Regulation S-X - Rule 3-10
No Action, Interpretive and/or Exemptive Letter:
Axtel. S.A. de C.V.
Based on the facts presented, the Division will not object if the Mexican subsidiaries of Axtel, Impulsora e Immobiliria S.A. de C.V.(Impulsora), Instalaciones y Contrataciones S.A. de C.V. (Instalaciones) and Servicos Ax-tel S.A. de C.V. (Servicos), are treated as 100%-owned subsidiaries for the purposes of Rule 3-10 of Regulation S-X. We note in particular that the non-parent company ownership for both entities is at the minimum level required to comply with Mexican law.
This position is based on the representations made to the Division in your letter. Any different facts or conditions may require a different result. Further, this letter only expresses the Division's position on enforcement and does not purport to express any legal conclusions on the question presented.
April 5, 2004
Securities and Exchange Commission
Division of Corporation Finance
Office of International Corporate Finance
450 Fifth Street, N.W.
Washington, DC 20549
Axtel, S.A. de C.V.; Impulsora e Inmobiliaria Regional, S.A. de C.V.;
Ladies and Gentlemen:
On behalf of Axtel, S.A. de C.V. (the "Issuer"), a variable capital corporation (sociedad anonima de capital variable) organized under the laws of the United Mexican States, Impulsora e Inmobiliaria Regional, S.A. de C.V., ("Impulsora"), a 99.998% owned subsidiary of the Issuer organized as a variable capital corporation (sociedad anonima de capital variable) under the laws of the United Mexican States, Instalaciones y Contrataciones, S.A. de C.V., (Instalaciones"), a 99.998% owned subsidiary of the Issuer organized as a variable capital corporation (sociedad anonima de capital variable) under the laws of the United Mexican States, and Servicios Axtel, S.A. de C.V. ("Servicios" and, together with Impulsora and Instalaciones, the "Subsidiaries"), a 99.998% owned subsidiary of the Issuer organized as a variable capital corporation (sociedad anonima de capital variable) under the laws of the United Mexican States, we respectfully re-quest that the Staff of the Division of Corporation Finance (the "Staff") of the Securities and Ex-change Commission (the "Commission") confirm that it will not recommend any enforcement action to the Commission if a Subsidiary does not comply with the reporting requirements of Sections 13 and 15(d) of the Exchange Act, provided that the footnotes to the Issuer's consoli-dated financial statements contained in the Registration Statement (at the time such Registration Statement becomes effective) and under the Exchange Act will contain condensed consolidating financial information with respect to each Subsidiary of the type described in Rule 3-10(f) of the Commission's Regulation S-X.
On December 16, 2003, the Issuer consummated a private placement of U.S.$175.0 mil-lion of 11% Senior Notes due 2013 (the "Old Notes"). The Subsidiaries fully and uncondition-ally guaranteed the Old Notes on an unsecured basis. In connection with the issuance of the Old Notes, the Issuer entered into an exchange and registration rights agreement that required the Is-suer to effect an exchange of the Old Notes for comparable securities that have been registered under the Securities Act of 1933, as amended (the "Securities Act").
On April 5, 2004, the Issuer and the Subsidiaries filed with the Commission a Registra-tion Statement on Form F-4 (Registration Statement No. 333-114196) (the "Registration State-ment") to register under the Securities Act the offering of (i) up to U.S.$175.0 million aggregate principal amount of the Issuer's 11% Senior Notes due 2013 (the "Exchange Notes") that would be offered in exchange for the Old Notes and (ii) guarantees (collectively the "Guarantee") of the Exchange Notes by the Subsidiaries. Upon effectiveness of such Registration Statement, the Is-suer intends to consummate an exchange offer pursuant to which up to U.S.$175.0 million prin-cipal amount of Exchange Notes will be issued in exchange for an equal principal amount of Old Notes. The Old Notes and the Exchange Notes are collectively referred to herein as the "Notes."
The Notes were issued pursuant to an indenture (the "Indenture") dated as of Decem-ber 16, 2003 among the Issuer, the Subsidiaries and the Trustee (as defined therein). The Inden-ture provides that the Notes are fully and unconditionally guaranteed by the Subsidiaries on an unsecured basis. The Guarantee is to the fullest extent permitted by the law, limited only to the extent necessary for the Guarantee not to constitute a fraudulent conveyance: the maximum ag-gregate amount of the obligations guaranteed by the Subsidiaries may not exceed the maximum amount that can be guaranteed without rendering the obligation voidable under applicable law relating to fraudulent conveyance.
Section 12(h)-5 of the Exchange Act exempts from Exchange Act reporting requirements those subsidiary issuers and subsidiary guarantors that may omit separate financial statements under Rule 3 10 of the Commission's Regulation S-X.
Rule 3-10(f) of Regulation S-X provides that "when a parent company issues securities and more than one of its subsidiaries guarantee those securities, the registration statement, parent company annual report, or parent company quarterly report need not include financial statements of the subsidiary guarantors if:
In our case, each Subsidiary is providing a full and unconditional guarantee. The guaran-tees are joint and several. In addition, the Issuer agrees that the footnotes to its consolidated fi-nancial statements contained in the Registration Statement (at the time such Registration State-ment becomes effective) and in reports filed under the Exchange Act will contain condensed consolidating financial information with respect to each Subsidiary of the type described in Rule 3-10(f) of the Commission's Regulation S-X.
The remaining element for fulfilling the requirements to benefit from an exemption from Exchange Act reporting requirements is that each Subsidiary be "100% owned" by the Issuer. Each Subsidiary has total capital stock outstanding of 50,000 common shares. The Issuer di-rectly owns all but one share of each of these three Subsidiaries. The remaining share of Impul-sora, which represents 0.002% of the total ownership interest in Impulsora, is owned by Telinor Telefonia, S. de R.L. de C.V. (the owner of the majority of the voting shares of the Issuer). The remaining share of Instalaciones, which represents 0.002% of the total ownership interest in In-stalaciones, is owned by Impulsora. The remaining share of Servicios, which represents 0.002% of the total ownership interest in Servicios, is also owned by Impulsora. There are no other own-ership interests in the Subsidiaries. The ownership of the remaining share by someone other than the Issuer is a requirement of Mexican law.
In particular, the Mexican Companies Law (Ley General de Sociedades Mercantiles), published in the Mexican Official Gazzette of the Federation of August 4, 1934, in its paragraph I of Article 89, requires that a sociedad anonima, which is the legal nature of each of the Issuer and the Subsidiaries, be incorporated by at least two shareholders, each subscribing at least one share. Article 89 reads as follows:
"In order to incorporate a sociedad anonima the following requirements shall be met:
The two-shareholder requirement applies to all types of business organizations in Mex-ico. "One-man" companies or single partnerships are not permitted under Mexican law. The two-shareholder requirement does not impose a limitation on the person holding qualifying shares. Any person, legal or natural, may hold qualifying shares in a Mexican sociedad anonima (unless otherwise determined by a particular law such as the foreign investment law or the banking law).
The Adopting Release (Nos. 33-7878 and 34-43124) relating to Financial Statements and Periodic Reports for Related Issuers and Guarantors (which, among other things, adopted Regu-lation 12(h)-5 of the Exchange Act and amended Rule 3 10 of Regulation S X and became effec-tive on September 30, 2000) addresses in its section III.A.1.a.i.(B) "Interpretive position regard-ing foreign issuers and guarantors" the issue of whether a foreign subsidiary that is required by local law to have more than one shareholder can be considered to be "100% owned" for purposes of Rule 3-10(f)(1). The adopting release provides that the Staff will continue to recognize the exception presented by the Crown Cork & Seal Company, Inc. (March 10, 1997) no-action letter.
In that case, the Staff agreed to a no-action request under former SAB 53 from a subsidi-ary organized in the Republic of France even though it had more than one voting shareholder. In granting the no-action position, the Staff noted that the non-parent ownership was at the mini-mum level required to comply with French law.
In our case, the non-parent ownership (one share) is also at the minimum level required to comply with Mexican law.
Based upon the foregoing discussion, we respectfully request that the Staff confirm that it will not recommend enforcement action to the Commission if a Subsidiary does not comply with the reporting requirements of Sections 13 and 15(d) of the Exchange Act, provided that the foot-notes to the Issuer's consolidated financial statements contained in the Registration Statement (at the time such Registration Statement becomes effective) and under the Exchange Act will con-tain condensed consolidating financial information with respect to each Subsidiary of the type described in Rule 3-10(f) of the Commission's Regulation S-X.
In the event that the Staff is not inclined to respond favorably to this request, we would appreciate the opportunity to discuss the Staff's concerns before a written response is issued. Seven additional copies of this letter are enclosed. Please acknowledge receipt of this letter by stamping the enclosed copy and returning it to our messenger.
If you require any additional information or have any questions or comments concerning the above, please call the undersigned at (212) 701-3000.
Very truly yours,
Roger Andrus, Esq.
Cahill Gordon & Reindel LLP
80 Pine Street
New York, New York 10005
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