It is very common for people to believe that selling a business in Costa Rica is the same as selling a piece of real estate. This is not necessarily true as there might be many different situations to consider which could change the scenario. The Business may or may be not part of the real estate transaction, meaning sometimes the owner also owns the business operating at that property.
Sometimes the transaction can be easy as businesses in Costa Rica normally operate under the name of a company structure such as a “Sociedad Anónima (S.A.)” or “Sociedad Limitada (Ltda)” which is known as a corporation or a LLC in the United States. One simple way to buy in Costa Rica is when the seller endorses the stocks of the corporation to the buyer so the buyer becomes the new owner and next step is to perform changes to the legal representation and appoint a new board of directors.
Acquiring an existing corporation as the way to purchase a piece of real estate or a business in Costa Rica is very common practice but there are some risks involved for the buyers. For lawyers it is easy to check the public records but certain type of documents like letters of exchange and promissory notes might not be on any registered record and later a creditor could appear with a collection based on one of these documents that were signed -and not disclosed- by the former owner/representative.
If an existing corporation is to be acquired it is always important to run credit reports on the corporation, the owners and the members of the board. Also, the Seller should be required to sign a sworn statement declaring that there are not undisclosed documents that might create a future liability to the corporation. Other obligations that need to be checked are taxes, employee social benefit liabilities and payroll withholding responsibilities. Each one has a different statute of the limitations.
When acquiring the corporation that runs the business and the buyer just does not want to take any risks then is better to set up a new corporation to start fresh and clean. For this it is important to remember that a Business is composed by physical items such as furniture, computers and merchandise as well as by non-physical things like commercial licenses, intellectual property, clients and goodwill. It is logical to think that the Buyer will want to keep things that have distinguished the business in the past.
he way to go then is ruled on articles 478 to 489 of the Code of Commerce where rules are contained for the Purchase of Mercantile and Industrial establishments. This is the legal procedure to transfer to a Buyer -new corporation- all physical and non-physical elements of a Business owned by a Seller -former owner-. The parties need to perform a document in front of a Notary establishing that the Business and all its elements are being transferred and the selling price needs to be disclosed. Once the document is signed the money is not delivered to the Seller, but is held in escrow by a third party -normally the Notary- until a publication is made on the official Gazette warning potential creditors about the transaction and granting them 15 days to concur and collect their credits from the selling price. Once the term is expired the money is given to the Seller and the transaction is completely legal, granting Seller no further claims can be made after that.
In an Interview with the Legal Counselor Jorge Eduardo Ramos Ramos he stated the following: “Even strictly following the procedure stated in articles 478 to 489 of the Code of Commerce, buyer must be aware of some specific liabilities that will not be covered by the protection given by the aforementioned law. As a rule of thumb, the legal ownership transfer process stated in the Code of Commerce will protect against non-privileged PRIVATE creditors. Therefore, there are some not covered remarkable exceptions: CCSS (Social Security) and/or any other related institutions liabilities (DESAF, INS, INA,…), Labor related claims/rights and tax liabilities. Those Institutions will simply transfer any outstanding bill or liability from the previous owner to buyers social security account regardless of the compliance of the aforementioned transfer procedure. The same happens with any labor related claims or rights, as Labor Judges have consistently consider the purchase of a business as an unrestricted assumption of former owner´s labor liabilities. The Tax Administration will also pursue any tax related liabilities, regardless legal transfer of ownership. So every single of those details need to be double checked before performing any Business transfer. Acquiring a business requires the intervention of an experienced legal/financial team that can perform the necessary Due Diligence”.
Another point to be checked when buying is the “Movable Guaranties” Act that creates a system to grant credits over movable assets like all of those that are contained on a Business and even over the contracts signed by such Business, including the rental contract of the place where the business operates. This will make necessary to check that the assets of the business were not given as guaranty before the business is sold to any new buyer. Fortunately the system is easy to check for any interested parties.
Sometimes the transaction can be easy as businesses in Costa Rica normally operate under the name of a company structure such as a “Sociedad Anónima (S.A.)” or “Sociedad Limitada (Ltda)” which is known as a corporation or a LLC in the United States. One simple way to buy in Costa Rica is when the seller endorses the stocks of the corporation to the buyer so the buyer becomes the new owner and next step is to perform changes to the legal representation and appoint a new board of directors.
Acquiring an existing corporation as the way to purchase a piece of real estate or a business in Costa Rica is very common practice but there are some risks involved for the buyers. For lawyers it is easy to check the public records but certain type of documents like letters of exchange and promissory notes might not be on any registered record and later a creditor could appear with a collection based on one of these documents that were signed -and not disclosed- by the former owner/representative.
If an existing corporation is to be acquired it is always important to run credit reports on the corporation, the owners and the members of the board. Also, the Seller should be required to sign a sworn statement declaring that there are not undisclosed documents that might create a future liability to the corporation. Other obligations that need to be checked are taxes, employee social benefit liabilities and payroll withholding responsibilities. Each one has a different statute of the limitations.
When acquiring the corporation that runs the business and the buyer just does not want to take any risks then is better to set up a new corporation to start fresh and clean. For this it is important to remember that a Business is composed by physical items such as furniture, computers and merchandise as well as by non-physical things like commercial licenses, intellectual property, clients and goodwill. It is logical to think that the Buyer will want to keep things that have distinguished the business in the past.
he way to go then is ruled on articles 478 to 489 of the Code of Commerce where rules are contained for the Purchase of Mercantile and Industrial establishments. This is the legal procedure to transfer to a Buyer -new corporation- all physical and non-physical elements of a Business owned by a Seller -former owner-. The parties need to perform a document in front of a Notary establishing that the Business and all its elements are being transferred and the selling price needs to be disclosed. Once the document is signed the money is not delivered to the Seller, but is held in escrow by a third party -normally the Notary- until a publication is made on the official Gazette warning potential creditors about the transaction and granting them 15 days to concur and collect their credits from the selling price. Once the term is expired the money is given to the Seller and the transaction is completely legal, granting Seller no further claims can be made after that.
In an Interview with the Legal Counselor Jorge Eduardo Ramos Ramos he stated the following: “Even strictly following the procedure stated in articles 478 to 489 of the Code of Commerce, buyer must be aware of some specific liabilities that will not be covered by the protection given by the aforementioned law. As a rule of thumb, the legal ownership transfer process stated in the Code of Commerce will protect against non-privileged PRIVATE creditors. Therefore, there are some not covered remarkable exceptions: CCSS (Social Security) and/or any other related institutions liabilities (DESAF, INS, INA,…), Labor related claims/rights and tax liabilities. Those Institutions will simply transfer any outstanding bill or liability from the previous owner to buyers social security account regardless of the compliance of the aforementioned transfer procedure. The same happens with any labor related claims or rights, as Labor Judges have consistently consider the purchase of a business as an unrestricted assumption of former owner´s labor liabilities. The Tax Administration will also pursue any tax related liabilities, regardless legal transfer of ownership. So every single of those details need to be double checked before performing any Business transfer. Acquiring a business requires the intervention of an experienced legal/financial team that can perform the necessary Due Diligence”.
Another point to be checked when buying is the “Movable Guaranties” Act that creates a system to grant credits over movable assets like all of those that are contained on a Business and even over the contracts signed by such Business, including the rental contract of the place where the business operates. This will make necessary to check that the assets of the business were not given as guaranty before the business is sold to any new buyer. Fortunately the system is easy to check for any interested parties.
