10 things to know about M&A in Mexico

Merges and acquisitions do not have a specific regulatory framework but are regulated by the General Law of Business Organisations, which sets out the corporate legal framework applicable for business organisations, as well as the requisite formalities to acquire shares and carry out a corporate merger. The transfer of assets is regulated by the Code of Commerce and the Federal Civil Code or local Civil Codes, depending on the location of the company or assets to be acquired. Other legislation may also be applicable, depending on the structure of the transaction, the participation of foreign investors, the relevant industry, etc.

In Mexico, it is common to use preliminary legal documents (MOU, LOI or HOT) in M&A transactions to evidence the initial agreement and to provide a framework to negotiate the definitive agreements. Such preliminary agreements do not bind the parties to conclude the transaction, but often impose a penalty if a party defaults or withdraws from the deal.

Due diligence may reveal a variety of issues, depending on the structure of the transaction, the industry in question, etc. It is particularly important to verify compliance with Mexican tax, customs, environmental, and labour laws, as well as real estate, data privacy and pending litigation or other proceedings. Even if complete due diligence is performed, buyers should request appropriate representations and warranties from the seller, to ensure that they are indemnified if the target is not as expected.

Many permits, licenses and authorizations granted by the Mexican governmental authorities are nontransferable. If a target’s business is regulated, the buyer should consider timing issues, complexity and additional costs of obtaining the necessary permits and authorizations to carry on the business once the asset acquisition has completed. M&A transactions require authorization prior to closing of the transaction from the Mexican competition authority when certain thresholds are exceeded.

Businesses may be combined in different ways, including either stock or asset acquisitions. The suitability of one form over the other depends mainly on 4 factors: (i) confidence in, and reliability of information supplied by the sellers and target, particularly regarding liabilities and contingencies; (ii) scope of sellers’ representations and warranties; (iii) creditworthiness of the sellers; and (iv) the target’s business sector and the nature of its assets. Where governmental permits and authorizations are a substantial part of the target’s business, an asset deal is preferable.

Tax issues in M&A projects in Mexico are a critical consideration, as they can significantly impact the structure, cost, and overall success of a transaction. Key aspects include the potential for capital gains tax on the sale of shares or assets, the application of value-added tax (VAT) on asset deals, and the importance of reviewing the target’s tax compliance and potential liabilities, such as unpaid taxes or ongoing audits. Additionally, the use of tax-efficient structures, such as mergers or reorganisations, and the availability of tax treaties to reduce withholding taxes on cross-border payments, should be carefully evaluated. Early and thorough tax due diligence is essential to identify risks, optimise the transaction structure, and ensure compliance with Mexican tax laws and regulations.

In Mexico the increased use of representations and warranties insurance in international cross-border transactions is driving deal making and reducing risks for would-be buyers and investors. In this context, the seller engages an insurance broker who will solicit terms and seek to pre-package an insurance policy, allowing the seller to approach the buyer with coverage terms at the outset of the deal as part of its negotiation strategy. Although there are not many R&W providers fully established in Mexico, US brokers are familiar with the Mexican market and can help to find tailored proposals.

Due to the predominance of family businesses in Mexico, takeovers are not a common practice. While poison pills are frequently adopted by companies in the US or Europe, they are not used to the same extent in Mexico. Hostile takeovers may be carried out through a tender offer in accordance with the Securities Market Law, however, these are not very common. The Mexican market has relatively few publicly traded companies and a high shareholder concentration which tends to discourage hostile takeovers.

Mexican laws are not restrictive in terms of the financing of M&A transactions. Parties are able to finance or secure transactions using the target’s assets, their own assets or third-party funds. International and local financial institutions, private equity funds, fintech entities and other financial players are all active in Mexican M&A.

Transaction documents should include covenants aimed at ensuring that the parties will collaborate in taking the steps required to fulfill closing conditions and complete the transfer. It is also common to include stand-still provisions regarding the conduct of business between signing and closing the transaction. Mexican stock purchase agreements commonly include a post-closing covenant for the seller to pay tax on the purchase price.