Exiting private equity investment is seldom an easy
proposition. At best, investors have to face the unpredictable
and sometimes unstable economic conditions and environment
affecting their investment, hoping that their expected rates of
return and other predictions materialize when it comes time to
dispose of their investment. As if economic risk was not enough
to deal with, in some jurisdictions, including Mexico, private
equity investors often face legal and structural challenges to
carry out their exit.
Despite the comprehensive and well-considered provisions in
investment documents typically calling for registration rights,
drag-along, tag-long and similar mechanisms to facilitate exit,
it is impossible to insulate an investment from legal and
regulatory changes that may affect the terms of the investment
and specifically the envisioned exit.
On April 25 2002, Mexico's Ministry of Finance and Public
Credit (Secretarka de Hacienda y Crédito
Psblico) published the Rules Applicable to certain
Acquisitions of Securities and Tender Offers (Reglas
generales aplicables a las adquisiciones de valores que deban
ser reveladas y de ofertas psblicas de compra de valores,
the Rules), which may negatively impact the possibility of
disposing of minority and majority private equity investments
in publicly traded Mexican companies.
The first part of the Rules imposes enhanced disclosure
obligations on issuers and their shareholders, and the second,
which is of greater concern for private equity investors,
addresses tender offers. Below is a general summary of the
Acquisitions subject to disclosure
Any person that directly or indirectly acquires stock
from an issuer and, as a result of such acquisition, holds 10%
or more but less than 30% of the capital stock of any publicly
traded issuer must disclose this fact to the Mexican National
Banking and Securities Commission (Comisión Nacional
Bancaria y de Valores, the CNBV) and the Mexican Stock
Exchange (Bolsa Mexicana de Valores, SA de CV, the
Stock Exchange), who will in turn disclose it to the market the
next business day.
Whenever as a result of any such transaction any person
becomes part of a group of related individuals or entities that
holds 25% or more of the capital stock of an issuer, then each
person within the group must disclose its individual stock
ownership, as well as whether or not it intends to acquire a
significant interest in the relevant issuer. The Rules define
significant interest as the ownership of or title to, directly
or indirectly, 30% or more of the voting stock of an issuer.
The definition of voting stock covers securities convertible
into common shares, and securities having common shares as
Insiders (that is, shareholders, directors, officers
and external advisers of the relevant issuer, as well as their
respective family members) who increase their participation in
the relevant entity by 5% or more must: disclose this fact to
the CNBV and the Stock Exchange, who will in turn disclose it
to the market the next business day; and inform whether or not
they intend to acquire a significant interest in the relevant
Directors and officers must: disclose to the CNBV all
transactions undertaken during a calendar quarter with respect
to stock of an issuer where they are insiders, within five
business days after the close of each quarter, whenever the
value of the transactions within such term equals or exceeds
500,000 unidades de inversion (UDIs), taking into
account the UDI value on the closing date of the relevant
quarter; and inform the CNBV, on the next business day on which
the threshold is reached, of all transactions undertaken within
a five business days, if the transactions have a an aggregate
value equal or in excess of 500,000 UDIs taking into account
the UDI value on the date of the last transaction.
Securities lending, securities pledge (caución
bursitil) (unless actually foreclosed) and repo
(reporto) transactions for the settlement of
international arbitrage transactions shall not be taken into
account for purposes of the disclosure requirements set forth
in the Rules.
Insiders must comply at all times with the short-swing
trading statutory restrictions set forth in the Mexican
Securities Market Law (Ley del Mercado de
Rules governing tender offers
Any person or group of persons (each an offeror) that
directly or indirectly intends, through one or more
transactions, to acquire a significant interest of more than
50% of the voting stock of an issuer, whether through the Stock
Exchange or otherwise, must carry out a public tender offer to
acquire 100% of the capital stock of the relevant issuer (a
tender offer), as follows:
- The offered price must be the same for all classes of
shares. The offer price may be paid in cash or through
exchange securities, in which case the offer documents must
specifically establish the exchange ratio between the offered
securities and the exchange securities.
- The offer may establish a minimum percentage or number of
shares to be acquired by the offeror for the offer to become
effective (that is, the offeror's obligation to purchase
offered securities may be conditioned to the tender of a
minimum percentage of offered securities).
- The offer must be divided Pro rata among all
tendering shareholders on the expiration date.
- The term of the offer may not be less than 15 business
days from the commencement date.
In the event that the offeror wishes to acquire a
significant interest below 50% of the voting stock of any
issuer, the tender may not be for less than 10% of the voting
The offer and its terms may be modified at any time before
the expiration date when the terms of the offer are made more
favourable to the tendering shareholders, in which case the
term of the offer must be extended for at least five business
An offeror seeking to acquire a significant interest below
60% of the voting stock of an issuer, may request the CNBV's
authorization to carry out a tender offer for less than 100%,
by submitting an opinion from the board of directors of the
issuer, approved by the audit committee, indicating the
circumstances that justify such a request. If such
authorization is obtained, the issuer must disclose the board's
opinion and make it available to investors.
CNBV approval: regulatory approvals and other
Like any other public offer of securities in Mexico, tender
offers must be previously approved by the CNBV. To obtain the
requisite approval, the offeror and the issuer must submit a
written petition, which must include, among other documents, a
preliminary information memorandum and a draft of the offer
notice to be published on the tender offer commencement date.
Contrary to other jurisdictions, in Mexico the issuer must sign
the corresponding petition, which in practice reduces the
possibility of hostile takeovers or unsolicited tender
To the extent required, the offeror must notify the
antitrust regulator, the Federal Competition Commission
(Comisión Federal de Competencia) before
closing the offer, and, if required under applicable law,
obtain all other necessary regulatory approvals (for example,
the approval of the Ministry of Communications and
Transportation in the case of telecommunications
concessionaires) as a condition of closing the offer.
Although the Rules are silent on this point, in some of the
recent tender offers, the CNBV has authorized the establishment
of additional conditions to closing, including bring-downs of
representations and warranties and absence of certain
Follow-on or market-sweep tender.
If, after giving effect to any tender offer, the
issuer has less than 15% of its shares among the general
public, the offeror must carry out a follow-on tender offer to
purchase all of the remaining stock in the market in order to
de-list the issuer.
Tender offers must be made pursuant to an information
memorandum setting forth the terms and conditions of the offer,
and containing the information established in the corresponding
regulations issued by the CNBV.
Among other things, the information memorandum must
specifically establish the offer price and method of payment,
the offer period, the expiration date and the right of
tendering shareholders to withdraw their acceptance if a second
or subsequent tender offer in respect of the same issuer is
launched, and all other conditions to closing. The information
memorandum must also include a description of any agreement
entered into with other purchasers, shareholders and directors
of the issuer or any other participant or third party.
Restrictions on the issuer, its directors and senior
Once a tender offer becomes effective and until the
corresponding expiration date, the issuer, its directors and
officers must refrain from entering into transactions affecting
The board of directors of the issuer must, within the 10
business days after the date the offer becomes effective,
prepare and disclose to the market its opinion with respect to
the tender offer. Should the board of directors face
circumstances that may give rise to a conflict of interest, or
whenever more than one offer is subject to terms that may not
be directly comparable, the board's opinion may be delivered
together with a fairness opinion issued by an independent
expert retained by the issuer at the request of the audit
Directors that are also stockholders of the relevant issuer
must disclose to the Stock Exchange, for subsequent
publication, whether they will participate in the tender offer
The CNBV may authorize exceptions to the obligation to
carry out a tender offer only in the following cases:
Acquisitions of stock, at market value, that result in a
redistribution of voting stock among persons of a same group of
purchasers, irrespective of whether such group of purchasers
continues to exist or not.
Acquisitions arising from inheritances or donations.
When a person's significant interest is increased as a
result of a capital reduction by the issuer.
In a market often plagued and criticized for insider
transactions, as evidenced in recent deals such as The Pepsi
Bottling Group's acquisition of Pepsi-Gemex, HSBC's acquisition
of Grupo Financiero Bital, Farmacias Ahumada's acquisition of
Far-Ben and Movil Access' purchase of Grupo Iusacell, the Rules
have served their purpose by ensuring that public and minority
investors will now have a non-discriminatory opportunity to
exit their investment in a Mexican company undergoing a change
But from the standpoint of a private equity investor, the
Rules' tender-offer obligations adversely impact the ability to
dispose of investments, including convertible debt, in a
Mexican publicly traded company to the extent that the
participation in question constitutes a significant interest,
or the proposed purchaser would acquire a significant interest
upon purchase of the investor's interest.
So, when structuring investments in a publicly traded
company in Mexico, or when contemplating registration rights,
drag-along or a put option against other shareholders of the
target company as a means to exit from an investment in Mexico,
the private equity investor and its counsel must carefully
weigh the impact of the Rules, and structure the investment in
a way that mitigates their application.
Now more than ever, exiting an investment in a publicly
traded company in Mexico may mean the sale of the entire
company or a disposition of the operating assets.
Garcia-Cuellar y Muggenburg
Samuel Garcka-Cuéllar is a senior partner of the
firm, specializing in mergers and acquisitions, and securities.
Most often Samuel works on cross-border transactions on behalf
of multinational clients such as The Pepsi Bottling Group and
Samuel is admitted in Mexico, having obtained his law degree
(JD) in 1968 from the Escuela Libre de Derecho in Mexico
Samuel has been named one of the world's leading lawyers in
his field by Chambers Global: The World's Leading Lawyers
2003 - 2004.
Samuel is fluent in Spanish and English.
Garcia-Cuellar y Muggenburg
Jean Michel Enriquez is a partner of the firm, specializing
in mergers and acquisitions, securities and telecommunications.
Most often Jean Michel works on cross-border transactions on
behalf of multinational clients such as The Home Depot,
PanAmSat, Kerzner International, Credit Suisse First Boston and
The Peabody Group.
Jean Michel is admitted in Mexico, having obtained his law
degree (JD) with honours in 1995 from Universidad
Iberoamericana in Mexico City. In 1997 Jean Michel received his
LLM degree from The London School of Economics and Political
During 1997 and 1998 Jean Michel worked as a foreign
associate at Cravath, Swaine & Moore, in New York City.
Jean Michel has been named one of the world's leading
lawyers in his field by Chambers Global:The World's Leading
Lawyers 2003 - 2004, and has been featured in
LatinLawyer's Mexico's Forty under Forty.
Jean Michel is fluent in Spanish, English and French, and is
a member of the editorial board of Expansión
Creel, Garcka-Cuéllar y Müggenburg
Paseo de los Tamarindos 60
Col Bosque de las Lomas
T: 52 55 11 050 600
F: 52 55 11 050 690