Healthcare M&A 2024 Comparisons

Healthcare assets in Mexico are in strong demand from regional and local investors. Several factors have contributed to this trend – mainly increased and steady demand for healthcare services (population growth and ageing) coupled with a decrease in public spending and investment in government-run or -sponsored hospitals and clinics as well as the lack of adequate government purchases and distribution of medication.

The market is highly fragmented. Historically, many local hospitals and clinics have been set up by individual or groups of medical practitioners and have evolved slowly into small and mid-size medical facilities providing a handful of services (including medical procedures, X-rays, and such), of ideal size and with interesting growth opportunities for consolidation efforts. Regional concentration (access to healthcare options is proportionately worse outside the Mexico City metropolitan area and certain other exceptions) also presents an interesting opportunity for investment outside these regions.

It is expected that government spending in healthcare will continue to lag behind regional levels (including as a result of more spending on social programmes that limits the ability of the Mexican government to leverage or shift spending priorities) and as such, private investment will be more relevant to make up for deficiencies in hospital infrastructure. Even the money that the government does spend flows into the hands of private healthcare providers, as the lack of capital expenditures has affected viable public infrastructure and forced government hospitals to subcontract certain services.

Investment in large hospital chains has been significant over the past couple of years. Large assets in Monterrey have been bought by regional funds and smaller regional assets have been subject to consolidation by specialised funds set up recently with a diverse investor base. Service providers that focus on one type of medical service (laboratory chains, blood collection and treatment facilities and specialised clinics) have also been targeted by investors.

The authors expect this trend to continue and enable private investors that can adequately attend to the needs of the middle and lower classes to successfully implement healthcare platforms with a healthy growth perspective.

As noted in 1.1 Healthcare M&A Market, the authors expect consolidation of smaller to medium-sized hospitals and clinics to continue during the upcoming year. Increase in employment due to nearshoring and other circumstances such as an increase in medical tourism (partially resulting from significant inflation for medical treatment and procedures in the United States) will continue to drive demand for medical services and interest from private equity and strategic investors.

Business entities operating or looking to operate in Mexico are typically incorporated as Mexican corporations both for legal and practical purposes (including, in regulated sectors, such as healthcare, for purposes of procuring federal or state government approvals where processes are designed for local companies). It is uncommon for start-ups seeking to do business in Mexico to be incorporated abroad. Having said that, investors may wish to hold participations in such Mexican entities through entities incorporated in other jurisdictions that may prove to be more tax efficient for purposes of the receipt of distributions or potential capital gains in the context of liquidity events or exits.

Incorporating a corporation in Mexico is not an overly complex process; however, a fair amount of information relating to the stakeholders needs to be provided, corporate incorporation documents (including by-laws) need to be prepared and formalisation steps (including notarial intervention) need to be complied with. Such process can take anywhere from two to six weeks. Nominal initial capital requirements exist but are not relevant in deciding which corporate form to elect. Obtaining tax identification numbers is also typically part of the initial incorporation process investors should consider.

Although Mexican corporate law contemplates a handful of different corporate forms, most business ventures operating in Mexico take the corporate form of either a sociedad anónima or a sociedad de responsabilidad limitada. Both of these types of corporate entities provide for limited liability.

Mexican corporate law has been progressively updated and currently allows for ample flexibility in structuring different types of equity (including preferred equity) and shareholder rights, corporate governance structures (boards, committees and observer rights) and transfer provisions (such as rights of first refusal or first offer, tag and drag alongs). Options, warrants, convertible debentures and other similar instruments are available for use when implementing investments by different types of investors.

Although angel and venture capital investors have been more present in Mexico in recent years, most businesses in Mexico still resort to founders’ and family and friends’ capital for financing their start-up stage. Third party funds are typically available to enterprises with some semblance of financial viability; whether venture capital at an earlier stage or growth equity once more consolidated.

Documentation of venture capital investments when made directly into the Mexican entity (consider that it is common for such investment to be made at a foreign Holdco level) is not normally complex and is typically limited to simple purchase or subscription agreements and corporate resolutions necessary to implement the investment. Venture capital seeks to document investments efficiently and resorts to very basic documents. Diligence processes undertaken by VC firms are typically not in depth exercises. Growth PE firms are more involved both from a documentation and diligence perspective.

As noted, venture capital is indeed available in Mexico. For the past ten years or so, both local and international VC managers have been present in the Mexican market. Although not as intensely as other asset classes, VC funds have fundraised with Mexican pension funds and other institutional or sophisticated investors. There are interesting stories of VC funds having invested in the healthcare industry (eg, dental services chains).

As to government funding, several decades ago, the federal government, created Fondo de Fondos, an initiative managed by Nacional Financiera, a Mexican government bank, that served as a limited partner for many of the first local PE funds operating in Mexico (prior to such funds being able to access Mexican pension funds). Throughout the years Fondo de Fondos co-invested with multiple local and regional funds in a variety of sectors. Unfortunately, the lack of budget allocations in recent years has restricted the ability of Fondo de Fondos from being more active.

Documentation for venture capital investments is not typically complex. VC funds, given the smaller transaction sizes, tend to seek more efficient and less intensely negotiated transaction processes. Transaction agreements tend to have generic representations and warranties as well as indemnity and other provisions. Some transactions shy away from shareholder arrangements and document the respective arrangements (eg, governance rights, veto rights, and transfer restrictions) exclusively in the company’s by-laws.

Typically, start-ups remain in the same corporate form throughout their business cycle. The operative company rarely changes form or jurisdiction. It is not uncommon, however, that VC investors request that their investments reside in a foreign Holdco. For VC investments, Cayman has been a popular jurisdiction. Tax efficiencies typically drive these decisions.

The lack of depth of the local capital markets poses a significant challenge to exiting via an IPO. Although there have been some exceptions, portfolio companies that have gone public have found a stagnant secondary market and pricing has had limited upside. PE funds have had to hold positions or sell below expectations. International listings have been rare given that transactions with a large enough offering size are complicated to come by. Having seen these examples, financial investors have sought to structure their exits with the help of investment bankers running private sale processes. But even those processes have their challenges, rarely if ever adhering to their initial timetables. It is not uncommon for sale processes (even of solid portfolio companies within interesting sectors) to be long with unexpected results.

If an IPO of a portfolio company is considered by investors as their exit strategy, without a doubt, dual listings (eg, listings in Mexico and in US markets, whether through a registered transaction or under an exemption to SEC registration) are preferred as they would in theory give more liquidity to the equity of the company facilitating exists once lock-ups have expired. Even though in recent years equity listings of Mexican companies have been limited, when such listings occur, it is common for them to be structured as dual listings. Even though it is possible for Mexican companies to list their shares only in foreign markets, traditionally, such listings have included a Mexican component.

Where a company chooses to list its stock can have an impact on how future M&A transactions are implemented. If, for example, once listed, an investor is interested in acquiring a controlling position in such company, tender offer regulations in effect in each the jurisdictions where the company is listed may require that simultaneous tender offers be launched. However, other than procedural requirements, the lack of listing in a specific market will not restrict the ability of future investments in such a company.

Unless for some specific reason a relationship with one particular potential buyer exists and pursuing a bilateral transaction makes sense (including from the point of view of price maximisation), sellers normally engage advisors to undertake competitive sale processes. Sale processes in Mexico are not unlike competitive processes in other jurisdictions and involve identifying potential bidders, negotiating NDAs and clean team agreements, organising diligence processes (including documentary processes, Q&As, and management presentations), receiving non-binding and subsequently binding offers and, once a prevailing bidder is selected, entering into exclusivity agreements for purposes of finalising transaction documentation.

Whether a sale of a privately held healthcare company is structured as a sale of 100% of the stock of the company or a partial sale depends more on the nature of the purchaser and their mandate than anything else.

Private equity investors tend to have different strategies and may prefer to purchase totality stakes, majority stakes or minority positions. As opposed to PE transactions, strategic transactions, by their nature typically involve complete takeovers of the target, unless such transactions are conducted in the context of a JV or similar endeavour.

In any case, investors would tend to prefer retaining operating partners as shareholders as opposed to financial investors (such as VC partners).

Although not uncommon, stock-for-stock deals are still a minority of M&A deals in Mexico. Stock-for-stock deals have been used by some public companies, by real estate investment trusts and energy investment trusts (that routinely use their equity as payment currency) and in a small number of deals structured as combinations. In the Mexican private equity market, very limited examples of stock-for-stock deals exist and mainly in platform build out efforts where a combination of cash and stock have been used in the past.

Most transactions in Mexico are structured as cash consideration transactions. Sellers typically seek liquidity. An environment where equity listings are rare (and as such the number of publicly traded companies is not robust) with low liquidity is not conducive to stock-for-stock deals.

Mexico is not unlike any other jurisdiction when it comes to contractual standards for documenting M&A transactions. Investments in Mexican entities are typically documented through purchase and/or subscription agreements that commonly contain general corporate and business specific representations and warranties, operating covenants and restrictions (more so when transactions are subject to conditions – including government approvals), termination provisions (which may include termination or break-up fees) and rules governing indemnity obligations of sellers (and buyer). Mexican court and arbitration conflicts provisions are common (arbitration trending as one of the preferred alternatives for sophisticated investors). Escrows (more than holdbacks) are very common, typically structured through trusts set up with Mexican banks that are authorised to render trustee services.

Representation and warranty insurance is not as common in Mexico as in other developed markets. The percentage of transactions where representations and warranty policies are issued likely remains below 10%. However, the use of such insurance is picking up. The fact that insurance companies and brokers have expressed their willingness and have begun to underwrite transactions governed by Mexican law and documented in Spanish and that premiums have migrated downwards to levels similar to other jurisdictions is encouraging. The terms of such policies (including exclusions) are still not identical to coverage granted in other jurisdictions but the benefits of having such coverage is starting to permeate into the Mexican M&A market and is now at the very least considered as an option in most transaction processes.

The Mexican legal framework, a civil-law based system, provides a robust set of principles and rules for interpreting and enforcing provisions as the ones described and that are typically included in complex M&A documentation. Even if case law may not be as developed as in common law jurisdictions, contractual standards are similar.

Corporate spin-offs are not a common method for implementing M&A transactions as they would require implementation of a two-step transaction where the new investor would acquire a participation in the spun-off entity. They are more common as a tool to implement corporate reorganisations.

Spin-offs can be structured as a tax-free transaction both at the corporate level and the shareholder level. Under Mexican tax laws and regulations, spin-offs are tax free only if one year before the spin-off and two years after the spin-off, the shareholders owning 51% or more of the equity of the Mexican company, continue as shareholders with the same proportion of participation. As such, spin-offs are not, commonly used to implement sales of businesses.

As noted, any subsequent business combination would trigger tax effects for any spin-off and would treat it as a taxable transfer.

Under the General Corporations Law spin-offs require shareholder approval at an extraordinary shareholders meeting. Once approved and registered in the public registry of commerce, shareholders and creditors have a 45-calendar-day term to object to the spin-off, which would suspend the effects of such spin-off until a final judgment is issued with respect thereto. If no objection is raised, once such 45-day term expires, the spin-off will be effective. No consent or ruling is necessary from Mexican taxing authorities to effect a valid spin-off.

Investors seeking to take a controlling position or even a significant stake in a public company would rarely do so through a stake-building process. Although it has been done when pricing merits, it is not common for a variety of reasons, including the fact that many public companies in Mexico are controlled by a controlling group (and as such the certainty of achieving a controlling position is low), a majority have board approval requirements for change of control (which would also result in the risk of not being able to increase the investor’s position) and where government approvals are required (for example, antitrust approval), co-operation is required from the target and/or the sellers. As such, investors would ordinarily seek to secure these approvals, consents and government authorisations in consummating their definitive and desired participation. Putting aside related party acquisitions, under the Mexican Securities Market Law and the regulations issued thereunder, purchases of 10% or more and less than 30% of a public companies’ stock need to be disclosed publicly within one business day from execution. At such time, the purchaser needs to disclose whether it intends on acquiring a “significant influence” on the respective company. Under the Securities Market Law, “significant influence” means the right to exercise voting rights with respect to at least 20% of a company’s stock.

Under the Securities Market Law, any person seeking to acquire 30% or more of a public company’s capital is required to launch a tender offer through the stock exchange where such shares are listed. If the purchaser is seeking to obtain “control” of the public company, the tender offer needs to be launched for 100% of the shares of the company. Tender offers are subject to the approval of the Mexican National Banking and Securities Commission in addition to any other governmental approvals that may be necessary (such as antitrust approvals or approvals from industry regulators, among others). Tenders are conducted based on a tender offer memorandum issued by the offeror.

Tender offers are subject to specific rules such as rules (i) requiring minimum tender periods (20 business days) and extension requirements, (ii) mandating equivalent consideration being offered to all shareholders, (iii) restricting the payment of premiums to one or more shareholders, and (iv) requiring the company’s board to issue an opinion with respect to the tender, among others. The Securities Market Law and its regulations include provisions that allow competitive tenders to be launched providing for protection to public shareholders allowing them to withdraw tenders in the context of such processes. If a tender results in minimum float requirements not being met or if the offeror intends on taking the business private, delisting processes may become relevant.

As noted, even though possible, the lack of depth of the Mexican securities markets, makes mergers or stock for stock transactions uncommon. Cash transactions are the norm in Mexico.

As noted throughout this questionnaire, there are a limited number of issuers with equity securities listed on Mexican stock exchanges. As such, the overwhelming majority of transactions are private transactions. For both public and private transactions, the norm is that transactions are settled in cash. Mergers and stock-for-stock transactions are exceptional and, as stated, have been used sparingly by Mexican public companies, are used commonly publicly listed real estate and energy funds (that have a mandate to use their stock as purchasing currency). Stock deals in the PE sector are, considering the nature of the investors, extremely rare (except if purchasing through an existing portfolio company).

The Securities Market Law does not in itself limit the types of conditions that can be included in a tender offer although it requires adequate disclosure. Offerors tend to seek to simplify their offers in the hope of making them more attractive to recipients of the offer. However, conditions such as (i) minimum participation (for example a condition stating that the offeror will only close on the tender if it is able to acquire a controlling share of the company) conditions, (ii) regulatory approvals (including antitrust and sector specific approvals), (iii) third-party consents, and (iv) absence of material adverse changes, among others, are common. Although financing conditions are not the norm, there have been precedents of tenders being subject to the availability of financing.

In tenders that are made in the context of negotiated transactions (eg, where a controlling group and the offeror have, prior to the launch, negotiated a purchase and sale agreement), conditions to closing are more similar to what would be expected in a private transaction, including bring-down of representations and warranties and performance of covenants, even if such conditions are applicable only to the transaction with such controlling shareholders or are structured as conditions to the launch of the applicable tender offer.

As noted, many of the purchase tender offers launched in Mexico in the past have been launched in the context of negotiated transactions where a controlling group decides to sell its participation in the company to the offeror. In such cases, the sellers typically agree to sell or tender their shares in the tender offer and may give a set of representations and warranties and provide indemnities (the extent of such representations and warranties and indemnification obligations vary and is not, in many cases, to the same extent as in private deals). The participation of the target company in those arrangements, if any, would be more limited than in the context of a private deal. One element that is ordinarily relevant in such transactions is the treatment of material non-public information and cleansing of such information at the adequate time.

Where there are no controlling shareholders, these agreements typically do not exist as there is no counterparty available with whom to transact with. The target company could not independently agree to undertake actions to facilitate an offer. If the board of the company decides to instruct the company to transact with a potential bidder, compliance by the directors with their duties of diligence and loyalty under the Mexican Securities Market Law could come into question.

In the context of mandatory tender offers where the purchaser is seeking control of the target, it is common for bidders to condition their offer upon a minimum tender objective. Although a majority of the common stock of the target would be sufficient to adopt most resolutions at a shareholders level, it is not uncommon for tenders to be conditioned upon higher acceptance and tender thresholds. In some instances where purchasers intend on delisting the stock of the target, and considering that delisting approvals need to be taken by at least 95% of the outstanding shares of the target, the minimum tender condition has been set at such level of participation.

Neither Mexican corporate nor securities laws provide for regulated squeeze out mechanisms to force minority shareholders to sell their stock, whether in a private or a public company. The Mexican Securities Market Law does provide for mechanisms where minorities are protected and able to sell their shares in a public company where a tender has been successful and will result in a delisting. Under such a law, the company needs to launch a second tender offer to delist (at a minimum price) and thereafter must fund an escrow that is available to minority shareholders to sell their shares for a period of six months at the tender price.

Even the most successful tenders fail to pick up every last shareholding position. Whether it is because certain holders did not know that they held such positions or such persons have passed away (or similar practical reasons), there is consistently a minority that fails to tender in the initial tender, in the delisting tender or via the escrow mechanism. Once delisting is finalised and the respective companies are privately held, there is some flexibility in converting such leftover positions into redeemable shares or other practical remedies. However, in such scenarios, it is highly recommended that consideration payable to such shareholders be consistent with what they could have obtained in the context of the tenders.

Under the Mexican Securities Market Law and regulations issued thereunder tender offer memorandums must disclose the origin of the funds that will be utilised for purposes of settling the tender offer. However, those regulations do not require that such funds come from equity of the offeror or otherwise restrict such funds coming from third-party financing. Although not common, it is possible to condition a tender offer on the availability of third-party financing.

Protections against change of control can be implemented in the by-laws of Mexican companies. In the case of privately held companies, the catalogue of options available to the existing shareholders is broader given the flexibility offered by the Mexican Corporations Law, as they can incorporate board or shareholder consent rights with respect to transfers, they can include rights of first refusal or rights of first offer and other transfer rights. Under the Securities Market Law, publicly held companies can include the need for board of director approval for purposes of a person acquiring significant stakes in the equity of the public company. Most public companies have incorporated these provisions into their by-laws, which provide that the board needs to approve significant acquisitions of stock as well as significant shareholder arrangements and a process whereby such consent is requested and granted. As mandated by the Securities Market Law said clauses typically include time periods for the board to resolve as well as guidance for the board to make their decisions.

Generally, the voting thresholds at shareholder meetings are the same for private and public companies. As a result, to the extent a shareholder is able to purchase more than 50% of the outstanding stock of a Mexican corporation (unless the specific by-laws provide more significant majorities or veto rights to one or more shareholders) it should be able to eventually hold meetings to approve all significant transactions at the company level (including appointment of board members – subject to the rights of minority shareholders to appoint directors – payment of dividends, capital increases and reductions and offering of securities).

One notable exception is the ability to delist a public company which requires a 95% vote.

As noted elsewhere in this questionnaire, where there is a controlling shareholder of a public company, it is very common that a tender offer be preceded by an agreement with such controlling shareholder. Unsolicited tender offers are extremely rare in Mexico. Such agreements effectively contain obligations to tender. It is debatable if the Mexican National Banking and Securities Commission regulations that govern tenders and that provide that tender offer memorandums must set out the right for shareholders that have tendered to withdraw their tender if a competitive offer on better terms is made would preclude these agreements from setting forth a mandatory sale obligation on controlling shareholders (or event penalties on such shareholders for failure to definitively tendering).

Any tender offer must be approved by the National Banking and Securities Commission (CNBV). Such approval is given by the CNBV once the CNBV has reviewed the tender offer memorandum, which is the main document governing the tender and that sets forth the terms and conditions thereof (including the price, term and tendering mechanics). The CNBV will confirm whether the tender offer memorandum complies with its regulations. The CNBV cannot discretionally impose pricing terms or time periods during which the tender has to be open. Time limits are set forth in the Securities Market Law, for example, a tender offer has to be open during 20 business days and requires extensions (five business days) if changes are made to the offer.

The CNBV typically takes anywhere from two to four months to approve transactions such as tender offers. If competing offers are launched (extremely rare in Mexico), the CNBV has taken the approach of looking at them sequentially. However, that approach could change, as it is not driven by regulation or codified practice.

As noted throughout this questionnaire, there is ample regulatory flexibility in determining the conditions to which offerors can subject tender offers. As such, as long as they are adequately disclosed, an offeror can subject their tender to any conditions they desire, including the receipt of regulatory approvals (even though for purposes of deal certainty, most offerors would prefer that regulatory approvals be in place prior to the launch of their tender offer). As a result, the term of a tender offer can be extended so that it does not expire if regulatory approvals are not timely issued.

The set up of a healthcare company in Mexico is subject to the provisions of the General Health Law, its regulations and several Mexican Official Standards. The applicable regulations and the type of permit, authorisation or licence needed for such company, will depend on the type of services that the healthcare company will render to the public.

The regulatory body in charge of the issuance the authorisations, permits or licences for healthcare companies is, on a federal level, the Federal Commission for Protection against Sanitary Risks (COFEPRIS) and, with respect to state or local oversight, the local health authorities. Application for permits and licences in the healthcare industry requires preparation of complex and complete filings and the issuance of the necessary licence, permits and authorisation can take up to 24 months. There is currently an important backlog at COFEPRIS and other authorities of submissions pending response and that has represented a challenge on how these entities can operate in observance of statutory requirements, sometimes forcing them to operate through approved subcontractors, based on deemed approvals, or otherwise.

There is technically no governmental entity entrusted with supervising or regulating M&A transactions in Mexico, whether private transactions or public.

There are certain government entities that are involved in M&A transactions but not in a role of generic supervisor of these transactions. For example, the Mexican Antitrust Commission needs to approve certain transactions that meet antitrust thresholds set forth in applicable competition law. The Ministry of Economy, through the Foreign Investment Commission may need to approve certain transactions within restricted sectors. Sector specific authorities may also need to issue consent (for example, the Ministry of Finance, the Central Bank of the Securities and Banking Commission (CNBV) in the case of financial intermediaries) and so on. With respect to healthcare, on a typical acquisition of shares, there would not be a specific regulatory consent necessary to consummate an M&A transaction; however, if such acquisition is structured as a sale of assets (eg, a sale of a hospital or a specific portfolio of medicines, the assignment of the respective sanitary licences or marketing authorisations could be subject to authorisation from health authorities).

As noted, with respect to transactions involving publicly held companies, the CNBV needs to approve tender offers.

Foreign investment restrictions do exist in Mexico in respect of certain sectors. Such restrictions may imply control by the Mexican government of certain sectors (such as in the oil exploration and extraction and certain sub-sectors of the electricity and other infrastructure related industries), complete and total restrictions on foreign investment (such as those relating to development banking activities), restrictions that limit the participation of foreign investment in certain sectors (for example restrictions on foreign investment owning more than 49% of a company’s stock in the port management, port services and air transportation industries) and requirements for the consent of the Ministry of Economy to exceed certain levels of foreign investment in the capital stock of Mexican companies (for example, 49% of the stock of companies engaged in the education sector). Such law also provides for the need to obtain approval for transactions involving foreign investment that surpass certain monetary thresholds. The Foreign Investment Law provides for exceptions to these restrictions and mechanisms whereby foreign investment may surpass such thresholds (including through non-voting securities). Healthcare is not subject to foreign investment restrictions.

There is no national security review of acquisitions in Mexico. There are also no restrictions imposed on foreign investment based on the jurisdiction of the investor. Currently, there are no specific export restrictions in place in Mexico.

Generally, and subject to certain exceptions, pursuant to the Federal Economic Competition Law, mergers and acquisitions are subject to the filing of a notice with the Federal Competition Commission (COFECE) in the event that the same exceed at least one of certain statutory thresholds that are measured with respect to (i) the amount of consideration paid in the context of the transaction (for the Mexican portion of the transaction), (ii) if the transaction involves a minimum of at least 35% of the total assets or capital stock of an economic agent, the value of the total assets or sales in Mexico of such agent, or (iii) if the acquisition in Mexico of assets or capital stock exceeds in value of a certain amount, the joint assets or annual sales in Mexico of the economic agents involved in the transaction (or series of transactions). The process to file notice and eventually obtain approval from COFECE may be more or less complex depending on the level of overlap in the businesses of the acquiror and the target and can take anywhere from three to six months generally.

Under Mexican labour laws and regulations, there are no consultations or approvals that are necessary from any labour-related Mexican government agencies to consummate acquisitions or mergers. However, it is always recommended that confirmation be sought as to the existence of collective bargaining agreements as such agreements may to some extent limit sales of assets, changes in domiciles, changes to the operation of the businesses, among others.

One of the main focuses of labour review of late is the subcontracting regime that applies to Mexican companies, given the limits and restrictions that have been recently imposed by labour regulation and tax law to such historically common arrangements.

Finally, benefits provided to employees, even in the absence of collective bargaining agreements are crucial in evaluating transactions as such benefits may not be reduced without indemnification or negotiation.

There are currently no currency controls in Mexico. Foreign currency is generally available for currency purchase transactions and exchange rates float freely with market forces. No central bank or other monetary agency approvals are necessary with respect to merger and acquisition transactions in Mexico.

No information has been provided in this jurisdiction.

The extent of due diligence conducted with respect to a private healthcare business is typically very detailed, in particular as it relates to regulatory matters, both sanitary and environmental. In addition to encompassing corporate, contractual, litigation, labour, tax and other items common to most businesses, healthcare diligence involves review of permits and registrations from or with federal (Federal Commission for Protection against Sanitary Risks (COFEPRIS)) or local governmental authorities. Such permits and licences include items such as operation notices, sanitary licences (eg, RX service, obstetric and general surgery). In addition, many healthcare services, such as RX and hazardous and biological material disposition require environmental permits.

If a target were a publicly traded company, diligence would ordinarily still encompass items that would typically be required from a private company. However, given that the knowledge of material non-public information relating to a public company restricts the ability of the persons that are in possession of such information from trading securities issued by the target company under the Securities Market Law, if any information is shared in the context of due diligence that would qualify as material non-public information (defined as información privilegiada), that information would need to be cleansed (disclosed publicly) prior to the transaction being launched. It is typical to negotiate terms pursuant to which the target company, or even the investor can publicly disclose such information so as to be able to freely trade on the securities of the target.

Patient’s data and health information is considered sensitive information and therefore are subject to the provisions of the Personal Data Protection Act and may not be disclosed without the written consent of the patients.

Under the Securities Market Law and rules issued by the National Banking and Securities Commission thereunder (CNBV), tender offer memorandums can be maintained as confidential (during which time the CNBV approval process can run its course) up to the day of the launch. On such date, the tender offer memorandum and respective offering notices need to be made public through the websites of the CNBV and the corresponding stock exchange.

As noted, any tender offer, whether for cash or stock (or a combination of both), requires a tender offer memorandum setting out the terms of the offer to be approved by the Mexican National Banking and Securities Commission (CNBV). Such tender offer memorandum will be published on the date of launch of the offering. In the case a tender offer also includes stock or other securities as consideration, the offering of such stock has to comply, unless certain exceptions are met, with public disclosure rules applicable in Mexico and such securities would have to be listed in an authorised exchange that would enable such securities being delivered via the settlement agency where the tender is to be settled. To the extent the stock to be delivered in exchange for the target’s shares is subject to a public offer, information to the issuer of such stock has to be publicly available.

Tender offer documents for a cash transaction do not require disclosure of financial statements from the bidder (although summary financial information is typically included in the tender offer memorandum and information relating to funding of the purchase price is required). In the case of stock-for-stock transaction, as noted, the regulations issued by the Mexican National Banking and Securities Commission require that detailed information (including financial information) of the purchaser (assuming the purchaser is the issuer of the stock being offered as part of the purchase price) be disclosed as part of the tender offer. Such information is similar to the information that would need to be disclosed in the context of the public offering of the securities of the purchaser (including business related information, financial information, corporate governance information, among others). Disclosure comparing rights under the tendered securities and the offered stock would also need to be part of the tender offer memorandum.

Under the Securities Market Law, in order to obtain approval for the launch of a tender offer, the offeror needs to file with the Mexican National Banking and Securities Commission copies of any agreements entered into with other purchasers, shareholders or board members of the target.

Directors of private companies are subject to less developed standards relating to their duties to the company and the potential liabilities that may result from their actions. Those general standards are set out in the General Law of Corporations. They are deemed to be agents of the company (and not the shareholders), are subject to conflict of interest rules and confidentiality obligations. There are limited scenarios where these directors are personally liable (for the reality of capital contributions, the satisfaction of legal requirements related to the payment of dividends and the existence of registries and records, among others). In any case, liability will run exclusively to the company and not the shareholders.

In the case of publicly traded companies, the standards are included in the Securities Market Law. Directors of public companies will be subject to the duties of diligence and loyalty set out in the Securities Market Law. Under the Securities Market Law, the duty of diligence is generally defined as a duty to act in good faith and in the best interest of the respective company and in exercising such duty, members of the technical committee would need to exercise information rights, rights to interview company officers and auditors and attend and vote at board meetings; failure to comply with this duty can result in damages and losses payable by the directors but can be limited through insurance unless actions are intentional, illegal or fraudulent. The duty of loyalty as described in the Securities Market Law relates generally to confidentiality and the requirement to refrain from acting in the case of conflicts of interest but also covers a larger catalogue of actions, such as an obligation to refrain from receiving economic benefits or procuring economic benefits to third parties as a result of their position as members of such committee, an obligation to disclose conflicts of interest, an obligation to refrain from favouring a holder or group of holders to the detriment of others, an obligation to abstain from benefitting from the assets of the company or taking advantage of business opportunities made available to the company, and requirements relating to the use of information belonging to the company and its corporate and financial records, among others; liability for breach of the duty of loyalty cannot be insured.

With respect to a board’s role in the context of M&A transactions, in private companies, such role (including the need for approvals) would most likely need to be set out in the corporate by-laws of the respective company or in a shareholders agreement, as there is no specific statute that requires such involvement. With respect to public companies, under the Securities Market Law, boards (and even shareholders at a shareholders meeting) need to approve certain significant transactions, which may involve sales of assets or mergers (but not sales of stock, as such transactions are not transactions of the company but are rather transactions by their shareholders). In some cases opinions from board committees are also required.

For private companies, it is not mandatory under Mexican law for boards to have committees entrusted with certain specific matters. It is common, however, in the context of private companies with PE investment or in the case of JV’s, for such companies to establish board committees, including executive committees, audit committees, compensation committees among others. Under the Securities Market Law applicable to public companies, boards of directors are assisted by at a minimum, two committees, a corporate practices committee and an audit committee. Such committees are entrusted with giving opinions to the board with respect to significant transactions, which may include scenarios where conflicts of interest exist.

In a privately negotiated transaction between sellers (shareholders) and buyers, the role of members of the board of directors of the purchased entity is basically non-existent.

In transactions involving publicly listed companies, the participation of the board may be more relevant. As noted, it is common for public companies to contain provisions in their by-laws requiring board approval for purchases of more than a specific percentage of the capital of the company (ordinarily 10% or more), in which case the approval of the board for purposes of consummating the transaction is necessary.

As a separate matter, under the Securities Markets Law, in the context of tender offers, within the ten business days following the launch of the tender, the board of directors is required to, after hearing the company’s corporate practices committee, its opinion as to the tender offer. Such opinion may (but is not required to) be accompanied by a third party fairness opinion. Fairness opinions are commonly used in Mexico as a manner in which board members seek to limit their liability.

As noted, boards of directors, when issuing their opinion with respect to a tender offer, may accompany such opinion with a fairness opinion issued by a recognised financial advisor. Although such third-party fairness opinions are not mandatory (they used to be required by regulation when there where competing offers or there was the possibility of a conflict of interest) they are very common as a manner in which boards tend to seek to limit their liability.