In negotiating stock or asset purchase agreements relating to Mexican companies, parties have sought alternatives in an effort to minimise the role of the courts if the purchaser makes an indemnification claim against the seller for breach of representations and warranties.
Independent determination
Parties often agree that indemnification claims submitted by purchasers be resolved by an independent firm with the required technical capabilities. In many cases the central issue in such claims is that the financial statements of the target company or the representations and warranties contained in the purchase agreement with respect to such financial statements did not accurately reflect the target company's situation. Therefore, accounting firms are chosen as the independent professionals to issue an opinion on whether the indemnification claim has merit or not, based on the information provided by the seller to the purchaser, and the seller's assertions. The parties agree to be bound by the decision of the independent firm.
The parties also agree on a mechanism to segregate certain funds to be used to indemnify the purchaser, if the decision of the independent firm finds that the claims of the purchaser have merit.
Administration trust
The escrow agreement is a legal mechanism that is not contemplated by Mexican law. Although there are contractual arrangements that can achieve the same goals under Mexican law, such as a conditional deposit, Mexican attorneys often prefer not to use cross-border hybrids and rather resort to a legal mechanism that has statutory recognition and is widely accepted in Mexico, such as the trust (fideicomiso). Therefore, trusts are used as the mechanism in lieu of an escrow. Trusts are used in Mexico for several purposes, one of which is the administration of funds and the release of such funds upon instruction from the parties as provided in the trust agreement. In Mexico, only financial institutions can act as trustees. In the case described above, a bank would typically be chosen as trustee.
The trust agreement must contain provisions specifying which parties (and in which circumstances) can instruct the trustee to release amounts that are part of the indemnification fund, as well as rules specifying the cases in which such amounts can be delivered to the sellers after the period for the purchaser to submit any indemnification claims under the purchase agreement has lapsed.
Dispute resolution
Although the mechanism described above would not preclude the parties from resorting to the dispute resolution method agreed upon in the purchase agreement, the purpose of implementing the indemnification procedure is to establish a mechanism that is a binding agreement and that is based on the assumption that both parties wish to settle any indemnification disputes in a more efficient manner than through lengthy litigation.
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