Daniel Del Río and Jesus Colunga of Basham Ringe & Correa assess the regulatory landscape for mergers and acquisitions in Mexico
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores (CNBV)) regulates the Mexican securities market. In addition, the General Law of Commercial Corporations (Ley General de Sociedades Mercantiles), the Securities Market Law (I) and the Federal Antitrust Law (Ley Federal de Competencia Econónomica) regulate takeovers.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Public offers must be approved by the CNBV.
It is common to obtain a memorandum of understanding or other type of agreement from the relevant shareholders to sell their shares. When the bidder applies for authorisation from the Securities Commission for the offer, the bidder must provide a copy of any prior arrangement with shareholders, board members or other acquirers related to the bid.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Public tender offers and acquisitions are the principle means of obtaining control of a public company.
Hostile acquisitions are allowed under the Securities Market Law but are extremely uncommon.
Friendly acquisitions must be made through a voluntary offer or a mandatory offer (Article 97 and 98 of the Securities Market Law). The bidder offers to purchase voting securities of the target company's common shares representing less than 30% of the voting stock of the target company (voluntary offer). If it is more than 30% a mandatory offer must be made.
Hostile takeovers are very rare in Mexico due to the fact that most of public companies are closely controlled by a small group of shareholders who own a significant percentage of the shares, making it difficult for a third party to acquire a controlling share.
2.2. What determines the choice of structure, including in the case of a cross border deal?
Common practice is to carry out a friendly acquisition under the provisions of the Security Market Law and supervision of the Securities Commission. The foreign law can be submitted in an agreement even if a Mexican entity is a party in the agreement.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Voluntary offers must remain open for 20 business days after the commencement of the offer.
Offers can only be made public with authorisation from the Securities Commission. The length of the authorisation process may vary and there are no mandatory timelines for the Securities Commission to approve or deny a request.
2.4. Are there restrictions on the price offered or its form (cash or share)?
No, there are no restrictions; the offer price may be paid in cash or securities.
2.5 What level of acceptance / ownership and other conditions determine whether the bidder makes the acquisition and can satisfactorily squeeze out or otherwise eliminate minority shareholder?
When a bidder makes an acquisition, they cannot force outstanding minority shareholders to sell their shares. Under Mexican Law there is no cash-out provision for minorities established; the Securities Market Law protects minority shareholders.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Payments of control premiums are not permitted.
Compensation agreements can be made, provided the target's board has approved the agreement and disclosed it to the public with opinion from the Corporate Practices Committee. Compensation must be equal for all target company shareholders, no matter the class or series of shares they hold.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase required?
An offer may be subject to the satisfaction of certain conditions, (i.e. such as minimum amount of shares to be acquired for the offer to be effective). These pre-conditions have to be established in the prospectus. Under the Securities Market Law no commitment funding is required.
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
Foreign residents with no permanent residence in Mexico are taxed on their Mexican sourced income under Mexican Income Tax Law (MITL).
MITL provides that in cases of income earned from a disposal of shares, the source of wealth will be considered to be located in Mexico if: the person who issued the shares is a Mexican resident; or, more than 50% of the accounting value of the shares or securities derives directly or indirectly from real estate located in Mexico.
In the case of income earned from disposing shares issued by Mexican corporations through the Mexican Stock Exchange, tax is paid through a 10% withholding tax on the gain from the disposal. The gain is calculated for each transaction, using the procedure set forth in the MITL, without offsetting losses.
3.2 Are there special considerations in cross-border deals?
Payment of tax on share disposals is not required when the taxpayer is a resident of a country that has a double tax treaty with Mexico.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defenses and are there any restrictions on their use?
Hostile takeovers are rare in Mexico. In cross-border deals, most important anti-takeover defences are the by-laws of the target company, as they can establish poison pills.
4.2 How do targets use antitakeover defences?
Through its by-laws, and by means of the Securities Commission.
4.3 Is a target required to provide due diligence information to a potential bidder?
No, however, bidders will always ask for a due diligence and if the target company does not provide it, it may hinder the takeover.
4.4 How do bidders overcome antitakeover defences?
The Securities Exchange Act allows secure mechanisms established in the by-laws of a potential target company.
4.5 Are there many examples of successful hostile acquisitions?
No. Cementos Mexicanos' (Cemex) acquisition of the Australian Rinker Group is one.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
Break fees are permitted and are commonly used as a deal protection device. Break fees, which can be a fixed amount or a percentage of the purchase price, are agreed between the bidder and the target company or its controlling shareholders in an acquisition or transaction agreement executed before the tender offer.
5.2 To what extent are deal protections limited, for example restrictions on impediments to bidding competition, break fees or luck up agreement.
Break fees must be reasonable considering the offer price, and comply with the provisions established by the Federal Competition Economic Law and Securities Commission in order to prevent blocking or restraining another offer.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the merger control notification thresholds in your jurisdiction?
A concentration is subject to a pre-merger notification when the following thresholds are met:
- One or a series of transactions gives rise to a concentration, regardless of where the transaction(s) takes place, which has a value in Mexico, directly or indirectly, exceeds 18 million times the minimum wage (around $84 million).
- When one or a series of transactions gives rise to a concentration that results in the accumulation of 35% or more of the assets or capital of an economic agent, whose annual assets or sales in Mexico exceed 18 million times the minimum wage.
- When one or a series of transactions gives rise to a concentration that results in the accumulation in Mexico of assets or share capital equivalent to 8.4 million times the minimum wage, and two or more economic agents whose assets or annual sales volume in Mexico, together or separately, are greater than 48 million times the minimum wage take part in the concentration.
6.2 When will transactions falling below those thresholds be investigated?
Transactions under the thresholds mentioned above are of no interest to the Commission.
6.3 Is a merger control notification filing mandatory or voluntary?
The merger control is mandatory when it fulfils the thresholds mentioned in question 6.1.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
Not applicable.
6.5 How long are the merger control review periods?
Within 60 business days following the date of receipt of a notification of a concentration, or as the case may be, the receipt of any additional information requested by the Commission, a final decision must be issued by the Commission. If the Commission considers the matter under analysis is a complex case, it may extend the decision period for 40 additional business days (100 in total).
6.6 At what level does your merger control authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
Transactions with no local competition effect are of no interest for the Commission. In addition, Mexican Competition Law can only be applied within the boundaries of the Mexican Territory.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Regarding foreign investment matters, a favourable resolution from the National Foreign Investment Commission is required for foreign investment to participate, directly or indirectly, in a percentage higher than 49% of the capital stock of Mexican companies when the aggregate value of the assets of such companies at the date of acquisition exceeds the amount determined annually by the Commission.
In case of a business combination, the acquisition vehicles should be structured considering the labor structure of the target companies and the best manner for the benefit of the employees considering the most beneficial employment terms that are available in light of the Mexican Federal Labor Law, such as regarding the Christmas bonus, vacation and vacation premium, and any other additional provision granted to employees for their work. That is to say, one of the key factors for a business combination is to analyse and determine the structure to be adopted for the employees.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
The Federal Criminal Law (Código Penal Federal), the Federal Law of Public Servers Liability (Ley Federal de Responsabilidad de Servidores Públicos) and the Federal Law for the Prevention and the Identification of Transactions with Illicit Funds (Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita).
7.2 What are the potential sanctions and how stringently have they been enforced?
For a corruption and bribery felony the sanction could be from two to 14 years imprisonment. The internal affairs office of the suspected authority initiates an investigation and after proof of corruption it gives notice to the public prosecutor for a criminal procedure.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
After obtaining the opinion of the Commission of Finance and Public Credit, in October, 2013, congress approved the economic package proposed by the president, Enrique Peña Nieto, on September 8. This package includes substantial amendments to various tax laws including the repeal of the tax deposits in cash and the single rate business tax, as well as new provisions regarding value-added tax, special tax on production and services, federal fee law and income tax.
8.2 What are the key recent developments in your jurisdiction?
A new antitrust law entered into force on July 7 2014. It arises from the June 2013 amendments to Article 28 of the Mexican constitution that had, as its specific purpose, the creation of both the Federal Antitrust Commission (Comisión Federal de Competencia Económica (COFECE)) and the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones (IFT)) as constitutionally autonomous agencies independent from the executive branch, and to set their basic organisation and operating principles.
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Daniel Del Río
Basham Ringe & Correa
Mexico City
About the author
Daniel Del Río Loaiza is of head of corporate and M&A. His focusses include foreign investment, international and financial agreements, joint ventures, real estate, antitrust, banking securities, and insurance.
He graduated from the Law School of the Universidad La Salle and obtained an LLM in business management from Tulane University in New Orleans.
He has lectured in different forums, including the International Bar Association, at events related to mergers and acquisitions, foreign investment in Mexico, and pro bono work. He has been recognised by the Chambers Global and Chambers Latin America as one of the leading lawyers in Mexico in M&A for several years, and by the International Who's Who of M&A lawyers. He was also named in Best Lawyers for Mexico in the areas of corporate law and M&A, and real estate.
He is president of the Mexican Bar Foundation (Fundación de la Barra Mexicana de Abogados), president of the Mexican Chapter of Los Amigos de Juan Pablo II, a member of the IBA Trust Foundation Board, and general director of Basham Ringe y Correa Foundation.
Jesus Colunga
Basham Ringe & Correa
Mexico City
About the author
Jesus Manuel Colunga Victoria is a senior associate of Basham Ringe y Correa, having joined the firm in 2003. His main areas of expertise are mergers and acquisitions, international business transactions, secured transactions and corporate law.
Colunga earned his law degree, with special mention, at Instituto Tecnologico Autonomo de Mexico. His postgraduate studies included commercial contracts at the Mexican Legal Bar and Attorney College and a Masters of Laws Degree (LLM) focussing on corporate law, international transactions, M&A and secured transactions at the University of Chicago law school.
Colunga is the secretary of the University Of Chicago Alumni Club Of Mexico. He has co-authored international publications, including the Mexico chapters of: Directors' Liability and Indemnification, and International Comparative Legal Guides: Practical Insights into Cross-Border Law.
