GENERAL OVERVIEW
What legislation governs M&A activity in your
country?
Mexico's main legislation governing M&A is
the General Law of Mercantile Companies (GLMC), which contains the
general provisions applicable to business entities incorporated as
Mexican companies. The law regulates, among other things, the
procedures to be followed in a merger, and when mergers may be
considered effective (that is, when the merger becomes effective
vis-à-vis the merging companies, their partners or
shareholders and third parties).
Other laws apply to M&A, depending on foreign investment
participation; antitrust provisions; employment law; environmental
laws (federal and local); and of course, tax legislation, including
tax treaties executed by Mexico with other countries.
Depending on the activity or industry of the companies being
merged, that is, banking, telecommunications, pharmaceutical,
mining, energy, or entertainment, additional regulating or
establishing restrictions or conditions may apply in order for the
M&A to take place. In some cases, it is necessary to obtain
previous authorization from the corresponding federal or state
governments.
What impact have recent legislative changes had on the nature
and amount of M&A activity?
On January 1 2004, various
reforms to the Mexican tax legislation became effective that impact
M&A activity. The most significant changes approved by Congress
were made to the Federal Fiscal Code (the FFC), which was
substantially modified, particularly regarding mergers and
spin-offs (escision), in order for mergers and spin-offs not
to be construed as a taxable transfers.
In a merger, a one-year continuity-of-business requirement is
now imposed on the merged entities, except where: 1) the activity
of the merged entities consisted of being the lessor /lessee of
goods between such merging companies; or 2) in the year preceding
the merger, more than 50% of the income of the merged company came
from the surviving company or vice versa; or 3) when the
surviving entity is liquidated within a year of the merger.
Furthermore, if a merger occurs within five years of a prior
merger or split-up, the prior authorization from the tax
authorities is required.
With regard to spin-offs, the existing continuity-of-interest
requirement has been modified. The 51% shareholding of the voting
shares must now be maintained for three years, beginning one year
before the spin-off, as opposed to the previous two-year
requirement. The holders of 51% of the voting shares must also
maintain the same proportion in the capital of the resulting
entities as they had in the original entity before the spin-off. It
could be interpreted that this new requirement shifts the
continuity test from being a pure vote test to both a vote and
value test. Under the prior law, limited vote shares were expressly
exempted in applying the continuity-of-interest requirement. The
reformed FFC no longer exempts limited voting shares but it
continues to exclude the shares held by the investing public.
Finally, if a spin-off is recharacterized as a capital reduction
under the Income Tax Law (ITL), it will always be subject to sale
treatment for tax purposes.
The new FFC also provides that, when a merger or spin-off is
part of a corporate restructuring, the other requirements provided
in the ITL must be met. A corporate restructuring is not defined in
Mexican tax law other than the discussion in the ITL regarding the
sale of shares within a related group (that is, at least 51% of the
shares are owned directly or indirectly by the same person). It is
important to note that a tax-free sale of shares within a related
group, referred to as a restructuring in the ITL, requires, among
other things, the prior authorization of the tax authorities. Given
the vagueness of the FFC as to when a merger or split-up will be
considered part of a corporate restructuring and which requirements
will apply, this new provision should be carefully analyzed before
entering into one of the mentioned operations.
What have been the most significant M&A transactions in
your jurisdiction over the past year?
The following
transactions were notified to the Federal Competition Commission
(the Commission), which is the Mexican antitrust authority, were
approved and are public knowledge:
Bank of America Corporation (GFBA)/Grupo Financiero Santander
Serfín, SA de CV (GFSS). Merger between GFBA (a US corporation
engaged in financial intermediation, like its affiliates, which in
Mexico are headed by Grupo Financiero Bank of America, SA de CV)
and GFSS (Mexican financial group that operates in the form and
terms established by the Law Regulating Financial Groups).
Grupo Financiero Bital, SA de CV (GFB)/Afore Allianz Dresdner,
SA de CV (Afore)/Allianz Dresdner I-1, SA de CV (Allianz). Merger
between GFB (Mexican stockholder of companies that participates in
financial intermediation and related services), Afore (Mexican
administrator of retirement funds), and Allianz (Investment
specialized group oriented to retirement funds).
How, and to what extent, is foreign involvement in M&A
transactions in your jurisdiction regulated or
restricted?
Given the provisions of the Foreign Investment
Law, activities carried out in Mexico must be identified to
determine whether the activity is reserved for the Mexican state or
whether restrictions apply.
Activities that are reserved exclusively to the state are, among
others:
- petroleum and other hydrocarbons;
- basic petrochemicals;
- electricity; and
- mail service.
The following economic activities are reserved exclusively to
Mexicans, or to Mexican companies whose by-laws exclude
foreigners:
- retail sale of gasoline and distribution of liquid
gas;
- radio broadcasting services and others of radio and
television, other than cable television;
- credit unions;
- development banking institutions, in the terms of the
applicable special law; and
- rendering of professional and technical services that are
expressly set forth in applicable legal provisions.
Although reduced substantially over the past few years, there
are still some activities where foreign investment is limited to
specific percentages.
- Up to 10% in cooperatives for production of goods.
- Up to 25% in domestic air transportation; air taxi
transportation; and specialized air transportation.
- Up to 49% in certain activities, such as: insurance
companies; bonding companies, currency exchange houses; bonded
warehouses; financial leasing companies; factoring companies;
limited scope financial institutions; retirement funds
management companies; manufacture and commercialization of
explosives, firearms, cartridges, ammunitions and fireworks
(not including acquisition and use of explosives for industrial
and extraction activities); telecommunications concessionaire
companies; and the printing and publication of daily newspapers
circulating within the Mexican territory.
- Up to 49%, but with the possibility of obtaining
authorization from the Mexican foreign investment authorities
for foreign capital to exceed this, in activities such as: port
services for vessels; concessionaires of airstrips; insurance
companies; cellular telephone services; and constructions of
ducts for oil and its derivatives, perforation of petroleum and
gas wells.
DUE DILIGENCE
What are the principal disclosure requirements in a typical
M&A transaction?
In a typical M&A transaction in
Mexico, full disclosure, in principle, is granted once the parties
have entered into a confidentiality agreement and, in some cases,
when a letter of intention or memorandum of understanding has been
executed.
Issues or matters involved in a due diligence are usually
extensive and may include, among other things:
- corporate issues;
- contracts;
- real estate;
- labour;
- environment;
- social security;
- industrial property and technology;
- public services and public supplies; and
- concessions and special permits or licences.
To what extent do disclosure requirements achieve market
transparency?
Mergers and acquisitions, because they fall
within the scope of the Federal Law of Economic Competition (FLEC),
will be available and made public knowledge through the information
provided on the internet. Further, when government entities are
somehow involved, through the new Law on Transparency, certain
information is available for public consultation.
How have recent M&A transactions and legislation dealt
with the issue of material adverse change clauses?
This
kind of clauses is not generally regulated by Mexican legislation
but specific laws refer to the concept.
Material adverse change clauses are applicable if expressly
agreed to by the parties and regulated in the corresponding merger
or acquisition agreement. If a material adverse change occurs, such
as adjustment of price, premature termination of the agreement, a
conventional penalty, damages and losses, the procedures
established by the parties for such events will be enforceable.
TAKEOVERS
Are there any specific regulations and/or regulatory bodies
governing takeovers in your jurisdiction?
A takeover is
regulated depending on the circumstances and the type of legal
entity involved.
According to their specific activity, banking institutions,
development finance companies, bonding companies, insurance
companies, financial groups, public bonded warehouses, financial
leasing and factoring companies, savings and loan associations,
credit unions and money exchange firms, and limited scope financial
institutions would need prior authorization issued by the Mexican
Ministry of Finance, to carry out a takeover, independently of the
compliance of other provisions contained in the law regulating the
specific activity.
On the other hand, publicly listed companies must comply with
specific rules and provisions contained in the Securities Market
Law and its regulations and circulars or bulletins issued by the
Mexican National Banking and Securities Commission (MNBSC), as well
as in the GLMC, and the Federal Civil Code and the Commerce Code,
the latter two as supplementary laws.
In fact, the requirements established by the MNBSC for publicly
listed companies to obtain registration of their shares or
certificates of ordinary shares is that the percentage of capital
stock to be publicly placed should not be less than 15% of the
listed company capital stock, and the criteria for the distribution
of the values applicable to the offer made in Mexico should be as
follows: i) at least 50% of the total amount of the offer will have
to be placed among those acquiring less than the 5% of the total
amount of the offer; and ii) no-one will be able to acquire more
than the 40% of the total amount of the offer.
What are the various methods by which a takeover can be
achieved?
In principle, four methods may be identified to
achieve a takeover in Mexico:
- Acquisition or transfer of shares or partnership-equity
interests, including the rights and liabilities inherent to
such shares or partnership-equity interest.
- Acquisition or transfer of assets of existing
companies.
- Acquisition of intangibles, that is, purchase of trade
marks, trade names, patents, software or know-how.
- Mergers, which under Mexican law imply that all assets and
liabilities capital, rights and obligations of the merged
(disappearing) company are transferred into the surviving
entity.
How differently does legislation treat hostile and voluntary
takeover bids?
Every merger, acquisition or restructure
will be supported by a written agreement executed by the parties,
where at least the essential concepts of the transaction are
included and where, the manner to resolve a controversy should be
an important part. Not regulating the latter, would take a
controversy to a resolution through court proceedings.
Of course, nothing in the agreement should be in violation of
specific obligations contained in the applicable laws, such as the
GLMC and the Commerce Code, among others, as well as with
provisions contained in the companies' by-laws, that is, put and
call provisions. Controversies in M&A are increasingly being
resolved through alternative dispute resolutions, including of
course, arbitration, instead of through court proceedings.
What penalties are imposed for parties that violate takeovers
regulations (or equivalent)?
When agreements contemplate
application of penalties and the cases where such penalties apply,
the agreement is the enforceable provision. It may include payment
of an indemnification by the party breaching the agreement, or an
agreed amount for damages and losses, or, in the absence of
specific provisions, going through court proceedings for the
eventual application of a penalty to be determined by the court
under the concept of damages and prejudices.
On the other hand, if the companies involved operate under
specific regulations, that is, an authorization from the Ministry
of Finance and/or the MNBSC, in case of serious infringements to
the provisions contemplated in the Securities Law, the MNBSC is
entitled to apply sanctions, which may vary from a simple fine to
suspension or cancellation of registration and even revocation of
the authorization.
If companies involved in biddings that have been awarded a
contract under the provisions set forth in the Law on Public Works
and Related Services, breach the terms and conditions agreed in the
corresponding agreement executed with government entities they may
be subject to a fine, temporary disqualification to participate in
bidding procedures or even to execute contracts with the federal
government or government entities regulated by said law.
What are the thresholds for disclosing bids and
offers?
Listed companies are obliged to deliver to the
stock or securities market (the market) all relevant information
and documentation required by the applicable law, for proper
disclosure to the market and the public. Likewise, proper
information must be made available through the company's home page,
as provided by the National Banking and Securities Commission Law
and its regulations.
When a merger or an acquisition is carried out by private
entities, the GLMC provides that the merger resolutions must be
published in the Official Gazette of the domicile of the
companies that are to merge and recorded in the Public Registry of
Commerce. The companies involved in the merger (whether as a merged
entity or a surviving company) must publish the balance sheet on
which the merger is based. Further, the company that will disappear
must also publish the procedure adopted for extinguishing its
liabilities.
COMPETITION/ANTITRUST
What recent developments in competition policy and
legislation relate to M&A in your jurisdiction?
The
antitrust law in Mexico is the FLEC. The purpose of this law is to
protect the competition process, and free market access, by
preventing monopolies, monopolistic practices and other
restrictions that deter the efficient operation of the goods and
services market.
How are competition/antitrust regulations enforced in your
jurisdiction?
The Commission, as the authority entrusted
with the application of the FLEC has, among others, the authority
to:
- investigate the existence of monopolies, state monopolies,
concentrations and illicit practices;
- establish coordination procedures to fight and prevent
monopolies, state monopolies, concentrations and illicit
practices;
- resolve cases under its competence and impose
administrative sanctions for violations of the FLEC and
denounce before the Public Prosecutor criminal practices on
competition and free access to the markets;
- comment on the adjustments to the federal public
administration programmes and policies when their effects may
be contrary to competition and free market access.
The Commission may assess the following sanctions: suspend,
correct or eliminate a specific concentration practice; order the
partial or total deconcentration of what has been unduly
concentrated; apply fines for having declared falsely or submitting
false information; having practiced absolute monopolistic
practices; having engaged in relative monopolistic practices; and
for being involved in forbidden concentrations, applying such
sanctions not only to the companies, but also to individuals who
acted on behalf of the companies involved in the forbidden
acts.
How does legislation approach the issue of abuse of dominant
position?
To determine non-compliance with the law, it
must be proved that the responsible party has substantial power in
the relevant market and the practices involve goods or services
corresponding to that relevant market.
In order to determine whether the relevant market is affected,
the authority takes into consideration, among other issues, the
possibility of substituting the goods or services by other national
or domestic goods or services; the distribution cost of the goods;
their relevant inputs; the restrictions imposed by the economic
agents or their associations and the time required to supply the
those regions from the market and the costs and potential access to
other markets of users or consumers.
To what extent are the parties to an M&A transaction
subject to prior notification requirements?
Under the FLEC
the concept of concentration is considered under different
scenarios, including when, through a merger or other actions,
control is acquired, including those acts through which
corporations, associations, stocks, equity interest, trusts and
assets in general are carried out among competitors, suppliers,
customers or any other economic agents.
The Commission must be notified of concentrations when the
thresholds set out by law are exceeded, that is: (i) if the value
of a transaction or series of transactions is equal to or higher
than 12 million times the general minimum wage in effect for the
federal district; (ii) if a transaction or series of transactions
implies the accumulation of 35% or more of the assets or shares of
an economic agent whose assets or sales amount to more than 12
million times the general minimum wage in effect in the federal
district; or (iii) if two or more economic agents participate in
the transaction, and their assets or annual volume of sales,
jointly or separately, add up to more than 48 million times the
general minimum wage in effect in the federal district, and such
transaction implies an additional accumulation of assets or capital
stock in excess of 4.8 million times the general minimum wage in
effect in the federal district.
The regulations of the abovementioned law also establish that
concentrations are not considered as possible monopolistic
practices, and therefore no prior notice or authorization is
required, in the following operations:
- juridical acts on shares or partnership-equity interests of
foreign companies, when the economic agents involved in said
acts do not acquire the control of Mexican corporations nor
accumulate in national territory shares, partnership-equity
participations, participations in trusts, or assets in general,
additional to those possessed directly or indirectly by them
before the operation; or
- operations in which an economic agent has had direct or
indirect title and possession, for at least the three preceding
years, of 98% of the shares or partnership-equity interests of
the economic agent(s) involved in the transaction. In such
cases, economic agents shall merely give written notice to the
Commission, within five days after the transaction takes
place.
Author
biographies
Patricia
Hernández-Esparza
PricewaterhouseCoopers
Corporate legal area
Patricia Hernandez-Esparza is the partner in charge of the
corporate legal area of PricewaterhouseCoopers. Before joining
PricewaterhouseCoopers as partner, she was a partner at Miranda,
Estavillo y Hernandez.
Patricia graduated from Universidad Femenina de Mexico and
Universidad Iberoamericana (attorney at law, magna cum laude,
1969). She is author of El Contrato de Asistencia Tecnica. She is
chairman of the Mexican Legislation Committee and member of the
Environmental Committee of the American Chamber of Commerce. She is
director-at-large of the board of directors of American Chamber of
Commerce Mexico and a member of the Mexican Bar, National
Association of Corporate Lawyers, the American Bar Association, the
International Bar Association, and the Mexican Association of
Executive Women.
Her main areas of practice are corporate law, foreign
investments, mergers and acquisitions, restructuring of corporate
groups, and contracts.
Fernando
Santamaria-Linares
PricewaterhouseCoopers
Corporate legal area
Fernando Santamaria is a senior manager in charge of the
corporate legal area of PricewaterhouseCoopers.
Fernando graduated from the Instituto Tecnologico Autonomo de
Mexico (ITAM) and has taken a specialized course in tax law at the
ITAM.
He is member of the International Bar Association.
His areas of practice are corporate law, mergers and
acquisitions, due diligence reviews, restructuring of multinational
corporate groups, foreign investments, contracts, and environmental
and pharmaceutical matters.
Constanza
Alanis-Uribe
PricewaterhouseCoopers
Corporate legal area
Constanza Alanis was born in Mexico City, Mexico. She has been a
lawyer of the corporate legal area of PricewaterhouseCoopers since
April 2000. Her areas of expertise include corporate law,
contracts, and environmental law.
Constanza obtained her law degree from the Universidad del Valle
de Mexico, and carried out postgraduate studies in corporate law
and economics at the Universidad
Panamericana.
Dalia
Goldsmit-Karakowsky
PricewaterhouseCoopers
Corporate legal area
Dalia Goldsmit Karakowsky was born in Monterrey, Nuevo Leon. She
has been a lawyer of the corporate legal area of
PricewaterhouseCoopers since August 2001, specializing in corporate
law.
Dalia studied at the Instituto Tecnologico y de Estudios
Superiores de Monterrey and graduated with honours as attorney at
law in December 1999.
Her main areas of practice are, among others, corporate law,
foreign investments, contracts, mergers and acquisitions, and
pharmaceutical matters.
PricewaterhouseCoopers
Mariano Escobedo No 573
Col Rincón del Bosque
CP 11580 México, DF
México
Tel: +52 55 5263 6000
Fax: +52 55 5263 6010