Mexican Stock Reform Needed

Wed, 2017/03/01 - 3:13pm | Your editor
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When renegotiating the terms of the North American Free Trade Agreement, here is something to change.

US investors in listed Mexican American Depositary Receipts are often denied full proxy voting rights. This is most likely to occur in the case of the most liquid large capitalization Mexican shares on the Big Board, like one on our recommended list which has been an easy way to buy Mexican growth for decades.

This company, like many venerable US stocks from Mexico used to have two classes of shares traded in Los Estados Unidos, called the A and the B shares. They had different voting rights, different ratios to the Mexican shares they represented, and were on different markets, the NYSE or trading OTC. As the Mexican market matured, the multi-class shares were combined on the local market, the same thing as it happening now in Brazil. In the case of our Mexican share, it happened at the end of the 20th century.

The result is that the ADR you buy today from your broker is made up of Certificados de Participacion Ordinarios, CPOs, made up of both former classes of shares, now unified.

However, the voting rights that go with ADRs are not equal to those for CPOs in Mexico itself. The A share component of the CPO (and therefore the ADR) doesn't give yanquis the right to vote on proxies. Only the B shares have voting rights. Since your ADR is made up of two former A shares and only one former B share, that means your vote is worth only 33 percent of that of a Mexican shareholder in the company I am writing about. That it takes 10 CPOs to make up an ADR doesn't change the fact that US holders are disenfranchised ADR. Similar discrimination is widespread among Mexican ADRs.

I assume the purpose is to protect the board from interference over its membership, its ability to issue new shares watering down those of existing shareholders, and approval of its accounts. However as we have seen in Mexico and other Latin American countries and even in Europe, giving the board a free hand can lead to corruption, fraud, and looting of companies.

It is time for Mexico to grant equal rights to US shareholders in its companies.


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