Although this type of commercial entity was created through a significant amendment to the Mexican Securities Law (Ley del Mercado de Valores) that became effective in June 2006, it took a few years until the investment promotion corporation (sociedad anónima promotora de inversión) (“SAPI”) became a widely used corporate vehicle by investors and shareholders of Mexican companies.
Among the main reasons for its growing popularity are its flexibility and corporate governance features that reflect market practices and common contractual arrangements used by investors. Some of the benefits of SAPIs include the easy implementation of by-law provisions and the application of specific performance of corporate governance and contractual covenants among shareholders, making the SAPI structure particularly attractive for joint ventures and private equity investments.
Other available forms of Mexican commercial companies (such as the corporation (sociedad anónima) and, to a lesser extent, the limited liability company (sociedad de responsabilidad limitada)), have been subject to serious limitations that derive mainly from an outdated Commercial Companies Law which was enacted in 1934, and which has not been significantly amended or updated. These limitations include the requirement that shareholders’ or partners’ agreements be limited to contractual arrangements (as opposed to corporate implementation), and the need for alternative and more complex implementing structures, such as placing shares in a voting trust.
This resulted not only in legal uncertainty to investors and increased costs, but also in more complex documentation, creating additional paperwork and imposing “bureaucracy” on the adoption of corporate resolutions.
The purpose of creating the SAPI was to encourage and facilitate the participation of investors, thus attracting private equity funds and other institutional investors. It is important to note that adopting this corporate form does not imply that the entity must evolve into a public company. SAPIs may remain as such indefinitely, without the need or obligation of issuing securities and listing them on a stock exchange.
Under Mexican law, the supreme corporate body is the shareholders’ or partners’ meeting (asamblea de accionistas o de socios). The Board has limited powers and a number of matters require shareholder, rather than Board, approval.
Shareholders of a SAPI are allowed to reach agreements that would otherwise not be permitted with regard to regular stock corporations, such as agreements limiting voting rights of shareholders. SAPIs may also include in their by-laws certain provisions that represent a significant change from the rules that have traditionally applied to stock corporations.
Corporations may be incorporated as a SAPI, or existing corporations may convert to SAPIs. Below is a brief description of the main characteristics that apply to SAPIs.
Specific Provisions in By-Laws
The by-laws of a SAPI may include provisions:
- Imposing restrictions on the transfer of shares or on the transfer of certain rights over shares of the same class or series;
- Specifying conditions for the exclusion of shareholders or giving shareholders the right to withdraw from the corporation or giving the entity the right to redeem shares and establishing a specific price or the basis to determine it;
- Allowing the issuance of special classes or types of stock, including stock with no-voting or limited voting rights, stock having certain non-economic rights other than voting rights, or only voting rights, stock limiting or increasing rights to the company’s profits or other special economic rights, or stock giving the holders veto rights or requiring the favorable vote of certain shareholders or groups of shareholders in shareholders’ meetings;
- Specifying mechanisms to be implemented in case of a deadlock among shareholders of the corporation;
- Increasing, limiting or eliminating preemptive rights contemplated in the General Law of Commercial Companies (Ley General de Sociedades Mercantiles) to participate in capital increases; or
- Allowing limits on liabilities for damages and lost profits that directors and officers may incur vis-à-vis the company.
Shareholders of a SAPI may agree:
- Not to enter into businesses that compete with the corporation;
- To grant put or call options, or to enter into other types of agreements to buy or sell shares (e.g. rights of first refusal, rights of first offer, tag-along rights, drag along rights);
- To transfer, assign or to enter into other transactions regarding the “title” to, or disposition or exercise of preemptive rights (i.e. shareholders can negotiate their preemptive rights to participate in capital increases, separately from the shares); and
- To limit their rights to vote in shareholders’ meetings.
Even though the foregoing are generally contained in shareholders’ agreements, these provisions are often mirrored in the by-laws of the SAPI in order to better implement such arrangements and make them applicable to all shareholders. This becomes even more convenient in those cases in which the shareholders’ agreement is governed by laws other than Mexican laws (a common example is a New York law governed shareholders’ agreement with mirror provisions in Mexican law governed by-laws (estatutos) of a SAPI).
Special Minority Rights
The percentage of shares required to exercise certain minority rights is lower in SAPIs than other forms of corporate entities. The following minimum thresholds apply to SAPIs:
- 10% of voting shares (even shares with restricted or limited voting rights), to appoint one director;
- 10% of voting shares (even shares with restricted or limited voting rights), to appoint one examiner or statutory auditor (comisario);
- 10% of voting shares (even shares with restricted or limited voting rights), to call a shareholders meeting to discuss matters on which such shareholder or group of shareholders have the right to vote;
- 15% of voting shares (even shares with restricted or limited voting rights), to initiate actions regarding director liability; and
- 20% of voting shares, to judicially oppose resolutions of shareholders’ meetings resolving on matters on which such shareholder or group of shareholders have the right to vote.
Management and Auditing
Management of SAPIs is entrusted to a board of directors. However, this type of company may also adopt management and auditing rules applicable to public corporations (such as a board with independent members and audit, compensation and corporate practices committees).
As opposed to regular stock corporations, SAPIs can acquire their own shares (even if the company is not publicly traded), and they are not bound to publish their financial statements.
Also, SAPIs are not subject to supervision by the Securities Commission, unless they register securities in the Mexican National Securities Registry (Registro Nacional de Valores).
Despite the benefits and corporate flexibility described above, it is important to review the tax effects in the country of residency of the shareholders of a SAPI. For example, a SAPI may not qualify as a “flow-though” entity or partnership for tax purposes in some jurisdictions. In such cases, other available forms of Mexican commercial companies with corporate governance flexibility might also be used to achieve an efficient tax structure.