Author: | Published: 5 Jan 2004
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

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 Rules.

Acquisitions subject to disclosure requirements

Investors generally
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 underlying assets.

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 issuer.

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 Valores).

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 stock.

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 days.

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 conditions

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 offers.

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 changes.

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.

Required documentation
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 officers

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 minority stockholders.

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 committee.

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 or not.

Tender-offer exceptions
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 of control.

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.

Author biographies

Samuel Garcka-Cuéllar

Creel 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 Vodafone plc.

Samuel is admitted in Mexico, having obtained his law degree (JD) in 1968 from the Escuela Libre de Derecho in Mexico City.

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.

Jean Michel Enriquez D

Creel 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 Science.

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 business magazine.

Creel, Garcka-Cuéllar y Müggenburg
Paseo de los Tamarindos 60
Col Bosque de las Lomas
Mexico 05120
Mexico DF
T: 52 55 11 050 600
F: 52 55 11 050 690