As in other developing markets, Mexican tender offer regulation has
evolved significantly over the past couple of decades. Although the more
noteworthy deals involving the purchase of controlling stakes in
publicly-traded companies (including the purchase of Banamex by
Citibank, PEPSIGX by The Pepsi Bottling Group, and Hylsa and IMSA by
Techint) have been subject to some level of regulation, the Mexican
regulator's continued focus on protecting minorities and transparency
has resulted in strict disclosure and procedural requirements, as well
as a tight rein on controlling shareholders.
The National Banking and Securities Commission (CNBV) has sought to
develop and implement a comprehensive regulatory framework for tender
offers conducted in Mexico. Rules governing tender offers are contained
principally in the Mexican Securities Market Law (the Securities Market
Law) and the regulations applicable to securities issuers and other
securities market participants (Rules). These provide the types of rules
and procedures applicable to tender offers in Mexico.
Rules set out in the Mexican Income Tax Law have been amended to
limit tax exemptions previously available to controlling shareholders
(individuals, as opposed to legal entities which did not benefit from
tax exemptions) that transferred control of a listed company as a result
of a tender. These changes are instrumental when structuring a public
tender offer. The current tax regime can be attributed to some extent to
the public backlash resulting from transactions (such as the Banamex –
Citibank deal) where controlling shareholders avoided any income tax
impact from the sale of their controlling stakes. In some instances,
such rules have resulted in more complex transactions involving
simultaneous tenders and capital reimbursements or similar transactions.
Regulatory requirements
The Securities Market Law and the Rules have a number of regulatory
requirements in place including that tender offers be approved by the
CNBV. Tenders are voluntary or mandatory depending on the percentage of
shares sought. Tender offers may be voluntary (where purchasers seek to
purchase less than 30% of the publicly-traded target) or mandatory (if
purchasers intend on purchasing 30% or more of the shares of the target
or if the purchaser seeks to gain control of the target). If mandatory,
the Securities Market Law may require that offers be extended for up to
100% of the capital of the target. The price offered by the offeror must
be the same for all shareholders. The price offered may be in cash, in
kind or a combination of both. However the Securities Market Law allows
for additional consideration to be paid to a specific group of
shareholders to the extent the payment of such additional consideration
is publicly disclosed, approved by the target's board, and merited as a
result of certain covenants applicable to such specific group of
shareholders (such as non-compete obligations). However, such
arrangements are atypical. Tender offers must be open for at least 20
business days and must be extended for five business days if the offer
is significantly modified. Any changes must enhance the terms for the
recipients and the shareholders retain the right to withdraw their
acceptance of the tender up until the last minute of the term of the
tender offer.
Tenders must be accepted pro rata by the offeror, irrespective of the
date on which the offer is accepted. The offers may come with
conditions, for example, achieving a certain percentage of tenders or
include clauses on material adverse effect and availability of
financing. If any approvals are required under the bylaws of the target
(which may be a result of poison pills or other defensive provisions
included in such bylaws), the board of directors of the target company
is required to issue its opinion in respect of the purchase price within
10 business days following commencement of the tender offer. Each
member of the board of directors of the target company and the chief
executive officer are required to disclose whether or not each of them
will participate in the tender offer with any shares they may hold.
Although not mandatory, the Securities Market Law suggests that a
fairness opinion be obtained from an independent expert and disclosed by
the board of directors of the target company.
A potential offeror may purchase shares of the target in open market
transactions prior to conducting a tender offer, provided that the
shares purchased do not exceed 30% of the issued shares. A purchaser is
required to publicly disclose the acquisition of shares of a public
company once the shares acquired exceed 10% of the capital stock.
If a tender is necessary, the requirement of disclosure extends to
ensuring the contents of the offering document (information memorandum)
are outlined specifically, and that it includes items such as the
description of agreements between the purchaser and the target's
shareholders, and pro forma financial information in certain
circumstances.
The Securities Market Law provides for exemptions from the
requirement to conduct tender offers where purchasers would otherwise be
required to do so. Such exemptions must be approved by the CNBV. These
may include certain capital reductions, stock foreclosures, related
party transactions such as inheritance and donation, and transactions
that are not inconsistent with the protection of the rights of
minorities. They could also include stock redistributions among
shareholders that have held shares of the target and controlled the
target for more than 5 years and that are part of the same group of
persons, provided they are made on market terms. Another is transactions
conducted in distress scenarios that have been previously approved by
the board of directors (considering the corporate practices committee's
opinion).
Although these and other rules seek to eliminate discretion, certain
questions still arise when structuring tender offers in Mexico. Answers
to five of these key questions are dealt with below.
Are indirect purchases, mergers and other similar transactions subject to tender requirements?
The Securities Market Law provides that tender offers must be
conducted when the purchasers intend on purchasing 30% or more of the
shares or control of the target through direct or indirect purchases.
Global consolidation has resulted in several Mexican publicly listed
companies being controlled by non-Mexican companies. To the extent such
controlling companies are targets of acquisitions abroad, purchasers
typically enquire whether a tender offer in Mexico is necessary. Whether
or not a tender offer in Mexico is merited will typically be a
fact-based analysis. If the foreign holding company is exclusively an
SPV holding the Mexican stock, or such Mexican stock represents a
majority of its assets, a tender offer is likely to be required. Where
the target is a company with other significant assets or lines of
business it is less likely. This is because the Mexican Securities
Market Law is designed to protect minority shareholders in the event
majority stakeholders conduct a sale of the Mexican company. One example
of this is the purchase by Inbev of a majority of the capital stock of
Anheuser-Busch. The target owns more than 45% of Grupo Modelo, a
publicly listed Mexican brewing company. Launching a tender offer in
Mexico for Modelo stock would have been inoperative in the context of
the purchase of Anheuser-Busch. Mexican law has never been
extraterritorial in matters such as these.
Whether or not the merger of a publicly listed company with another
company (publicly traded or not) merits a tender offer, and to what
extent minority shareholders of such a merged company should benefit
from protections provided under the tender offer rules, has been
recently analysed by the CNBV. It has done this in the context of the
recent merger of Embotelladoras Arca and Grupo Continental, two publicly
listed companies. The analysis centred on the protection of the rights
of minority shareholders. This was because the CNBV thought target
minority shareholders would be effectively forced by the controlling
shareholders into accepting the merger, and therefore the consideration
offered (consisting of stock of the surviving entity), without being
afforded the basic protection contained in the tender offer rules (ie
the right to accept or reject the merger). After detailed analysis, the
CNBV approved the merger without the need of a prior tender, but
required that the board of both entities retain specialists to issue
fairness opinions to the shareholders and that all other requirements
contained in the tender offer rules be met as part of the transaction.
One important factor considered by the CNBV was the fact that
shareholders of the merged entity received listed shares in exchange for
their shares in the target, which shares could be sold immediately
after the consummation of the merger. This offered those shareholders
the possibility of liquidating their investment in the merging company.
Can a tender offer be launched for less than 100% of the sharers by a controlling shareholder?
Tender offer rules require a person acquiring more than 30% of the
shares of a public company to launch a tender offer to the rest of the
shareholders. The percentage of shares for which the tender must be
launched depends on whether the offeror intends to acquire control of
the target. If they do not intend to gain control of the target, the
offer may be launched for a minimum of 10% of the outstanding shares of
the target or for a greater percentage of shares provided that the
resulting holding does not result in the purchaser acquiring direct or
indirect control of the target. Conversely, if the purchaser already has
control of the target, a tender offer may be launched for a percentage
of the target which is less than 100% of the shares.
When are fairness opinions merited?
As stated eariler, obtaining fairness opinions from investment banks
or other specialised firms is optional under the Mexican Securities
Market Law and the Rules. Although such requirement has never been
mandatory, under prior regulations of the CNBV certain guidance was
provided. Regulations (now amended) used to provide that the board of
directors of a target could obtain fairness opinions if it deemed that
the circumstances resulted in a conflict of interest to the board (for
example where board members were appointed by a selling controlling
shareholder, although not sellers themselves) or where there was more
than one offer that was not comparable.
Therefore, requesting and disclosing fairness opinions is a purely
discretional decision of the board of directors of the target. Such a
decision is, in practice, guided by the board's fear of breach of their
duties of loyalty and diligence. Obtaining fairness opinions that
provide that the price being offered is fair to shareholders allows
board members, when issuing their opinion on the tender, to effectively
argue that they have not breached such duties. In this context, most
important is the duty of loyalty that requires board members never to
favour one group of shareholders over another (which could be deemed to
be the case if that board offers a positive opinion on a tender where
the controlling shareholders have committed to sell to the offeror).
Obtaining fairness opinions is very common in transactions involving a
corporate reorganisation of a controlling shareholders' interest, as has
been the case of many tender offers involving the holdings of Grupo
Carso (such as Teléfonos de México, Carso Infraestructura y Construcción
and América Móvil).
How are competitive tenders analysed?
Neither the Securities Market Law nor the Rules give much insight as
to how competitive tenders are conducted in Mexico. Other than certain
references to restrictions on limitations to shareholders from accepting
competitive tenders, nothing much has been legislated in this respect.
There have been competitive tenders in Mexico in the past, most notably,
the tenders launched with respect to the purchase of Aeroméxico in
2008. But no judicial precedents exist in Mexico to refine the duties of
the board (including duties of loyalty and diligence) of a target in
analysing and opining on matters such as these. In our view, guidance
from regulators as to procedural requirements as well as clarity in the
manner in which boards should react in a competitive tender scenario
would be a welcome addition to the existing regulatory framework.
Are subsequent tender offers necessary for delisting?
In addition to tender offers that are mandatory as a result of a bid
by an offeror, the Mexican Securities Market Law requires tender offers
to be launched by a publicly listed company in the event the CNBV
cancels registration of its shares in the National Securities Registry
(a prerequisite to listing of the company's stock on the Mexican Stock
Exchange). The cancellation can be either as a result of the breach of
the applicable listing requirements or at the request of the company
(subject to certain limited exceptions recently introduced in the
Rules). This procedure is in place to protect minorities so that they
won't be left holding illiquid securities. Among other characteristics
of such company tender offers, which are targeted at non-controlling
shareholders, the company is required to offer a minimum price (the
highest of an average trading price for the prior 30 days and the book
value of the stock). In addition, the company, upon cancellation of the
listing of its shares, is required to set up a trust (the residual
trust) with sufficient funds to purchase any shares not tendered during
the offer at the same price as was offered in the tender.
In tender offers for up to 100% of the stock of a publicly traded
company, another question that typically is raised is whether, if as a
result of the tender the minimum statutory listing requirements are no
longer met (which should give rise to cancellation of registration and
listing), the offeror or the company should launch a subsequent
delisting tender. Issuing a subsequent tender could result in such a
tender being made at a price that is lower than the initial tender offer
price, which would make no sense at all, particularly given the
rationale of the tender offer rules. Therefore, we believe the best
practice is for the initial tender to serve as the delisting tender and
for the offeror, or the company, to set up the residual trust
immediately after closing of the offer. This approach has been approved
by the CNBV in the past.
| Carlos F Obregón Rojo
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Carlos Obregón advises underwriters and issuers in respect of
domestic and international debt and equity offerings, including
corporate bond offerings, sovereign offerings and structured asset
backed transactions, both public and private (involving auto loans,
mortgage loans, equipment leases and infrastructure projects among
others). He has also assisted several private equity firms in raising
capital through publicly issued securities on the Mexican Stock
Exchange. He has recently assisted domestic issuers such as Gas Natural
México, Daimler, Volkswagen, Grupo Herdez and Liverpool in their debt
offerings in Mexico as well as underwriters in domestic equity
offerings, including Sportsworld. He acts as counsel to Ford in their
private auto loan securitizations in Mexico. He recently helped Promecap
close a private equity/debt and distressed asset fund in Mexico, the
first of its kind.
He has represented domestic and international lenders in structuring
and restructuring credit facilities for Mexican public and private
sector entities. Carlos Obregón speaks Spanish and English.
Ritch Mueller
Blvd. Manuel Avila Camacho 24, 20th floor,
Lomas de Chapultepec,
11000 Mexico D.F.
T. (52.55) 9178.7000
T. (52.55) 9178.7042
F. (52.55) 9178.7095
E. cobregon@ritch.com.mx
W. www.ritch.com.mx
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| Rodrigo Conesa Labastida |
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Rodrigo Conesa is the managing partner and leader of the real estate
practice group at Ritch Mueller. Rodrigo actively participates in
transactions involving real estate financings, acquisitions and
developments working for lenders and developers. He regularly advises
real estate investment trusts in respect of their investments in Mexico
(including property acquisition, financing, development and management
of the assets). Mr Conesa is very active in M&A transactions in a
variety of sectors, including real estate, financial services, gaming,
infrastructure and other industries. He also advises municipal and state
governments in the preparation and structuring of bidding processes in
connection with infrastructure projects primarily in the water and waste
management areas.
He received his law degree from Universidad Iberoamericana in Mexico
City and his LL.M., from Columbia University in New York and is licensed
to practice law in Mexico and New York. He speaks Spanish and English.
Ritch Mueller
Blvd. Manuel Avila Camacho 24, 20th floor,
Lomas de Chapultepec,
11000 Mexico D.F.
T. (52.55) 9178.7000
T. (52.55) 9178.7042
F. (52.55) 9178.7095
E: rconesa@ritch.com.mx
W. www.ritch.com.mx
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