I INTRODUCTION

The Federal Law of Economic Competition became effective in Mexico in 1993. Congress approved important amendments to this statute in 2006 and 2011. In 2013, the Constitution was amended to improve the enforcement of competition law and policy and, as a result of this constitutional amendment, Congress enacted a new Federal Law of Economic Competition (LFCE or Competition Law) in 2014. The Federal Economic Competition Commission (CFCE or Commission) enforces the Competition Law in all areas of the economy, except the telecommunications and broadcasting sectors, where the LFCE is enforced by the Federal Telecommunications Institute (IFT).

Under the LFCE, pre-merger notification is mandatory when certain thresholds are met. Since 2014, a notified transaction must be approved by the CFCE or IFT before consummation. Under the LFCE, reportable transactions will not produce legal effects without such approval.

The Competition Law provides both a size of transaction test and a size of person test for determining whether a filing is required. For 2016, pre-merger notification is required when:

  • a the transaction amounts to more than 1,314.7 million pesos in Mexican territory;2
  • b an economic agent acquires 35 per cent or more of the assets or capital stock of an economic agent who has assets or annual sales of at least 1,314.7 million pesos; or
  • c the acquired assets or capital stock amount to more than 613.5 million pesos,3 and the assets or annual sales of the parties involved in the transaction, jointly or separately, amount to more than 3,505.9 million pesos.4

The assets and sales taken into account are the ones located or originated in Mexican territory.

Failure to file can result in a fine of between 365,200 pesos5 and 5 per cent of the parties’ annual sales.

The LFCE provides certain exemptions to the pre-merger notification requirement. Some general examples of these are:6

  • a intra-corporate transactions;
  • b acquisitions of capital stock by an acquirer who holds control of the company since its incorporation or when such control has already been approved by the CFCE or IFT;
  • c transfers of assets or capital stock to administration or warranty trusts;
  • d international transactions not implying acquisition of control of Mexican companies or accumulation of assets in Mexican territory; and
  • e certain acquisitions solely for investment purposes.

Approved transactions may not be subject to further investigation unless the approval has been based on false information, or the approval has been subject to conditions and the parties do not comply with such conditions.

Transactions not surpassing the thresholds or falling under the exemptions may not be investigated after a year following their consummation. Transactions not subject to mandatory pre-merger notification may be voluntarily reported in order to seek approval and eliminate the possibility of further investigation.

It is important to mention that the ninth transitory provision of the new Federal Law of Telecommunications and Broadcasting7 states that as long as preponderant economic agents8 exist in the telecommunications and broadcasting sectors, mergers between concessionaries (i.e., telecommunications and broadcasting operators) will not require previous authorisation from the IFT whenever:

  • a the preponderant economic agent is not involved in the transaction;
  • b the Dominance Index shows a negative variation in the sector, as long as the Herfindahl-Hirschman Index does not show an increase that exceeds 200 points;
  • c as a result of the transaction, the economic agent has a share of less than 20 per cent in the corresponding sector; and
  • d the merger does not produce harmful effects to competition in the sector.

This type of transaction will require a post-closing notice instead of the pre-merger notification filing.9

In addition to the LFCE, the following regulations and guidelines are related to merger control:

  • a Regulations of the LFCE, issued and amended by the CFCE on 30 October 2014 and 21 January 2016, respectively. These regulations complement the merger control provisions established in the LFCE;
  • b Regulations of the LFCE for the broadcasting and telecommunications sectors, issued by the IFT on 7 January 2015. These regulations complement the merger control provisions established in the LFCE;
  • c Technical Criteria for the Calculation and Application of a Quantitative Index to determine concentration in the relevant market, issued by the CFCE on 23 April 2015. This Technical Criteria maintains the application of the Herfindahl-Hirschman Index and determines the elimination of the Dominance Index;
  • d Technical Criteria for the Calculation and Application of a Quantitative Index to determine concentration in the markets related to telecommunications and broadcasting sectors, issued by the IFT on 17 March 2016. This Technical Criteria also maintains the application of the Herfindahl-Hirschman Index and determines the elimination of the Dominance Index (except for procedures under the ninth transitory provision of the Federal Law of Telecommunications and Broadcasting);
  • e Guidelines for the Notification of Concentrations, issued by the CFCE on 9 October 2015. These guidelines provide further details regarding application of thresholds, information and documents required for the filing, among other issues;
  • f Guidelines of the Investigation Procedure of Relative Monopolistic Practices (dominance) and Illegal Mergers, issued by the CFCE on 22 June 2015. These guidelines explain in detail the investigation procedure of illegal mergers, among other issues; and
  • g Guidelines for Exchange of Information between Economic Agents, issued by the CFCE on 10 December 2015. These guidelines provide the rules regarding information exchange during the due diligence, among other issues.

II YEAR IN REVIEW

In 2015, the CFCE concluded reviews of 149 pre-merger notifications with the following outcomes: 141 transactions were authorised, four transactions were conditioned to comply with undertakings, one was not authorised, and three did not finish their process. Also, in the first trimester of 2016, the CFCE concluded reviews of 33 pre-merger notifications with the following outcomes: 32 transactions were authorised and one transaction was deemed as not presented, inadmissible or withdrawn.

Of the 2015 conditioned cases, the Soriana/Comercial Mexicana transaction merits mention. Soriana, the buyer, and Comercial Mexicana, the seller, are both Mexican companies dedicated to the retail trade of an extent product variety, mainly food and home products, through self-service stores. The merger consisted of Soriana acquiring 159 stores owned by Comercial Mexicana and the approval was conditioned upon Soriana not acquiring one or more of the shops located within the 27 markets in which the Commission determined that competitive risks existed.

The transaction that was not authorised was the IEnova Gasoductos/Pemex GBP case. IEnova Gasoductos is a subsidiary of Sempra Energy, a Mexican company created to hold shares in companies that transport hydrocarbons, petroleum and petrochemicals in Mexico. Pemex GPB is a subsidiary of PEMEX and their activities cover processing, transportation and commercialisation of natural gas and liquefied petroleum gas. The Commission decided not to authorise the merger as it would have resulted in non-compliance of undertakings previously imposed on Pemex GPB (in 2001 and 2005, the former Competition Commission analysed two mergers that allowed Pemex GPB to participate in the companies that operated the natural gas pipeline of San Fernando and of liquefied petroleum gas pipeline of Burgos-Monterrey; the approvals were conditioned upon Pemex GPB ending its participation in both companies through public bid). As the IEnova Gasoductos/Pemex GBP transaction would achieve the removal of Pemex GBP from both companies, but without taking into consideration the public bid procedure, the Commission considered that the transaction contravened the previously imposed undertakings. Even though IEnova Gasoductos and Pemex offered new undertakings, they were not considered as suitable by the Commission and the decision was not to approve.

Another worth mentioning is the Alsea/WalMex case. In February 2014, the CFCE approved the merger in which Alsea bought from WalMex a restaurants chain. Even though the CFCE analysis determined that there were no significant entry barriers in the chain restaurant market, it also determined that the exclusivity clauses imposed by Alsea onto mall operators, owners and developers created an entry barrier for its competitors. Therefore, the transaction was conditioned on certain undertakings, which consisted, among others, in the elimination of exclusivity clauses in the lease agreements of commercial spaces. In the fourth trimester of 2015, the CFCE determined that Alsea breached this undertaking and imposed a fine of approximately 20.4 million pesos. It was also instructed to amend the agreements in a term of 75 business days.

The IFT’s information on pre-merger control activity is not as available as that of the CFCE. Notwithstanding, a review of the 2015 and 2016 (up to May 2016) press releases of the IFT indicate that one transaction was approved, two economic agents were fined for failing to notify a transaction that met the thresholds and one transaction was conditioned to compliance of undertakings.

III THE MERGER CONTROL REGIME

The notification must be filed by the parties involved in the transaction (e.g., buyer and seller) although a common representative must be appointed to act on behalf of the parties before the CFCE or IFT. As of 1 January 2016, a filing fee of 160,000 pesos is mandatory.

The initial filing must provide, in general, some corporate and financial information and documents (articles of incorporation, by-laws, capital structure, corporate charts and financial statements); the agreements governing the transaction; the scope of the non-compete obligations; an explanation of the transaction purposes; and a brief description of the products and market shares of the parties. Such information and documents are described in Article 89 of the LFCE and are commonly known as ‘basic information’.

Within a 10-business-day period, the CFCE or IFT may request basic information that was not provided with the initial filing, and such information must be submitted in a 10-business-day period, extendable under duly justified causes.

By reviewing the basic information, the CFCE or IFT should be able to determine whether the transaction raises competition concerns, in which case they would issue an additional information request in order to proceed with a deeper analysis on concentration effects.

The additional information request may be issued and notified to the parties within a 15-business-day term after the compliance of the basic information request, or after the initial filing if such request was not issued. This additional information request may include any kind of economic information that the authority deems necessary to analyse the effects of the transaction (description of products and substitutes, production processes, costs, investment amounts, distribution options, suppliers, clients, prices, market shares, etc.), and in many cases it has to be provided in a high level of detail. This information must be submitted within a 15-business-day term, extendable under duly justified causes.

If the notifying parties fail to comply with the information requests, it is legally understood that the notification was not filed. However, the transaction may be notified again and the procedure would start from the beginning.10

The CFCE or IFT shall issue its decision within a 60-business-day period after the compliance of the additional information request; the compliance of the basic information request (if an additional information request was not issued); or the initial filing (if no basic or additional information requests were issued). In exceptionally complex cases, this 60-business-day term may be extended for up to 40 additional business days. The CFCE or IFT decision may consist of approving, with or without conditions, or disapproving the transaction. If a decision is not issued within the established time frames, the notified transaction is deemed approved. The approval of the transaction will be valid for a six-month period, which may be extended for another six months when justified causes are credited by the parties. The transaction may not be closed after the expiration of said periods, unless a new notification is filed. The parties shall provide the CFCE or IFT with documents evidencing the transaction formalisation within 30 business days after closing.

During the notification process, when the concentration raises competition concerns, the CFCE or IFT shall inform the parties about them at least 10 days before the case is included for decision in the board of commissioners’ agenda. No later than one day before the case is included for decision in the board of commissioners’ agenda, the parties may offer undertakings in order to prevent the risks found by the authority. The 60 or 40-day terms mentioned above will start to count again from the day the proposed undertakings are filed. Also, parties can offer undertakings from the beginning of the process (with the initial filing), in which case these terms will not be interrupted, although it is rarely recommended.

The CFCE or IFT is empowered to, and frequently does, request information to third parties who may be related to the market where the concentration takes place or has effects, being also empowered to request information to other authorities. Such information shall be provided in a 10-business-day period, extendable for another 10 days when justified.

The LFCE does not acknowledge the legal standing of affected third parties to challenge approval decisions issued by the CFCE or IFT in a pre-merger notification process. However, third parties may submit their concerns and provide information and documents, which shall be taken into account by the Commission when issuing its decision.

During the notification process, access to the file is restricted to any person different from the notifying parties. Once the process is concluded, the Commission shall publish its decision, excluding the information classified as confidential, and any person may have access to the rest of the non-confidential information contained in the file, through a specific petition filed under the transparency law.

Regarding the concurrent review of mergers, Article 5 of the LFCE provides that if one of the two agencies deems that a case that is being reviewed by the other should actually be reviewed by it, then this should be informed to the agency that is reviewing the case. If such agency declines jurisdiction, then the case should be sent to the requestor agency within five business days. However, if after such notice the agency does not decline jurisdiction, then the procedure will be suspended and the case will be sent to the economic competition, telecommunications and broadcasting circuit courts in order to determine which agency holds jurisdiction over the case. Also, whenever one of the agencies receives a case and deems that it should be reviewed by the other, the case should be sent within five business days. However, if the receiving agency declines jurisdiction this should be informed to the other agency within five business days, and the case should be sent to the circuit court in order to determine which agency holds jurisdiction. Regarding this issue, it is important to mention that a recent precedent of a circuit court may have opened the door to concurrent review of both agencies within their respective sectors.

IV OTHER STRATEGIC CONSIDERATIONS

Whenever the parties foresee that the merger is not expected to produce competition risks, it is recommended to provide economic information11 with the filling. Even though the parties are not obligated to provide such information at that time, providing it may avoid a request of additional information (such situation will speed up the process).

It is also recommended to approach both the CFCE and the IFT at the early stages of the process in order to hold meetings with the officers in charge of the case. The purpose of such meetings would be to answer any questions and to explain every aspect of the merger. By having these meetings, the scope of the basic information request and the additional information request may be reduced.

CFCE or IFT decisions may be challenged before federal courts via amparo, which is a trial aimed to revoke unconstitutional or illegal decisions of any kind of authorities. In the case of the CFCE and IFT decisions, these trials are followed before competition, telecommunications and broadcasting specialised federal district judges and circuit courts that were created after the constitutional amendments of 2013. Amparo trials have no specific time frames and sometimes may last more than a year. Thus, in certain cases it is recommended to file a new notification offering suitable undertakings instead of challenging the CFCE decision before federal courts.

V OUTLOOK and CONCLUSIONS

On 29 June 2012, just as the current administration was about to begin, elected president Enrique Peña reached a political agreement with the three largest parties in order to perform several structural reforms. One of them consisted of enhancing the enforcement of competition law and policy. Another one consisted of improving the telecommunications and broadcasting law, and enhancing its enforcement. As a consequence, some amendments to the Constitution were approved by the legislative bodies in 2013. Some of the most important changes are as follows:

  • a the Federal Competition Commission and Federal Telecommunications Commission (both agencies within the executive branch) were replaced by the new autonomous constitutional entities CFCE and IFT, respectively;
  • b the five former commissioners were replaced by seven new commissioners for each entity;
  • c the power to enforce the LFCE in the telecommunications and broadcasting industries was transferred to the IFT;
  • d the CFCE and IFT were empowered to issue LFCE regulations (before the constitutional reform, the LFCE regulations were issued by the president);
  • e new federal courts specialised in competition, telecommunications and broadcasting were created; and
  • f the reconsideration appeal was eliminated, so the CFCE and IFT decisions may only be challenged through amparo trial before the specialised federal courts.

In order to implement the constitutional reform, in 2014, a new Federal Law of Economic Competition and a new Federal Law of Telecommunications and Broadcasting were enacted.

Besides the above, the main changes to the competition legal framework that had an impact on the merger control regime are the following:

  • a concentrations surpassing the monetary thresholds require approval from the CFCE or IFT prior to its consummation. No agreement or legal act executed to formalise the transaction will be valid without said authorisation;
  • b a new stage of the notification procedure was created, where the parties may offer conditions or remedies in order for the concentration to be approved;
  • c the time frame to request basic information was extended from five to 10 business days and the time frame to issue a decision was extended from 35 to 60 business days. As a consequence, a notification procedure may last seven months, plus the time consumed by the parties in gathering and submitting requested information. In the cases that the parties propose conditions or remedies, the procedure may last about one year;
  • d generation of competition barriers as a consequence of the proposed transaction was included as a cause for objection. Acquiring or increasing substantial market power, as well as acquiring the ability to displace other economic agents or to perform monopolistic practices, remained as causes to object the transaction; and
  • e the Herfindahl-Hirschman index is still applicable for the analysis of market concentration levels and the proposed transaction effects. However, the Dominance index, which acknowledged positive effects on competition derived from mergers between small players, was eliminated.

Also, as mentioned in Section I, supra, the CFCE issued the Guidelines for Notification of Concentrations. Even though neither major changes nor clarification on the meaning and scope of the ‘competition barriers’ concept (which was included in the new law and is different from the ‘entry barriers’ concept) were included, there is one very important aspect to mention. These guidelines provide that collaboration agreements (a figure that is not regulated in the LFCE) may be reviewed under the merger control procedure whenever such transactions meet the characteristics of a concentration; therefore, the parties will have certainty regarding the legality of a collaboration agreement if they submit it to scrutiny before the Commission, before its closing. This implies that the agreement would be studied under a rule of reason basis, which will give the parties the possibility to submit economic arguments such as efficiency gains, absence of substantial market power, among others, for the authorisation of the agreement.

Also, it is important to mention that the constitutional amendments referred above provide that, starting in 2016, one commissioner will be replaced every year and the new commissioners will hold office for nine years as of the date of their ratification by the Senate. As a consequence, the commissioners of the CFCE and IFT concluded their positions on the last day of February 2016. As part of the process for the designation of the new commissioners, the Evaluation Committee has sent the list of candidates to the president, who should send the proposal for new commissioners to the Senate for their ratification soon.

Footnotes

1 Rafael Valdés Abascal and José Ángel Santiago Ábrego are partners at Valdés Abascal Abogados, SC.

2 18 million times the Unit of Measure and Update (UMA), currently: 73.04 pesos.

3 8.4 million UMAs.

4 48 million UMAs.

5 5,000 UMAs.

6 It is important to bear in mind that some specific requirements need to be met to fall into each of the exemptions.

7 Effective as of 13 August 2014.

8 Preponderant economic agents are agents that have a national share of more than 50 per cent in the corresponding sector. As of 6 March 2014, the IFT determined the existence of two preponderant economic agents, one for each of the telecommunications and broadcasting sectors.

9 This notice must be filed before the IFT within 10 days following the closing. The IFT will have 90 days to investigate the merger and, if substantial market power in the relevant market exists, such authority will be entitled to impose measures in order to protect competition.

10 The payment of a new filing fee would be required.

11 Description of products and substitutes, production processes, costs, investment amounts, distribution options, suppliers, clients, prices, market shares, etc.