The Mexican Securities Market Law regulates a type of corporation called Investment Stock Corporations (Sociedades Anónimas Promotoras de Inversión, SAPI). This corporate vehicle has significant differences from the stock corporations contemplated under the General Law of Commercial Companies (the Corporations Law).

One of the main purposes of the Securities Law is to promote the access of smaller companies to the equity and securities markets. SAPIs have proven to be an ideal vehicle for solving perhaps the most significant legal obstacles confronting private equity investors in Mexico under the traditional corporation structure. Such obstacles include: (i) special or designed corporate governance rights, (ii) transfer restrictions, exit rights and liquidity schemes, and (iii) capitalisation and distributions.

Corporate governance

Prior to SAPIs, the vehicle most commonly used to address certain corporate governance concerns for private equity investors was the trust. Nevertheless, this vehicle has several complications.

Instructions

For the satisfactory operation of a trust, instructions need to be constantly given to the trustee by shareholders. Such instructions must relate clearly to the matters expressly provided for in the trust agreement, otherwise the trustee will not take any action that would require shareholders' judgment or interpretation.

Cost

The establishment of a trust implies fees and costs involved in its set-up and maintenance. Such fees increase the overall cost of the transaction.

Exit rights

In private equity transactions exit rights are one of the most important issues. Private equity transactions need to have a simple and efficient exit right (liquidity scheme).

Under the current Corporations Law, the consent of the shareholders is needed in order for the exit rights and liquidity mechanisms to be implemented. Investors require shareholder consent or alternatively the incorporation of a trust. In the case of incorporation of a trust, the trustee would need to hold the title to the shares of the target company, and instructions would be required by the shareholders for the trustee to implement call options, drag-along, tag-along and other liquidity provisions to which the parties previously agreed.

In addition to the issues of cost and instructions mentioned above, acting on this type of arrangement requires the agreement and cooperation of the relevant trustee.

Capitalisation and distributions

The Corporations Law does not provide a structure for complex capitalisation mechanisms. Therefore the following obstacles usually arise in private equity transactions: (i) shareholders may not waive pre-emptive rights to subscribe capital stock increases in advance, and shareholder consent is required for the issuance of new shares and capital increase or decrease; (ii) corporations (which are not public) may not repurchase their own stock; and (iii) a shareholder may not be excluded from profit distributions.

The obstacles mentioned above have traditionally been dealt with using certain alternatives. In most cases such alternatives are not tailor-made and therefore have limitations, such as:

• Issuing new shares as treasury shares, which are issued at closing. The shareholders subscribe and pay for the treasury shares, subject to certain conditioned subscription rights. However, in this approach everything must be agreed at closing, thus limiting flexibility.
• The preferred distribution of profits to a particular shareholder is commonly tackled by granting preferred dividends and liquidation premiums through the issuance of preferred shares. The Corporations Law has limited regulations on this matter.

SAPIs

Under the Securities Law the SAPIs have addressed these issues by permitting the adoption of the following provisions in SAPI by-laws, and if needed, further regulating such agreements in a shareholders' agreement.

• Regulating options and other type of buy or sell agreements (for example, rights of first refusal, tag-along rights, drag along rights).
• Entering into other transactions regarding the exercise of pre-emptive rights.
• Granting shareholders the right to withdraw from the company or giving them the right to redeem shares establishing either a specific price or the basis for determined price.
• Establishing restrictions on the transfer of shares or on the transfer of certain rights over shares.
• Providing the rules for the exclusion of shareholders.
• Limiting voting rights of shareholders and/or allowing the issuance of special classes or series of shares, for example (i) non-voting or limited voting rights, (ii) non-economic rights other than voting rights, or only voting rights, or (iv) shares that grant veto rights or special voting rights.
• Deadlock mechanisms.

Recent experiences

In recent transactions SAPIs have been incorporated or traditional corporations have been transformed into SAPIs to adequately tackle the problems and issues discussed above. Some of the benefits of using a SAPI in private equity transactions or other investment structures are flexibility of the investment structures, simple and efficient exit rights (liquidity schemes), and cost efficient structures. Common problems of private equity may be addressed and mitigated using solutions that investors are accustomed to in their practice. Such issues are tackled using provisions already contemplated in the statute instead of preparing tailor-made solutions that would have to be tested.