MEXICO Law and Practice Contributed by: Gabriel Robles, Héctor Cárdenas, Eric Silberstein and Eduardo Aiza, Ritch Mueller
practice is mainly used in the context of European- led bidding processes and is hardly implemented in Mexico. When using a vendor due diligence report, it is likely that sellers will have to provide reliance and even representations as to the accuracy, complete - ness and correctness of the vendor due diligence, opening the door to additional indemnification risk for the sellers/target. In Mexico, advisers are required to put together a vendor due diligence report mainly in the context of cross-border due diligence processes where a local subsidiary is being sold as part of a global transaction, for which the sell-side has implemented a vendor due diligence. However, it is not uncommon for legal advisers to take a leading role in advising in the context of an auction sale. In such cases, they typically conduct a focused and limited review of the most relevant aspects of the target’s business, without performing full vendor due diligence reports. The aim of this is to assist the tar - get’s management and/or officers in navigating the legal due diligence process effectively, including tasks such as the proper and organised preparation of the virtual data site, responding to Q&A mechanics, par - ticipating in expert sessions, and addressing various other legal due diligence enquiries. 5. Structure of Transactions 5.1 Structure of the Acquisition In Mexico, private equity transactions are generally private and are implemented through either: • a purchase agreement, structured as a secondary transaction (ie, the fund acquires shares from exist - ing shareholders), which approach is mainly used when the private equity fund is acquiring 100% of the target; or • subscription or investment agreements, structured as a primary transaction (ie, the fund subscribes and pays for a capital increase of newly issued shares by the target, thus diluting the existing shareholders).
In conducting a privately negotiated transaction (as opposed to a bidding process), private equity funds have more leverage and are more aggressive in their positions, from a valuation standpoint through the definitive agreements. Another relevant feature when conducting private negotiations is the increased flex - ibility for parties to be creative in structuring and searching for alternative accommodation of the par - ties’ needs. While these structures have historically been driven primarily by the applicable tax considera - tions, the Mexican government has recently become more aggressive in exercising its tax audit authority, which in addition to the judicial reform has decreased the ability for institutional investors, such as private equity funds, to be flexible on these structures. From time to time, private equity funds also partici - pate in bidding processes. Such a process generally aims to sell 100% of the equity of the target and is a seller-controlled process in respect of timing and eco - nomic and legal terms. In this process, multiple bid - ders compete and submit confidential bids for a tar - get, including a position in respect of a draft purchase agreement that the seller makes available. This limits the ability to be aggressive in negotiating transaction documents and related negotiations, as the sell-side will consider – in addition to the economic offer – the ability to close expeditiously and the availability of a cash payment (ie, no acquisition financing). There are other disadvantages for private equity funds in bid - ding processes, including the need to be aggressive in the economic offer considering the competitive nature of the bid, offering a higher amount than may pos - sibly have been agreed privately, and the expenses incurred in the process with the uncertain component of being able to successfully close a transaction. 5.2 Structure of the Buyer The private equity fund does not invest directly, but uses a special purpose vehicle (SPV) for the particular transaction. The SPV used for the acquisition is led directly by the fund’s internal team. The selection of the type of SPV and the jurisdiction of its incorpora - tion is generally tax driven, but is also affected by the time required to set up an SPV in Mexico. Sometimes, the fund signs the initial agreement and then assigns its rights to the SPV ahead of closing the transaction.
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