MEXICO Law and Practice Contributed by: Gabriel Robles, Héctor Cárdenas, Eric Silberstein and Eduardo Aiza, Ritch Mueller
and upon instructions from the applicable parties. This is the more moderate approach and the market stand - ard for deferred payment. Another way to structure deferred consideration is through an agreement between the parties to release payments as certain conditions are met, which is a pro-deal provision. These conditions may be based on the mere lapse of time or the achievement of specific milestones. This mechanism can be implemented in transactions involving deferred signing and closing, and it contributes to providing greater closing cer - tainty. As the seller works towards fulfilling the agreed conditions, which, once met, justify the release of the agreed-upon payments, the buyer also receives the target under the expressly agreed-upon circum - stances deemed necessary for its operation. This mechanism can be structured as a sellers’ financing, including relevant debt features or simply a schedule of payments. Leverage Private equity buyers are generally more aggressive and have leverage. When structuring transactions, they aim to keep the existing shareholders on the hook for indemnification payments through holdback or escrows (which are often used to secure any poten - tial price adjustment payments). Rather than having long discussions as to the security mechanism, private equity funds try to get the highest potential amount within the deferred payment structure. Holdbacks and escrows range from 5% of the purchase price (being a very low threshold and very aggressively pro-seller) to 25% or even 30% of the purchase price (being the highest threshold and very pro-buyer). To keep sellers on the hook, private equity funds try to pay a lesser amount of cash while retaining the sellers with skin in the game and motivating them to maximise their exit value with an earn-out and, potentially, through a rollover mechanism. Private equity sellers try to sell and exit in an “as is, where is” structure, pursuant to which they get paid and no deferred consideration or other post-closing price adjustment remains. This is in part because at the time of exit, many funds are dissolved and all amounts have to be distributed, and private equity sellers strive to avoid having surviving liability. In this sense, when
the fund is a selling shareholder, it pushes to avoid making representations in respect of the business, as the existing shareholders are those involved in the day-to-day operations. This is an instance where sell - ers push for R&W insurance to be included as part of the transaction so that there is no need to negotiate security mechanisms for indemnification payment. A key concept in all these negotiation strategies is leverage, as leverage will determine how far an off- market position can go in the negotiation. 6.2 Locked-Box Consideration Structures It is not typical in Mexico to have a locked-box con - sideration. Parties agree on an initial value, but that changes as the negotiation process moves along. Although upon signing binding agreements the agreed consideration remains, it is subject to the agreed-upon price adjustments (such adjustments can be made either at closing, or post-closing). In any event, when agreeing on a locked-box consideration, the seller is liable for leakages. 6.3 Dispute Resolution for Consideration Structures When parties agree on a price adjustment mecha - nism, such mechanism includes a standard dispute resolution process. At or before closing, the sell - ers provide a closing statement identifying in good faith the amounts corresponding to each item of the adjustment and what they believe the final price to be. Following closing, buyers have a period of 30–60 days to audit the target and get back to the sellers either accepting or refusing the amounts allocated to the items in the statement. There is then a period for the principals to negotiate in good faith and, where they fail to agree on one or more item, such items are submitted to a pre-agreed independent expert who will determine the amounts in respect of the disputed items. Such resolutions will be final and cannot be appealed. 6.4 Conditionality in Acquisition Documentation In Mexico, the conditionality of private equity deals mirrors that of an M&A transaction. In addition to regu - latory consents (ie, antitrust – CNA, foreign invest - ments – the CNIE), the second main type of conditions
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