As in other jurisdictions, there are in Mexico a number of corporate agreements or resolutions that may affect, in whole or in part, directly or indirectly, a certain group of equity holders. This group is usually defined as the one that has a smaller equity participation when compared with the controlling shareholders. The noncontrolling group is commonly referred to as the “Minority Shareholders.” Mexican corporate law provides for “Minority Rights,” for the protection of certain minimum rights in their favor that are exempt from an otherwise controlling interest decision.
Minority Rights are governed by Mexican law, specifically by the General Law of Commercial Companies (“LGSM”). Minority Rights are classified according to the percentages jointly or individually held by the Minority Shareholders, including the following:
(i) Thirty-three percent (33%): Right to issue a call for a General Shareholders Meeting (LGSM article 184).
(ii) Twenty-five percent (25%): Appointment of a director (LGSM article 144); filing of a liability action against directors (LGSM article 163); postponement of a corporate vote (LGSM article 199); and judicial opposition to decisions adopted by a Shareholders’ Meeting (LGSM article 201).
(iii) Twenty percent (20%): Spin-off objection (LGSM article 228 bis).
(iv) Ten percent (10%): Appointment of a director in a board of three or more members (LGSM article 144).
As a consequence of these rules, there is no specific rule under Mexican law that governs the economic valuation of shares/equity interests in the context of equity holders proceeding to withdraw/separate from the respective company. Thus, unlike other jurisdictions, there is no regulation in Mexico, for example, permitting Minority Shareholders to exercise their separation right from the partnership while triggering a valuation of their shares/equity interests. Such right is particularly not in existence in the context of potential disputes with the controlling shareholders. The LGSM is simply silent on these issues.
The above notwithstanding, at the statutory level, there are some provisions that may actually trigger the performance of stock valuation (not necessarily in favor of a given group of shareholders):
- LGSM article 141 states that if the value of assets contributed to the company for the issuance of stock decreases within a two-year period, then the corresponding shareholder must pay the missing value to the company; hence, in order to ascertain whether the corresponding assets’ value decreased, an appraisal would need to be prepared; and
- Securities Market article 108 provides that a company with an offering that is cancelled must make a public offer of such securities; to this end, as deemed necessary to protect investors, the National Securities and Banking Commission must request a valuation by an independent expert with the purpose of setting the offer price.
A nonbinding regulation called “Code of Principles and Best Corporate Governance Practices,” issued by the Business Coordinating Council (Consejo Coordinador Empresarial), sets forth a number of useful rules for corporate interaction. However, they do not go as far as requiring stock valuation, or formulas considering it as an alternative to settle disputes that may arise between shareholders/members.
As a result of the lack of regulation on the use of shares/equity interests valuation as a tool to facilitate settlement of shareholder disputes, in Mexico the solution has been the execution of shareholder agreements; the provisions of which may be incorporated in the bylaws. Some common contractual provisions include valuation formulas of shares/equity interests to set a fair price for shares/equity interests in order to, for example, separate from the partnership in the event of a dispute with the controlling shareholders. These disputes are commonly triggered by the adoption of resolutions that involve capital stock increases, nondistribution of dividends, mergers or other complex corporate transactions, etc. In all these cases, while the resolutions themselves may be legal, they may contravene the interests of minority shareholders.
Finally, other good examples of cases where the appraisal of shares/equity interests is often used as a tool are those designed to set a fair purchase price of shares/equity interests of conflicting shareholders. Those rules often refer to rather complex formulas for appraisals, as well as expert opinions. However, there are also more simple, standardized and proven systems, such as call options, put options, purchase offers with the possibility of counteroffers (known as “Russian roulette”), purchase-sealed envelope bids (known as “Texas shoot-out”), sale-sealed envelope bids (known as “Mexican shoot-out”) or auctions. In all cases the idea is that through the neutral mechanism of a self-appraisal no one is able to abuse the system because the other side may buy or sell equity at the proposed equity value.
These are the rules that exist concerning equity valuation in Mexico. As you may gather, the statutory options are limited, while the practice is that any such structures are more often found in shareholders’ agreements and other corporate contractual options.
** Lowenstein Sandler LLP thanks Juan Francisco Torres Landa, Omar Guerrero Rodríguez, Angel Domínguez and Fernando Medina of Hogan Lovells Mexico for their contribution to this blog. You can find more on Mr. Torres-Landa’s practice here and read more on Mr. Guerrero’s practice here.