Uncertainty in financial markets and its effects on hostile takeovers in Mexico
Ana Paula Telleria
Nader, Hayaux y Goebel, Mexico City
Nader, Hayaux y Goebel, Mexico City
As the price of shares and other types of securities declines, and the uncertainty in financial markets in Mexico continues, Mexican issuers are experiencing decreases in their market capitalisation compared to their book value. This lays the ground for hostile takeovers of public companies. Additionally, the continued depreciation of the Mexican peso against the United States dollar is making foreign investors review investment opportunities in Mexico.
The available options to each company or issuer should be analysed, whether faced with an attack or defence case, taking into consideration not only applicable regulation but also:
• the particulars of each case;
• the parties involved;
• the defence mechanisms in place; and
• the best interests of the shareholders or holders of securities.
Generally, there are two main types of issuers in the Mexican capital market:
• public companies (sociedades anónimas bursátiles or SABs); and
• issuers of structured instruments (structured issuers), including:
– publicly traded development certificates (certificados bursátiles de desarroll or CKDs);
– investment project certificates (certificados bursátiles de proyectos de inversión or CERPIs),
– real estate certificates (certificados bursátiles inmobiliarios or FIBRAs),
– investment in energy and infrastructure certificates (certificados bursátiles de inversión en energía e infraestructura or FIBRA Es), and
– special purpose acquisition companies (SPACs).
SABs have a concentrated ownership and control structure. Most SABs are conglomerates owned and controlled by families. They consist of holding companies that invest in other companies characterised by vertical or horizontal integration where control is clearly identified. Most SABs float small percentages of their shares in the public market, which makes a hostile takeover extremely difficult.
Structured issuers (except for FIBRAs, which usually have a controlling-group with lock-up provisions and poison pills in place), float almost 100 per cent of their securities in the public market. In general, they are controlled by Mexican pension funds (the percentage of securities owned by foreign investors varies from one structured issuer to another). Governing bodies of structured issuers are usually controlled by a manager, which in most cases is a subsidiary of the sponsor of the structured issuer.
The feasibility of taking over a company or issuer depends, among others:
• on the outstanding shares or securities, as well as the number of shares or securities held by the controlling group – in case the latter exists;
• the defence mechanisms in place within the issuers’ structure pursuant to applicable regulation; and
• on the structure of the controlling ownership (ie, whether it is organised in a holding vehicle, through a voting contract or a similar arrangement).
Takeovers in Mexico must be carried out through a tender offer (oferta pública de adquisición), regulated by the Securities Market Law (Ley del Mercado de Valores or LMV) and the general provisions applicable to issuers of securities and other participants of the stock market (disposiciones de carácter general aplicables a las emisoras de valores y demás participantes del mercado de valores).
The LMV provides for two types of tender offers: mandatory tender offers and voluntary tender offers. The LMV also allows issuers to contemplate certain defence mechanisms against hostile takeovers that have not been authorised by the board of directors.
Any hostile acquisition made outside of a public tender offer will be void and the acquirer will be liable for the damages and losses caused to the other shareholders. Additionally, the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV) may impose a penalty that may range from ten per cent to 100 per cent of the amount of the transaction to the purchaser.
One of the main objectives of the securities laws in Mexico is to promote full and fair disclosure of all material corporate information, including relevant acquisitions of securities in the Mexican market. In particular, Mexican law establishes disclosure obligations related to acquisitions of shares and other securities listed on the Mexican Stock Exchanges including:
• Any person or group of persons who directly or indirectly acquire shares or securities of an issuer that results in a holding equal to or greater than ten per cent, but less than 30 per cent of said shares or securities, must disclose such circumstance and whether they have the intention to acquire control of the issuer.
• Any relevant person, related to an issuer, who increases or decreases its participation in said issuer by five per cent of its holding, must disclose such circumstance and their intention or not to acquire significant influence.
If a person intends to acquire 30 per cent or more of the outstanding shares of a SAB, either directly or indirectly, they must do so through a mandatory tender offer. Takeover bids must be authorised by the CNBV in accordance with the provisions of the LMV and the Regulations.
Mexican Antitrust Law (Ley Federal de Competencia Económica), provides that any act of merger or acquisition of control by virtue of which shares, certificates or other securities are concentrated must be authorised by the Federal Antitrust Commission (Comisión Federal de Competencia Económica or COFECE) before taking place when the act or succession of acts:
• represent in Mexico an amount in excess of approximately $80m;
• indicate the accumulation of 35 per cent or more of the assets or shares of an economic agent, whose annual assets in Mexico or annual sales originated in Mexico represent more than approximately $80m; or
• when the act or series of acts imply the accumulation in Mexico of assets or corporate capital in excess of approximately $37m and two or more agents whose assets or annual sales, jointly or individually, represent more than approximately $213m take part in the transaction.
In case a specific transaction is deemed as a concentration and meets any of the thresholds referred to above, a notification must be filed in writing with COFECE prior to such transaction taking place.
Issuers may establish defence mechanisms against hostile takeovers and tender offers in their bylaws or governing documents. These mechanisms generally limit the acquisition of shares or other types of securities to a certain percentage or require authorisation from their corporate bodies for relevant acquisitions.
To establish such defence mechanisms, the LMV provides two main requirements:
• the defence mechanisms must be approved by the shareholders through a qualified majority that exceeds 95 per cent of the outstanding share capital; and
• that the measures are not inequitable for shareholders, and that the ability to take control of the company is not absolutely restricted.
In the case of defence mechanisms for SABs that require approval of the board of directors for the acquisition of a certain percentage of shares, the bylaws must contain objective standards for the board to approve or reject the proposed acquisition. These mechanisms must not contravene the provisions of the LMV for mandatory tender offers or nullify the exercise of the acquirer's ownership rights.
A comprehensive analysis of defense mechanisms in place within a target, which includes their validity vis-á-vis compliance with applicable regulation, must be exhausted before any takeover strategy is determined and put into action. Some takeover strategies may even include prior discussions with relevant investors and the issuers’ board as allies to surpass hurdles built into the issuer as poison pills.
It is relevant to point out that there has been very limited litigation relating to hostile takeovers; poison pills have been generally upheld by Mexican courts.