1. What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
In Mexico, the transfer of shares/equity quotas of private commercial companies is regulated under the General Law of Business Organizations (Ley General de Sociedades Mercantiles "GLBO") and the Code of Commerce (Código de Comercio); likewise, the transfer of assets is regulated under the Code of Commerce (Código de Comercio) and the Federal Civil Code (Código Civil Federal) (or local Civil Codes), accordingly. Other secondary legislations are also applicable, depending on the type of transaction, the participation of foreign investments, or the particular industry. M&A transactions are also regulated by the Federal Law on Economic Competition (Ley Federal de Competencia Económica), the Foreign Investment Law (Ley de Inversión Extranjera), and by special laws regulating different matters and industries (e.g. the Federal Law on Telecommunications and Broadcasting (Ley Federal de Telecomunicaciones y Radiodifusión), the Law on Credit Institutions (Ley de Instituciones de Crédito), inter alia).
The main regulatory authority for M&A transactions is the Mexican Federal Antitrust Commission (Comisión Federal de Competencia Económica "COFECE"), which enforces merger control. Transactions whereby companies or the so called "economic agents" merge, acquire portions of other companies, or associate or carry out operations that unites them are considered "concentrations". Those concentrations must be reported to COFECE whenever certain economic thresholds are surpassed, so that COFECE can assess the impact of the transaction on the market and any potential risks for competition. As a result, COFECE may authorize, deny or condition the execution of transactions.
The acquisition of public companies is regulated under different legal provisions and authorities, such as the Securities Market Law (Ley del Mercado de Valores), the rules and regulations issued by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores), the Ministry of Treasury and Public Credit (Secretaría de Hacienda y Crédito Público), the Mexican stock exchanges, and the GLBO.
It is important to consider that certain activities are restricted as to the participation of foreign investment, as provided under the Foreign Investment Law, by forbidding or limiting the percentage of participation that a foreign investor may hold in a Mexican company. Therefore, when allowed by such law, foreign investors must obtain an authorization issued by the Mexican National Foreign Investments Commission (Comisión Nacional de Inversiones Extranjeras) to participate (i.e. by means of an acquisition) in a Mexican company. Additionally, authorization by such National Foreign Investments Commission (Comisión Nacional de Inversiones Extranjeras) must be obtained for those transactions in which foreign investment will participate in a percentage over 49% of a Mexican company, only in those cases where the value of the total assets of the target company surpasses the amount that the aforementioned Commission sets on a yearly basis. For 2020, such amount was set on $20,184,671,346.26 Mexican Pesos.
Finally, other authorities may be involved in M&A transactions. For example, the Mexican Social Security Institute (Instituto Mexicano del Seguro Social), which is the main authority regulating public health, social security and benefits, as well as pensions, would be involved in those asset deals that involve a transfer of employees; also, certain corporate acts to be carried out through an M&A transaction must be recorded at the Public Registry of Commerce (Registro Público de Comercio); the transfer of title of real estate assets must be registered before the Public Registry of Property (Registro Público de la Propiedad), and certain guarantees (such as non-possessory pledges, leasing agreements, ownership retention provisions in contracts, among others) must be registered before the Registry of Movable Guarantees (Registro Único de Garantías Mobiliarias).
2. What is the current state of the market?
The M&A market is going through a difficult phase derived from the current international financial crisis, and the obvious challenges derived from the COVID-19 pandemic. However, there are signs of recovery and certain industries and sectors have been active.
According to public sources, the reported deal value in the Mexican M&A market for 2020 had a loss of 26.4% against 2019 figures. Unsurprisingly, 2020 had fewer transaction than the past recent years, though numbers have been recovering since the end of 2020 and the beginning of 2021, especially in connection with restructuring, asset and business consolidation, and refinancing transactions.
Moreover, certain sectors where not negatively impacted by the COVID-19 pandemic and its consequent financial crisis and have been active in M&A transactions, such as e-commerce, micro-financing, fintech, and SAAS (Software-as-a-Service).
Additionally, the entrance into force of the USMCA on July 1 is expected to increase investments in Mexico from the U.S. and Canada. Notwithstanding that investments from the U.S. and Canada have been steady in the last years, there was a mild uncertainty in the investors' environment prior to the entrance into force of the USMCA, which took place on July 1, 2020. Now, investments from those countries are expected to increase.
A relevant aspect to look at are the mid-term elections scheduled to happen in Mexico in June 2021, and which undoubtedly will impact the markets, especially in connection with those industries that might potentially experience regulatory reforms and that are very reactive to the country's political climate.
3. Which market sectors have been particularly active recently?
We have seen an increase in restructuring operations in the financial market in all kind of industries, including fintech, SAAS (Software-as-a-Service), and e-commerce. Food and product delivery platforms, and the health and sanitary sectors - key for the fulfillment of needs that have raised and grown since the COVID-19 spread - are other sectors that have been active.
4. What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Among the most significant factors, we can consider: (i) the market and lifestyle disruptions derived from the COVID-19 pandemic; (ii) the regulatory changes that many sectors in the Mexican economy are experiencing, due to the nationalist and state-oriented approach of the current federal administration; and (iii) business consolidation and restructuring derived from the international and national financial crisis.
Within the foregoing, there are different aspects and factors to consider: the COVID-19 pandemic has changed and will continue changing working and lifestyle preferences and habits. The process of digitalization of business has accelerated and as a result, work, economic activity and residences are likely to move away from centralized systems and big urban centers, directly affecting several sectors, such as real estate.
Also, business and consolidation, debt restructuring, corporate restructures, the acquisition of distressed entities, the search for efficiencies and the need to raise capital and issue debt instruments are factors derived from the global financial crisis that should be followed closely.
Finally, the current federal government has been active in issuing new laws and unraveling existing ones with the purpose of moving towards a protectionist and state-oriented approach for certain industries, such as the energy, electricity, renewables, education, telecommunications, oil and gas, and infrastructure sectors. Additionally, a major reform to labor laws is under discussion in the Mexican congress, aiming at regulating and sanctioning practices of unjustified subcontracting of work. Such reform has risen concerns for many companies which have moved towards restructuring efforts (including mergers, spin-offs, consolidation and sale of business units) to address the potential impacts of the foregoing.
In contrast to the economic and financial distress that the global pandemic brought unto many industries, technology is one of the few that has been benefitted. The benefits and growth experienced by the tech industry have brought and favored the development of new forms of technology, that have helped develop new business opportunities for businesses that had never considered the importance of a technological platform and technological features, nor had considered them as an important part of budget allocation. Therefore, acquisition of software development will play a crucial role over the next two years, putting technology at the center of many M&A transactions in its different variations and innovative aspects (e.g.) fintech, SAAS (Software-as-a-Service) and e-commerce.
To view the full article please click here.
Originally published in The Legal 500 Country Comparative Guides
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
