[co-authors: José María Nicola, Juan Manuel Mercant, Guzmán Rodríguez]*
World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Uruguay. View the full guide.
Guyer & Regules
In your jurisdiction, which sectors do venture capital funds typically invest in?
Key sectors attracting venture capital (VC) investments in Uruguay include financial services (including FinTech companies, mobile wallets, and digital payment solutions), e-commerce, consumer products, and information technology.
Do venture capital funds require any approvals before investing in your jurisdiction?
As a general rule, investments in Uruguay do not require prior approval. However, there are certain regulated industries that do require prior authorization when making an investment or transferring the investment, such as certain media companies, rural real estate, transportation, software, certain financial services companies, insurance, cannabis, etc. Most VC deals occur in industries where no prior authorization is required.
Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
See response to question 2.
Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
Yes. A VC investor will need to make an antitrust analysis in an early stage of the transaction.
As of April 12, 2020, a pre-merger control regime is effective in Uruguay. Under such regime, request for authorization is required for transactions in which the buyer and the target jointly have a gross revenue in the Uruguayan territory of approximately USD 70,000,000.
Transactions closed prior to April 12, 2020 only required a pre-merger notification if certain thresholds were met.
What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Typically, VCs acquire a minority stake of 10–15% in early-stage investments by way of equity (ordinary shares) or in certain cases preferred shares without voting rights. The standard legal structure consists of paid-in capital increases (capital contributions) or share transfers. The VC target company is typically a Uruguayan corporation (sociedad anónima) although we expect to see more target companies in the future to take the form of a SAS (sociedad por acciones simplificadas). The investors are sometimes Uruguayan holding companies and at other times US or European holding corporations.
In these cases, it is frequent for the parties to subscribe to a shareholders’ agreement in which the investor and the founders can agree on certain covenants, vetoes, and corporate governance matters. Typically, founders retain control of the company and VC investors impose restrictions and conditions. Parties sometimes also negotiate puts and calls.
Other possible investment structures we have seen consist of loans (in the form of notes issued by the target company) convertible to shares.
While determining the preferred structure, tax is usually the key driver. Intellectual property also takes a relevant role in some VC transactions related to FinTech, software, and information technology.
Is there any restriction on rights available to venture capital investors in public companies?
No. Securities regulations in Uruguay apply uniformly to all investors and shareholders of a public company, regardless of domicile.
What protections are generally available to venture capital investors in your jurisdiction?
Uruguayan investment law provides general protections to all investors, stating that foreign investors have at least the same protections that Uruguayan investors have. The law also states that, as a general rule, investments do not require any prior authorization or registration, and that there are no existing foreign exchange controls either.
Investors can distribute the dividends they obtain from the VC company and transfer them outside Uruguay without any restrictions except for fulfilling corporate law formalities and paying the applicable taxes.
Statutory protections available to minority shareholders in a Uruguayan corporation include certain information rights, the right to sue the board of directors in cases of breach of the duty of care and duty of loyalty, as well as the right to sue majority shareholders in the event they abuse their voting rights.
Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
No, it is not common. Typically, in VC investments there are no escrow accounts or guarantees and there is no (or limited) recourse to the founding shareholders or other controlling shareholders.
A warranty and indemnity insurance market has not yet been developed in Uruguay although registered insurance companies could potentially offer this product.
What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
The most common exit strategy is to negotiate drag-along rights, tag-along rights and put options when making the investment. Typically, these obligations are stipulated in a shareholders’ agreement and in Uruguay it is standard for shareholders’ agreements to be guaranteed by a pledge of shares of the shareholders involved.
Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
There is no IPO market in Uruguay although there are regulations permitting IPO.
*Guyer & Regules