Buying and Selling Equity Interests in Colombian Companies: Risks and How to Protect Yourself
## The risk of buying a company without due diligence
Buying equity or shares in a company also means taking on its hidden liabilities: undisclosed labor debts, unpaid taxes, pending lawsuits, contractual breaches.
Without proper due diligence, a buyer can end up paying for problems that existed before the deal.
Due diligence: what to review before buying
Legal matters: - Whether the company legally exists and is in good standing (certificate of existence and legal representation) - Bylaws and amendments — restrictive transfer clauses - Board or shareholder meeting minutes from the last 3 years - Active contracts with customers, suppliers, tenants - Active litigation (check the Judicial Branch database: ramajudicial.gov.co)
Labor matters: - Full payroll and types of employment relationships - Up-to-date social security payments (PILA) - Ongoing labor lawsuits or warnings from the Ministry of Labor - Outstanding statutory benefits owed to employees
Tax matters: - Income tax returns for the last 3 years - Account status with the DIAN (tax authority) - Industry and commerce tax up to date - Obligations to local/municipal tax authorities
Operational matters: - Active lease agreements - Industry-specific licenses and permits - Intellectual property (trademarks, software, patents)
The representations and warranties clause
At the heart of the equity purchase agreement should be representations and warranties from the seller covering: - The absence of hidden liabilities - The accuracy of the financial statements - The absence of undisclosed litigation - Full ownership of the equity, free of liens
If a liability the seller concealed shows up after the purchase, indemnification clauses let the buyer recover what was paid.
Price adjustment mechanisms
In larger transactions, it's common to include:
- Base price plus working-capital adjustment: the final price is adjusted based on the financial statements as of closing
- Earn-out: part of the price is paid conditional on the company's future performance
- Escrow: a percentage of the price is held by a third party for 12-24 months as security for the representations
Differences between an SAS and an SRL for transfers
| Aspect | SAS | SRL (Ltda.) |
|---|---|---|
| Name of the unit | Share (acción) | Equity interest (cuota parte) |
| Transfer restrictions | Per bylaws | Statutory right of first refusal |
| Formalization | Endorsement in the shareholder registry | Public deed or private document with notarized signatures |
| Flexibility | High | Medium |
In an SRL, before selling to an outside party, you must first offer the interest to the existing partners on the same terms (right of first refusal).
Tax impact of selling equity
Selling equity interests or shares triggers: - Occasional gains tax (15% rate) if the interest was held for more than 2 years - Ordinary income tax if held for less than 2 years - An obligation to report the transaction in the income tax return
Are you buying or selling an ownership stake in a company? A legal review beforehand can save you from costly problems. We can support you in structuring the transaction.
El asistente jurídico digital de Jurídiconline analiza tu situación específica. La revisión inicial es gratuita.
