The purpose of this note is to inform you about the proposed reform to Mexico’s Securities Market Law (“Securities Law”), aimed at protecting listed companies from hostile takeovers by implementing the “Poison Pill” defense strategy. The goal of a “Poison Pill” is to prevent potential buyers from acquiring a controlling interest by limiting the maximum stake a shareholder may purchase and dilution of the holdings of all owners.
Background “Poison Pill”
During the second world war, soldiers were equipped with cyanide pills for committing suicide in the event of falling captive into enemy hands and as an option for dying less painfully than torture, plus the risk of being exacted military information and intelligence.*During the eighties, corporations in the United States developed a method for defending themselves against uninvited offers for acquisition (hostile) utilizing the referred term as a simile. Although death by cyanide poisoning was a bad option, it was still the preferred one for soldiers. In the case of corporations, the method is not exempt from risks and may result to be adverse; albeit it can be preferred over a hostile takeover and the loss of control of the entity.
Background & Current Events
The proposed reform to the Securities Law includes mechanisms to protect companies from hostile takeovers by investors, such as the “Poison Pill” strategy. Additionally, the reform aims to improve market liquidity by allowing
companies to increase their outstanding shares without fear of losing control.
The term “Poison Pill” refers to a defensive strategy employed to prevent a potential acquirer from taking control of a company by purchasing large amounts of its shares. This strategy effectively blocks the accumulation of a company’s outstanding shares by distributing additional free or heavily discounted shares to all existing shareholders.
However, a “Poison Pill” may also have drawbacks. It can protect underperforming executives and boards from shareholder efforts to replace them. Additionally, they can keep a stock price lower than it would otherwise be, at least in the short term.
Key Factors in the implementation of the “Poison Pill”
The main factors to consider in the implementation of the “Poison Pill” include:
- Protecting companies against hostile takeovers;
- Flexibility for companies to increase their outstanding shares without fear of losing control; and
- The need for justification and often the inclusion of sunset provisions in a “Poison Pill”.
Defense in Hostile Takeovers: Perspectives from Mexico, United States and France
In 2015, the Mexican Supreme Court (“SCJN” for its acronym in Spanish) issued a landmark decision halting Grupo Mexico’s (GM) hostile takeover of Grupo Aeroportuario del Pacifico (GAP). Unanimously, the First Chamber of the SCJN upheld the constitutionality of article 48 of the Securities Law, which allows a company to limit the acquisition of shares by a single holder, who intends to take control of the company.
In contrast, in the United States and France, the “Poison Pill” strategy has been the chosen line of defense against hostile takeovers. During the COVID19 pandemic in the United States, the “Poison Pill” mechanism was widely used among the companies that make up the country’s stock market. In February of 2020, 27 companies activated this mechanism, and since April of the same year, more than 40 companies adopted or renewed this defensive measure. Similarly, in France, the “Poison Pill” mechanism was adopted in March of 2006.
By way of contrast, in France it is necessary to hold a shareholders’ meeting of the company at risk, and upon a simple majority vote, the decision is made whether or not the shareholder discount is executed. The required quorum is 20%, and in the event of a second round, it is not necessary to establish an attendance quorum. Unlike in many countries, French law requires individuals or legal entities to declare their intentions when questioned by the French authorities about the possibility of a hostile takeover.
Please follow updates related to this reform proposal.
