With the advent of the financial crisis and the unprecedented global recession affecting industrialised and emerging economies alike, companies across the globe, large and small, blue-chips and start-ups, have been facing a scarcity of capital, and the seemingly impossible task of raising debt or equity financing.
Facing imminent defaults and an overall distressed environment, public companies and corporate finance specialists have been scrambling to devise creative, cost-effective and expeditious ways of raising equity capital to keep companies afloat, often through privately negotiated transactions at a discount over prevailing market prices (like Warren Buffet's investment in Goldman Sachs and General Electric, as well as Mitsubishi UFG's investment in Morgan Stanley). With varied success, Mexican publicly-traded companies have been equally active in these endeavours, opting for private investment in public equity (Pipe) transactions, which have generally been consummated in the following critical path.
In preparing this critical path, we assumed that (i) the by-laws of the company are standard form and do not contain a poison-pill or other special restrictions affecting the issuance of shares, (ii) the investor will not own 30% or more of the capital stock of the company after to the transaction, and therefore the transaction will not be subject to applicable tender-offer regulations in Mexico, and (iii) the company does not operate in a regulated industry, requiring special approvals from industry regulators (such as telecommunications and airlines). The critical path is as follows:
Execution of a memorandum of understanding or letter of intent and confidentiality agreement with the company, investor and the controlling shareholders. The need to disclose the execution of the MOU or LOI should be considered under applicable securities laws. Among other points to consider as part of the analysis, would be the binding/non-binding nature of the commitment. The execution of the Subscription Agreement by the Company's Controlling Shareholders should be considered.
Due diligence with the company and investor. To the extent the Investor will conduct a due diligence of the Company, the Company may be legally required to accord the same due diligence access to third-parties interested in a competing transaction.
Board of directors meeting of the company approving the transaction.
Execution of subscription agreement with the company, investor and controlling shareholders.
Filing of notification with Mexico's Federal Competition Commission (Comisión Federal de Competencia).
Publication of a call for a general shareholders meeting of the company. The call must be published in a national journal in Mexico at least 15 days prior to the scheduled date for the meeting.
The day after the publication of the call identified in Step 6, the company must disclose to the public a document describing (i) the terms of the proposed capital increase, (ii) the reasons for the capital increase and (iii) the effects on the shareholders.
General shareholders meeting where the shareholders should approve the following matters:
(i) Ratification of the subscription agreement.
(ii) Approval of the capital increase, and the issuance of the corresponding shares by the company.
(iii) The publication of a pre-emptive rights notice, informing the shareholders of the company as to the capital increase and their respective pre-emptive rights to subscribe and pay their pro rata share of the new shares at a specified price. The shareholders not wishing to exercise their pre-emptive rights to subscribe and pay the new shares may expressly waive such rights at the shareholders meeting. It is common for the Subscription Agreement to include the controlling shareholders as a party. If the agreement is structured this way, typically the controlling shareholders covenant and agree to waive their respective pre-emptive rights at the Shareholders Meeting.
(iv) Granting the investor the right to subscribe and pay the new shares not subscribed and paid by the company's shareholders in accordance with the subscription agreement.
Publication of pre-emptive rights notice. The shareholders of the company will have 15 days after such publication to exercise their respective pre-emptive rights. The shareholders that did not exercise their pre-emptive rights during the subscription period, will be deemed to have waived their rights, and the corresponding new shares may be subscribed and paid by the investor at a price that is not below the subscription price.
Upon expiration of the subscription period and once all other conditions to closing in the subscription agreement have been satisfied or waived (and regulatory approvals have been obtained), the parties will consummate the closing of the transaction and the investor will subscribe and pay the available new shares at the subscription price. The Subscription Agreement may provide that the Investor will not be required to subscribe and pay for the New Shares unless they represent at least a (i) certain percentage of the Company's capital (on a fully-diluted basis), or (ii) a minimum number of shares.
Although Pipes are generally doable in Mexico, in practice they have been difficult to implement in light of the rigidity of Mexican-shareholder pre-emptive rights legislation. Specifically, the need to call shareholder meetings, and have shareholders waive their pre-emptive rights (expressly or by not subscribing shares during the pre-emptive-rights period), may lead to critical delays at a time when capital is urgently needed. If anything, the prevailing markets have shown that Mexican publicly-traded companies lack a legal framework to allow them to quickly raise equity capital. Perhaps, this topic will be addressed in the legislation that will inevitably be enacted to deal with some of the lessons learned during this crisis.