MERGERS & ACQUISITIONS LAWS AND REGULATIONS 2024

by Mariano Acebal and Ruben Velazquez

Overview

Mexican M&A activity is generally governed by: the General Law of Commercial Companies (“Ley General de Sociedades Mercantiles”), which regulates the incorporation and normal day-to-day activities of all kinds of commercial entities (i.e. management, shareholders’/partners’ agreements and meetings, annual approvals, etc.), as well as their merger, transformation and spin-off; the Code of Commerce (“Código de Comercio”); the Federal Civil Code (“Código Civil Federal”) or – depending on the specific case – local/states’ Civil Codes and the General Credit Titles and Operations Law (“Ley General de Títulos y Operaciones de Crédito”), which provide the general framework for contractual obligations and agreements, in some cases apply as supplementary law and also may have a greater impact in the structuring of guarantees around M&A transactions; the Income Tax Law (“Ley del Impuesto Sobre la Renta”), the Value Added Tax Law (“Ley del Impuesto al Valor Agregado”) and the Federation Tax Code (“Código Fiscal de la Federación”), which outline the most important tax-related aspects and implications around M&A transactions; and the Federal Economic Competition Law (“Ley Federal de Competencia Económica”), which regulates, among others, concentrations between “economic agents” when certain thresholds set forth in such law are surpassed, in which case, they may be subject to prior authorisation from the Federal Antitrust Commission (“Comisión Federal de Competencia Económica”).

Likewise, depending on the industry/sector within which the target company carries out its business, as well as the specific nature of the M&A transaction – of which we will briefly speak below – M&A activity may also be governed by the Securities Market Law (“Ley del Mercado de Valores”) and certain rules and regulations issued by the National Banking and Securities Commission (“Comisión Nacional Bancaria y de Valores”) and/or the Treasury and Public Credit Ministry (“Secretaría de Hacienda y Crédito Público”), which regulate the operation of securities markets and publicly traded companies in Mexico, including tender offerings, public offerings and other transactions involving securities and publicly traded companies, the Foreign Investment Law (“Ley de Inversión Extranjera”), which prohibits or limits the percentage of foreign investment allowed to participate in certain sectors, derived from which authorisations from the National Foreign Investment Commission (“Comisión Nacional de Inversiones Extranjeras”) may be required, when a foreign investor/acquiring entity wants to participate in a percentage greater than 49% of the Mexican entity’s capital stock and the total asset value of the entities participating in the transaction surpasses a threshold determined annually by the aforementioned Commission, the Federal Labor Law (“Ley Federal del Trabajo”) and the Social Security Law (“Ley del Seguro Social”), which may become more relevant in transactions involving employer’s substitution processes and other special laws that only apply to determined industries/sectors such as the Federal Telecommunications and Broadcasting Law (“Ley Federal de Telecomunicaciones y Radiodifusión”), the Mining Law (“Ley de Minería”) and the Credit Institutions Law (“Ley de Instituciones de Crédito”), to mention a few of them.

Considering the aforesaid, we could state that the principal regulator for Mexican M&A transactions is the Federal Antitrust Commission and other regulators that may be involved in certain M&A transactions – depending on the industry/sector within which the target company carries out its business, as well as the specific nature of the same – may be the National Banking and Securities Commission, the Ministry of Economics (“Secretaría de Economía”), Federal Telecommunications Institute (“Instituto Federal de Telecomunicaciones”) and Mexican stock exchanges (i.e. Bolsa Mexicana de Valores (BMV) or Bolsa Institucional de Valores (BIVA)), among many others.

Regarding typical forms of acquisitions, as in many other jurisdictions, M&A transactions in Mexico are normally structured through mergers, asset or stock – either shares or partnership interests – acquisitions and public tender offers, in the case of publicly traded companies.

Although there is no defined timeframe, nor steps to follow in order to complete an M&A transaction in Mexico and this normally depends on the complexity of negotiations around the same, as well as third-party authorisations required – if and when applicable – normally, the first step the parties involved take is entering into legal preliminary documents such as term sheets, letters of intent and/or memorandums of understanding, by which they normally set out the general commercial terms governing the respective transaction.  Once the parties have entered into any of the above-mentioned preliminary documents, the next step is the start of the target’s due diligence process, in order to confirm commercial terms, set forth in the preliminary documents, identify potential risks and define certain terms to be included in the definitive transaction documents.  Due diligence processes may be divided into three main types: (i) high-level due diligence, which involve a preliminary, quick review of the essential elements of target entities and are more commonly used in transactions with tight closing timeframes, limited due diligence resources and/or in which purchasers/investors already have certain knowledge of the target entity; (ii) fatal-flaw due diligence, which focuses on identifying any critical issues that could potentially doom the project or transaction and is often used in transactions where the risk of a single oversight could lead to significant losses; and (iii) full-fledged due diligence, which is a comprehensive and detailed review covering all critical aspects of a business or project and is conducted to thoroughly understand all potential risks and opportunities associated with a transaction.  As a third (and normally final) step in an M&A transaction, the parties will negotiate the definitive – both principal and ancillary – transaction documents, which may or may not be subject to certain conditions precedent; although, in some cases, a fourth step related to post-closing obligations may also exist.

According to public sources, the M&A Mexican market experienced a slight decrease in 2023 with respect to overall transactions conducted within 2022, with the real estate, industrial, banking and investment, IT-Fintech and mining sectors being the most active ones during the past year and the energy, infrastructure and telecommunications sectors being the less active ones, mainly due to legislative reforms, proposals, as well as governmental actions that continue to cause uncertainty among investors.

Likewise, according to public sources, during 2023, inbound investment was the most robust activity, while outbound and domestic acquisitions ended up with similar numbers.  Regarding inbound investment, the United States and Spain were the bidder countries with most activity, followed by the United Kingdom, Chile and some others, while regarding outbound acquisitions, Spain and the United States were the target countries that registered most activity, closely followed by Colombia.  While domestic M&A remains strong – as local companies seek to consolidate their presence and expand their market reach within the country through the acquisition by larger conglomerates of their smaller competitors and/or the agreement on strategic mergers – inbound M&A has, traditionally, been more robust, driven by foreign investors being attracted by Mexico’s market size, favourable investment climate and strategic geographical location and importance (now even greater due to the nearshoring effect we speak about below).  Regarding outbound M&A, it has experienced a slight growth – especially in food and beverage and retail sectors – derived from local businesses’ desire to expand beyond the domestic market as well as diversify revenue sources and become more globally oriented.

Significant deals and highlights

According to public sources, the leading sectors were the real estate, industrial, banking and investment, IT-Fintech and mining sectors.

Some M&A transactions that took place in Mexico during 2023 that are worth mentioning were the following:

  • Real Estate: Fibra Mty, S.A.P.I. de C.V. (Fibra Monterrey) acquired a 46-industrial building portfolio for approximately US$767 million, which comprehend a gross leasable area of approximately 822,052m2, an increase of more than 100% of Fibra Monterrey’s reported gross leasable area at the end of 2022, which will also allow an increase in its income derived from the lease of industrial properties from 50.4% to approximately 72%.
  • Banking and Investment: Redem Tech LLC (Kapital), a Mexico-based Fintech focused on strengthening companies through technological financial solutions, acquired Banco Autofin Mexico, S.A., a local provider of commercial banking services for an amount of US$50 million.
  • IT-Fintech: Cogeco Inc, a Canada-based cable television operator acquired, through its subsidiary Cogeco Connexion Inc, the local cable television provider OXIO Mobile, S.A. de C.V., a Mexico-based software-computer, traditional & other software company engaged with a cloud-based mobile carrier as-a-service platform for an amount of US$74.11 million.
  • Industrial: RS Group plc, a listed United Kingdom-based global wholesaler of electrical and electronic components for industrial customers and suppliers, through its subsidiary Allied Electronics & Automation, completed the acquisition of Risoul y Cia, S.A. de C.V., a Mexico-based provider of industrial and automation product and service solutions for an amount of US$275 million.

Key developments

During 2023, there were material changes in specific pieces of legislation that might indirectly affect M&A activities in certain industries/sectors.  One is the reform to mining sector regulations regarding award process, term and renewal, limitations to transfer and security interest over mining concessions and another is the amendments approved to the Securities Market Law, introducing new simplified procedures to register securities before the National Securities Registry (“Registro Nacional de Valores”) by the so-called “Simplified Issuers” (“Emisoras Simplificadas”), which are still awaiting changes in secondary or ancillary legislation and regulations in order to be able to fully implement the same.

Likewise, although the current Government’s attitude towards foreign investment – mostly in certain industries/sectors such as energy – has remained aversive, at closing of the fiscal year 2023, Mexico’s Direct Foreign Investment reached an approximate amount of US$36 billion, which represented a historic maximum.  This is a clear reflection that, notwithstanding the Government’s position on certain matters, Mexico has sufficient legal infrastructure to provide certainty to investments.

Also, Environmental, Social and Governance (ESG) regulations and practices are evolving, with increased awareness driven by domestic policies and international standards that, as a result, have also become more relevant in M&A transactions.

Finally, as in many other jurisdictions, there is a clear trend in the modernisation of the way M&A transactions are being carried out in Mexico, especially through the introduction and increased use of new technologies and artificial intelligence.  Some key aspects around this are the use of technology to enhance due diligence, improve transaction times, costs and efficiency and streamline processes related thereat.

Industry sector focus

As referred to above, during 2023, the leading sectors in M&A transactions within Mexico were the real estate, industrial, banking and investment, IT-Fintech and mining sectors.

The particular reasons behind this sector-specific M&A derive from the intention of foreign and domestic entities to leverage synergies, enhance competitive advantages and capitalise on new market opportunities.

Specifically speaking about the real estate and industrial sector, nearshoring has been a significant factor of their recent (and expected future) growth, especially in the northern part of the country where new developments are being built in strategic areas.  This has also led to joint ventures and mergers between manufacturing, construction, logistics and transportation entities.

Likewise, the banking and investment, Fintech and IT sectors have been at the forefront of M&A due to increasing consumer demand for digital financial services, the need to diversify their product offerings (including the need to cater to the younger population and compete with global financial services), digital transformation trends and Mexico’s growing Fintech industry.  The growth of e-commerce and mobile payments, as well as the need of traditional banks and investment firms to digitalise their operations has particularly fuelled M&A activity as well.

The year ahead

2024 is an election year in both Mexico and the United States, so this is a significant factor that will surely influence M&A activity for the following year (or years) to come.

Considering the outcome of the Mexican election that implies the continuity of the previous Government, one could think that M&A transactions in certain sectors – such as the energy sector – will remain on hold, although considering the pro-ecological background of the new President and what she has stated regarding the promotion of clean energies, the increase in infrastructure projects related to the same could also affect M&A activity in the country.

Although it is too early to really know the position that the new Government will adopt in relation to certain important issues and if it will follow the line of the Government that is about to conclude, or if they will distance themselves from it, we shall remain expectant considering it may imply the continuance of existing policies or a radical change in some of them, which may cause certain industries/sectors that have remained partially or mostly closed to M&A transactions in the past years to open up again to the same.

Nevertheless, aside from the aforesaid, we have strong reasons to believe that 2024 will be a year involving an increase in M&A transactions as a consequence of the nearshoring effect which, fortunately, continues to be a hot topic addressed by Mexico’s elected President and the possible members of her cabinet and a non-stop growing snowball that represents a significant economic opportunity driven by global supply chain realignments and geopolitical shifts caused, among others, by United States-China trade tensions and disruptions caused to supply chains by the COVID-19 pandemic.

Derived from the aforesaid, we expect active M&A activity especially in the real estate, industrial, banking and finance, transportation, logistics, manufacturing and IT-Fintech sectors.

This chapter has been published by Global Legal Insights (GLI).

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