining an exequatur normally becomes very similar to a full litigation process, and substantial delays and costs may derive thereto.

17 What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?

The most common funding structures include direct contributions through capital increases, irrevocable contributions and bank lending, both from local and foreign institutions. Some local companies also have raised funds in the foreign capital markets by means of private placements. It is important to point out that capital increases are taxed with a 1 per cent capitalisation tax. In the case of bank lending, although interest is tax deductible, payments to foreign lenders are subject to 10 per cent withholding tax.

18 Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?

In the past, lending in important transactions came from foreign sources. Although the majority of financing comes from abroad, local banks have been more involved in some of the most recent major transactions. Additionally, more companies are making private placements in local market. There have been no IPOs in the Dominican Republic as the capital markets are still underdeveloped.

19 What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?

Local companies must prepare their financial statements in according to the International Financial Reporting Standards (IFRS).

20 Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?

There are no disclosure, registration or licensing requirements affecting private equity funds investments in the Dominican Republic, except for those in certain regulated industries such as financial services, telecommunications and energy. However, the prior authorisation of the National Securities Council and registration with the Stock Market Registry is required in the event a private equity fund intends to raise funds in the Dominican Republic through a public offering.

21 Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.

There are no specific restrictions, requirement or protections applicable to foreign investors in connection with private equity investments in the Dominican Republic, other than those applicable to any type of local or foreign investors.

22 Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?

Yes, investments in certain regulated industries such as financial services, insurance, telecommunications, oil & gas and mining may require the prior authorization of the applicable regulatory agency in such sector. The approval processes generally entail the filing of documentation related to the transaction and information on the acquirer, in addition to compliance of certain formalities if the documentation is not in Spanish and has been executed abroad. The timing involved will depend on the regulator involved, but generally obtaining approval may take a couple of months. Regulators have been generally known to approve private equity investments provided that the investor file the documentation that is required.

23 Please describe any antitrust approvals or other competition law requirements that may apply connection with private equity investments into your jurisdiction?

Although competition matters are regulated in the Dominican Republic by Law No. 42-08 on the Defense of Competition, no approvals or filings are required in connection to private equity investments in our jurisdiction.

24 Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle? Are there extraterritorial regulations from other jurisdictions that are playing an increased role and that have posed challenges to executing transactions in your jurisdiction?

Law No. 72-02 regulates and sanctions asset laundering activities in the Dominican Republic. Money laundering is considered a crime and those involved in such activities may be subject to imprisonment for up to 20 years and fines of up to the equivalent of 200 minimum wages. Law No. 72-02 also binds regulated financial institutions, individuals or entities engaged in brokerage or intermediation of securities, investments and futures; foreign exchange agents; the Central Bank of the Dominican Republic and any other person or entity involved in activities that are susceptible to be used in asset laundering such as casinos, real estate brokerage, car dealers, insurance companies and brokers, professional services, etc. by imposing on them a series of obligations aimed at preventing and detecting money laundering activities. Such persons have to: (i) identify their clients or beneficial owners with their identity card or passport; (ii) inform the Financial Analysis Unit of all cash transactions exceeding US$10,000 or of any suspicious transactions; (iii) maintain for at least 10 years, records of the transactions and the identity of the persons or companies that have made the transactions or that have entered into business relations with the entity; and, (iv) create appropriate internal control procedures and bodies in order to avoid and prevent the realisation of money laundering activities, among other obligations. The employees, officers, directors or authorised representatives of the abovementioned persons or entities that do not comply with the above obligations may be subject to a monetary fine of the equivalent of 50 to 150 minimum wages and two to five years in prison.

25 Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?

There are no foreign exchange controls in the Dominican Republic. Companies are able to freely repatriate capital and pay dividends after payment of the corresponding taxes in the Dominican Republic.

26 What are the basic tax issues affecting private equity investments in your jurisdiction?

Both individuals and companies are subject to the income tax whether or not they are domiciled or reside in the Dominican Republic. Any individual or legal entity residing or domiciled (having a permanent establishment) in the Dominican Republic, as well as undivided inheritances of taxpayers domiciled in the country, shall pay the tax on their income from Dominican sources, and from sources outside of the Dominican Republic arising from investments and financial gains. Additionally, persons that neither reside nor are domiciled in the Dominican Republic, shall be subject to tax on their income from Dominican sources. The current income tax rate is 29 per cent. Capital gains generated in the sale of shares of Dominican companies are subject to income tax at rate of 29 per cent. Additionally, purchasers are required to withhold 1 per cent of the purchase price in a share sale transaction. Prior to the 2012 tax reform in the Dominican Republic, dividends paid by a Dominican company to its shareholders, whether foreign or local, were not subject to income tax in the Dominican Republic. However, after such reform, companies have to pay 10 per cent withholding on dividend payments.

27 What impact are recent and projected changes in macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?

Despite worldwide economic crisis, the Dominican Republic has enjoyed macroeconomic stability during the last two years, with stable inflation rates and falling interest rates. This environment may result in more private equity investments in the coming year.

28 Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.

Although not specifically aimed at private equity investments, the recent enactment of Regulation No. 664-12 for the application of Securities Law No. 19-00 shall have an important effect on private equity funds looking to raising funds locally. The regulation is aimed at fostering the development and dynamisation of the local capital markets by increasing transparency, protecting investors and aligning regulations to international standards.

29 Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.


30 Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.


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