After 2020, the total transactions, as well as the total aggregate value of the transactions performed during that year, showed a decrease of 3% and 26% correspondingly, in accordance with information from the Transactional Track Record (TTR). In contrast, the second quarter of 2021 showed an increase, both in total aggregate value and total number of transactions, in relation to the same quarter of 2020. As stated in information in the TTR, during 2021 there has been a total of 58 M&A transactions with a total aggregate value of USD3.466 and a total of nine Private Equity Transactions with a total aggregate value of USD76 million.
While the COVID-19 pandemic generated significant uncertainty in the Mexican economy, the foregoing works as proof that both the vaccination plan implemented by the federal government and as the easing of health measures resulting from the pandemic have, to date, allowed the Mexican economy to start a slow recovery.
While the remedial actions taken by the Mexican government were not those expected by the private sector, they allowed and are still allowing for the private equity M&A transactional market in Mexico to continue to grow and, regardless of the fact that it has not done so at the expected rate, the sector has still continued to yield positive results.
Furthermore, a recent amendment to the Federal Labour Law (Ley Federal del Trabajo) has implemented further restrictions for the rendering of outsourcing services. These have resulted in a large number of mergers between companies of the same corporate group, in order to merge the in-sourcing companies and avoid a breach with the new prohibitions set forth as result of the aforementioned amendment to the Federal Labour Law.
As previously stated, there has continued to be an increase in private equity M&A transactions, which have achieved a higher rate than in 2020.
As an example of the aforementioned, Aerodrome Infrastructure, a subsidiary of Fintech Holdings, made a Public Acquisition Offer (OPA) for the acquisition of 44,343,015 shares of Grupo Aeroportuario del Centro Norte (OMA). According to the information disclosed, the transaction was performed with JP Morgan as the financial intermediary, with a total transaction value of approximately USD672,84 million.
Another notable transaction was the acquisition by Alta Growth Capital, a private equity fund that invests in middle-market companies operating in Mexico, of Mexarrend, which is the second-largest independent leasing company in Mexico, for a total value of approximately USD10 million.
Another important transaction was the one developed by Betterware de México, a company that recently became public through the merger with the special-purpose acquisition company (SPAC) DD3, which acquired 60% of the capital stock of GurúComm, a virtual mobile operator (VMO), that will allow Betterware to offer, in addition to direct-to-customer sales of household products, telecommunication services. According to information from the TTR, the private equity market in Mexico has increased in number of transactions by a 12.50% in relation to the same period from the previous year. Regardless, the total aggregate value has decreased by 67.09%.
Furthermore, according to information from AMEXCAP, over the last 20 years, the accumulated committed capital has reached an amount higher than USD61.6 billion, which represents an annual growth rate of 12.7%. Additionally, and in accordance with the information provided by AMEXCAP, the Private Equity market has created more than 1.4 million job opportunities, representing almost 10% of the total job opportunities created over the last 18 years in Mexico.
Finally, the industries that have maintained a higher activity rate during 2021 are the technology industry, with 46 transactions and a change of 100% relative to the same period for 2020, the financial and insurance industry, with 45 transactions and an increase of 114%, the internet industry, with 22 transactions and an increase of 83% and the distribution and retail industry with 14 transactions and an increase of 133%, all of them relative to the same period in 2020. The foregoing shows, as stated before, that there has been an improvement in Mexico’s economy and in contrast, the financial and insurance industry closed 2020 with a total of 62 transactions while the technology industry closed with 59 transactions, numbers that are close to the amount of transactions for those industries during the first semester of 2021.
As mentioned in 1.1 M&A Transactions and Deals, the technology industry as well as the financial and insurance industries have been the most active regarding M&A transactions during 2021. Furthermore, venture capital in Mexico during the first semester of 2021 had a total aggregate value of approximately USD1.976 and the total number of transactions was 73, which represents an increase of 440.22% and 73.81% respectively.
Some of the most relevant legal developments include, as mentioned in 1.1 M&A Transactions and Deals, the recent amendment to the Federal Labour Law which as a result made outsourcing widely regulated, introducing a general prohibition for the rendering of outsourcing services except where certain criteria are fulfilled by the parties. Thus, an increase in M&A transactions will probably be seen in Mexico which will not necessarily raise much capital, as they will be performed for the Mexican holding companies to merge with their in-sourcing companies.
Another important legal development in Mexico arises from the amendment made by the Mexican Stock Exchange (Bolsa Mexicana de Valores) (BMV) in 2017 to its internal regulation, in order to allow SPACs to be listed and operate in accordance with their traditional legal structure. Regardless, these special-purpose acquisition companies have still to be more broadly used in Mexico as, to date, there have been only two precedents. The first one is the SPAC incorporated by Vista Oil & Gas in 2017, which raised a total of USD650 million and had as its purpose the acquisition of companies from the Energy industry in Mexico, Colombia, Argentina and Brazil. The second one is Promecap Acquisition Company which had as its target investment in family companies, private equities and public companies. This is the only SPAC that, to date, has successfully merged with another company, which was Acosta Verde, a company of which the main activity is the operation and management of shopping malls in Mexico, for a total amount of approximately USD200 million. Furthermore, interest in this vehicle has been increasing, as investors are starting to consider SPACs as a great alternative to traditional initial public offerings (IPOs), arising from the benefits they have, including that they allow for younger companies to become publicly listed, avoiding long and highly expensive procedures.
Additionally, other Mexican companies such as the aforementioned Betterware have merged with SPACs but in other stock exchanges outside of Mexico. In the case of Betterware, the company merged with DD3 Mex Acquisition Corp, an affiliate of DD3 Capital Partners, and became the first Mexican company to be listed in the NASDAQ Stock Exchange.
In this regard and up to this date, there is still no further regulation for the operation of SPACs, thus, the aforementioned precedents have used the exception introduced to the internal regulation of the BMV and have adapted both the procedure as well as certain legal requirements for the SPACs, in order to bring security to their investors. As such, there will probably be amendments or further legal provisions issued by the Mexican Financial Authorities in order to regulate these vehicles more precisely.
Furthermore, previously other publicly listed vehicles have been created, such as fiduciary certificates of capital development (certificados bursátiles de capital de desarrollo – CKDs) and fiduciary investment project securitisation certificates (certificados bursátiles fiduciarios de proyectos de inversión – CERPIs), which have greatly increased their presence in the Mexican financial markets.
The primary financial regulators for private equity funds and transactions under Mexican law include:
Mexican law does not provide specific regulation for M&A activities, per se. However, much will depend on the type of structure that each M&A transaction is intended to carry out, so the following regulators may apply, among others:
Over the years, Mexico has become an important party to foreign investment in most economic sectors and, as such, has been advancing its foreign investment framework. In general terms, foreign investments are regulated by the Foreign Investment Law (Ley de Inversión Extranjera – LIE) and its regulations. As per the LIE, and as a general rule, foreign investments in Mexico should be reported to the Foreign Investment Registry (Registro Nacional de Inversiones Extranjeras), which is a governmental registry that keeps a record of the Mexican entities operating in Mexico with foreign shareholders and capital.
The LIE provides the following definition of foreign investment:
In addition, pursuant to Article 7 of the LIE, there are particular sectors in which the percentage of foreign investment is legally regulated and limited, as follows:
In addition, the above-mentioned restrictions on foreign investment as set forth in the LIE must not be exceeded indirectly or directly through other agreements or trusts, nor through indirect foreign participation.
Furthermore, special authorisation from the CNIE is needed when foreign investment will exceed 49% in the following industries:
Antitrust matters are regulated under the Federal Economic Competition Law (Ley Federal de Competencia Económica – LFCE) and its regulations. Antitrust regulators, the COFECE and the IFT, have authority to clear transactions that exceed any of the thresholds provided in the LFCE. It should be noted that a transaction will not have legal effect until it is authorised.
The LFCE provides exemptions to the pre-merger notice requirement, under specific circumstances – for instance, when the transaction is a corporate restructure or if it implies the incorporation of a trust whereby an economic agent transfers its assets, stock, etc, without the purpose or necessary consequence of transferring them to a company other than the trustor and the fiduciary institution.
In Mexico, legal due diligence exercises for private corporations are typically carried out on a broad basis, so as to avoid any present or future contingencies and liabilities. However, much will depend on the target entity, the type of activities it carries out, or the sector or industry of that target entity, and the legal due diligence will generally cover the following:
However, legal due diligence for publicly traded corporations is commonly limited to publicly available information, due to the standard confidentiality provisions.
Vendor due diligence is a common feature that provides full disclosure to potential investors, allowing vendors to maintain even greater control throughout the due diligence process, whilst paying close attention to any potential hidden defects or environmental matters, specifically pertaining to the real estate sector. On a more general level, activities carried out in Mexico must comply with the necessary governmental licences and authorisations and are subject to any potential remediation action.
Advisers may issue a legal opinion that provides credibility to the private equity transaction, based on the documents reviewed and applicable law, which further speeds up the sale process.
Acquisitions by private equity funds are typically initiated through an initial deal evaluation by the buyer. Consequently, the buyer will approach the seller with an initial negotiation, most likely a year or less before an investment is agreed upon, and where assurances will be made regarding the intention of the buyer.
Consequently, if both parties come to an agreement, a broad legal due diligence process (as detailed in 4.1 General Information) will be carried out, in order to avoid any present or future contingencies or liabilities. The scope of the legal due diligence process will rely on the activities the potential private equity seller carries out, including the market sector to which it belongs, financials and corporate matters.
Once the legal due diligence process is carried out, final negotiations between the parties are common, where final terms and conditions are agreed upon and the parties may then proceed to the signing of the legal documentation.
In Mexico, purchase agreements or subscription agreements of private equity transactions are common practice. It is important to consider that private equity transactions in Mexico are subject to both commercial and financial law.
Private equity-backed buyers generally carry out their acquisitions by means of special-purpose vehicles (SPVs), which in many cases include limited partnerships, Structured Equity Securities (CKDs), trusts or private entities. In rare cases, the private equity-backed buyer participates directly in the acquisition documentation.
Private equity deals are generally straightforward. In practice, most deals are financed through capital contributions by way of a shareholders' meeting of the target corporation, and the buyer will concurrently enter into a shareholders’ agreement with the target corporation, which sets forth the terms and conditions.
In Mexico, equity commitment letters may be used in order to provide certainty of funds from a private equity-backed buyer. Furthermore, most private equity deals in Mexico are commonly owned by the private equity fund and management executives.
Deals involving a consortium of private equity sponsors are allowed but are not common. In most cases, a single private equity firm will carry out the transaction.
Co-investment by other investors alongside the private equity fund is common. Furthermore, such investments are commonly passive stakes which, by their nature, do not allow for voting rights in investment decisions.
Consideration structures will vary on a case-by-case basis, considering the size of the transaction, the investor profiles and the current market conditions.
Earn-out provisions are common, since they encourage an owner to remain active in their business for a specific period. This allows the private equity firm to purchase at a lower price and the owner to generate considerable revenue if the target corporation achieves a certain level of performance.
It is common for a seller to provide representations and warranties regarding their corporate purpose, liquidation procedures, spin-offs, insolvency events, bankruptcy or corporate restructuring, or any other representation or warranty that may provide further comfort to the buyer, as well as legal certainty, that may affect the private equity transaction in any way. In certain cases, bonds or personal guarantees may be granted in favour of a buyer, in order to provide further assurances.
The buyer will generally provide documentation regarding incorporation documents, powers of attorney, its intent on utilising the committed capital, and assurance that it has no knowledge of any actions, claims or procedures by any court, government agency or arbitrator affecting the legality, validity or enforceability of the pertinent private equity documents. In general, the buyer will provide assurances to the seller in connection with the origin of the funds that will be used for the acquisition, and its track record.
The charge of interest on leakage in locked-box consideration structures will vary on a case-by-case basis. Leakage clauses, by their very nature, provide legal certainty and protection on a locked-box (or fixed-price) consideration in private equity transactions. Other than permitted leakage, which is agreed upon by the parties in a private equity transaction, those parties may establish an interest rate charge if a leakage occurs, upon mutual consent.
Dispute resolution mechanisms will usually be agreed upon by the parties in a private equity transaction if leakage takes place. The parties will also, upon mutual consent, come to a consensus as to what constitutes leakage and, as previously mentioned, permitted leakage. Generally, these types of transactions will include an arbitration clause, as explained in 6.11 Commonly Litigated Provisions.
It is common to include a typical level of conditionality, such as the condition for closing, but such conditions tend to vary, depending on the size of the private equity transaction. Furthermore, market conditions and investor profiles tend to set the pace for certain levels of conditionality, alongside obtaining the necessary approvals from the COFECE, including third-party consents such as key contractual counterparties.
Material adverse change/effect provisions are common in private equity transactions, particularly when financing is involved, as they influence fund certainty directly. They allow for each party to notify the other in cases of financial stability, insolvency events and disruption of services, among others.
It is common for a buyer to accept a “hell-or-high-water” clause in Mexico.
Moreover, these types of clauses are generally aimed at buyers who are assuming all risk on antitrust matters in a private equity transaction. However, if the deal raises concerns, it is common for the commitments offered to the authority to be previously agreed by the parties.
Break fees are allowed and commonly used in Mexico and have no legal limits. Reverse break fees are allowed but are rarely employed.
In private equity transactions, the parties will generally agree upon mutual terms to terminate the acquisition agreement if the private equity seller or buyer refuses to carry out the actions necessary for the fulfilment of their obligations, or if the corresponding party fails to make payments of committed capital, notwithstanding the obligation of the investor to pay the non-compliance penalty usually set forth in the acquisition agreement.
The return on investment in a private equity transaction is uncertain by nature. Furthermore, the seller and buyer must commit fully to the nature of the investments carried out and the risks they entail, which even exist when decision-making is based on prudent criteria and best corporate practices by the seller. Both parties in a transaction will expressly accept that the return on investment cannot be guaranteed under any circumstances. In any case, the allocation of risk does not change according to the nature of the buyer or seller, except in very specific cases.
The main limitations on liability for the seller usually include limitations for indemnity clauses, a cap for damages and certain thresholds – this is to limit any potential liability for the seller that may emerge from their corresponding representations and warranties.
As the buyer will become the owner of the target corporation, it is common for the buyer to request the following warranties from the seller:
Additionally, it should be noted that the seller is bound to comply with all the warranties that it provides to the buyer and will be liable to pay damages and losses that any default may cause the buyer. However, it is common to establish a penalty clause that will limit the responsibility of the seller in the event of default of any of the provided warranties; the amount established in the penalty clause is often the amount of the transaction (acquisition of the shares or the amount of the investment).
It is also important to note that the management team does not provide any direct warranties to the buyer, since the seller shall guarantee that the management team can carry out the daily activities and management of the target corporation. Moreover, under Mexican law, the management team is directly responsible for certain actions that they carry out in the target corporation.
Finally, if the limitation of liability is not contemplated, the seller will be liable for any damages and losses that it may cause the buyer, which will have to be proven to a competent judge in a court procedure, and the competent court by its own discretion will establish an amount for any such losses and damages.
In most cases, both the seller and the management team will provide indemnities for the buyer. In some cases, personal guarantees are included to entice the buyer. Warranty and indemnity (W&I) insurance is not common in Mexico. However, it is common to have an escrow or retention in place to back the obligations of a seller; this can be used if the parties agree.
In Mexico, litigation is not common in private equity transactions. More often, disputes between the parties will be settled via arbitration or mediation, or some other form of conciliation.
Bodies such as the International Chamber of Commerce (Cámara de Comercio Internacional), the Mexican Arbitration Association (Centro de Arbitraje de México) and the American Arbitration Association are the preferred entities to rule on an arbitration.
Public-to-privates are not common in private equity transactions. To provide context, there are approximately 145 public companies listed in the BMV and the Institutional Stock Exchange (Bolsa Institucional de Valores) (BIVA), all of which have a high shareholder concentration and are not open to be sold.
As discussed in 7.3 Mandatory Offer Thresholds, material shareholding disclosure thresholds must be set for publicly listed corporations, as per Article 98 of the Ley del Mercado de Valores (LMV). This does not apply to private corporations.
Furthermore, as per Articles 109, 110 and 111 of the LMV, publicly listed corporations should make the following information public:
The foregoing does not apply to private entities, and there are no disclosure thresholds under Mexican law.
Under Article 98 of the LMV, a mandatory offer must be made if a person or group of persons intends to acquire or achieve by any means, directly or indirectly, the ownership of 30% or more of the common shares of a corporation registered in the RNV, inside or outside a stock exchange, by one transaction or several successive transactions; that entity will be obliged to carry out the acquisition by means of a public offer, as set forth in Article 97 of the LMV, and in accordance with the following:
The LMV does not currently provide for a specific type of consideration, but cash is more commonly used for the target shareholders in the acquisition processes for both public and private corporations.
Shares, negotiable instruments or cash with the option to re-invest all or a portion of the cash proceeds in other securities may also be offered as consideration.
As previously mentioned, Article 98 of the LMV provides that the consideration offered must be equal, regardless of the class or series of the target's shares.
It is important to consider that a minimum level of consideration is not required under Mexican law, although the CNBV may issue an opinion with regard to the fairness of the consideration.
The regulators allow offer conditions, which are necessary in certain specific situations. In some instances, as previously explained, an approval from the COFECE is necessary to close an acquisition, so the parties include a condition that requires the authorisation from the COFECE, otherwise the transaction will be retroactively voided. Conditions that require the bidder to obtain financing are not common, but have occurred in the past, and the regulators will not restrict the use of such a condition. Other security measures include break fees (as previously explained), and rights of first refusal.
The bidder may seek control of the board of directors or another governing body in an entity. Furthermore, in the case of investment promotion in limited liability stock companies, all of the governance rights may be carried in a minority stake (such as appointing members of the board and voting on day-to-day matters, among others). Squeeze-outs are not common and, as provided in 8.5 Minority Protection for Manager Shareholders, are prevented by minority rights set forth in the applicable laws.
Irrevocable commitments are uncommon in Mexico. When they are used, there are generally outs available for the seller if they receive a better offer. Generally, the irrevocable commitment ends through the passage of time.
Hostile takeovers are permitted under Mexican law, mainly the LMV.
However, it is important to consider that the relatively low number of public corporations mixed with a high shareholder concentration tends to discourage hostile takeovers in Mexico, which are uncommon, with just two attempts at hostile takeovers having been made in the past.
During 2015, the Mexican Supreme Court ruled that any provisions in the company by-laws aimed at deterring or limiting hostile takeovers must be in accordance with Article 48 of the LMV in order to be valid. This is almost always the case in Mexican publicly traded corporations.
Equity incentivisation of the management team is common in certain transactions and is generally permitted under Mexican law – this includes equity from public entities (to the extent that the terms set forth in Article 8 of the LMV are followed).
The level of equity ownership varies, depending on the private equity transaction. There is no predetermined amount used as a reference.
Mexican transactions of this nature vary from case to case; in some cases, management may receive ordinary equity, in other cases, preferred equity, and in still other cases, cash considerations.
The typical leaver provisions are aimed at maintaining the services of management shareholders, who by their nature are key employees. The scope of leaver provisions is focused on retaining the original management team to maximise the target corporation’s growth from the start of the private equity transaction.
The typical vesting provisions are aimed at protecting management shareholders from any contingencies and liabilities that may arise from the relationship between a buyer and seller from the very beginning of the transaction.
In Mexico, common restrictive covenants agreed to by management shareholders include non-compete and non-solicitation undertakings. The limits of enforceability will generally be mutually agreed between the parties.
The General Corporations Law (Ley General de Sociedades Mercantiles – LGSM) and the LMV provide minority rights that have to be included in a limited liability stock corporation and an investment promotion limited liability investment corporation.
Limited-Liability Stock Corporation (Sociedad Anónima)
In a limited-liability stock corporation, the following applies:
Investment Promotion Limited-Liability Investment Corporation (Sociedad Anónima Promotora de Inversión – SAPI)
In an investment promotion limited-liability investment corporation, the following applies:
Management may not veto any decisions where minority shareholders have voting rights. Management teams may have the right to control or influence the exit of a private equity fund, but in many cases, they will require the prior approval of the shareholders' meeting.
Typically, private equity funds will require the capacity to carry out the day-to-day operations of a portfolio company. However, the LGSM requires certain percentages of votes for decisions that may affect or alter the corporate by-laws of the company, so the other shareholders will have to vote on resolutions in that regard. Finally, in some instances, a threshold for specific amounts is set; if any actions over a predetermined amount are to be taken, a vote by all shareholders will be required.
The only circumstance in which a shareholder could be liable for its actions in a company, and where the piercing of the corporate veil could occur, is if a corporation is used with the sole intent of defrauding third parties or circumventing the law. Any such action will be considered to be misuse of a legal entity, so the issue would need to examine the core of the corporation in order to locate the author of such actions (which would be a shareholder or officer of the company).
The private equity fund shareholder typically imposes its compliance policies on the portfolio companies, especially if the private equity fund requires those compliance policies to be followed in order to achieve its overall objectives.
In Mexico, private equity transactions are usually long-term. The parties in a private equity transaction will usually agree upon the investment holding period, which can range from three or five years up to ten years. Furthermore, it is common practice to establish clauses allowing the extension of the holding period for up to two additional years.
The most common form of private equity exit is the sale of the target corporation to other funds or investors. IPO exits are not common in Mexico. Furthermore, private equity sellers may choose to reinvest upon exit, which will often be based upon current market conditions and seller liquidity.
Under Mexican law, drag-along right clauses (derecho de arrastre) may only be enforced in equity arrangements if such a provision is present in the targets’ by-laws; otherwise, as per Mexican law, there is no legal action to force minority shareholders into selling their shares.
Drag-along rights are fairly common in Mexico, dating back to before the enactment of the LMV in 2006. Nowadays, under the SAPI regime, it is possible to enforce compliance with drag-along rights, since Mexican law provides for additional exceptions to the free circulation of shares. However, the opposition of buying or selling would necessarily have to go through a judicial process.
Conceptually, tag-along right clauses (derecho de acompañamiento) are aimed at protecting the interests of minority shareholders, enabling them to join a transaction under the same conditions as a majority shareholder. If the private equity fund shareholders (acting as majority shareholders) sell a stake, the management shareholders (acting as minority shareholders) will enjoy tag-along rights, as long as that provision exists in the target's by-laws.
As per Mexican law, there is currently no tag-along threshold, but parties may choose to include a certain threshold in the target's by-laws.
Exit by way of an IPO is not a common practice in Mexico. In this regard, lock-ups are not commonly enforced on investors.
Although not common practice in Mexico, relationship agreements may be entered into between the private equity seller and the target company.