The Initial Public Offerings Law Review: Mexico
Mexico's GDP growth during 2019 was zero per cent, well below expectations. On the positive side, Mexico's inflation rate decreased compared with 2018. Rating agencies downgraded Mexico's rating or put Mexico on negative watch. Unless Mexico's growth expectations in the coming years become more positive, we believe that investors' confidence will continue to be affected. With a few recent exceptions, issuers of securities in the Mexican capital markets have historically been large companies with a reliable operational history. Currently, there are approximately 140 publicly traded companies in Mexico. Investors of securities in Mexico are primarily institutional and sophisticated investors. Given the size of the market and the number of these investors, underwriters and issuers have generally targeted big and well-seasoned investors during the marketing efforts in an IPO.
In the recent past, IPOs in Mexico have consisted of offerings of structured instruments such as certificados bursátiles fiduciarios de desarrollo, which are a type of variable income security that offers investors the opportunity to participate in private equity-like funds, and certificados bursátiles fiduciarios inmobiliarios, which are the Mexican version of real estate investment trusts. To increase IPO activity, the federal government administration issued a decree in early 2019 slashing the tax rate for new equity issues from 30 per cent to 10 per cent. However, this tax break has not achieved the intended results. The slowdown of IPOs in Mexico was increased as a result of several geopolitical events such as Brexit and the uncertainties of investors arising from the political and economic situation in Mexico and also primarily due to the negotiation of a new trade deal by Mexico with the United States and Canada.
Any firm that seeks to complete an IPO in Mexico must request authorisation from the Mexican Tax Ministry through the National Banking and Securities Commission (CNBV). There are currently two authorised stock exchanges in Mexico: the Bolsa Mexicana de Valores, S.A.B. de C.V. (BMV) and the Bolsa Institucional de Valores, S.A. de C.V. (BIVA). Securities traded in Mexican stock exchanges must be deposited with S.D. Indeval Institución para el Depósito de Valores, S.A. de C.V. (Indeval), which is a company member of the same corporate group as BMV. Both BMV and BIVA have an international quotations system (SIC) in which companies that have been previously listed in stock exchanges from recognised countries may be acknowledged in the Mexican stock exchanges for operational purposes.
As mentioned, the largest investors in the Mexican capital markets are authorised retirement funds (Afores), through their special purpose investment vehicles. New regulations applicable to Afores will migrate the investment regime to a 'life cycle' funds system by managing target date funds that rebalance their allocation of risk assets as workers in a certain age bracket approach retirement, based on a strategy previously established by the fund manager. In this model, the investment fund slowly migrates with the worker in a seamless, long-term trajectory, from a high-risk to a conservative profile. At this stage, it is difficult to predict how this new regime will impact the markets.
It is important to point out that the Mexican securities market for fixed-income instruments is considerably larger than that of variable-income instruments. Rules for completing public offerings of debt securities in Mexico are similar to those for completing public offerings of equity securities. This chapter will focus on the requirements, rules, regulations, regulators and players that participate in IPOs for companies in Mexico.
i Main stock exchanges
There are two authorised stock exchanges in Mexico. For a stock exchange to legally operate in Mexico, it needs authorisation from the Tax Ministry. BMV is the oldest of both stock exchanges and its predecessor started operating in 1895. The IPO of BMV was completed in 2008. In 2011, BMV signed an agreement with the stock exchanges of Colombia, Lima and Santiago to create the Latin American Integrated Market (MILA). MILA facilitates the IPO processes of companies by eliminating certain requirements and, as long as one of the regulators and stock exchange of any of the four countries approves the public offering, the companies may offer their shares in the other countries without the need to go through the burden of obtaining authorisations from each regulator and stock exchange at each jurisdiction. Thus far, MILA has not been widely used by issuers.
Companies from all types of industries in Mexico are listed on BMV and there is no specific type of company or industry that has been historically targeted by BMV since they were, until recently, a 'monopoly' that accepted listings from companies of all types and sizes.2
BIVA is an affiliate of Central de Corretajes, S.A.P.I. de C.V. (Cencor). Cencor filed the corresponding request before the Tax Ministry in 2015 and obtained its approval in 2017. BIVA has an alliance with Nasdaq to use and operate its technologic platform. Since BIVA started operating recently, at this point it is difficult to distinguish if they have or will target any specific type of company or industries for listing their shares on its exchange. Some efforts have been made recently to try to attract mid-cap and even small-cap companies for listing their shares on BIVA, but no IPOs have been completed by companies on BIVA as of the end of 2019.3
A few large-cap corporations that have already listed their shares in Mexico have also listed equity securities in other countries, primarily in the United States through American depositary receipts (ADRs). Some of the Mexican companies that have listed ADRs in US stock exchanges are América Móvil, CEMEX, Coca-Cola FEMSA, Fomento Económico Mexicano, Grupo Aeroportuario del Pacífico, Grupo Aeroportuario del Sureste, Grupo Aeroportuario OMA, and Grupo Televisa. The latest IPO of ADRs by a Mexican company on the New York Stock Exchange was completed in 2019 by Vista Oil & Gas, S.A.B de C.V.
ii Overview of listing requirements
Authorisation to consummate an IPO in Mexico must be requested from the CNBV. The approvals granted by the CNBV for an IPO include: (1) the registration of the shares in its National Registry of Securities (RNV), and (2) the actual public offering of the shares and the use of the offering documents. Additionally, the listing of the shares must be requested from either or both of the Mexican stock exchanges. The third player involved in the authorisation process for IPOs in Mexico is Indeval, as depositary of the shares. The authorisations are filed before these three different entities simultaneously, but the shares may not be listed if the CNBV does not expressly approve the IPO.
Mexican securities laws and regulations impose several registration, listing and maintenance requirements for issuers of securities in Mexico. Listing requirements imposed by each authorised stock exchange include:
- operational history;
- financial situation of the issuer;
- minimum amount of shares that will be offered to the public (gran público inversionista);
- minimum price for each offered security;
- percentage of the capital stock that will be placed which must be of, at least, 15 per cent of the corporate capital of the issuer or a minimum amount calculated based on an inflation-indexed unit (UDI);
- minimum amount of investors, which must be at least 100;
- distribution criteria for the securities, provided that no person can acquire more than 40 per cent of the offered securities; and
- corporate governance.
Some listing requirements described above are not applicable to all types of issuers of shares, as described in detail below.
iii Overview of law and regulations
As discussed, the Tax Ministry, through the CNBV, is the governmental agency that grants authorisation for IPOs in Mexico. IPOs are primarily regulated under the Mexican Securities Market Law (LMV) and the General Provisions Applicable to Issuers of Securities and other Market Participants (CUE). Additionally, each authorised exchange in Mexico as well as Indeval have their own internal regulations. There are also special regulations for the SIC, for Afores, for corporations and for negotiable instruments that are applicable to publicly offered securities.
The LMV was enacted in 2005 and has been valid since 2006. The LMV provides for two types of companies that may list their shares on a Mexican stock exchange and offer such shares through public offerings in Mexico: sociedades anónimas bursátiles (SABs) and sociedades anónimas promotoras de inversión bursátil (SAPIBs). Both SABs and SAPIBs are a variety of sociedades anónimas, which are corporation-type firms whose capital is represented by shares. In terms of governance, the shareholders' meeting is the supreme corporate body, and management is entrusted to a board of directors and a corporate practices committee that oversees certain matters related to corporate practices. The members of the committee must be board members. While SABs must have an audit committee, SAPIBs may choose to have an audit committee or a statutory auditor (who is an individual and not a committee). The LMV requires both types of companies to have independent board members. SAPIBs are only required to have at least one, while the boards of directors of a SAB must have at least 25 per cent of independent members. Additionally, the LMV only requires the chairman of the corporate practices committee of SAPIBs to be independent, but it requires all members of the corporate practices committee and the audit committee of a SAB to be independent.
Such differences between SAPIBs and SABs arise from SAPIBs being smaller companies that are required to transition into SABs within a 10-year period or after they reach certain capitalisation thresholds. Mexican securities laws and regulations and the internal regulations of the exchanges in Mexico also have differentiated listing requirements for SABs and SAPIBs. Such listing requirements are more stringent for SABs than for SAPIBs. The table below outlines the main listing requirement differences for SABs and SAPIBs:
|Financial information||If the latest audited financial statements are more than six months old, interim financial statements with limited review must be provided. If the interim financial statements with limited review are more than three months old, internal financial statements for the previous quarter must be provided.||If the latest audited financial statements are more than six months old, non-audited financial statements must be provided.|
|Minimum amount of titles to be listed||At least 10 million titles must be listed.||No minimum amount of titles to be listed.|
|Transition programme||Not applicable.||Must have a programme for transitioning into a SAB.|
|Percentage of corporate capital to be placed with third-party investors||15 per cent of the corporate capital or 950 million UDIs if less than 12 per cent of the corporate capital is placed with the public.||12 per cent for BMV and not applicable for BIVA.|
|Minimum amount of investors||200 for BMV and 100 for BIVA.||Not applicable for BIVA and 20 for BMV.|
|Distribution criteria||No investor may have more than 40 per cent of the offered shares.||Not applicable for BIVA and no exception for BMV.|
|Equity||At least 20 million UDIs.||15 million UDIs for BMV and 12 million UDIs for BIVA.|
|Operating income||BIVA – to be analysed on a case-by-case basis. BMV – the previous three years must have positive operating income.||BIVA – to be analysed on a case-by-case basis. BMV – the previous two years must have positive operating income.|
|Minimum float||15 per cent.||Not applicable.|
It is important to point out that BMV has in the past waived some listing requirements contained in its internal regulations based on case-by-case analyses, if they were deemed to be in conflict with the listing requirements of the LMV or the CUE.
The offering process
i General overview of the IPO process
From a legal perspective, the IPO approval process starts with a formal request for approval submitted with the CNBV. The documents that must be filed are, in general, the following:
- a written letter describing the offering, the names of the banks leading the underwriting efforts, the listing exchanges, the expected timing to complete the offering and any other relevant information;
- organisational documents and powers of attorney of the individuals signing the request;
- by-laws of the company to be adopted once it becomes public;
- a draft of the shareholders' meeting approving (1) the adoption of the legal regime as a public company, and (2) the IPO, among other things.
- drafts of the share certificate to be deposited with Indeval;
- drafts of the offering prospectus, public notice for the IPO and marketing documents. The senior management, external legal counsel and auditors must sign the prospectus certifying that, to the extent of their expertise and review, there is no material misstated or omitted information contained in the prospectus;
- annual audited and, if required, limited review financial statements or interim financial statements;
- a draft of the underwriting agreement to be executed among the issuer and the underwriters; and
- legal opinion and letters from the auditors.
The listing exchange must issue a favourable opinion in order to approve the listing so a filing with this information must also be completed with the exchange. Finally, Indeval must approve the deposit of the corresponding share certificates.
From the issuers' side, a shareholders' meeting must be held in order to, among other things, approve or ratify (1) the transformation of the company into a SAPIB or a SAB, as the case may be; (2) the capital increase evidencing the shares that will be the subject matter of the IPO, provided that shareholders would also be allowed to offer their shares in the IPO in simultaneous secondary offerings; (3) all requests and acts related with the IPO; and (4) the IPO itself.
A typical timeline for an IPO in Mexico takes between six and 12 months and consists of the following events:
- Testing the waters. The shareholders of the company may approach investment bankers to discuss the possibility of listing the shares of the company, or investment bankers that know the company or have provided services to the company in the past may approach the shareholders of the company to discuss the possibility of an IPO.
- Engagement of advisers. The shareholders of the company start discussing the possibility of an IPO with legal, financial and other advisers (on a confidential basis) and engagement letters are executed.
- Kick-off. A formal kick-off meeting or conference call is held in which the company, the underwriters and all advisers participate in order to discuss the IPO and the corresponding timeline.
- Drafting. Outside counsel for the company, the underwriters and the company's management draft the offering documents.
- Management presentations. All parties involved in the drafting process hold meetings with management to discuss all relevant aspects of the business, operations and financial, legal and accounting condition. This process aids advisers for preparing IPO materials.
- Site visits. Outside counsel, advisers and the underwriters visit the company's headquarters and operational facilities to further understand its operations and management practices.
- Initial filing. Once all of the advisers involved in the IPO process are comfortable with the drafts of the IPO documents, such documents are formally filed with the CNBV, the corresponding Mexican stock exchange where the shares will be listed and Indeval. Initial filings are typically confidential, which means that no investor knows that a request for an IPO has been filed.
- Courtesy meeting with the CNBV. It is advisable to hold a courtesy meeting with the CNBV immediately prior to or after the initial filing in order to provide to the agency a brief overview of the companies and the specifics of the IPO. Typically, the senior management of the company, its inside and outside counsel, the underwriters and the auditors attend these meetings.
- Initial review period. The CNBV, the listing exchange and Indeval review the information that was formally filed by the company. The review periods vary and it has historically taken a couple of weeks for the corresponding stock exchanges and Indeval to review the information. On the other hand, the CNBV takes approximately eight weeks to review the information. Comments from the CNBV, the listing exchange and Indeval are all sent separately to the companies and their advisers. During all recent IPO processes in Mexico, the CNBV has given preference to their review over the review of other types of instruments. The foregoing, because there is a non-written rule in Mexico that provides that IPOs should be given preferential treatment in terms of timing over other types of public offering procedures.
- Due diligence sessions. Concurrently with the CNBV's, Mexican stock exchanges' and Indeval's review, the company and their advisers hold due diligence sessions with management and auditors. Such due diligence sessions have historically been held through the guide of questionnaires prepared by the underwriters' counsel. In addition to such sessions, the companies' advisers complete due diligence procedures and review all of the information pertaining to the companies in order to complete the offering documents and be in a position to issue legal opinions and negative assurance letters certifying that there is no material information omitted or misrepresented in the offering documents.
- Lifting of confidentiality and launch of the transaction. Each IPO process is different and the company and all external advisers involved in the transaction may determine to lift confidentiality of the transaction and launch it at a different point in time. The timing for lifting confidentiality and launching the transaction depends on the market situation (which may vary depending on the social, political and economic situation of the country and other international geopolitical events that may influence the IPO, the review process of the CNBV, the Mexican stock exchanges and Indeval, and the actual situation of the issuer). As a general proposition, no investor in Mexico can be approached to discuss the potential IPO prior to the moment at which the information submitted to the CNBV becomes publicly available. On the other hand, lifting of confidentiality will be required if for any reason information related to the proposed IPO leaks to the public.
- Analysts' presentations. Immediately after confidentiality is lifted and the transaction is launched, the company and its advisers may discuss the specifics of the IPO with third parties. At this point, the underwriters and the companies typically discuss the specifics of the company and the IPO with analysts from the same firm as the underwriters involved in the transaction in order to try to understand the price range for the transaction.
- Investor education, pilot fishing and anchor presentations. Concurrently or after discussing the transaction with the analysts, the company and its advisers start holding meetings with potential investors. During the 'investor education' process the underwriters and their analysts seek to 'educate' potential investors about the company. These meetings help all parties involved to have a better sense of the valuation of the companies and their assets, which will be a good source for setting forth a price range for the transaction. 'Pilot fishing' and 'anchor presentations' typically refer to an investor education process, but with fewer investors – commonly those that will be the main participants in the deal. This process helps the companies and their advisers to understand the market's sentiment. Sometimes 'pilot fishing' procedures may be held prior to lifting confidentiality and launching the transaction but only if such procedures are completed as 'non-deal roadshow processes' and the IPO and its potential terms and conditions are not discussed.
- Roadshow presentations. Once the company and the underwriters are comfortable with proceeding with the transaction, roadshow presentations are openly held with potential investors. During these meetings, the companies' principals and the underwriters discuss with potential investors all aspects related to the company and the IPO.
- Issuers' committee of the Mexican stock exchanges. The listing stock exchange requires an internal approval from an ad hoc committee that reviews the IPO and the business and operations of the relevant company. This committee is formed of individuals that are independent from the listing stock exchange. Their impartial suggestions are generally taken by the companies pretending to consummate an IPO.
- The CNBV's approval. Once all the requirements are met for registering the shares of the company in the RNV, the CNBV issues an official communication authorising (1) the registration of the shares in the RNV; (2) the IPO; and (3) the use of the offering documents for purposes of the IPO. These approvals are typically obtained immediately prior to the date on which the public offering notice is published.
- Favourable opinion from the stock exchanges. After the CNBV and the issuers' committee approves the IPO, the listing stock exchange issues a favourable listing opinion. These favourable opinions are typically issued concurrently with the CNBV's approval or shortly after such date.
- Bring-down. Prior to officially publishing the notices for the IPO the companies' advisers hold bring-down due diligence sessions to be certain that the companies' information is still valid and accurate.
- IPO notice. On the business day prior to pricing the transaction or immediately before the market opens on the day in which the IPO will be priced, the company issues (through one of the underwriters) an 'IPO notice' calling the investors to participate in the offering.
- Hot deal option. In recent years, issuers and underwriters have been including an option in IPOs in terms of which the companies may issue additional shares. These options are in addition to any over-allotment options that are granted by the issuers and the goal of such options is to try to accurately reflect the amount of shares that will be actually purchased by the investors.
- Pricing date. On this date, the investors formally agree with the companies that they will invest and acquire their shares and the purchase price is determined.
- Deposit in Indeval. Prior to the settlement date of an IPO (and once Indeval has approved the text of the share certificates), the share certificates are deposited with Indeval.
- Settlement. As a general rule, IPOs are settled through one of the underwriters through the listing Mexican stock exchange at T+2. Settlement of an IPO that had an international piece might settle in accordance with the rules governing the foreign market.
- Over-allotment options. To try to maintain the price of the shares, underwriters may be granted an option to purchase additional shares during a specific time period (typically 30 days after the transaction is settled).
- Post-offering notices. Mexican regulation requires the company and the underwriters involved in IPOs to provide different information and notices about the transaction after the deal is completed (price, amount of shares offered, geographical distribution, insider investors, and information regarding over-allotment options, among others).
- Lock-up periods. The company's controlling shareholders and senior management with a position in the capital stock of the company are commonly prevented from selling their shares during specific time periods post-closing in order to avoid market distortions. In our experience, these time periods have ranged from 90 to 360 days.
If the companies concurrently offer shares outside of Mexico, the dates described above are commonly matched with the required dates under the jurisdiction of the other countries where the shares will be offered.
ii Pitfalls and considerations
Several challenges may arise during an IPO process in Mexico. Some of these challenges may be completely out of the company's control, its shareholders, their advisers and the control of the underwriters, such as macroeconomic and geopolitical situations. Others depend solely on the companies' activities. Given the size of the Mexican market, it has been historically difficult for issuers to satisfy the minimum shareholders requirement imposed by the exchanges as a listing requirement. Also, because controlling shareholders (typically families that have owned the business for generations) are generally reluctant to relinquish control, some issuers have faced difficulties to adjust corporate governance and share arrangements as required by regulators.
iii Considerations for foreign issuers
There have been several listings of foreign companies in Mexico in the past. Although some of these listings were completed without a public offering, all registration and listing requirements had to be met. The biggest challenges for foreign issuers in Mexico have been translating the company's information into Spanish and 'tropicalising' the offering documents and the company's organisational documents in order to meet Mexican legal requirements.
SABs and SAPIBs must comply with several post-IPO reporting obligations. Primarily, they must provide annual and quarterly reports to the CNBV and the listing stock exchange. Annual reports include the same information as the IPO prospectus, except for the information referring to the public offering and they must be updated yearly by the company's management. Annual reports are signed by the senior management of the companies certifying that such reports do not omit material information or misstate information. Additionally, these reports include the annual audited financial statements of the issuers. Quarterly reports focus mainly on financial results. Also, they must publish events that may have an influence on the price of its securities, called 'relevant events', and calls for shareholders' meetings, copies of the minutes of their shareholders' meetings, current by-laws and other material corporate documents. All materials that require disclosure must be published on the websites of the CNBV, the listing exchange and the relevant company. Mexican public companies must also meet all corporate governance requirements under the LMV (as generally described in Section II.iii).
Outlook and conclusion
No major amendments to the Mexican securities laws and regulations have been discussed or lobbied in Mexico recently. As mentioned above, the tax reforms enacted in 2019 to reactivate IPO activity in Mexico are still in effect but they may not be enough to achieve this purpose. Investors will continue to monitor closely the actions of the federal government that may have an impact on the macroeconomic environment in Mexico.
The past year was a very slow one for the IPO market in Mexico. It can be hoped that after companies and investors finally have the opportunity to grasp the position of the Mexican government on key issues, more IPOs will be completed. The Mexican stock exchanges have been actively pursuing potential issuers, particularly mid-cap companies that have not previously accessed the capital markets in order to advise them and try to facilitate IPOs and listing procedures. Furthermore, key anchor institutional investors such as Afores have considerable unutilised resources, so once the economic situation in Mexico is more stable for investors, such resources may be used for funding future IPOs.
1 Guillermo Pérez Santiago is a partner and José Alejandro Cortés Serrano is an associate at Galicia Abogados, S.C.