Private Equity 2024 Comparisons

So far, 2024 has been a good year for private equity transactions generally, and for certain sectors specifically. There has been an increase in both the number of transactions, as well as their size. The increase is a consequence of certain funds’ exits, mainly due to the lapse of time of their initial investment, and other funds taking on opportunities that result from a stable economy and emerging sectors. Some of the sectors that have seen more activity are technology, healthcare and consumer goods, due to the rise of e-commerce and fintech, and the fact that M&A activity is driven by the pursuit of operational efficiencies and the expansion of service offerings, given that, investors are generally looking for digital solutions and long-term sustainable practices.

Other relevant trends include a tighter and stricter approach to valuation. With the increase in interest rates and money being more expensive, funds are looking harder and with a higher degree of scrutiny at new investments. Additionally, Mexico has always benefited from its geopolitical position next to the United States, generally allowing for a continuous increase in cross-border economic activity and, thus, an ongoing trend for private equity transactions – nowadays, specifically, in respect of real estate transactions resulting from the nearshoring phenomenon. Albeit at a minor level, European and Middle Eastern private equity funds are increasingly looking into a variety of investment opportunities in Mexico. Finally, private equity funds seem to be focusing on versatile businesses that can adapt to any fast-changing industries and environments and that strive to apply principles of sustainability.

As discussed above, in Mexico in 2024, the sectors where private equity has been more active are:

• technology – as a result of the constant search for digital solutions and innovation;
• healthcare – due to the growing demand for healthcare services and recent reforms in Mexico’s healthcare system, including changes to public and private healthcare regulations; and
• consumer goods – partly as a consequence of the backend of the recovery from the pandemic. 

Also as discussed before, higher interest rates and money being more expensive result in higher financing costs for private equity funds, which translate into more detailed, stricter assessment of potential targets and investments. To try to avoid minimising or limiting the size of the investment from a cash perspective, private equity funds try to find creative ways to structure transactions, including by negotiating earn-outs and other performance-based incentives.

Macroeconomic conditions, such as inflation and the volatile Mexican peso/US dollar exchange rate, have also contributed to private equity funds adopting a more cautious approach when evaluating investments and taking a harder look at opportunities. Another factor driving the cautious approach is geopolitical events. Both the United States and Mexico are in the midst of contentious and high-profile presidential elections and changes in government, creating uncertainty as to how the new presidents in each country will handle foreign investment control, monetary policy and other regulatory matters, resulting in a cautious approach to new transactions.

While these represent challenges for new investments, private equity activity in Mexico has continued to increase.

Mexico has passed several reforms over recent years, including changes to the prior energy reform, labour laws, tax laws and an increased regulatory framework in respect of anti-money laundering, counter-terrorism financing and data privacy protection laws. As a result of these reforms, when evaluating and negotiating investments, private equity funds have to conduct a more expansive and extensive due diligence process to account for deliverables, third-party consents (including from certain government authorities) and potential contingencies deriving from foregoing changes in the law. As these relate to private equity portfolio companies, many of these changes in the law require each entity to incorporate new internal and external policies (ie, anti-money laundering policies, ESG programmes and data privacy notices) and, in certain cases, such as in respect of labour reform, to conduct internal restructurings (ie, employee hire schemes).

Furthermore, the transition made in 2020, by replacing the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA), continues to impact the economy, increasing opportunities, growth, and business prospects.

In conducting transactions, certain consent requirements or pre-closing remedial actions can be time-consuming and extend the negotiation process, thus increasing the cost, both from a time and fees perspective.

Key Regulators

Prior to engaging in any M&A transaction, the parties must evaluate whether any government approvals are required, specifically, the approval of the Federal Antitrust Commission (Comisión Federal de Competencia Económica – COFECE) or the National Commission of Foreign Investment (Comisión Nacional de Inversiones Extranjeras – CNIE). In addition to the foregoing, there are instances where authorisation from the Ministry of Economy (Secretaría de Hacienda y Crédito Público – SHCP) or the Mexican Securities and Exchange Commission (Comisión Nacional Bancaria y de Valores – CNBV) is required. Additional authorisations could be required, but these are more specific to a particular transaction in a specialised sector – for example, authorisation by the Ministry of Infrastructure, Communications and Transportation (Secretaría de Infraestructura, Comunicaciones y Transportes – SICT) in respect of telecommunications transactions.

In respect of COFECE approval, this would be required if the transaction and/or the agents involved (including the private equity fund, directly and indirectly) satisfy one of three statutory thresholds, these being the value of the transaction, the assets of either one of the agents in Mexico, and the combined assets of all agents involved. Also, COFECE has issued non-binding guidelines in respect of non-compete arrangements which it could also use to comment on a transaction. Provisions regarding the filing with COFECE and the ability of the parties to exit a transaction based on conditions imposed by COFECE are heavily negotiated.

As it relates to foreign investment controls, the notice or consent requirement varies depending on the industry where the direct or indirect investment is being conducted and the percentage of the investment (ie, there are activities that are reserved exclusively for Mexican nationals, or entities 100% controlled by Mexican investment, and others for which the percentage that foreign investment may hold is limited). In recent years, foreign investment controls have become stricter, specifically in more sensitive sectors (ie, aerial passenger and cargo transportation) in an effort to protect national interests and sovereignty.

National Security

In respect of national security, scrutiny comes through the diverse government agencies whose consent is required, namely the National Commission of Foreign Investment (CNIE). While foreign investment is not a specific national security matter, scrutiny of a foreign national would start with this organism. It is important to note that while the law does not necessarily differentiate between private foreign investment and state-backed investment, the latter naturally undergoes a higher degree of scrutiny.

EU FSR Regime

The EU FSR Regime is not really applicable in Mexico. This regime could be related to a transaction in Mexico to the extent that a private equity fund from a European jurisdiction is participating. Here, the burden would be on such participant to comply with the additional scrutiny in Europe. At this point, this is not likely to be of material relevance to the private equity sector in Mexico.

Anti-bribery, ESG – Recent Developments

While not a specific development, over the last 12 months more anti-bribery investigations have been conducted and it appears that the related laws are being and will be more strictly applied and enforced. This, in addition to the more comprehensive due diligence process, is resulting in private equity portfolio companies having to implement and enforce harsher and stricter compliance policies, as well as compliance by all members of the company.

ESG is a trending topic worldwide and Mexico is no exception. Both government authorities and the market in general are scrutinising investments, issuances and day-to-day operations to consider ESG practices. Private equity is no exception to the foregoing, and investments are being scrutinised to ensure that they include an ESG component.

Generally, investors ask for a full and extensive due diligence review with a view to producing a red flag report (ie, highlighting key findings in respect of items requiring either some action or special consideration and identified contingencies). However, there are instances where investors require a full due diligence report which includes full descriptions of all legal aspects of a target company, including templates identifying the main provisions of diverse legal documents executed by the target.

Due diligence is not limited to reviewing documents. It comprises other activities, such as available public independent searches (ie, public registries), site visits, management presentations conducted by the target, and Q&A processes with relevant officers of the target.

As mentioned before, a legal due diligence is a comprehensive process as it focuses on all relevant areas; however, focus and detailed review may vary based on the industry and operations conducted by the target.

Key Areas Covered by Standard Legal Due Diligence

The following are the key areas covered by a standard legal due diligence in Mexico:

• corporate;
• material agreements;
• real estate matters;
• financing matters;
• environmental and other regulatory matters;
• labour and employment matters;
• intellectual property;
• compliance (including anti-bribery and anti-money laundering);
• litigation;
• tax matters;
• data privacy; and
• insurance.

Additionally, in Mexico, the use of representations and warranties (R&W) insurance is less common than in other jurisdictions. While some players are currently making an effort to implement it, the number of exceptions and exclusions for Mexico result in lower use of the product. Consequently, the legal due diligence report becomes not only a key element for understanding the target’s business and deciding whether to move forward with the proposed transaction, but also plays a fundamental role in negotiating the underlying M&A agreement. This is particularly relevant with respect to representations and warranties, and indemnification clauses.

Vendor due diligence has proved to be a valuable resource for conducting due diligence processes in the context of a bid; however, this trend and market practice is mainly used in the context of European-led bidding processes and is hardly implemented in Mexico. When using a vendor due diligence report, it is likely that sellers will have to provide reliance and even representations as to the accuracy, completeness and correctness of the vendor due diligence, opening the door to additional indemnification risk for the sellers/target.

In Mexico, advisers are required to put together a vendor due diligence report mainly in the context of cross-border due diligence processes where a local subsidiary is being sold as part of a global transaction, for which the sell-side has implemented a vendor due diligence.

However, it is not uncommon for legal advisers to take a leading role in advising in the context of an auction sale. In such cases, they typically conduct a focused and limited review of the most relevant aspects of the target’s business, without performing full vendor due diligence reports. The aim of this is to assist the target’s management and/or officers in navigating the legal due diligence process effectively, including tasks such as the proper and organised preparation of the virtual data site, responding to Q&A mechanics, participating in expert sessions, and addressing various other legal due diligence enquiries.

In Mexico, private equity transactions are generally private and are implemented through either:

• a purchase agreement, structured as a secondary transaction (ie, the fund acquires shares from existing shareholders), which approach is mainly used when the private equity fund is acquiring 100% of the target; or
• subscription or investment agreements, structured as a primary transaction (ie, the fund subscribes and pays for a capital increase of newly issued shares by the target, thus diluting the existing shareholders).

In conducting a privately negotiated transaction (as opposed to a bidding process), private equity funds have more leverage and are more aggressive in their positions, from a valuation standpoint through the definitive agreements. Another relevant feature when conducting private negotiations is the increased flexibility for parties to be creative in structuring and searching for alternative accommodation of the parties’ needs.

From time to time, private equity funds also participate in bidding processes. Such a process generally aims to sell 100% of the equity of the target and is a seller-controlled process in respect of timing and economic and legal terms. In this process, multiple bidders compete and submit confidential bids for a target, including a position in respect of a draft purchase agreement that the seller makes available. This limits the ability to be aggressive in negotiating transaction documents and related negotiations, as the sell-side will consider – in addition to the economic offer – the ability to close expeditiously and the availability of a cash payment (ie, no acquisition financing). There are other disadvantages for private equity funds in bidding processes, including the need to be aggressive in the economic offer considering the competitive nature of the bid, offering a higher amount than may possibly have been agreed privately, and the expenses incurred in the process with the uncertain component of being able to successfully close a transaction.

The private equity fund does not invest directly, but uses a special purpose vehicle (SPV) for the particular transaction. The SPV used for the acquisition is led directly by the fund’s internal team. The selection of the type of SPV and the jurisdiction of its incorporation is generally tax driven. Sometimes, the fund signs the initial agreement and then assigns its rights to the SPV ahead of closing the transaction.

Private equity investments are conducted with a mix of equity and financing. For the purposes of the equity, private equity funds do provide an equity commitment letter, subject to general caveats such as due diligence.

In relation to financing, sellers generally ask that a commitment letter from a financial institution be delivered at signing. This provides sellers with the certainty that sufficient funds will be in place for closing and comes at a cost to the fund because a commitment fees is payable at signing. Financing could be in the form of a bridge loan to be refinanced following the acquisition, which is the more expensive option as the interest rates are higher, or a term loan, which is the more suitable option but also the one that takes longer. This has not changed over the last 12 months.

Consortiums

Consortiums are a standard structure conducting private equity transactions, specifically in instances where certain assets are limited for acquisition purposes or where the ticket is too high. Consortiums entail entering into agreements as to how the consortium will vote and/or conduct investments.

Co-investors

Co-investment is also a standard practice, particularly in respect of international private equity funds. In this case, the private equity fund negotiates the deal and incorporates another entity at the end. The sellers do not interact with the co-investor which, in many cases, is an institution such as a multilateral bank. These co-investors are passive and all the business and negotiation is fronted and carried by the fund.

Initial Cash Payment

In Mexico, the main form of consideration is an initial cash payment at closing based on a multiple of the enterprise value which is then subject to a closing or post-closing adjustment, mainly based on working capital, debt and cash. In some instances, such as a deal with a simultaneous sign and close, the price may be fixed and not subject to adjustment, as all pricing components are known at the time of closing.

Earn-out payments for existing shareholders

As mentioned before, the Mexican market has adopted as common practice the structuring consideration for private equity transactions of granting the existing shareholders earn-out payments based on a set of performance metrics that take into account the financial information for the ongoing year, future performance or a mix of both.

Rollovers for existing shareholders

Another form of consideration that comes in the context of private equity transactions is rollover for existing shareholders, whereby the existing shareholders receive equity in the acquiring entity and share limited corporate rights and full economic rights in addition to exit rights (and obligations) together with the private equity fund. This feature works well in the context of acquisitions where the private equity fund acquires 100% of the target and generally intends to conduct the target’s operations. This consideration mechanism has its challenges, the main one being that it limits the amount of the cash-out consideration for the existing shareholders and could dissuade them from closing the transaction.

Deferred Consideration

Deferred consideration is a must in any mid-size or bigger transaction. Deferred consideration is the most efficient form of securing indemnification for potential known (assuming this is negotiated) or unknown contingencies that materialise within a period of time following closing. The main structures for negotiating a deferred payment are either (i) a holdback, whereby the buyer retains a portion of the purchase price and releases periodic payments (assuming no indemnification payments are required to be made), which is a pro-buyer/investor mechanism and is considered an aggressive provision; or (ii) an escrow, whereby the buyer deposits a portion of the purchase price with an independent third party (eg, a Mexican trust executed by a Mexican financial institution) which, in turn, releases funds pursuant to the trust agreement and upon instructions from the applicable parties. This is the more moderate approach and the market standard for deferred payment.

Another way to structure deferred consideration is through an agreement between the parties to release payments as certain conditions are met, which is a pro-deal provision. These conditions may be based on the mere lapse of time or the achievement of specific milestones. This mechanism can be implemented in transactions involving deferred signing and closing, and it contributes to providing greater closing certainty. As the seller works towards fulfilling the agreed conditions, which, once met, justify the release of the agreed-upon payments, the buyer also receives the target under the expressly agreed-upon circumstances deemed necessary for its operation. This mechanism can be structured as a sellers’ financing, including relevant debt features or simply a schedule of payments.

Leverage

Private equity buyers are generally more aggressive and have leverage. When structuring transactions, they aim to keep the existing shareholders on the hook for indemnification payments through holdback or escrows (which are often used to secure any potential price adjustment payments). Rather than having long discussions as to the security mechanism, private equity funds try to get the highest potential amount within the deferred payment structure. Holdbacks and escrows range from 5% of the purchase price (being a very low threshold and very aggressively pro-seller) to 25% or even 30% of the purchase price (being the highest threshold and very pro-buyer). To keep sellers on the hook, private equity funds try to pay a lesser amount of cash while retaining the sellers with skin in the game and motivating them to maximise their exit value with an earn-out and, potentially, through a rollover mechanism.

Private equity sellers try to sell and exit in an “as is, where is” structure, pursuant to which they get paid and no deferred consideration or other post-closing price adjustment remains. This is in part because at the time of exit, many funds are dissolved and all amounts have to be distributed, and private equity sellers strive to avoid having surviving liability. In this sense, when the fund is a selling shareholder, it pushes to avoid making representations in respect of the business, as the existing shareholders are those involved in the day-to-day operations. This is an instance where sellers push for R&W insurance to be included as part of the transaction so that there is no need to negotiate security mechanisms for indemnification payment.

A key concept in all these negotiation strategies is leverage, as leverage will determine how far an off-market position can go in the negotiation.

It is not typical in Mexico to have a locked-box consideration. Parties agree on an initial value, but that changes as the negotiation process moves along. Although upon signing binding agreements the agreed consideration remains, it is subject to the agreed-upon price adjustments (such adjustments can be made either at closing, or post-closing). In any event, when agreeing on a locked-box consideration, the seller is liable for leakages.

When parties agree on a price adjustment mechanism, such mechanism includes a standard dispute resolution process. At or before closing, the sellers provide a closing statement identifying in good faith the amounts corresponding to each item of the adjustment and what they believe the final price to be. Following closing, buyers have a period of 30–60 days to audit the target and get back to the sellers either accepting or refusing the amounts allocated to the items in the statement. There is then a period for the principals to negotiate in good faith and, where they fail to agree on one or more item, such items are submitted to a pre-agreed independent expert who will determine the amounts in respect of the disputed items. Such resolutions will be final and cannot be appealed.

In Mexico, the conditionality of private equity deals mirrors that of an M&A transaction. In addition to regulatory consents (ie, antitrust – COFECE, foreign investments – the CNIE), the second main type of conditions are those that require third-party approvals in respect of the business. These conditions include waivers or consents from financial institutions, as well as potential consent requirements from suppliers, landlords and so on.

Whether shareholder approval is required is based on the by-laws of each target, but in Mexico, to conduct a primary issuance of shares, a waiver from the existing shareholders is required in respect of their statutory right to subscribe and pay any capital increase proportionally. This is generally addressed at closing, within the corporate resolutions (which is a standard closing deliverable).

Additionally, given that Mexico is a highly regimented country, conditions may sometimes involve actions directly related to the proper functioning of the target, such as registering its intellectual property rights with the relevant authorities or ensuring that agreements with employees retained by the target comply with applicable Mexican labour law.

The following are conditions to any M&A or private equity transaction in Mexico – material adverse effect, the absence of judgments and orders, as well as true and correct R&W insurance. However, the importance and scope of these concepts varies from deal to deal, based on the parties, the industry and the current market conditions.

“Hell or high water” provisions in Mexico are related to antitrust approval and, in respect of other regulatory approvals, they are negotiated on a case-by-case basis but are rarely seen, as antitrust agencies may impose conditions while other regulatory agencies may only approve or not approve the transaction.

“Hell or high water” provisions are considered aggressive and are not really customary in Mexico but they can be a starting point in seller-driven negotiations or in sellers’ initial drafts.

Ultimately, parties should agree to share the risk of the authority approving the transaction with conditions, except for in very specific circumstances. It has become increasingly common to find “burdensome conditions” providing that if the conditions imposed by COFECE materially affect the buyer, then the buyer has the right not to close the transaction. This applies both for M&A and private equity deals.

Break fees in Mexico are more common in competitive processes than in private deals. The reason for this is that when a seller decides to close a transaction with a specific buyer to the detriment of others, the expectation is that a successful closing will occur and the break fee will cover the trade-off of closing with another buyer.

Break fees range from 1% to 3% of the purchase price and the main triggers are – to the extent the buyer has an obligation – failure by the buyer to obtain regulatory approvals, failure by the buyer to secure financing, and breach by the buyer of the underlying purchase agreement.

Termination provisions are fairly standard in Mexico. Agreements may be terminated by:

• mutual agreement of the parties;
• the buyer or seller if any of the conditions precedent to their respective benefit are not satisfied or become impossible to satisfy (provided that the other party is not in breach at such time);
• either party if the other party breaches the agreement; or
• either party not in breach if any of the conditions have not been met at the longstop date.

The longstop date varies depending on the type of transaction and the conditions applicable to it, but six months is the usual timeframe when antitrust approval is required.

Allocation of risk for private equity buyers is the same or more aggressive than it is for corporate buyers (as private equity buyers strive to protect a fiduciary duty and justify investments before investment committees).

With regard to private equity sellers, they tend to be very risk averse and try to limit or, where possible, avoid, any surviving liability following closing, as previously discussed (see 6.1 Types of Consideration Mechanisms).       

As discussed before, private equity sellers try to avoid any business-related representations. If it comes to making representations, then a full package is expected from the private equity sellers (irrespective of management, as the fund will ultimately be liable for any indemnification payment).

When selling, private equity funds will try to negotiate a materiality threshold for a claim to be indemnifiable, a basket with a true deductible, and limit the liability to 5% or 10% of the purchase price at the most. In addition, they will push for a liability survival of maximum 12 months (except for fundamental representations and extended representations). The limitations discussed in this paragraph are those that are sell-side friendly. In respect of known contingencies, parties either adjust the price or agree on a specific indemnity that is not generally tied to the limitations negotiated. Parties also negotiate rights to defend any such known contingency.

All of these have already been addressed.

The most-litigated provisions in the context of private equity negotiations are the scope of the representations and indemnification security, both as buyers and sellers. Metrics for earn-outs are also heavily discussed among principals. Finally, in respect of partial investments, corporate governance, exit rights and mechanisms for solving controversies are also heavily negotiated.

Furthermore, depending on the nationality of the sellers and buyers (ie, for tax purposes), provisions related to tax obligations and responsibilities become highly significant, such as filing of tax returns, straddle periods, refunds and post-closing actions.

The Mexican securities market is quite inactive and highly illiquid, thus the volume of M&A transactions taking a public company private is limited. Moreover, most public companies are controlled by private families, thus acquiring and delisting them is difficult. Assuming there is no tender offer, the board of directors of any such targets would generally request a fairness opinion prior to bringing the transaction to the shareholders for approval. Upon agreement, the parties would execute a transaction agreement setting forth the necessary steps for the transaction and very limited representations and warranties.

Any shareholder that reaches an ownership percentage of 5% or more in a public company must disclose their shareholding to the Mexican Stock Exchange, while a shareholder who reaches 10% ownership must file a notice with the Mexican Stock Exchange setting forth their ownership structure and any agreements related to the shares they own (ie, voting or otherwise).

The foregoing are the most relevant notices a private equity buyer must deliver. In addition to these, there are tender offer notices and filings which are dependent on the type of tender offer (ie, voluntary or mandatory).

The Securities Market Law sets forth that upon reaching a shareholding of 30% or more of the outstanding shares of a public company, the holder thereof (directly or through related parties) must conduct a tender offer for 100% of the outstanding shares. Such mandatory tender must be priced at least at the highest value paid by the acquiring shareholder over the last 12 months.

As stated above in 7.3 Mandatory Offer Thresholds, mandatory tenders must be priced at least at the highest value paid by the acquiring shareholder over the last 12 months. The market in Mexico is split in respect of consideration. While in some instances, mainly in respect of family-run businesses, consideration is paid in cash, there are more strategic tenders where payment is made with an exchange of shares.

Tender offers in Mexico may be conditional. Such conditions may include a minimum percentage of acceptance of the offer, material adverse effect, regulatory approvals and obtaining financing. In addition to these conditions, there are instances where bidders may try to protect their tender offer by adding break fees, matching rights and exclusivity provisions.

Bidders not seeking 100% ownership can strive to obtain other corporate governance rights such as seats on the board, certain veto rights or super-majority matters, as well as protections granting the bidder a right to consent in instances where their investment or shareholding could be affected. Information rights in addition to statutory disclosure obligations are also available.

Squeeze-outs in Mexico can be conducted through a tender offer; however, if unsuccessful or a minority interest remains within the ownership structure, majority shareholders may vote to buy out the minority shareholder or approve a share redemption, thus redeeming such minority’s shares or, alternatively, to squeeze a party out through a long legal proceeding.

In advance of the launch of a tender offer, bidders often obtain significant assurances from the controlling group as to the acceptance and main terms of the tender offer. Bidders aim for these commitments to be irrevocable, but a premium needs to be paid as the principal shareholders relinquish their right to seek other options by shopping the deal. Negotiations for irrevocable commitments generally occur within the weeks or months leading up to the launch of the tender offer.

Among the features included in these negotiations are the irrevocable nature of the acceptance, the right to accept another offer (if a new, higher and unsolicited offer is received), additional consideration and the duration of the offer.

In an effort to achieve alignment between the investors and the management team, the private equity fund will generally grant stock options (or, sometimes, phantom stock) as equity incentive plans. The percentage ownership allotted to these plans is somewhere between 5% and 10% of the total common (or non-voting) stock.

Sweet equity is generally the type of stock covered by an incentive plan. The plan allows for management to receive part of the shares allotted to each member with the passing of time and to the extent the member remains working for the company. Shares vest over time as well. Additional shares may be granted if performance metrics are achieved.

In Mexico, management do not often obtain preferred shares. Such shares would be part of preferred distributions in the event of liquidity and payment of dividends.

Vesting of stock is standard in Mexican stock option plans. Vesting allows the company some certainty as it relates to the employee staying and their corresponding commitment to the company. Shares typically vest some time between three to four years.

Additionally, Mexico has adopted a “good leaver” and “bad leaver” concept. A good leaver is an employee who leaves for the right reasons and on good terms (including termination without cause) with the company and is generally entitled to keep their vested shares, and sometimes even negotiate payment for unvested shares, with the company. On the other hand, a bad leaver is an employee that is terminated for cause or otherwise leaves the company for the wrong reasons, in which case, the employee forfeits their unvested shares and the company buys back the vested shares at a penalty (ie, nominal valuation, at cost).

The main restrictive covenants in Mexico are non-compete, non-solicitation, non-disparagement and confidentiality obligations for members of management or key employees. These remain enforceable for the duration of the employment and for a year or two following termination (in some cases, this could go up to three years).

Whether these are part of the equity package, employment arrangement or standalone documents depends on the specific circumstances of the hiring.

The stock option shares generally enjoy minimal rights aimed to protect the grant and the percentage represented, but avoiding granting rights that are related to the business operation. These shares are granted vetoes regarding critical matters of governance and potential changes (ie, amending the rules of the plan, changing the rights of the shares subject to the plan) and also anti-dilution provisions. Standard information rights are granted as well.

The level of control a private equity fund has in its portfolio companies varies based on the size of the investment and the percentage owned. Private equity has seats on the board of directors and veto rights over both the board of directors and shareholders’ meeting (the main governing body in Mexico) regarding super-majority matters. Some of the matters for which vetoes are granted, include:

• amending the by-laws;
• conducting strategic transactions;
• approving the business plan;
• approving annual budgets;
• approving capital expenses and financing beyond certain thresholds;
• disposing of material assets; and
• hiring or removing of high-level executives (ie, the CEO and CFO).

Private equity investors have standard information rights.

Generally, the private equity fund would have no liability; however, there are instances under the applicable law where the private equity fund may be deemed liable for the actions of the portfolio companies. Such circumstances include:

• piercing the corporate veil if the shareholders are deemed an extension of the fund;
• fraud; and
• when management of the private equity fund participates in management of the portfolio company.

Unfortunately, in Mexico exiting through an IPO is an option that is difficult to explore as the market for IPOs has been dry. Private equity funds are exiting through either a sale of 100% of the shares of their private equity-backed company or by conducting secondary sales to other private equity funds. These are the typical ways in which private equity investors exit their investments. It is not standard to see rollovers or reinvestments from private equity in Mexico.

Drag and tag rights are fairly standard in Mexico; however, these are rarely used, as informal negotiations take place ahead of initiating the drag or tag processes. For drag-along provisions to be triggered, generally offers must be for 100% of the company. In some instances, for the drag-along to be triggered, a minimum consideration threshold must be obtained. Regarding tag-along rights, minimum thresholds generally start at 10%.

In light that there is no market for IPOs in Mexico, it is difficult to discuss recent trends. However, back in the day, standard lock-up periods ranged from six months to one year.