Securities

On Friday June 1 2001, the decree amending the Securities Market Law (the Securities Law) and the National Banking and Securities Commission Law was published in the Official Gazette of the Federation, as a result of the bill submitted by Mexico's President to the Senate on April 3 2001.

The Amendments are some of the most relevant to be made to the securities market in Mexico in the last 10 years. The main purpose of the Amendments, according to the Finance Commission of the Senate is:

"...amending in an integral manner the Securities Law, and partially the National Banking and Securities Commission Law, in order to update the legal framework applicable to the securities market in Mexico, incorporating new concepts and legal institutions, adapting the existing ones to the new requirements of the securities market, taking into consideration the legal structures that have been efficiently implemented in the international markets."

In addition to the Amendments, on June 4 2001, amendments to various other laws related to the financial sector, such as the Credit Institution Law, the Law to Regulate Financial Groups and the Investment Companies Law, among others, were enacted. The amendments contained in such decrees are not analyzed in this article.

Most of the Amendments made to the Securities Law point in the right direction, although there is still work to be done. Due to the fact that many issues introduced in the Amendments are a partial copy of different legal systems applicable in other countries, certain changes in the Securities Law will require further practical, legal and judicial analysis and development, to fully comply with their purpose. As such, they are not fully integrated nor do they fully apply to Mexico's own circumstances and legal tradition. But perhaps this is how legal systems in constant communication develop.

This article only analyzes matters pertaining to issuers within the securities market. Nevertheless, the Amendments refer to administrative and structural aspects of the market that must also be studied to adequately understand the future securities market.

Information to the public

Prior to the Amendments, all information addressed to the public regarding securities required prior authorization from the National Banking and Securities Commission (the Commission). Consequently, in theory, all information about issuers such as annual reports and reports to the Mexican stock exchange, as well as preliminary offering memoranda, required an administrative authorization from the Commission. Following the recent Amendments, only information that has as its purpose the promotion or publicity of securities addressed to the public requires prior authorization from the Commission. Accordingly, the Amendments focus on the purpose of promotion and publicity.

Thus, all information from the issuer that is not related to the promotion or publicity of its securities can be freely distributed amongst the public without further requirements or prior authorization.

Information for the purposes of promotion or publicity must be clear, objective and truthful. Within the guidelines for the distribution of information to the public, the concept of "total integration" is introduced for purposes of the offering documents. This concept establishes that no information with a promotional purpose about securities offered by means of a public offer can be distributed, unless the content of such information is contained in the prospectus or the relevant information memorandum, nor can it be distributed if it induces any misunderstanding of the terms of such offering or the characteristics of the securities.

As a general rule, issuers must be careful that everything that is said or commented, even verbally in, for example, a road show, must be consistent and contained in the prospectus. This will avoid issuing additional information that could be different from, or more comprehensive than, the information contained in the prospectus or in the corresponding offering document.

It is important to point out that all information regarding the issuer must be handled in a consistent manner, through a single source and ensuring that in every meeting with analysts, clients, suppliers, potential partners or any third parties, only information that has been previously released to the public is used.

In the event there is a need to provide any type of sensitive information, it is advisable to obtain a confidentiality agreement so that the receiving party is advised of its confidential nature, thereby ensuring that no information is being provided inadvertently and thus avoiding any civil or administrative responsibility that could result from such use.

When publishing information pertaining to a public offering of securities, reference must be made to the prospectus as determined by the Commission through its regulations.

Enforceability of securities

The Amendments introduce a new concept that grants all securities, as defined in the Securities Law, "execution force". Accordingly, the Amendments also grant the ability to exercise legal actions pertaining to such securities pursuant to the summary proceeding contained in the Commerce Code, as well as pre-judgment attachment of goods to secure payment. Once the securities have been registered with the National Registry of Securities, they will have execution force under Article 1391 of the Commerce Code, including those cases in which such registration has been suspended or canceled for reasons of non-compliance by the issuer.

The scope that the Securities Law gives to the concept of "securities" is broad and permits the creation of new instruments that fall under this concept. Theoretically, the possibility of including any new negotiable instruments is considered as "numerus apertus". Some consider, however, that the General Law of Negotiable Instruments and Credit Operations is "numerus clausus", or limited, regarding the number of negotiable instruments that can be legally issued. The Amendments authorize the development of various types of instruments within the market that will fall under the authors' concept of negotiable instruments.

Filing requirements

The Amendments update the filing requirements for issuers, introducing rules that were already in full force and effect through various regulations (circulares) and that the Commission has applied in the past. The Amendments aim to introduce the notion that every issuer has a right to register its securities and that governmental authorities will only intervene in issues regarding disclosure of information. This opinion is expressed in the report issued by the Joint Commission of the Finance and Public Credit and Legislative Studies of the Mexican Senate, which establishes the following:

"These Commissions agree that the protection of investors and the efficiency of the securities market depend mainly on the adequate and timely disclosure of information by the issuers. Nevertheless, in our country, authorizations for the public offering of securities have been granted or denied based on the nature of the securities to be issued, as well as on the characteristics of the issuer. In this regard, the intent is that the authorizations be granted precisely under the principle of full disclosure of information regarding the situation of the corporation and the securities issued by it and, with this, allow investors to make decisions in a reasonable manner."

If this principle becomes applicable, the Amendments fall short of their objectives, because they authorize the Commission to impose additional requirements that could be inconsistent with the objectives of the Amendments. Thus, because of the lack of certainty and clarity in the Amendments, the authors do not believe that an issuer that simply declares and informs everything pertaining to its situation may accede the market without the governmental authorities, either now or in the future, trying to regulate the offering of "products" within the market in a discretionary manner.

Under the Amendments, issuers intending to file their securities in the Securities section of the National Registry of Securities (formerly the National Registry of Securities and Intermediaries) and obtain an authorization from the Commission to undertake a public offering, need to meet the following requirements:

• they must include in their request the prospectus, an independent legal opinion and, in case of debt instruments, the credit rating of the issuance, issued by a securities rating institution, as well as a favourable opinion from a stock exchange regarding the registration of the issuer's securities, in the securities listing of the stock exchange;
• amend their by-laws to make them consistent with some of the new dispositions established by the Securities Law that are analyzed later in this article; and
• file any additional information the Commission may request.

The prospectus must address issues regarding the financial, administrative, economic, accounting and legal situation of the issuer and the securities. It must also contain relevant information that contributes to an adequate decision-making process by the investor. The annual financial statements must include the opinion of an independent external auditor, as well as any other requirement established by the Commission, except for issuers of debt securities with a maturity date equal to or less than one year.

The Commission retains broad authority to issue dispositions that regulate the procedures for registering securities with the National Registry of Securities for the approval of its public offering, the guidelines for drafting offering documents, the manner and the terms in which the information should be made available to the public, and to issue any "criteria to determine when an external auditor and whomever issues a legal opinion, may be considered independent."

The authors hope that the Commission's administrative practice will be consistent with these objectives and that the issuers prepare quality information that permits the authority to exercise its faculties in a manner that may limit, as little as possible, the development and offering of new market instruments.

Independent directors

A fundamental point contained in the Amendments is the creation of the "independent director". With this new figure, there is a higher expectation that the issuer's corporate governance practices will be enhanced. This concept is contained throughout the amendments made to the financial sector, whether brokerage houses, banks, financial groups or other intermediaries. The government believes that with this figure, issuers may have on their boards of directors a "counterweight" that, being independent from the daily administration of the corporation, may permit a healthier development of the corporation's business activities.

This independent director is one of the most critical aspects of the Amendments. It is always convenient to have capable people, independent of the corporation's criteria and operation, to voice their opinion to the persons in charge of the operation of the corporation's business affairs. On the other hand, participation on the board of directors is not the only way to permit the orderly and healthy development of the issuers. In more developed markets, the concept of independent director is used with respect to the high-level officers and management of a corporation, but not the "control groups". As long as Mexican corporations do not have a more diverse shareholder composition, the applicability of this "foreign" figure will be limited. However, the Amendments point in the right direction and entail a considerable effort in updating Mexico's commercial legislation.

The Amendments define as "independent directors" those persons who, chosen on the basis of their experience, capability and professional prestige, are not: (i) employees or officers of the issuer (including employees or officers that had worked as such during the previous year in the corporation); (ii) shareholders that may have "authority to direct" the issuer's officers; (iii) partners or employees of corporations or associations that provide advice or consulting services to the issuer, or to the corporations that belong to the same economic group as the issuer, whose earnings represent 10% or more of its earnings; (iv) clients, suppliers, debtors, creditors, partners, directors or employees of a corporation that may be a client, supplier, debtor or important creditor (it is important when sales of the issuer represent more than 10% of total sales of the client or supplier (it must be understood that sales are "to the" issuer). For debtors or creditors this is important when the credit is more than 15% of the assets of the corporation or its counterpart); (v) employees of a foundation, association or civil company that receives important donations from the corporation (important donations are considered those that represent more than 15% of all donations received by the institution); (vi) general directors or high-level officers of a corporation on whose board of directors the general director or a high level officer of the issuer has a seat; and (vii) spouses or concubines, as well as blood relatives, in-laws or civil relatives.

Family relations are limited to first-degree family members in all cases, except in cases of officers of the issuer or shareholder who have the authority to direct, in which case the limitation is raised to third-degree family members. According to the Mexican Civil Code, each generation entails one degree of family relations. For example, first-degree family members are parents, children, parents in law, children of the wife (not of the husband) and adopted children. Up to third-degree family members are the members mentioned above, and also grandparents, great grandparents, grandchildren, great grandchildren, brothers and sisters, nephews and nieces, sisters and brothers in law.

It is necessary to analyze each specific case to determine the independence of these directors, due to the complexity of the requirements. The authors recommend that each issuer conducts an analysis, keeps evidence of this analysis, and reviews it from time to time.

The independent director concept is relevant because, according to the Amendments, the board of directors is integrated by a minimum of five and a maximum of 20 directors, of which at least 25% must be independent. For each director, an alternate must be named, with the understanding that alternates of the independent directors must have the same character. Additionally, the Amendments establish that the board's authority to approve transactions with related parties, as indicated below, or those that represent more than 1% of the issuer's assets, cannot be delegated.

Furthermore, independent directors have relevance regarding audit committees (see below), considering that its chairman and the majority of its members must be independent. The audit committee must give its opinion regarding transactions with related parties, and propose the retention of independent specialists in those matters that it considers necessary, to voice their opinions accordingly.

In conclusion, the critical aspect of the Amendments consists of those mechanisms and situations that allow a person or a group of persons to have control of an issuer. The authors recommend carefully reviewing the impact of these Amendments so that, if necessary, the issuer can undertake the necessary adjustments to avoid future conflicts arising from the points described above.

Non-offer listings

The Amendments introduce a new disposition consistent with regulations in other markets that permit the registration of securities in the stock market and in the National Securities Registry without offering such securities to the public. This means that securities are distributed in the secondary market without an initial public or secondary offering of shares. This procedure is known in the US as a Level II Registration.

Accordingly, issuers that want to register their securities in the Securities section of the National Securities Registry without actually making a public offering must request this from the Commission. Such issuers will be subject to the same requirements as exist for a public offering, on the understanding that instead of producing a prospectus, they will provide an information booklet that is identical to a prospectus, except for the section on public offering.

Although this appears to be an advantage for issuers, it also constitutes a burden for the issuer, despite its valid purpose. In the past, when a public company merged with a private one and the private one survived, or when a public company spun off, the securities of the surviving or new corporation were automatically registered. The result was that securities in private corporations whose "regular" information had not been disclosed to the market were being traded in the stock exchange. Thus, information booklets will need to be produced to address these types of corporate reorganizations.

Maintenance requirements

The concept of maintenance requirements already existed in regulations issued by the Commission. The Amendments simply incorporate these requirements into the Securities Law. For issuers to maintain their registration in the Securities section of the National Registry of Securities, they must comply with the following requirements:

• information – file quarterly and annual reports that contain financial, administrative, economic, accounting and legal information about the issuer, as well as about the securities issued by it, adjusting such reports to the Commission's requirements. These reports must include all relevant information for the public to make adequate decisions. Such reports will contain information similar to that contained in any offering documents of the issuer. The Commission may impose additional requirements through generally applicable regulations;
• relevant events and meetings – issuers must comply with the obligation to disclose all relevant information regarding shareholders' meetings and file it in a timely manner;
• qualitative and quantitative stock market requirements – regarding equity securities, issuers must comply with the maintenance requirements of the stock exchange, including requirements regarding independent directors. This is inconsistent with the purpose of registration based on disclosure;
• policies applicable to public companies – this pre-existing obligation involves following policies that are consistent with the interests of the public including: (i) repurchase and placement of securities representative of their capital; (ii) holding companies belonging to the same corporate group; (iii) common representatives of bondholders and holders of other securities issued in series; (iv) measures that must be adopted prior to the cancellation of the registration of securities that tend to protect the interests of the public and the market in general; (v) adoption of communication and control mechanisms to avoid the purchasing or selling of shares by persons with access to confidential information; and (vi) not performing transactions that may be against the law or against the healthy practices of the market.

Repurchase

The disposition that allows corporations to repurchase their shares through the stock exchange is amended. The change authorizes the purchase by the issuer to be carried out against the issuer's net worth (as long as the shares belong to the issuer), or against its corporate capital if it is decided to transform them into treasury shares. That is, two types of repurchased shares are provided for those shares that are "property" of the issuer and "treasury" shares. The Amendment establishes the accounts the purchase must be charged to. This is evidently at the option of the issuer.

In addition, the shareholders' meeting must expressly agree every year, for each fiscal year, the maximum amount that may be used to purchase the issuer's own shares. The Amendments introduce the Commission's requirement that the board must designate the persons responsible for undertaking the repurchase.

A disposition is introduced which, in the authors' opinion, has no basis and unnecessarily limits the issuers. The amendment states that, if an issuer maintains its shares registered both in the Securities section as well as in the Special section of the Registry, the issuer may only purchase those shares that represent its social capital or any instruments referred to them, directly or indirectly, through the stock markets mentioned in the Securities Law, ie only through the Mexican stock exchange. Accordingly, the purchase by an issuer of its own shares if they are listed in other markets, such as the New York stock exchange, is not permitted.

Non-ordinary shares

For years, the Commission has sustained the "one share one vote" principle. This principle disallows differentiation between shares for the purpose of voting. There is a clear tendency towards trying to limit, if not completely extinguish from the Mexican market, structures that allow the control of any issuer by a group of shareholders that do not hold more than 50% plus one of all the outstanding shares. The policy's guiding principle is that when someone does not own more than half of all the capital, certain conflicts of interest may arise between controlling and minority shareholders. The authors name this point as the "controlling rent", consisting of privileges that controlling shareholders have but that non-controlling shareholders do not have.

The development of mercantile law applicable to stock corporations must avoid any kind of abusive practices, therefore, the authors agree with the purpose of the Amendments. However, it is in this particular area that the Amendments fall short of their purpose: although restrictions are introduced, certain innovative features are not provided for, such as poison pills, anti-takeover provisions, provisions regarding agreement with respect to the vote, as well as many other innovations authorized in developed markets.

This issue has been extensively discussed. Accordingly, many theories have been suggested, such as those that establish that when "control" is "tied", the price of the issuer's shares trade at an important discount, affecting the whole market. Although the objective is desirable, in practice, the authors believe that in the Mexican market there will be less offerings, due to the fact that under the Mexican legal system, there is no legal entity such as that in the US making it difficult or impossible to make a hostile takeover against issuers. The authors hope this issue may further develop for the benefit of all shareholders.

The Amendments establish, as previously contained in the Law, that issuers may issue non-voting shares, shares with certain other corporate limitations, and restricted voting shares that are different from those provided by Article 113 of the General Law of Commercial Companies (the Commercial Companies Law). Despite this, as a result of the Amendments, the issuance of shares other than ordinary shares (including those provided by Article 113 of the Commercial Companies Law) must not exceed 25% of the capital placed among the public, of the total amount of shares placed with the public. Previously, the limitation applied to all of the outstanding capital, now the limitation applies for "each placement of shares".

The Amendments also provide that the Commission may increase this limit by an additional 25%, as long as this increase is represented by non-voting shares, shares with other limitations on their corporate rights, or restricted voting shares that, in any case, must be convertible into common shares in a term not to exceed five years, as of the date the shares were placed.

The Amendments also introduce a concept related to foreign investment because, to determine the limit of shares that is different from common shares, the shares and fiduciary titles that represent them and which, pursuant to the nationality of the holder, restrict the voting rights in accordance with the foreign investment laws, must not be considered. This applies, for example, to ordinary participation certificates under the so-called "master" trust of Nacional Financiera, SNC or other credit institutions.

Additionally, implementing mechanisms to "make more expensive the taking of control" when grouping a common share with another "restricted" voting share is prohibited. This applies to structures that negotiate or offer to the public in a joint manner, common, limited voting, or non-voting shares, except when these latter shares can be converted into ordinary shares for a term not to exceed five years, or that, because of the nationality of the holder, the shares or fiduciary titles that represent them limit the voting right under the applicable foreign investment rules.

As a general rule, the authors consider that the market should be regulated only with respect to what is strictly necessary. The type of shares, different from common shares, offered to the market and accepted by it, should be an issue strictly for the offerors and offerees. This type of regulation only restricts the market, promotes the "exit" of issuers, does not encourage registration with the stock exchange, and is an obstacle to the bid and offer process. Intervention to "protect" the public is not justified in cases where the regulation interferes with the free will of the parties. Additionally, such requirements are not consistent with requirements in other countries.

Special rules for issuers

The Amendments contain adjustments to certain exceptions to the Commercial Companies Law regime, as follows.

Minority directors

All minority holders of limited voting shares, including those established in Article 113 of the Commercial Companies Law or the limited voting shares provided in such article, representing at least 10% of the corporate capital in one or both series of shares (except non-voting shares), shall have the right to appoint at least one director and his or her alternate. If this minority designation is not exercised, the holders of such shares will enjoy the right to appoint at least two directors and their alternates as a group. In the second case, the designations, substitutions and revocations of such directors, shall be adopted in a special meeting of shareholders.

Statutory auditor (comisario)

Shareholders with or without voting rights, representing at least 10% of the capital, may appoint a statutory auditor. The revocation of these directors and statutory auditors can only be done when the rest of the directors and statutory auditors are revoked.

Integration and operation of the board of directors

The board must be composed of a minimum of five and a maximum of 20 directors, of which at least 25% must be independent. For each director, an alternate must be appointed, with the understanding that the alternate independent directors have the same character. In the case of a tie, the president has the tie-breaking vote. Likewise, issuers must establish in their by-laws that:

• the board must meet at least once every three months;
• the president, at least 25% of directors, or any of the statutory auditors, may call a board meeting;
• the audit committee report must be submitted to the board;
• the board has the authority to approve: (i) transactions that may differ from transactions done in the ordinary course of the corporation's business and that are to be executed between the corporation and its shareholders, with persons that may be part of the issuer's management or with persons with whom the issuer maintains monetary ties or, where appropriate, blood and civil family relationships up to second degree, the spouse or concubine; (ii) the purchase or sale of 10% or more of the issuer's assets; and (iii) the granting of liens for an amount of more than 30% of the issuer's assets, as well as transactions other than the ones mentioned above that represent more than 1% of the issuer's assets. Such authority cannot be delegated by the board. The board members are accountable for any such resolution adopted in this respect except when, not having any responsibility, they express their nonconformity at the moment the discussions were taking place and the resolution of the board was adopted; and
• the statutory auditors must be called, in addition to the board meetings, to every meeting of any intermediate consulting committees in which the board may have delegated any rights.

Audit committee

Issuers must create an audit committee with directors, of which at least the president and a majority must be independent. At the committee meetings, the presence of the statutory auditors will be required. The statutory auditor will assist as invitee with a right to voice opinions but without a right to vote. The audit committee will have the authority to:

• prepare an annual report describing its activities and submit it to the board; and
• give its opinion regarding relevant transactions or transactions with related persons, as explained above, and propose retaining any independent experts in cases that may be considered necessary, for them to express their opinions.

Opposing interests

The board members, the statutory auditors that attend the meetings of the audit committee and, in any case, the members of such committee, that in any given transaction may have interests that oppose those of the issuer, must inform the rest of the management or members of the applicable committee, and abstain from any discussion or resolution. Any person contravening this will be responsible for any loss or damages caused to the issuer.

Shareholders' meetings

The Amendments address the following issues regarding meetings of shareholders:

• summons – shareholders with voting shares, including limited voting or restricted shares, representing al least 10% of the corporate capital, may request that a meeting be called under the terms of Article 184 of the Commercial Companies Law;
• information – from the moment the call to the meeting is published, all the information and documents regarding each matter contained in the agenda must be immediately and freely placed at the disposition of the shareholders;
• proxies – the persons attending such a meeting as representatives of the shareholders must present a proxy in their favour according to the forms prepared by the issuer, containing (i) the issuer's name as well as the agenda, with the understanding that under the general issues section, there cannot be any issue contained in Articles 181 and 182 of the Commercial Companies Law, and (b) enough space for any instruction the shareholder may include in the proxy for its exercise. The issuer must place at the disposition of any intermediary representing any shareholders, for the term provided for in Article 173 of the Commercial Companies Law, the proxy forms for the intermediaries to send to the respective shareholders. The issuer's secretary of the board is obliged to verify the fulfillment of the above-mentioned disposition and confirm such compliance to the meeting. The latter must be included in the shareholders' meeting minutes;
• claims against the administrators – shareholders representing at least 15% of the issuer's capital may directly exercise any claim against the administrators, the statutory auditors and the members of the audit committee, as long as the requirements of Article 163 of the Commercial Companies Law are observed;
• postponement of resolutions – shareholders that hold at least 10% of the voting shares, including limited voting or restricted shares, represented in a meeting, may request a postponement of voting on any issue about which they may not consider themselves fully informed, adjusting to the terms and conditions contained in Article 199 of the Commercial Companies Law; and
• opposition or suspension of resolutions – shareholders that hold at least 20% of voting shares, including limited voting or restricted shares, represented in a meeting, may judicially oppose the resolutions adopted at the shareholder meeting at which they have a right to vote, as long as the requirements of Articles 201 and 202 of the Commercial Companies Law are satisfied.

Special statutory clauses

The issuer, if previously authorized by the Commission, and through an extraordinary shareholders' meeting, may provide in its by-laws additional dispositions to those provided by the Commercial Companies Law, establishing requirements that may prevent the acquisition of shares in a way that may grant control of the issuer, directly or indirectly, without the board's approval. The issuer may adopt such provisions in its by-laws, as long as it strictly adheres to the requirements of the law.

Finally, it is important to clarify that some rules do not apply to certain financial issuers who, for purposes of integrating their shareholdings and their board, as a general rule, must abide by the dispositions of the specific financial laws applicable to such issuers. These exceptions are an example of the inconsistency of the rules – there is no specific difference for distinguishing issuers in such way. The above-mentioned dispositions may be summarized in the following chart:

Brokerage certificates (certificados bursàtiles)

A new negotiable instrument called a "brokerage certificate" is created. Its main objective is to facilitate the issuance of instruments that are considered as being issued in series, and that may include conditions and covenants without losing their characteristic of being executable instruments, such as debentures, certificates of deposit and ordinary participation certificates regulated by the General Law of Instruments and Credit Transactions. This certificate may be issued by corporations (sociedades anónimas), government entities, state entities, municipalities and financial institutions when acting as trustees.

Brokerage certificates have the same characteristics as negotiable instruments issued in series. The difference is that these instruments are issued as bearer certificates, specifying the use of the proceeds. Conditions can be established regarding issuance and amortization, as well as early termination events including those pertaining to a breach of covenants by the issuer. Additionally, the brokerage certificates may have coupons attached to them for the payment of interest and, if applicable, for partial payments, which can be negotiated separately. Accordingly, certain dispositions of the General Law of Negotiable Instruments and Credit Transactions are applicable to these instruments and to the coupons.

This new negotiable instrument marks a return to certain concepts repealed during the 1980s for tax reasons, such as "bearer" titles and the negotiation of "coupons" for the exercise of rights, including payment of interest.

Furthermore, the brokerage certificate represents an inexpensive way of borrowing funds, because the requirement to have a public notary certify the issuance is repealed; covenants may be provided for therein, as well as conditions applying to the term and to early termination events.

Tender offers

The Amendments contain the possibility of the Commission establishing dispositions regarding the regulation of tender offers, which may contain, among other things, the requirements for the request to the Commission, the terms and conditions of the tender offer, and the information regarding the tender offer that must be provided to the public by the acquiring party.

The Amendment intends to regulate so-called "tender offers" so as to respect the rights to be granted to minority shareholders, and avoid the situation arising that, when transferring important portions of capital of the corporation, the offer is not extended to every shareholder pro rata. With these dispositions, the Commission seeks to ensure that "control premiums" be shared with all of the shareholders of the issuer.

It is unclear whether the Commission will follow the same road that the European Commission took or the system adopted by the North American market. Time will tell which system is adopted, but certainly it will one that provides equal treatment among all shareholders, and which will be of benefit for both issuers in particular, and the market in general, as long as the legal framework is respected.

Inside information

Previously, the Law contained a general prohibition applicable to any person that had access to confidential, material, non-public information regarding transactions that benefited such a person in particular or that benefited any third persons. This prohibition was not adequate, because the purpose of the rule is to reduce the incidence of this type of transaction, regardless of whether the person undertaking these transactions obtains any benefit. Accordingly, the Amendments have eliminated the concept of "benefit", prohibiting the direct or indirect undertaking of such practices by any person that has access to inside information.

In this regard, a general prohibition is introduced that applies to any person who has access to inside information, which imposes an obligation not to inform or recommend to any third parties the execution of any transactions with any type of securities resulting in a variation of price, as a result of the misuse of such information.

The Amendments have substantially increased the scope of the presumption of access to inside information, including the following:

• persons that, indirectly, may hold 10% or more of the shares of an issuer, including for such purposes, the shares of those persons over whom the shareholder has any parental rights (patria potestad), as well as shares placed in trust over which the shareholder may be the settler or beneficiary;
• directors, officers, managers and agents of corporations that (i) indirectly hold 10% or more of the shares of an issuer, or (ii) are part of the same corporate group as the issuer;
• groups of persons holding 25% or more of the issuer's shares, which are related economically, or as holding companies or as companies that are part of the same corporate group;
• the spouse or concubine, as well as such blood, in-law or civil family members up to the second degree; and
• persons undertaking securities transactions in a manner that differs from their historical investment pattern, and who may have had reasonable access to inside information through any of the persons presumed to have access to inside information, or spouses or concubines of any of those persons, or who have a family, personal, professional or business relationship with such persons.

As a general rule, persons with access to inside information should refrain from acquiring securities issued by the issuer with whom they may have a relationship for a period of three months counted from the day of the last sale they executed, regarding any type of securities issued by such issuer. This same prohibition applies to the sale and last purchase of any type of securities issued by the issuer with whom they are related. The above-mentioned limitations apply to purchases made directly or through third parties or trusts, this latter case being added by the Amendments.

Likewise, the Amendments have incorporated certain rules into the Law that were previously dispersed across several financial rulings issued by the Commission (Rulings 11-24, 11-28 and 11-28 bis), as well as the stock exchange's Internal Regulation. Thus, the Law includes an obligation on the issuer to inform the public of any relevant circumstance that may influence the price of the securities. These occurrences, known as "relevant events", must be disclosed as soon as they occur, unless the issuer adopts measures to guarantee that such information may be known exclusively by persons that must have access to it.

It is important to keep in mind that this exception does not apply in certain cases and, consequently, issuers must disclose such relevant information in any of the following cases: (i) when the event has already taken place; (ii) when information is disclosed through means of mass communication that may lead to error or confusion regarding the relevant event; (iii) when the price or volume of the securities traded may suffer variations, considering as such, changes in the offer or demand for securities, or in their price that may be inconsistent with their historical behaviour, and that may not be explicable under the existing public information.

The Amendments also introduce modifications regarding the regulation of investments that certain people may undertake. First, limitations are placed on directors, officers, managers, agents, independent external auditors, statutory auditors and secretaries of management bodies of the issuer, as well as of the issuer's shareholders that may directly or indirectly control 10% or more of the shares of the corporation, to purchase or sell, directly or indirectly, shares of the issuer with whom they may have ties and that such issuer may offer to purchase or sell. These persons may only purchase or sell shares of the issuer through a public offering. The same limitations apply to trustees in trusts established to manage stock option plans for employees, pension funds, retirement funds of the issuer or any other similar fund with like purposes, directly or indirectly incorporated by the issuer that such persons are related to.

Second, transactions with securities undertaken by officers and employees of financial entities are also regulated. Such financial entities must establish rules, policies and control mechanisms in this regard. Those officers and employees who violate such policies or mechanisms established by the financial entities may be sanctioned by suspension from performing activities in the stock market, for terms ranging from three months to five years. The Commission is the entity in charge of imposing such sanctions. The Commission may also prohibit such persons from obtaining employment, representation or commission within the financial sector for the same period. Officers and employees of financial entities may only operate through an intermediary in the securities market, in accordance with the general dispositions issued by the Commission.

Finally, it is important to note the addition of a new article 52 bis 2, that correctly relocates the sanctions that were previously established in article 16 bis, that apply to undertaking transactions based on confidential information and the improper use of such confidential information.

Regarding the applicable economic sanctions for executing transactions using confidential information, in general, the Amendments increase the amounts and limit the Commission's discretion by fixing a minimum amount for the penalties. Such minimum amount is the amount equivalent to that obtained from the transaction.

Likewise, the one-year statute of limitations that previously existed is abolished. The Amendments also introduce two new sanctions:

• fines ranging between 10% and 50% of the aggregate transaction amount when no benefit is obtained; and
• fines ranging from 400 to 10,000 minimum daily wages applicable to persons that inform third parties or give recommendations to third parties for them to execute transactions with any type of securities whose price may be influenced by confidential information.

To inhibit the temptation to undertake transactions using confidential information, a fine ranging between 400 and 5,000 minimum daily wages is levied on persons exercising such transactions without obtaining an economic benefit.

Finally, it is important to highlight the effort made by the Amendments to define the concept of "benefit" to avoid ambiguities. Thus, "benefit" is defined as profit gain or loss avoidance. To calculate benefits derived from transactions that use confidential information, the following methods are applicable, depending on the conduct:

if the transgressor undertakes an opposite transaction to the one that gave rise to the violation of the law within 20 days of the day on which the confidential information was revealed, the benefit should result from the difference between the price of both transactions depending on the relevant volume;

if the relevant event is a public offering, the benefit should result from the difference between the price at the public offering or the price at which the transgressor would have undertaken the opposite transaction, as compared with the one that gave rise to the violation of the law, prior to the offering, without the 20-day limit mentioned above being applicable, and the transaction that took place, averaged by the applicable volume.

in all other instances, for the calculation of the benefit, the difference between the average of the prices of the securities that the quotation supplies authorized by the Commission may inform during the five business days following the date in which the information has been made public and the price of the transaction undertaken, taking into consideration the relevant volume.

Regarding persons with access to inside information who undertake transactions before the 3-month deadline mentioned above, the benefit is the one resulting from the difference between the prices of one and the other transaction taking into consideration the relevant volume.

The main point for issuers contained in the Amendments that requires immediate attention is the adjustment of the issuer's by-laws. Issuers must amend their by-laws, as well as integrate and designate their boards of directors, audit committees and members of these organs, pursuant to the provisions of Article 14 bis 3 of the Securities Market Law, at the next shareholders' meeting or, if not, at the annual shareholders' meeting. The transitory article states that the previous disposition will not affect in any manner the rights that correspond to shareholders with regard to the article previously mentioned, which means that they are already valid and enforceable.

Franck, Galicia y Robles
"Torre del Bosque",
Blvd. Manuel Avila Camacho No. 24, 7º Piso
Lomas de Chapultepec
11000 México, DF
Tel: (52) 5540 9200
Fax: (52) 5540 9202
Internet: www.fgr.com.mx