Equal Rights for All

Last January, when the British mobile phone operator Vodafone bought a minority stake in Iusacell, the Mexican mobile company, it excluded small shareholders from the deal. Vodafone bought its 34.5% share of Iusacell from the controlling Peralta family, rather than offer to buy shares at the same price from minority investors.

Under Mexican securities law, Vodafone did nothing illegal and Iusacell’s share price picked up by 38% in the weeks following the deal. But that deal, like dozens before it, left a distinct impression among minority shareholders in Mexico that they are second-class investors, or worse.

“Corporate governance is a big concern of the investment community,” says Alvaro Rodríguez, vice president for finance and administration at Grupo Elektra, the retail chain. “We simply do not have good grades in terms of corporate governance. A lot of people are not comfortable with the monitoring information that we have available in this country.”

That is beginning to change. In June, in an attempt to make Mexico’s capital markets more attractive to all investors, President Vicente Fox signed a new capital markets law that changed 80% of the country’s securities regulations. Among other things, the new law requires greater disclosure of corporate information to all shareholders, places strict rules on tender offers, creates new standards for corporate governance and criminalizes insider trading.

Jorge Familiar, vice president of the National Banking and Securities Commission (CNBV), says the main impetus for the new capital markets law was the recognition of the global movement towards greater minority rights. If Mexico wants to attract more local and foreign portfolio capital flows, it needs to reinforce and strengthen its securities law. “We were convinced that in order for the Mexican market to gain a higher degree of development, we needed to have stronger protection of minority shareholders,” he says.

Mexico is not alone. Argentina recently introduced similar regulations. Brazil is also debating a broad reform of its corporate governance legislation.

According to Familiar, Finance Minister Francisco Gil Díaz and Undersecretary of Finance Agustín Carstens were instrumental in pushing the changes through a surprisingly receptive Congress. “These are very important topics for everyone,” says Familiar. “When you are talking about transparency, investor protection, cheaper financing for companies, better investment opportunities for people in general – these are things that everyone feels need to be addressed and worked on.”

It does not help that Mexican companies can issue shares with a number of restrictions, which confuse investors and limit management’s accountability to outside shareholders. Mexican companies typically issue three classes of shares that confer full, partial or no voting rights. For instance, Telmex, Mexico’s largest and most liquid stock, has issued A and L class shares as well as ADRs that trade on the New York Stock Exchange. A shares held by Mexicans have full voting rights but investors in L shares, mainly foreigners, cannot vote.

Preserving Liquidity
With investor interest waning in all but the biggest and most liquid Mexican stocks, government officials know they must do everything they can to develop a capital market that is more fair, transparent and efficient. Many agree that the new law is a promising step in the right direction in terms of providing a higher degree of legal certainty for investors.

The CNBV now has the power to write secondary regulation covering all aspects of the new law. Acquisitions are a key area and the CNBV is expected to establish which transactions must be conducted through a public tender offer. “If someone wants to purchase, for example, 51% of a company, our regulation aims to require that purchase to be done through a tender offer available to all investors, for all classes of shares,” says Familiar.

The new law reduces the amount of equity an investor or group of investors must hold in order to exercise their rights. A group of investors that holds 10% of the voting stock of a company is now able to appoint an independent auditor and appoint a board member to summon shareholder meetings or delay a shareholder vote if there is insufficient information with which to make a decision.

The law also allows a group with 15% of the shares in a company to sue the board, a specific board member or member of the management in civil court. “Before this was included in the securities law, the level [of equity required] was around 33% of the capital of the company,” says Familiar. “So you can imagine it was very hard for an investor to exercise these rights.”

Rodríguez, of Elektra, says most leading Mexican companies already follow international standards of corporate governance, including equal treatment for all shareholders. “A year and a half ago, before this new law came into effect, we instituted a new corporate governance policy in our company. We have nine board members and four are independent,” he says. The independent directors control the audit, compensation, investment and related-party committees.

The new securities law also regulates the issuance of restricted, or non-voting shares. Companies can only issue non-voting shares equivalent to a maximum of 25% of their public float. In certain cases, the CNBV can increase that limit by an additional 25% but only if these non-voting shares convert to voting shares within five years.

It was once common to link securities of different types together for trading purposes. Familiar says, “For example, you have companies which link one voting share with two non-voting shares and issue this in a public offering. These shares trade in the market as one.”

Under the new rules, controlling shareholders likely will see their influence diluted, though probably not enough to substantively change management, business strategies or ownership.

At Iusacell, the Vodafone purchase is still a sensitive issue. “It’s very clear that one of the issues that caused concern for us was the way Vodafone acquired the shares of the Mexican shareholders,” says William Roberts, Iusacell’s chief financial officer. He met with the president of the CNBV and the president of the stock market and received assurances that the transaction was legal. “Having said that,” says Roberts, “the fact is, minority shareholders felt uncomfortable, [and] there was something that they did not benefit from.”