For the last decade or so, Mexico has been one of the most
popular destinations for foreign investment in various
different shapes and forms, including private equity capital.
Despite the ever-increasing popularity and growth of private
equity financing in Mexico, the Mexican legal framework poses
peculiar challenges to the private equity investor in four
basic areas: corporate governance, capitalization and
distributions and regulatory approvals.
Perhaps the most significant legal issues and problems
confronting private equity investors in Mexico relate to
corporate governance matters, which partly derive from the
outdated legal framework governing commercial companies.
One of the fundamental problems stems from the fact that
Mexican corporate law, enacted in 1934, prohibits covenants
whereby shareholders of a Mexican corporation (sociedad
anónima) the most common form of corporation in Mexico,
agree to vote, or refrain from voting until a future date. It
is, arguably, the most important type of covenant found in a
shareholders' agreement which effects certain understandings
among the parties, such as protections regarding so-called
'major decisions' and registration rights.
In terms of major decisions, the issue is relatively easy to
overcome by implementing supermajority protections, in the form
of qualified voting quora, whereby the adoption of any 'major
decision' requires the affirmative vote of the investor.
However, where it is necessary for the investor, as a minority
shareholder of the target company, to make the company
undertake certain actions (not just refrain from taking
actions), for example, executing agreements and registration
statements, Mexican corporate law does not provide the investor
with specific means to ensure compliance with voting agreements
in shareholders' agreements.
Acknowledging the significance of this, lawyers have
designed various solutions to create self-executing mechanisms
whereby the investor is in a position to ensure compliance with
otherwise unenforceable sections of a shareholders' agreement.
In practice, the most widely accepted solution has been the
creation of a voting trust (fideicomiso), through which the
controlling shareholders deposit their shares, and specifically
pre-instruct the trustee to vote in accordance with the
instructions delivered by the investor.
Another key issue relating to corporate governance is the
enforceability of certain restrictions and shareholders' rights
in connection with transfers of shares, such as drag-along and
tag-along rights. Once again the most popular means of ensuring
compliance with drag-long provisions and other transfer
restrictions is a trust.
Capitalization and distributions
As in the case of voting covenants, Mexican law does not
have the ideal framework on which to structure sophisticated
capitalization schemes. The obstacles are essentially
threefold. 1) Mexican law does not allow for a shareholder to
waive pre-emptive rights to subscribe capital increases in
advance. 2) A company cannot agree to issue new stock and sell
it without a resolution of the shareholders' meeting. 3) A
company cannot repurchase its own stock, except through
open-market transactions, where the company is publicly listed
and subject to a number of limitations.
In light of these limitations, in certain cases it becomes
very complicated to structure private equity investments, which
typically call for adjustments in percentage equity interest
held by the fund through the issuance of additional shares, or
redemption of shares, upon the occurrence of certain events, or
the failure of the target company to meet certain performance
The problems relating to the issuance of new shares are
normally solved by issuing treasury shares at closing, and
granting conditional subscription rights to the investor to
subscribe and pay for the shares.
Unfortunately, if the terms of the investment require the
repurchase of shares by the target company, the solution must
generally centre around the controlling shareholders, or a
third party acquiring the corresponding shares from the
investor. This constitutes a direct liability on the part of
the controlling shareholders and is not a self-executing
Naturally, the problems relating to pre-emptive rights are
more difficult to overcome if the target company is a listed
company, in which case the public shareholders must be accorded
a minimum 15-day term to subscribe the new shares, which
inevitably delays the closing. One solution in the case of
listed companies has been the issuance of convertible loan
instruments to the investor, which may be issued without
triggering any pre-emptive rights at the time of issuance, or
conversion in favour of the target company's shareholders.
As far as distributions to shareholders are concerned, there
are two fundamental principals under Mexican law that often
create problems in structuring special rights on distributions.
1) A shareholder may not be excluded from the profits of a
corporation and, 2) dividends may only be paid out of the
target company's net profits and not from the profits generated
exclusively by a division or an asset of the target company. As
a result of these limitations, tracking stock schemes may not
be implemented and so-called 'cash waterfalls', or special or
senior rights of the shareholders in connection with
distributions must be structured as preferred dividends and
preferred liquidation premiums.
Despite the fact that Mexico has been shifting from a
heavily regulated to a more liberal laissez-faire economy,
there remain a variety of pre-investment governmental consents
required in order to consummate investment transactions.
In the case of private equity investments, the need to
obtain regulatory consents frequently poses timing pressures
which often test the expedited timetables under which such
investments normally take place.
The nature of the governmental consents in Mexico depends on
factors relating to the target company's industry - that is,
whether the target company operates within a so-called
'regulated industry' such as telecommunications or banking, the
size and form of the investment, and the size of the
participants, namely the target company and the investor.
In the context of private equity transactions, the most
common governmental consent required is the approval of the
Federal Competition Commission. The need to obtain this consent
is normally based on the total consideration or amount being
invested, and/or the size of the investor or the target
company, considering the corresponding exemption thresholds set
out in the Federal Economic Competition Law.
From a timing perspective, the Competition Commission filing
must be made before the execution of the transaction documents,
which typically reflect the authorization of the Competition
Commission as a condition to closing, or provide for an unwind
mechanism whereby the investor would divest its investment if
the Competition Commission denies or materially conditions the
approval. In certain cases, where the target company has been
hard-pressed for funds, companies have received capital in the
form of convertible loans which generally do not require
Competition Commission approval until the time of
In the context of regulated industries, the approval of
industry regulators is generally required.
In certain circumstances, where the investor is a
non-Mexican and the investment is particularly sizeable, the
consent of the Foreign Investment Commission may be
Despite the challenges which result from having to structure
cutting-edge deals within a regulated environment, and an
outdated legal framework like Mexico's corporate law, practice
shows that Mexican law has just enough flexibility and
resources, like the fideicomiso, can be tailored to accommodate
the needs and concerns of private equity investors relating to
important matters such as timing of the investment, and
Creel, García-Cuéllar y
Bosque de Ciruelos 304 – 2o Piso
Bosque de las Lomas
11700 Mexico, D.F.
Tel: 52 5596 3309
Fax: 52 5596 1821