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 Paraguay. View the full guide.

PARAGUAY

Gross Brown

1) In your jurisdiction, which sectors do venture capital funds typically invest in?

There is no official record indicating the sectors in which venture capital funds typically invest. Nevertheless, in practice, the sectors attracting venture capital investments are IT and FinTech.

2) Do venture capital funds require any approvals before investing in your jurisdiction?

No, venture capital funds do not require any approvals before investing in Paraguay.

3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?

Change of control

If the target company is a sociedad anónima (corporation), unless otherwise stated in the bylaws, shares can be freely transferred. Shareholders are required to provide notice of the acquisition of shares to the Subsecretaria de Estado de Tributación (local tax authority) and the Abogacia del Tesoro (corporate surveillance governmental agency) of the Ministry of Finance.

If the target company is a sociedad de responsabilidad limitada (limited liability corporation), unless otherwise stated in the bylaws, shares cannot be transferred to third parties without: (i) unanimous consent of the shareholders, if there are up to five shareholders; or (ii) consent of the shareholders representing three-quarters of the corporate capital, if there are more than five shareholders.

Except for the latter and the requirement stated in our response to question 4 of this Guide, there are no other rights or obligations applicable to the shareholders resulting from a change of control.

Shareholders’ rights and obligations in corporate governance

Shareholders have the right to appoint the members of the board of directors (the “BoD”) or a sole manager; to review and approve the financial statements and the BoD or the sole manager’s report; and to remove the members of the BoD or the sole manager. Should a shareholder, who is a natural person, be a director of the company at the same time, then such person may also be liable for any (i) omission or negligence; (ii) breach of laws or regulation while acting as director; (iii) other damages caused to the company or third parties while acting as director resulting from willful misconduct, abuse of power, or gross negligence. This is applicable for all directors, regardless of whether they are also shareholders.

If the target company is a sociedad anónima, decisions made by the shareholders are subject to the following requirements:

i. The BoD must call for a shareholders’ meeting, set the specific agenda in advance and publish the call in a local newspaper (the minimum statutory timeline for the shareholders’ meeting to take place is 15 days after the first publication).

ii. Shareholders have the right to vote in person or by proxy.

iii. Local regulation sets different quorum and voting requirements, for different matters. The highest quorum requirement is 60% of voting shares; and highest voting requirement is absolute majority (50% + 1 of voting shares).

iv. Any shareholder (notwithstanding the percentage of shares held) has the right to challenge the decisions made by shareholders.

If the target company is a sociedad de responsabilidad limitada, decisions by the shareholders are subject to the following requirements:

i. Notice of shareholders’ meetings must be delivered to each shareholder. There is no publication requirement or mandatory waiting period.

ii. Unless otherwise stated in the bylaws, quorum and voting requirements established for a sociedad anónima will apply.

iii. Decisions on the modification of the corporate purpose, merger, or any other modification that would entail additional obligations for the shareholders require a unanimous vote by the shareholders.

Any shareholder (notwithstanding the percentage held) has the right to challenge the decisions taken by other shareholders.

4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?

Under the Paraguayan merger control system, the obligation to notify a transaction to the Paraguayan competition authority is triggered by the signing of the agreement to acquire, sell or exchange a controlling share, provided that any of the following thresholds are met:

i. the transaction will result in the acquisition or holding of a 45% market share, or higher, of a relevant market; or

ii. the aggregated turnover in Paraguay of the parties to the transaction, during the last fiscal year preceding the relevant agreement, is above USD 100,000 minimum.[1]

5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?

The sociedad anónima is the preferred structure for investment in venture capital deals, since shares can be freely transferred, and also considering that local laws provide for stricter rules as to the administration, constitution and control of such companies.

In contrast with corporations, if the target company is a sociedad de responsabilidad limitada, unless otherwise stated in the bylaws, shares cannot be transferred to third parties without consent of the shareholders and bylaw modification.[2]

6) Is there any restriction on rights available to venture capital investors in public companies?

No. Securities regulations in Paraguay apply uniformly to all investors and shareholders of a public company, whether they be natural or legal persons, or national or foreign, and regardless of domicile.

7) What protections are generally available to venture capital investors in your jurisdiction?

Paraguayan law grants equal treatment to foreign and domestic investment, except for the ownership of land near borders by foreigners. Sectors reserved for the Paraguayan state are not open to private investment (either domestic or foreign).

Paraguay has entered into 23 (twenty-three) agreements[3] on Reciprocal Investment Promotion and Protection, including agreements with South Africa, France, United Kingdom, Switzerland, Taiwan, Belgium, Luxembourg, the Netherlands, Korea, Hungary, Germany, Austria, Spain, Peru, Romania, Chile, Venezuela, Costa Rica, El Salvador, Czech Republic, Portugal, Cuba and Italy. For the 2013-2018 period, Paraguay signed but has not yet ratified agreements with the United Arab of Emirates (signed in January 2017) and the State of Qatar (signed in February 2018). These agreements establish favorable conditions and provide a framework of legal certainty to investors and their investments. Paraguay has also entered into bilateral investment treaties (each, a “BIT”) with Argentina, Austria, Belgium, Bolivia, Brazil, Chile, Costa Rica, the Czech Republic, Ecuador, El Salvador, France, Germany, the Republic of Korea, the Netherlands, Peru, Portugal, Romania, South Africa, Switzerland, the United Kingdom, Spain, Hungary, Venezuela and, in January 2017, with the United Arab Emirates.

In order to improve the business and investment environment, Paraguay has developed and implemented reforms of its judicial system, including the introduction of amendments to the Criminal Code (made effective in 2009), with stricter provisions concerning money laundering, human trafficking and intellectual property rights.

Paraguay is also a member of the Multilateral Investment Guarantee Agency, which offers foreign investment guarantees for non-commercial risks in developing countries, as well as dispute settlement services for the investments covered. Paraguay has also accepted the terms and conditions of the Overseas Private Investment Corporation of the United States of America, which finances and insures investment projects against risks such as the non-convertibility of currency, expropriation and political violence, inter alia.

8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?

There is no market practice of warranty and indemnity insurance in our jurisdiction.

Pursuant to Law N° 827/96 “Of Insurance and Reinsurance”, article N° 125, no insurance company can cover risks in Paraguay without authorization from the Superintendency of Insurance (Superintendencia de Seguros).

9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?

Since there is no regulation regarding exit mechanism for transactions, these mechanisms are usually agreed upon by the parties in their shareholder’s agreement. Common exit mechanisms include management buyouts and secondary sales.

10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?

Exits via an IPO are not often chosen by investors after a venture capital investment in Paraguay.

However, if the investor decides to pursue and IPO, the offering could be done either through local licensed entities (registered brokers) or on a private basis. This would not create onerous challenges, provided that it is conducted under the Private Placement Exemption described below:

· On a strictly limited and discrete basis (i.e., only to a limited number of pre-selected individuals). Any contact made with a potential investor should be on a personal basis (one person at a time) to avoid the sale being interpreted as a public offering.

· From outside of Paraguay (i.e., via emails/post/website/phone calls) or on a limited fly-in basis.

· Whereby no contractual documentation is signed by the marketing entity onshore (although the investor can sign onshore, provided the marketing entity subsequently signs offshore).

· Where an appropriate legend is used on all marketing materials (see 4.1 above) and where information on (a) liability, (b) risk and (c) profitability are properly disclosed (the “Private Placement Exemption”).

Nevertheless, the offer and sale of Securities would be considered a public offer if it is not conducted under the Private Placement Exemption. This would trigger registration requirements and in the case of non-compliance, the application of sanctions.

[1] As of February 21, 2020, PYG 219.283 million, approximately USD 33.6 million.

[2] Bylaw modification must be approved by the Abogacia del Tesoro and then registered with the Registry of Legal Persons and Associations of the Public Registry of Commerce.

[3] The list and text of all the treaties is available at: https://investmentpolicy.unctad.org/international-investment-agreements/countries/164/paraguay