MEXICO Law and Practice Contributed by: Eduardo Triulzi, Eric Silberstein and Ana Jáuregui, Ritch Mueller
5.4 Implementation How the implementation of an investment round and the set-up/installation of an employee incen - tive programme typically inter-relate depends on whether stock options have vested or not, and whether the investment of such stock options may dilute the share participation of the investor as a result. Owing to the formalities involved in issuing new shares in Mexico, determining the number of shares that would correspond to the investor can be a complex issue. The exit-related provisions that typically govern the shareholders’ rights among one another in relation to a sale or IPO of the venture or another liquidity event include a right of first offer, a tag- along right and a drag-along right, as well as piggyback and registration rights. A right of first offer provision is often included to give certain major venture capital investors the first option to purchase the shares of the company in a poten - tial sale before they are offered to other third parties. A tag-along right is granted to the ven - ture capital investors for any transfer by a key holder for which the rights of first offer are not exercised. A drag-along right is typically granted to shareholders representing more than 50% of the share ownership, who will then generally be able to force the other shareholders to co-sell their shares to a prospective buyer who wishes to acquire the entire company. Documentation may also include lock-ups (especially for found - ers, for a certain period of time) and customary exemptions thereto for permitted transfers. 6. Exits 6.1 Investor Exit Rights The decision of which exit strategy to pursue is typically made by the company’s board of direc - tors, with input from the company’s manage -
Employee Stock Ownership Plan shares are typi - cally kept in the treasury of the company and are given (assigned) to the employees for sub - scription and payment upon certain conditions provided for in their employment agreements being met. Such shares are typically non-voting shares and are subject to special transfer provi - sions. These incentives usually create corporate, labour and tax concerns, and should be struc - tured carefully. 5.3 Taxation of Instruments The tax considerations that determine the struc - ture of an incentive pool are diverse. Firstly, it is important to consider the type of incentive offered – ie, whether it is in the form of stock options, phantom shares, performance bonuses or profit sharing, among others. Each of these incentives may have different tax implications for both the company and the beneficiaries. Secondly, it is relevant to consider the appli - cable tax treatment for each type of income or benefit. By way of example, stock options may be subject to tax at the time of subscription of the shares, whereas phantom shares or perfor - mance bonuses may be taxed at the time of pay - ment of the economic benefits. In addition, the applicable tax rate may vary depending on the type and amount of income. However, most such benefits (when paid either in cash or in shares) are deemed salary pay - ments for Mexican tax purposes. In summary, when structuring an incentive pool, it is crucial to consider not only the type of incen - tive offered but also the tax implications for both the company and the beneficiaries, including the applicable tax rate and the timing of taxable events.
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