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Due Diligence in Finance: A Guide to Ecuadorian Best Practices

Ecuador’s business landscape has seen a significant surge in mergers and acquisitions (M&A) deals, with foreign investors increasingly eyeing opportunities in the country. However, ensuring a smooth transaction process requires meticulous due diligence on both sides.

The Scope of Due Diligence

In Ecuador, the typical scope of due diligence encompasses:

• Financial aspects: reviewing financial statements, analyzing cash flow, and assessing debt levels
• Legal aspects: verifying corporate structure, examining contracts, and checking for any legal disputes or claims
• Regulatory aspects: ensuring compliance with relevant laws and regulations, such as tax laws and labor laws
• Operational aspects: evaluating the company’s operations, including management, employees, and physical assets

Liability for Pre-Contractual Statements

In Ecuador, liability for pre-contractual statements is governed by general principles of contract law and misrepresentation. Parties are required to act in good faith during negotiations, and sellers may be held liable if they make false statements or representations that induce the buyer to enter into a contract. However, parties can negotiate contractual provisions to limit or exclude liability for pre-contractual statements or representations.

Publicly Available Information

Publicly available information on private companies and their assets can be accessed through various sources, including:

• The Superintendency of Companies, Securities, and Insurance
• The Property Registry
• The Internal Revenue Service
• Court lawsuits

Buyers typically conduct thorough searches to obtain information about a target company’s financial status, legal standing, encumbrances certificates, fulfillment of legal obligations, and ownership structure before entering into an agreement.

Actual or Deemed Knowledge

In M&A transactions, a buyer’s actual or deemed knowledge can significantly impact claims against the seller. If a buyer is aware of certain issues prior to closing and proceeds with the transaction, it may be more challenging to later claim damages for those known issues. Buyers are expected to exercise due diligence and investigation to discover relevant information, and their ability to bring claims for misrepresentation or breach of warranties may be influenced by their knowledge and reliance on representations.

Conclusion

In conclusion, due diligence is a critical component of M&A transactions in Ecuador, and buyers must ensure they thoroughly investigate the target company’s condition to avoid potential pitfalls. By understanding the scope of due diligence, liability for pre-contractual statements, publicly available information, and the impact of actual or deemed knowledge, investors can navigate the complex landscape with confidence.

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