Contributed By Holland & Knight
Mexico currently has two exchanges (the "Exchanges"): (i) Bolsa Mexicana de Valores, S.A.B. de C.V. (“BMV”) and (ii) Bolsa Institucional de Valores, S.A. de C.V. (“BIVA”). Additionally Mexico has an International Quotation System (Sistema Internacional de Cotizaciones), which is an electronic quotation to trade shares listed on foreign stock exchanges.
There are different segments within the exchanges, which correspond to the types of securities to be traded in such exchanges. Depending on the type of security, different rules and governance requirements apply to the issuers and sponsors.
There are several indices, some below.
(i) S&P/BMV IPC,
(ii) S&P/BMV INMEX,
(iii) S&P/BMV IPC CompMx,
(iv) S&P/BMV IPC LargeCap,
(v) S&P/BMV MidCap,
(vi) S&P/BMV IPC SmallCap,
(vii) S&P/BMV IMC30 (MidCap Select 30 Index),
(viii) S&P/BMV HABITA (Housing Index),
(ix) S&P/BMV FIBRAS, and
(x) S&P/BMV SUSTENTABLE.
BMV index inclusion criteria is the following:
In order to reduce turnover, the selection process is subject to a two-stock buffer, whereby current index constituents remain in the index if they rank among the 22 stocks with the smallest rankings.
In cases where two or more stocks have the same combined ranking, the most liquid stock based on MDTV is selected.
Regarding the constituent weightings, the index is weighted based on float-adjusted market capitalisation, subject to a single stock weight cap of 10%.
Each index is weighted based on float-adjusted market capitalisation.
This index is weighted based on float-adjusted market capitalisation.
All stocks in the Selection Universe are ranked based on value traded. Value traded is represented by the median of the monthly medians of value traded for the prior six-month period. The MMVT is defined as the median of the daily value traded for a given company in a given month. The value traded is calculated by multiplying the number of shares traded by each stock's price
The 20 highest ranking stocks, based on value traded, are selected and form the index. If the selection universe consists of fewer than 20 stocks, then all stocks in the selection universe are selected and form the index.
The index is weighted based on each stock's value traded, subject to a single stock weight cap of 25%.
2. Social Responsibility; and
3. Corporate Governance.
All remaining eligible stocks that satisfy the following criteria as of the January rebalancing reference date are selected and form the Selection Universe:
BIVA has the FTSE BIVA index.
BIVA index inclusion criteria is the following:
The main regulatory body is the Mexican National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) (“CNBV”). In addition, other non-governmental and self-regulated entities are involved in the listing process, such as the Exchanges (BMV or BIVA) and a regulated securities deposit and clearing institution (currently only the S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V.).
The CNBV has the remit of supervising and regulating (within the limits of its powers) the entities that are part of the Mexican financial system, in order to procure its stability and correct operation, as well as maintaining and promoting the healthy and balanced development of said system as a whole, in protection of the interests of the public.
For the CNBV to properly supervise and regulate the entities that are part of the securities market in Mexico, specifically those entities involved in a securities listing or public offering process, the Securities Market Law requires the securities subject to public offer and intermediation in the securities market, be registered at the National Securities Registry (“Registro Nacional de Valores”) (“RNV”), a registry in charge of the CNBV.
The CNBV has the power to authorise the registration of such securities at the RNV for the securities to be listed in the exchanges and, for that purpose, it verifies the compliance of the issuer with the legal framework set forth to protect the interest of the investors, mainly to comply with the full disclosure principles adopted by the International Organization of Securities Commissions (“IOSCO”). Additionally, for the listed securities to be publicly offered, the CNBV has to authorise its public offering as well as the offering documents (prospectus, public offering notice and others) once such documents meet the legal requirements and criteria established in the Securities Market Law and the “General regulations applicable to issuers of securities and other participants of exchange markets”.
The Exchanges, on the other hand, have the purpose of providing access to the listing of securities in the respective trading systems. Additionally, the Exchanges have the purpose of establishing the standards and schemes, both operational and behavioural, tending to promote the fair and equitable development of the securities market and its participants, as well as contribute to its integrity and transparency.
CNBV: Regardless of the type of securities to be publicly offered, a formal request must be made for the registration of the securities at the RNV and for its public offering.
Depending on the type of security, a variety of documents must be annexed to such request to initiate the process.
Exchange: A formal listing request must be filed with the exchange simultaneously with the CNBV filing (BMV and BIVA have different but similar forms of listing requests to be submitted depending on the type of security).
The documents provided to the exchange will also be reviewed by the securities deposit institution (“Indeval”).
The specific requirements are provided according to the types of issuers and securities. Please see below.
All public companies must adopt minimum corporate governance requirements set forth in the Securities Market Law, the “General regulations applicable to issuers of securities and other participants of exchange markets” and the Exchange Internal Regulation, as well as complying with the commercial practices of financial markets and any recommendation provided by authorities.
o must have an operational track record of three years with a positive average operating profit;
o net worth of 20 million Investment Units;
o the listed shares must represent at least 15% of the paid-in capital stock;
o at least 10 million shares must be listed.
o must have an operational track record of three years;
o no minimum net worth required;
o at least 15% of capital stock must be publicly offered, representing at least 10 million shares.
o must have an operational; track record of two years with a positive average operating profit;
o net worth of 12 million of Investment Units;
o at least 10 million shares must be listed;
o the listed shares must represent at least 15% of the paid-in capital stock.
o must have an operational track record of three years;
o net worth of 12 million Investment Units;
o at least 15% of capital stock must be publicly offered, representing at least 10 million shares.
SABs and SAPIBs require a minimum net worth, as follows:
For both SABs and SAPIBs, shares representing at least 15% of the capital stock must be held in public hands.
Audited financial statements for the last three years or from the date of incorporation of the issuer (if such incorporation has less than three years), including the external auditor's favourable opinion to said financial statements.
Real Estate Investment Trusts (“FIBRAs”):
The underwriters have the obligation to report to the CNBV and to the Exchange the number of acquirers, and the degree of diversification of the securities holding within five working days after the settlement date.
However, in terms of the Securities Market Law and “General regulations applicable to broker-dealers”, in connection with the public offer, underwriters must comply with the following obligations:
None other than those provided for item 2.2 Specific Eligibility Requirements for Issuers Undertake a Primary Listing.
The main requirements are that secondary listings basically have the same requirements as primary listings, but are required to provide translations of corporate documents and opinions from the primary listing jurisdictions.
First steps consist of filing before the CNBV a formal securities registration and public offering request, and with the exchange a formal listing request. Such requests must comply with requirements provided in the Securities Market Law (Ley del Mercado de Valores) and “General regulations applicable to issuers of securities and other participants of exchange markets”. Along with the referred requests, issuers must file before the CNBV and the exchange mainly (it may vary depending on the type of security – shares, real estate fiduciary certificates for Mexican REITs, etc.) a preliminary prospectus, form of title or share certificate, audited financial statements, opinions, corporate resolutions and agreements such as shareholders' agreements.
After the filing is made, the CNBV will have a period of time to review the documentation and may provide comments to the issuer. Once several rounds of comments and responses occur, the CNBV may authorise the registration of the securities and its public offering.
Yes, but it's very similar to the process for a local company. If a company in a different jurisdiction wishes to list its shares on a Mexican exchange, it has to file before the CNBV certain additional documentation under applicable rules and regulations. However, the process is very similar to the one that Mexican companies have to comply with to obtain a primary listing.
Normally shares are registered in the RNV, but a large number of foreign issuers trade their shares in the International Quotation System (Sistema Internacional de Cotizaciones) (“SIC”), a platform that allows investing in shares and Exchange Traded Funds (“ETFs”) whose securities have been listed offshore (the registration is made possible by a sponsorship of a broker).
The main ways to structure an IPO are through: (i) direct offering of the company's shares in the primary market, or (ii) through a special vehicle such as a Mexican trust issuing a participation certificate (certificados de participacion ordinaria), where the shares of the company are transferred to the trust.
Additionally, in connection with structured vehicles, there is an undefined possibility to structure an IPO, depending on the objective of the transaction.
Furthermore, IPOs can be structured depending on the type of investor to which such offering is addressed (limited offerings).
Except for those requirements in item 2.2, there are no specific requirements regarding the structure of an IPO.
The main ways of structuring a subsequent equity offering are through: (i) the issuance of new shares by the company (primary offering or follow-on), (ii) current shareholder selling shares previously acquired in a primary offering (secondary offering), (iii) mix offerings that include primary and secondary offerings at the same moment, or (iv) the issuance of new shares under a shelf programme.
Subsequent offerings can be implemented through direct offerings of the company's shares or through a Mexican trust issuing participation certificates.
Not really. The procedures in the event of a primary or a secondary listing are the same.
The procedure is quicker and simpler if the offering is made only to existing shareholders. No offering documents are required under Mexican law or regulations in order to carry out a rights offer to the existing shareholders.
Advisers appointed in connection with an equity offering and their role:
Usually it does not differ. Sometimes, depending on the issuer and the issuer's business, additional advisers may be appointed, such as tax legal experts, appraisers or others in connection with the specific sector of the issuer.
All equity public offerings under applicable laws and regulations require a prospectus or offering document. When issued under an existing shelf programme, the prospectus is amended by a supplement to the prospectus providing details of the offer.
A prospectus must include all material information from the issuer and assets, depending on the type of security. Such information can be summarised in the following:
a) Main activity.
b) Distribution channels.
c) Patents, licences, trade marks and other contracts.
d) Main customers.
e) Applicable legislation and tax situation.
f) Human resources.
g) Environmental performance.
h) Market information.
i) Corporate structure.
j) Description of the main assets.
k) Judicial, administrative or arbitration processes.
In the case of shares, additionally:
l) Shares representative of the share capital.
In the case of foreign issuers, additionally:
n) Exchange controls and other limitations that affect the shareholders.
a) Operation results.
b) Financial situation, liquidity and capital resources.
c) Internal controls.
d) Critical accounting estimates, provisions or reserves.
In the case of foreign issuers, additionally:
Underlying Assets (only for structured securities issuers)
a) General Information.
a) General characteristics of the offer or programme, as the case may be.
a) General information of the Issuer.
The following participants are liable for the contents provided within the scope of their duties:
1. The issuer.
2. The underwriters.
3. The independent auditor.
4. The independent legal counsel.
5. The guarantor (if applicable).
6. The trustee (if applicable).
7. The settlor (if applicable).
8. The common representative (if applicable).
9. The financial adviser and/or structuring agent.
10. Other advisers might be liable, for example, for studies concerning a specific kind of assets or valuations of the company's assets.
The content requirements of the offering documents differ depending on the type of securities to be offered. Accordingly, the “General regulations applicable to issuers of securities and other participants of exchange markets” establishes different content requirements for the following securities:
e. REITS (Fibra Inmobiliaria);
f. Mortgage Trusts;
g. Energy and Infrastructures Investment Trust (Fibra E) (depending on the type of sector because some requirements might be different).
In accordance with the “General regulations applicable to issuers of securities and other participants of exchange markets” a preliminary version of the prospectus is presented in the first filing, which is complemented through subsequent filings both with the comments/requirements from the CNBV, the Exchanges and from the transaction parties.
Prior to obtaining the authorisation, a preliminary prospectus signed by the parties mentioned in item 6.2 Responsibility and/or Liability for the Content of a Prospectus and initialled by the issuer's legal representative is submitted to the CNBV. Once the authorisation is obtained, two copies of the definitive prospectus (signed and initialled just as mentioned before) with all of the exhibits, is normally submitted to the CNBV.
The “General regulations applicable to issuers of securities and other participants of exchange markets” establishes that, depending on whether it's an IPO or a subsequent offering (follow-on), both the prospectus and any other offering documents must be available for public investors, in accordance with the following:
Black Out Period
Issuers performing an issuance on a date close to or after the publication of periodic financial information in terms of the Title IV of the “General regulations applicable to issuers of securities and other participants of exchange markets” should consider the following:
i. The closing date/public auction date/pricing date of securities must occur ten business days after the publication of the issuer's financial information (this is applicable for the issuance of securities without public offering and Frequent Issuers).
ii. The closing date/public auction date/pricing date of securities, cannot occur within five business days prior to the publication of the issuer's financial information (this is applicable for the issuance of securities without public offering and Frequent Issuers).
Additionally, in the case where the pricing or closing date occurs within five to ten business days prior to the publication of the issuer's financial information, such issuer must disclose in the offering documents (public offer notice, prospectus and/or supplement, as the case may be), the date in which the financial information will be published, the expected tendency regarding the historical information, and if possible, the financial information of the latest available monthly period.
Under a shelf programme, issuers are able to publicly offer and place securities without having to submit a new prospectus or even update the prospectus of the programme, as long as the issuer complies with its reporting obligations under the “General regulations applicable to issuers of securities and other participants of exchange markets”.
Restrictions to market the securities are applicable in Mexico before the issuance documents (specially offering document or prospectus) are publicly available. Under applicable law, an issuer may file issuance documents with the authorities as confidential, meaning such documents will be available to the public until: (i) the issuer requests them to be publicly available, or (ii) upon the CNBV (as authority) and the Exchanges (as self-regulatory institutions) request.
Once the offering documents are available to the public through the securities exchange and CNBV's platforms, then issuers are allowed to market and offer the securities freely.
They are limited to certain selling practices rules.
Research reports shall comply with a restriction period commencing the first day of the offer and until for days after the IPO is made, or ten days after the placement in case of previously registered securities (follow-on).
There is always a possibility to ask for damages in general terms (judicial process shall be established) in addition to any additional penalty to be granted by the CNBV.
Not routinely, although we have seen some research reports from institutions outside the syndicate advising on the transaction. There is no specific guidance or regulatory requirements regarding such unconnected research reports.
A book-building process is commonly used for equity offerings in Mexico.
Currently, the most common manner to structure an equity offering is through best efforts. Mexican underwriters will rarely commit to firm commitment.
The key terms of an underwriting agreement are:
Each underwriter negotiates with the issuer the commission, which consists typically of an amount equal to a percentage agreed over the total amount of securities placed. Sometimes a success bonus is granted by the issuer on a discretionary basis. However, it is determined on specific circumstances for each offer.
Stabilisation in connection with an equity offering allows the underwriters to purchase and sell the publicly offered securities on the open market. Stabilising transactions consist of certain bids or purchases of securities made for the purpose of preventing artificial declining in the market price of the securities after the offer is made. Any stabilisation activity cannot consist in manipulating the market because manipulation is against best practices and enforced by the CNBV.
There are rules contemplated on the Securities Market Law, namely:
Public offers in Mexico are governed by Mexican law. In the case of foreign issuers conducting a public offering in Mexico, Mexican law would apply, but formation documents and other items related to issuer’s operations may be governed by any foreign law.
English or New York Law may not be used to govern an underwriting agreement.
We are not aware of any cases of securities governed by Mexican law to have a conflict of laws.
A judgment rendered in a foreign jurisdiction would be enforceable in the competent courts of Mexico pursuant to Article 1347-A of the Commerce Code, which provides, inter alia, that any judgment rendered outside Mexico may be enforced by Mexican courts, provided that:
Regarding arbitrations awards, Mexico is part of the New York Convention (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards), and the Mexican Commerce Code reinforces the principles of recognition and enforceability of foreign arbitration awards. The only exception to its enforcement are listed in Article 1461 of said Commerce Code, and are customary exceptions (ie, if the award has been declared null or is not enforceable under the legislation where the award was rendered, one of the parties was not properly notified of the arbitration proceedings, etc.).
None other than those described above for foreign judgements, and with regard to arbitration awards, the only requirements are also established in Article 1461 of the Mexican Commerce Code, in general terms: (i) submitting a written request to the Mexican judge for its recognition; (ii) the Party requesting its execution should submit the original of the award duly authenticated or a certified copy, along with the original arbitration agreement, or a certified copy; and (iii) if the award or agreement was not written in Spanish, a translation into Spanish made by an official expert should also be submitted.
No, the enforceability of any of the transaction documents would not be affected in general terms.
Foreign companies applying for registration of securities representing its share capital in the RNV must certify to the CNBV that they have rights equal to or higher than those required for SABs, and minority rights, and that their governing bodies maintain its organisation, operation, duties, responsibilities and internal controls at least equivalent to those of said companies according to Mexican applicable laws.
In our experience, according to transactions we have been involved in, a typical timetable would be as follows:
The CNBV takes more time to analyse documents from first-time issuers (such as IPOs), as they have no background concerning the company’s financial information or market behaviour. Subsequent offerings usually take less time than IPOs.
Tax issues could arise in the context of investment vehicles such as public FIBRAs (Mexican Real Estate Investment Trusts) or FIBRA Es (Energy Investment Trusts), where specific tax requirements set forth in the Mexican Income Tax Law ("MITL") or in Tax Miscellaneous Regulations need to be fulfilled in order to be able to achieve tax transparency at the level of the issuing vehicle.
Likewise, different classification rules related to the nature of financial instruments (eg, private and public shares, bonds, derivatives, convertible shares, repos or preferred shares) may result in different tax treatments depending on whether the instrument is treated as debt or equity pursuant to the MITL and equivalent regulations in the recipient country. For example, debt instruments deemed to represent an equity investment from a tax perspective may be reclassified as equity under the MITL but not under foreign law.
Mexican tax resident individual shareholders are subject to an additional 10% WHT on dividends distributed by Mexican companies if they arise from profits generated from 2014 onwards. This WHT is considered final.
Under MITL temporary provisions, however, certain tax credits may be granted to individual Mexican shareholders against such additional withholding tax with respect to reinvested dividends originated exclusively in 2014, 2015 or 2016 and distributed in 2017 and subsequent years, provided certain requirements are met. Considering such credits, the effective WHT rate could be 9%, 8% or 5% depending on the year the dividend is distributed.
Dividends paid to foreign tax residents are subject to a domestic 10% WHT over the gross dividend paid amount.
In contrast, dividends paid by Mexican companies to other legal entities tax resident in Mexico are not subject to a WHT.
Depending on the shareholder’s residence jurisdiction, Income Tax Treaties for the Avoidance of Double Taxation ("Tax Treaties") entered into by Mexico with other countries may provide for a relief either by reducing the applicable WHT rate or eliminating the WHT. Such could be the case of the Tax Treaties between Mexico and France, the Netherlands, the United Kingdom or the United States, under which the payment of dividends will not be subject to a WHT in Mexico under certain circumstances.
Returns of capital to shareholders upon the liquidation of a company or otherwise are treated as tax-free amortisation of capital up to the amount of the shareholder's adjusted previously contributed capital per share.
Yet, in the event of liquidation of a company, reimbursements per share made to shareholders in excess of their adjusted-for-inflation contributions per share are treated as liquidation dividends and thus taxable to the extent such dividends are not paid out from the Net Tax Income Account (“CUFIN”) account. The CUFIN represents profits already taxed at the level of the Mexican distributing company.
If profits are distributed by means of stock dividends or generally are reinvested within 30 days after a distribution takes place, the tax could be deferred until the shares are paid for upon a capital reimbursement or liquidation of the company.
No stamp duty, capital duties or transfer taxes apply in Mexico in the matters of reference.
Capital gains derived by non-residents from the sale or disposition of (i) publicly traded shares issued by Mexican tax resident entities, (ii) shares issued by foreign companies registered at the SIC ("Sistema Internacional de Cotizaciones"- or Mexico's International Quoting System), as well as (iii) titles or equity indexes related to these shares (eg, ETFs), are subject to a 10% income tax rate, when the transfer is carried out through authorised Exchanges or Mexican derivatives markets.
However, a rate of 35% instead of the 10% rate described above will apply under certain exceptional circumstances, among others, if a 10% interest holder within a period of 24 months disposes 10% or more of the paid shares of the issuing company.
Similarly, capital gains arising from the transfer of shares in Mexican Open-ended Investment Funds will be subject to income tax at the rate of 10%.
The broker dealer or stock market intermediary is responsible for withholding the tax.
The sale of publicly traded shares could be tax free when the seller is a resident of a country that has an applicable tax treaty with Mexico, provided that they comply with formal requirements, including evidence of tax residence issued by the tax authorities of their respective countries.
The sale of publicly traded FIBRA or FIBRA E certificates by Mexican resident individuals and foreign tax residents is tax exempt.
The issuers must provide quarterly and annual reports.
Within 20 business days following the end of each of the first quarters of the fiscal year and within 40 working days following the end of the fourth quarter, the issuer must make public, through the CNBV and the Exchange, the financial statements, as well as the economic, accounting and administrative information comparing at least the figures of the quarter in question with the financial statements of the previous year in accordance with the applicable accounting regulations. The quarterly report must contain an update of the annual report or the prospectus of placement in case that, at the date of presentation of disclosure of the aforementioned financial information, the issuer will not have the obligation to publish said report regarding the comments and analysis of the administration on the operation results and financial status.
No later than April 30th of each year, the issuer must make public, through the CNBV and the Exchange, an annual report corresponding to the previous year that includes the annual audited financial statements of the reported year as well as the operating and administrative information of the issuer for the reported year.
For some types of securities, issuers must provide monthly reports in accordance with the “General regulations applicable to issuers of securities and other participants of exchange markets”.
Disclosure requirements in respect of information regarding the issuer
The disclosure of periodic information is considered relevant information, as well as any change to the structure or characteristics of the securities. Issuers are required to disclose any information that may affect the price of the securities, such as: (i) unusual changes in the market price or volume of operation of its securities and (ii) changes in the supply or demand of its securities or in their price, which are not consistent with their historical behaviour and cannot be explained by the public information.
Also, considered to be relevant events, but not limited to, are the following:
To determine if an event is relevant, the issuer must consider if the event in question is equivalent in value to 5% or more of the its assets, liabilities or consolidated capital, or amount to 3% of the consolidated total sales of its previous year.
Corporate governance requirements
Only those disclosed in the documents from the IPO, any changes thereto.
Specific rules applying to transactions post-listing
The Securities Market Law provides, depending on the transaction, specific rules for both the board of directors and the shareholders meeting as follows:
Board of Directors
The board of directors must approve prior opinion of the practices committee:
The shareholders meeting, in addition to the provisions of the General Business Company Law (Ley General de Sociedades Mercantiles), will take place in order to approve operations in which the company or its subsidiaries intend to execute, during a fiscal year, when said operations represent 20% or more of the consolidated assets of the company based on figures corresponding to the close of the immediately preceding quarter, regardless of the way in which they are executed, whether simultaneous or successive, but due to their characteristics may be considered as a single operation.
These obligations apply equally to foreign incorporated issuers.
Penalties include fines ranging from approximately MNX806,000 to MNX8,060,000 and are independent of any damages.
In addition, a trading halt or the cancellation of the registration of the securities in the RNV can be granted by the CNBV as these are considered serious infringements.
The head of finance and legal counsel or equivalent that do not comply with their obligation to review within their respective competences, and sign quarterly and annual reports, will be sanctioned with an administrative fine imposed by the CNBV of 10,000 to 100,000 days of salary under the LMV equivalent to MNX806,000 to MNX8,060,000 (per rate MNX80.60 Unit of Measurement and Update (“UMA”) is the economic reference in pesos to determine the amount of payment from obligations and alleged assumptions provided for in federal law, the states and Mexico City, as well as in legal provisions from all of the above). The chairmen of the committees of corporate practices or auditing of SABs, which fail to prepare the annual report on their activities and present it to the board of directors of the company, will be liable for a fine of 20,000 to 100,000 UMAs under LMV, equivalent to MNX1,612,000 to MNX8,060,000.
Issuers that fail to provide the CNBV or the stock exchange in which they list their securities the quarterly or annual reports, or when they submit them incomplete or without complying with the requirements, terms or conditions required for it, similarly, to the issuers that fail to prepare their financial statements in accordance with accounting principles issued or recognised by the CNBV, will receive a fine of 30,000 to 100,000 UMAs under LMV, equivalent to MNX2,418,000 to MNX8,060,000.
These sanctions might be applicable for SABs, shareholders, members and the secretary of the board of directors and relevant executives, will be equally applicable to SAPIB, FIBRAs, CKDs, shareholders and other persons performing any of the aforementioned positions, when the legal precepts are applicable to them.
Violation of these provisions will be considered serious infringements and the fines referred previously are independent of the suspensions, disqualifications, cancellations, interventions and revocations that may be appropriate.
Regardless of the economic sanctions that, pursuant to the applicable law, the CNBV imposes on the issuers for violating these provisions for not preparing their financial statements in accordance with accounting principles issued or recognised by it, the CNBV will require the issuers to modify their financial statements in order to comply with the aforementioned principles and its disclosure to the public.