The Private Equity Outlook in Mexico

After 2021, the total volume of M&A transactions in Mexico increased by 25% to 394 deals. In addition, the total aggregate value of the transactions performed during that year showed an increase of 78% to USD19.4 billion over 2020, based on 208 transactions with disclosed consideration in accordance with information from the Transactional Track Record (TTR). In contrast, the second quarter of 2022 showed a decrease, both in total aggregate value and in the total number of transactions, in relation to the same quarter of 2021. As stated in the TTR, during the second quarter of 2022 there has been a total of 37 M&A transactions with a total aggregate value of USD2.488 billion and a total of eight private equity transactions with a total aggregate value of USD34 million.

Furthermore, according to information from the Mexican Association of PE & VC Funds (AMEXCAP), over the last 20 years, the accumulated committed capital has reached an amount higher than USD61.6 billion, which represents an annual growth rate of 12.7%. Investments have reached USD39.9 billion through 3,260 transactions. Additionally, and in accordance with the information provided by AMEXCAP, the private equity market has created more than 1.4 million job opportunities, representing almost 10% of the total job opportunities created over the last 18 years in Mexico.

After the strong recovery of the global economy in 2021, Mexico faces enormous economic challenges this year as well as the continuing challenge of the COVID-19 pandemic and the omicron variant, which keeps generating significant uncertainty in the Mexican economy.

While the remedial actions taken by the Mexican government were not those expected by the private sector, they allowed and are still allowing for the private equity M&A transactional market in Mexico to continue to grow. Although it has not done so at the expected rate, the sector has continued to yield positive results.

Furthermore, the amendment to the Federal Labour Law (Ley Federal del Trabajo) has implemented further restrictions on the rendering of outsourcing services. These have resulted in many mergers between companies of the same corporate group, to merge the in-sourcing companies and avoid a breach of the new prohibitions set forth because of the amendment to the Federal Labour Law.

Notable Transactions

As previously stated, there has continued to be an increase in private equity M&A transactions, which have achieved a higher rate than in previous years.

As an example, the Ontario Teachers’ Pension Plan (OTPP), a Toronto-based pension fund, and CPP Investments, a subsidiary of CPPIB - Canada Pension Plan Investment Board, closed the acquisition of an additional 9.5% in Mexico-based Ideal from the Slim family. According to the information disclosed, the acquisition value was MXN12.22 billion.

Another notable transaction was the merger of Televisa and Univision. According to information from the TTR, Televisa, a Mexico City-based Spanish-speaking audio-visual media and content company, completed the merger of its media and content business unit with US-based Univision, to create TelevisaUnivision, the largest Spanish-speaking media company in the world. The deal value was USD4.8 billion.

Another important transaction was the acquisition developed by SWVL. According to information SWVL, a Dubai-based company engaged in operating buses on fixed routes and allowing customers to book and pay for them using an app acquired Mexico-based Urbvan for USD82 million. The identity of the seller was not disclosed. Urbvan, based in Mexico City, is engaged in operating a mobile app that offers a daily commute transportation system. Following the deal, Urbvan will seek to expand to other markets.

Key Sectors and Industries

Finally, the industries that have maintained a higher activity rate during 2022 are the internet, software and IT services, with 25 transactions and an increase of 32%, real estate with 23 transactions with an increase of 92%, banking and investment with 20 transactions and a decrease of 20%, industry-specific software with 16 transactions and a decrease of 36%; all of them relative to the same period in 2021.

Furthermore, the sectors with the most deals at the end of 2021 were the technology industry, with 113 transactions and a change of 79% relative to the same period for 2020, and the financial and insurance industry, with 105 transactions and an increase of 62%, the internet industry, with 44 transactions and an increase of 5% and the distribution and retail industry with 45 transactions and an increase of 181%, all of them relative to the same period in 2020.

The foregoing shows, as stated before, that there has been an improvement in Mexico’s economy, and in contrast, the internet, software and IT services technology closed 2021 with a total of 48 transactions while the real estate industry closed with 37 transactions, numbers that are close to the number of transactions for those industries during the second quarter of 2022.

As mentioned in 1.1 M&A Transactions and Deals, the internet, software and IT services industry as well as the real estate industry have been the most active regarding M&A transactions during 2022. Furthermore, venture capital in Mexico during the second quarter of 2022 had a total aggregate value of approximately USD1.699 billion and the total number of transactions was 84, which represents a decrease of 14.35% and an increase of 9.09% respectively, relative to the same period in the previous year.

Some of the most relevant legal developments include, as mentioned in 1.1 M&A Transactions and Deals, the amendment to the Federal Labour Law which has increased the regulation of outsourcing, introducing a general prohibition for the rendering of outsourcing services except where certain criteria are fulfilled by the parties. Thus, an increase in M&A transactions will probably be seen in Mexico which will not necessarily raise much capital, as they will be performed for the Mexican holding companies to merge with their in-sourcing companies.

Another important legal development in Mexico arises from the amendment made by the Mexican Stock Exchange (Bolsa Mexicana de Valores – BMV) in 2017 to its internal regulation, to allow special purpose acquisition companies (SPACs) to be listed and operate in accordance with their traditional legal structure. Regardless, these special-purpose acquisition companies have yet to be broadly used in Mexico as, to date, there have been only two precedents. The first one is the SPAC incorporated by Vista Oil & Gas in 2017, which raised a total of USD650 million and had as its purpose the acquisition of companies from the energy industry in Mexico, Colombia, Argentina, and Brazil. The second one is Promecap Acquisition Company, which had as its target investment in family companies, private equities, and public companies. This is the only SPAC that, to date, has successfully merged with another company, which was Acosta Verde, a company of which the main activity is the operation and management of shopping malls in Mexico, for a total amount of approximately USD200 million. Furthermore, interest in this vehicle has been increasing, as investors are starting to consider SPACs as an attractive alternative to traditional initial public offerings (IPOs), not least because they allow for younger companies to become publicly listed, avoiding long and highly expensive procedures.

Additionally, other Mexican companies such as Betterware have merged with SPACs but in other stock exchanges outside of Mexico. In the case of Betterware, the company merged with DD3 Mex Acquisition Corp, an affiliate of DD3 Capital Partners, and became the first Mexican company to be listed on the NASDAQ Stock Exchange.

In this regard and up to this date (September 2022), there is still no further regulation of the operation of SPACs, thus, the exception introduced to the internal regulation of the BMV has been used, and the procedures – as well as certain legal requirements for SPACs– been adapted, to bring security to investors. As such, there will probably be amendments or further legal provisions issued by the Mexican Financial Authorities to regulate these vehicles more precisely.

Furthermore, other publicly listed vehicles, such as fiduciary certificates of capital development (certificados bursátiles de capital de desarrollo – CKDs) and fiduciary investment project securitisation certificates (certificados bursátiles fiduciarios de proyectos de inversión – CERPIs), have greatly increased their presence in the Mexican financial markets.

Primary Financial Regulators

The primary financial regulators for private equity funds and transactions under Mexican law include:

• the Mexican Central Bank (Banco de México);
• the Ministry of Finance (Secretaría de Hacienda y Crédito Público);
• the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores – CNBV).
• the National Commission for the Protection and Defence of the Users of Financial Services (Comisión Nacional para la Protección y Defensa de los Usuarios de Servicios Financieros).
• the Retirement Fund System Commission (Comisión Nacional del Sistema de Ahorro para el Retiro); and
• the Institute for the Protection of Bank Savings (Instituto para la Protección al Ahorro Bancario).

Sector-Specific Financial Regulators

Mexican law does not provide specific regulation for M&A activities, per se. However, much will depend on the type of structure that each M&A transaction is intended to carry out. The following regulators may apply, among others:

• the Federal Economic Competition Commission (Comisión Federal de Competencia Económica – COFECE);
• the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones – IFT);
• the National Commission on Foreign Investment (Comisión Nacional de Inversiones Extranjeras – CNIE);
• the CNBV;
• the Consumer Protector Agency (Procuraduria Federal del Consumidor);
• the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales);
• the Ministry of Labour and Welfare (Secretaría del Trabajo y Previsión Social);
• the Ministry of Energy (Secretaría de Energía);
• the Ministry of Health (Secretaría de Salud);
• the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos);
• Local or Federal Labour Boards (Junta Local o Federal de Conciliación y Arbitraje);
• the Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial);
• the Federal Commission for Protection against Sanitary Risk (Comisión Federal para la Protección contra Riesgos Sanitarios); and
• the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social – IMSS).

Foreign Investment

Over the years, Mexico has become an important party to foreign investment in most economic sectors and, as such, has been advancing its foreign investment framework. In general terms, foreign investments are regulated by the Foreign Investment Law (Ley de Inversión Extranjera – LIE) and its regulations. As per the LIE, and as a rule, foreign investments in Mexico should be reported to the Foreign Investment Registry (Registro Nacional de Inversiones Extranjeras), which is a governmental registry that keeps a record of the Mexican entities operating in Mexico with foreign shareholders and capital.

The LIE provides the following definition of foreign investment:

• the participation of foreign investors, in any proportion, in the capital stock of Mexican corporations.
• investment carried out by Mexican corporations which have a majority of foreign capital; and
• the participation of foreign investors in the activities and sectors contemplated in the LIE.

In addition, pursuant to Article 7 of the LIE, there are sectors in which the percentage of foreign investment is legally regulated and limited, as follows:

• Up to 10% in co-operative production associations.
• Up to 25% in local air transportation.
• Up to 49% in:
1. factoring corporations;
2. leasing corporations;
3. currency exchange houses;
4. insurance and bonding corporations;
5. investment funds (not private equity corporations);
6. port administration;
7. cable TV, basic telephone services, and newspapers; and
8. corporations involved in the manufacturing and sale of firearms and explosives.

In addition, the above-mentioned restrictions on foreign investment as outlined in the LIE must not be exceeded indirectly or directly through other agreements or trusts, nor through indirect foreign participation.

Furthermore, special authorisation from the CNIE is needed when a foreign investment will exceed 49% in:

• telephone-cellular services.
• shipping corporations; and
• air terminals.

Antitrust

Antitrust matters are regulated under the Federal Economic Competition Law (Ley Federal de Competencia Económica – LFCE) and its regulations. Antitrust regulators, the COFECE and the IFT have the authority to clear transactions that exceed any of the thresholds provided in the LFCE. It should be noted that a transaction will not have legal effect until it is authorised.

The LFCE provides exemptions to the pre-merger notice requirement, under specific circumstances – for instance, when the transaction is a corporate restructure or if it implies the incorporation of a trust whereby an economic agent transfers its assets, stock, etc, without the purpose or necessary consequence of transferring them to a company other than the trustor and the fiduciary institution.

Anti-bribery

In general terms, anti-bribery and sanctions are regulated by the General Law of Administrative Responsibilities (Ley General de Responsabilidades Administrativas – LGRA), which includes determining the mechanisms for the prevention, correction, and investigation of administrative responsibilities. Entities may be sanctioned under the terms of the LGRA when acts related to serious administrative offences are carried out by individuals acting in their own name or on behalf of the legal entity, and who intend to obtain by means of such conduct benefits for said legal entity.

ESG

In recent years Mexico has seen a significant regulatory trend for the incorporation of environmental, social, and corporate governance (ESG) criteria to regulate the impact of business activities.

International ESG developments

UN Sustainable Development Cooperation Framework

At an international level, Mexico was an active participant in the 2030 Agenda for Sustainable Development. In this respect Mexico has implemented a National Committee for 2030 and in 2002 signed the UN Sustainable Development Cooperation Framework of Mexico 2020–2025 (UNSDCF), which has as one of its four priorities the need to move towards an inclusive and sustainable economic model, which, on the one hand, promotes climate change mitigation and, on the other , strengthens adaptation and resilience to the effects of climate variability and change, especially for the most vulnerable population groups and territories.

United States-Mexico-Canada Agreement (USMCA)

The signing of the USMCA created a need for Mexico to comply with diverse dispositions in international and national regulation including labour and employment rights, anti-corruption, and environmental co-operation.

Domestic ESG developments

There have been efforts to implement internal regulations; some of these are advancing slowly, and others are in the process of being discussed, as follows.

Gender balance on boards of directors

A last paragraph is to be added to Article 143 of the General Law of Commercial Companies and the first paragraph of Article 24 of the Securities Market Law is to be amended to achieve greater participation of women on boards of directors, preventing the loss of talent, in favour of a fairer and more inclusive society. This remains merely an initiative.

General Corporate Responsibility and Corporate Due Diligence Law Initiative

Born as a result of the “General Recommendation No 37” on the Respect and Observance of Human Rights in the Activities of Businesses issued by the National Human Rights Commission in May 2019, Article 25 paragraph four of the Political Constitution of the United Mexican States addresses fundamental issues such as:

• the creation of a registry on corporate responsibility in order to oversee compliance with human rights and corporate social responsibility obligations;
• arbitration and mediation as mechanisms to settle disputes on the matter;
• risk prevention through the implementation of control and compliance mechanisms on human rights;
• corporate social responsibility as an efficient mechanism for control and mitigation of damages; and
• establishing a mixed sanctioning regime that incorporates fines and administrative warnings.

Ethics codes

A Section XIV and a second paragraph to Article 6 of the General Law of Mercantile Corporations have been added. These establish the need to incorporate a code of ethics, complementary and non-limiting, as a requirement of the incorporation of a legal entity.

Circular Economy General Law Initiative

This establishes the concept of “circular economy” defining it as the “system of production, distribution and consumption of goods and services, oriented to the redesign and reincorporation of products and services to maintain in the economy the value and useful life of the products, materials, and resources associated with them as long as possible, and to prevent or minimise the generation of waste, reincorporating them again in cyclical or biological production processes, in addition to promoting changes in production and consumption habits”.

The main obligors in such initiative are those who manufacture, elaborate, produce and distribute electronic devices in national territory, which at the end of their useful life become waste, establishing the express obligation to comply with the Mexican Official Standards in accordance with the provisions of the General Law for the Prevention and Integral Management of Waste and its Regulations.

Federal Law for the Protection of the Cultural Heritage of Indigenous and Afro-Mexican Peoples and Communities

This law incorporates a completely new regime of sanctions on those companies that commit acts constituting cultural appropriation, understood as the illegitimate use, without (i) payment of any consideration or (ii) authorisation, of the of designs of indigenous communities in commercial products.

In Mexico, legal due diligence exercises for private corporations are typically carried out on a broad basis, to avoid any present or future contingencies and liabilities. However, much will depend on the target entity, the type of activities it carries out, or the sector or industry of that target entity, and the legal due diligence will generally cover the following:

• organisational and corporate documentation;
• accounting and financial records;
• bank accounts and loans;
• insurance and bonds;
• tax filings and documents;
• labour and social security;
• occupational health and safety matters;
• real estate and environmental safety;
• land, buildings, and improvements;
• machinery, equipment, and other items of personal or movable property owned or leased by the corporation;
• a maquila (a foreign-owned factory);
• patents, trade marks, transfers of technology, and copyrights;
• data protection and privacy;
• immigration;
• regulatory compliance; and
• other matters related to the nature of the corporation.

However, legal due diligence for publicly traded corporations is commonly limited to publicly available information, due to the standard confidentiality provisions.

Vendor due diligence is a common feature that provides full disclosure to potential investors, allowing vendors to maintain even greater control throughout the due diligence process, whilst paying close attention to any potential hidden defects or environmental matters, specifically pertaining to the real estate sector. On a more general level, activities carried out in Mexico must comply with the necessary governmental licences and authorisations and are subject to any potential remediation action.

Advisers may issue a legal opinion that provides credibility to the private equity transaction, based on the documents reviewed and applicable law, which further speeds up the sale process.

Acquisitions by private equity funds are typically initiated through an initial deal evaluation by the buyer. Consequently, the buyer will approach the seller with an initial negotiation, most likely a year or less before an investment is agreed upon, and where assurances will be made regarding the intention of the buyer.

Consequently, if both parties agree, a broad legal due diligence process (as detailed in 4.1 General Information) will be carried out, to avoid any present or future contingencies or liabilities. The scope of the legal due diligence process will depend on the activities the potential private equity seller carries out, including the market sector to which it belongs, financials, and corporate matters.

Once the legal due diligence process is carried out, final negotiations between the parties are common, where final terms and conditions are agreed upon and the parties may then proceed to the signing of the legal documentation.

In Mexico, purchase agreements or subscription agreements of private equity transactions are common practice. It is important to consider that private equity transactions in Mexico are subject to both commercial and financial law.

Private equity-backed buyers generally carry out their acquisitions by means of special-purpose vehicles (SPVs), which in many cases include limited partnerships, structured equity securities (CKDs), trusts, or private entities.  In rare cases, the private equity-backed buyer participates directly in the acquisition documentation.

Private equity deals are generally straightforward. In practice, most deals are financed through capital contributions by way of a shareholders’ meeting of the target corporation, and the buyer will concurrently enter into a shareholders’ agreement with the target corporation, which sets forth the terms and conditions.

In Mexico, equity commitment letters may be used to provide certainty of funds from a private equity-backed buyer. Furthermore, most private equity deals in Mexico are commonly owned by a private equity fund and management executives.

Deals involving a consortium of private equity sponsors are allowed but are not common. In most cases, a single private equity firm will carry out the transaction.

Co-investment by other investors alongside the private equity fund is common. Furthermore, such investments are commonly passive stakes that, by their nature, do not allow for voting rights in investment decisions.

Consideration structures will vary on a case-by-case basis, considering the size of the transaction, the investor profiles, and the current market conditions.

Earn-out provisions are common since they encourage an owner to remain active in their business for a specific period. This allows the private equity firm to purchase at a lower price and the owner to generate considerable revenue if the target corporation achieves a certain level of performance.

It is common for a seller to provide representations and warranties regarding their corporate purpose, liquidation procedures, spin-offs, insolvency events, bankruptcy or corporate restructuring, or any other representation or warranty that may provide further comfort to the buyer, as well as legal certainty, that may affect the private equity transaction in any way. In certain cases, bonds or personal guarantees may be granted in favour of a buyer, to provide further assurances.

The buyer will generally provide documentation regarding incorporation documents, powers of attorney, its intent on utilising the committed capital, and assurance that it has no knowledge of any actions, claims, or procedures by any court, government agency, or arbitrator affecting the legality, validity or enforceability of the pertinent private equity documents. In general, the buyer will provide assurances to the seller in connection with the origin of the funds that will be used for the acquisition, and its track record.

The charging of interest on leakage in locked-box consideration structures will vary on a case-by-case basis. Leakage clauses, by their very nature, provide legal certainty and protection on a locked-box (or fixed-price) consideration in private equity transactions. Other than permitted leakage, which is agreed upon by the parties in a private equity transaction, those parties may establish an interest rate charge if a leakage occurs, upon mutual consent.

Dispute resolution mechanisms will usually be agreed upon by the parties in a private equity transaction if leakage takes place. The parties will also, upon mutual consent, come to a consensus as to what constitutes leakage and, as previously mentioned, permitted leakage. Generally, these types of transactions will include an arbitration clause, as explained in 6.11 Commonly Litigated Provisions.

It is common to include a typical level of conditionality, such as the condition for closing, but such conditions tend to vary, depending on the size of the private equity transaction. Furthermore, market conditions and investor profiles tend to set the pace for certain levels of conditionality, alongside obtaining the necessary approvals from the COFECE, including third-party consents such as key contractual counterparties.

Material adverse change/effect provisions are common in private equity transactions, particularly when financing is involved, as they influence fund certainty directly. They allow for each party to notify the other in cases of financial stability, insolvency events, and disruption of services, among others.

It is common for a buyer to accept a “hell-or-high-water” clause in Mexico.

Moreover, these types of clauses are generally aimed at buyers who are assuming all risk on antitrust matters in a private equity transaction. However, if the deal raises concerns, it is common for the commitments offered to the authority to be previously agreed upon by the parties.

Break fees are allowed and commonly used in Mexico and have no legal limits.  Reverse break fees are allowed but are rarely employed.

In private equity transactions, the parties will generally agree upon mutual terms to terminate the acquisition agreement if the private equity seller or buyer refuses to carry out the actions necessary for the fulfilment of their obligations, or if the corresponding party fails to make payments of committed capital, notwithstanding the obligation of the investor to pay the non-compliance penalty usually set forth in the acquisition agreement.

The return on investment in a private equity transaction is uncertain by nature. Furthermore, the seller and buyer must commit fully to the nature of the investments carried out and the risks they entail, which even exist when decision-making is based on prudent criteria and best corporate practices by the seller. Both parties in a transaction will expressly accept that the return on investment cannot be guaranteed under any circumstances. In any case, the allocation of risk does not change according to the nature of the buyer or seller, except in very specific cases.

The main limitations on liability for the seller usually include limitations for indemnity clauses, a cap for damages and certain thresholds – this is to limit any potential liability for the seller that may emerge from their corresponding representations and warranties.

As the buyer will become the owner of the target corporation, it is common for the buyer to request the following warranties from the seller:

• that the target corporation is duly incorporated as per Mexican law;
• that the target corporation possesses all the permits, licences or governmental authorisations, necessary to carry out its daily activities and transactions;
• that the premises or facilities (if the target corporation owns any) comply with applicable environmental regulations;
• that there are no actions, claims, or proceedings initiated against the target corporation; and
• that the target corporation has complied with all the necessary corporate authorisations for the buyer to invest or acquire shares thereto.

Additionally, it should be noted that the seller is bound to comply with all the warranties that it provides to the buyer and will be liable to pay damages and losses that any default may cause the buyer. However, it is common to establish a penalty clause that will limit the responsibility of the seller in the event of default of any of the provided warranties; the amount established in the penalty clause is often the amount of the transaction (acquisition of the shares or the amount of the investment).

It is also important to note that the management team does not provide any direct warranties to the buyer since the seller shall guarantee that the management team can carry out the daily activities and management of the target corporation. Moreover, under Mexican law, the management team is directly responsible for certain actions that they carry out in the target corporation.

Finally, if the limitation of liability is not contemplated, the seller will be liable for any damages and losses that it may cause the buyer, which will have to be proven to a competent judge in a court procedure, and the competent court by its own discretion will establish an amount for any such losses and damages.

In most cases, both the seller and the management team will provide indemnities for the buyer.  In some cases, personal guarantees are included to entice the buyer. Warranty and indemnity (W&I) insurance is not common in Mexico. However, it is common to have an escrow or retention in place to back the obligations of a seller; this can be used if the parties agree.

In Mexico, litigation is not common in private equity transactions. More often, disputes between the parties will be settled via arbitration or mediation, or some other form of conciliation.

Bodies such as the International Chamber of Commerce (Cámara de Comercio Internacional), the Mexican Arbitration Association (Centro de Arbitraje de México), and the American Arbitration Association are the preferred entities to rule on arbitration.

Public-to-privates are not common in private equity transactions.  To provide context, there are approximately 145 public companies listed in the BMV and the Institutional Stock Exchange (Bolsa Institucional de Valores – BIVA), all of which have a high shareholder concentration and are not open to being sold.

As discussed in 7.3 Mandatory Offer Thresholds, material shareholding disclosure thresholds must be set for publicly listed corporations, as per Article 98 of the Ley del Mercado de Valores (LMV). This does not apply to private corporations.

Furthermore, as per Articles 109, 110, and 111 of the LMV, publicly listed corporations should make the following information public:

• the person or group of persons who acquire ordinary shares of a corporation registered in the National Securities Registry (Registro Nacional de Valores – RNV), directly or indirectly, inside or outside a stock exchange, through one or more transactions of any nature, simultaneous or successive, that result in a shareholding equal to or greater than 10% and less than 30% of those shares;
• persons related to a corporation whose shares represent the capital stock registered in the RNV, who directly or indirectly increase or decrease their participation in that capital by 5%; and
• the person or group of persons who directly or indirectly holds 10% or more of the target’s capital stock.

The foregoing does not apply to private entities, and there are no disclosure thresholds under Mexican law.

Under Article 98 of the LMV, a mandatory offer must be made if a person or group of persons intends to acquire or achieve by any means, directly or indirectly, the ownership of 30% or more of the common shares of a corporation registered in the RNV, inside or outside a stock exchange, by one transaction or several successive transactions; that entity will be obliged to carry out the acquisition by means of a public offer, as set forth in Article 97 of the LMV, and in accordance with the following.

• The offer must include the different types of classes/series of the target’s shares, including those with limited, restricted, or non-voting rights.
• The consideration offered must be equal, regardless of the class or series of the target’s shares.
• The offer must be made:
1. for the percentage of the target’s capital stock that is equivalent to the portion of ordinary shares that are intended to be acquired, or for 10% of that capital, whichever is higher; or
2. for 100% of the capital stock when the bidder intends to obtain control of the company.
• The offer must indicate the maximum and the minimum number of shares to be acquired.

The LMV does not currently provide for a specific type of consideration, but cash is more commonly used for the target shareholders in the acquisition processes for both public and private corporations.

Shares, negotiable instruments or cash with the option to re-invest all or a portion of the cash proceeds in other securities may also be offered as consideration.

As previously mentioned, Article 98 of the LMV provides that the consideration offered must be equal, regardless of the class or series of the target’s shares.

It is important to consider that a minimum level of consideration is not required under Mexican law, although the CNBV may issue an opinion regarding the fairness of the consideration.

The regulators allow offer conditions, which are necessary in certain specific situations. In some instances, as previously explained, an approval from the COFECE is necessary to close an acquisition, so the parties include a condition that requires the authorisation from the COFECE, otherwise, the transaction will be retroactively voided. Conditions that require the bidder to obtain financing are not common but have occurred in the past, and the regulators will not restrict the use of such a condition. Other security measures include break fees (as previously explained), and rights of first refusal.

The bidder may seek control of the board of directors or another governing body in an entity. Furthermore, in the case of investment promotion in limited liability stock companies, all the governance rights may be carried in a minority stake (such as appointing members of the board and voting on day-to-day matters, among others). Squeeze-outs are not common and, as provided in 8.5 Minority Protection for Manager Shareholders, are prevented by minority rights set forth in the applicable laws.

Irrevocable commitments are uncommon in Mexico. When they are used, there are generally outs available for the seller if they receive a better offer. Generally, the irrevocable commitment ends over time.

Hostile takeovers are permitted under Mexican law, mainly the LMV.

However, it is important to consider that the relatively low number of public corporations mixed with a high shareholder concentration tends to discourage hostile takeovers in Mexico, which are uncommon, with just two attempts at hostile takeovers having been made in the past.

In 2015, the Mexican Supreme Court ruled that any provisions in the company by-laws aimed at deterring or limiting hostile takeovers must be in accordance with Article 48 of the LMV in order to be valid. This is almost always the case in Mexican publicly traded corporations.        

Equity incentivisation of the management team is common in certain transactions and is generally permitted under Mexican law – this includes equity from public entities (to the extent that the terms set forth in Article 8 of the LMV are followed).

The level of equity ownership varies, depending on the private equity transaction. There is no predetermined amount used as a reference.

Mexican transactions of this nature vary from case to case; in some cases, management may receive ordinary equity, in other cases, preferred equity, and in still other cases, cash considerations.

The typical leaver provisions are aimed at maintaining the services of management shareholders, who by their nature are key employees. The scope of leaver provisions is focused on retaining the original management team to maximise the target corporation’s growth from the start of the private equity transaction.

The typical vesting provisions are aimed at protecting management shareholders from any contingencies and liabilities that may arise from the relationship between a buyer and seller from the very beginning of the transaction.

In Mexico, common restrictive covenants agreed to by management shareholders include non-compete and non-solicitation undertakings. The limits of enforceability will generally be mutually agreed upon between the parties.

The General Corporations Law (Ley General de Sociedades Mercantiles – LGSM) and the LMV provide minority rights that must be included in a limited liability stock corporation and an investment promotion limited liability investment corporation.

Limited-Liability Stock Corporation (Sociedad Anónima)

In a limited-liability stock corporation, the following applies:

• minority shareholders that own at least 25% of a company’s capital stock have the right to name a member of the board, as provided in the LGSM;
• minority shareholders that own at least 10% of the company’s outstanding shares have the right to name a statutory auditor, as provided in the LGSM;
• minority shareholders that own at least 33% of the company’s outstanding shares may call a shareholders’ meeting over the matters they have voting rights on, as provided in the LGSM;
• minority shareholders that own at least 33% of the company’s outstanding shares may file suits directly against board members for violations of fiduciary duties owed to the company, as provided in the LGSM; and
• minority shareholders that own at least 20% of the company’s outstanding shares may oppose any shareholders’ resolution, as provided in the LGSM.

Investment Promotion Limited-Liability Investment Corporation (Sociedad Anónima Promotora de Inversión – SAPI)

In an investment promotion limited-liability investment corporation, the following applies:

• minority shareholders that own at least 10% of a company’s capital stock have the right to name a member of the board, as provided in the LMV;
• minority shareholders that own at least 10% of the company’s outstanding shares have the right to name a statutory auditor, as provided in the LMV;
• minority shareholders that own at least 10% of the company’s outstanding shares may call a shareholders’ meeting over the matters they have voting rights on, as provided in the LMV;
• minority shareholders that own at least 15% of the company’s outstanding shares may file suits directly against board members for violations of fiduciary duties owed to the company, as provided in the LMV; and
• minority shareholders that own at least 20% of the company’s outstanding shares may oppose any shareholders’ resolution, as provided in the LMV.

Management may not veto any decisions where minority shareholders have voting rights. Management teams may have the right to control or influence the exit of a private equity fund, but in many cases, they will require the prior approval of the shareholders’ meeting.

Typically, private equity funds will require the capacity to carry out the day-to-day operations of a portfolio company. However, the LGSM requires certain percentages of votes for decisions that may affect or alter the corporate by-laws of the company, so the other shareholders will have to vote on resolutions in that regard.  Finally, in some instances, a threshold for specific amounts is set; if any actions over a predetermined amount are to be taken, a vote by all shareholders will be required.

The only circumstance in which a shareholder could be liable for its actions in a company, and where the piercing of the corporate veil could occur, is if a corporation is used with the sole intent of defrauding third parties or circumventing the law. Any such action will be a misuse of a legal entity, so the issue would need to examine the core of the corporation in order to locate the author of such actions (which would be a shareholder or officer of the company).

The private equity fund shareholder typically imposes its compliance policies on the portfolio companies, especially if the private equity fund requires those compliance policies to be followed in order to achieve its overall objectives.

In Mexico, private equity transactions are usually long-term. The parties in a private equity transaction will usually agree upon the investment holding period, which can range from three or five years up to ten years. Furthermore, it is common practice to establish clauses allowing the extension of the holding period for up to two additional years.

The most common form of private equity exit is the sale of the target corporation to other funds or investors. IPO exits are not common in Mexico. Furthermore, private equity sellers may choose to reinvest upon exit, which will often be based upon current market conditions and seller liquidity.

Under Mexican law, drag-along right clauses (derecho de arrastre) may only be enforced in equity arrangements if such a provision is present in the targets’ by-laws; otherwise, as per Mexican law, there is no legal action to force minority shareholders into selling their shares.

Drag-along rights are common in Mexico, dating back to before the enactment of the LMV in 2006. Nowadays, under the SAPI regime, it is possible to enforce compliance with drag-along rights, since Mexican law provides for additional exceptions to the free circulation of shares. However, the opposition to buying or selling would necessarily have to go through a judicial process.

Conceptually, tag-along right clauses (derecho de acompañamiento) are aimed at protecting the interests of minority shareholders, enabling them to join a transaction under the same conditions as a majority shareholder. If the private equity fund shareholders (acting as majority shareholders) sell a stake, the management shareholders (acting as minority shareholders) will enjoy tag-along rights, if that provision exists in the target’s by-laws.

As per Mexican law, there is currently no tag-along threshold, but parties may choose to include a certain threshold in the target’s by-laws.

Exit by way of an IPO is not a common practice in Mexico. In this regard, lock-ups are not commonly enforced on investors.

Although not common practice in Mexico, relationship agreements may be entered into between the private equity seller and the target company.