I OVERVIEW OF M&A ACTIVITY
In 2015, the total value of M&A transactions carried out in Mexico amounted to US$20.5 billion, an almost 50 per cent decrease from the previous year (US$30.1 billion in 2014).2 However, this difference between 2014 and 2015 is largely due to Carlos Slim’s acquisition of 5.8 per cent of America Movil from AT&T for US$5.8 billion and Fibra Uno’s purchase of a real estate portfolio for US$1.8 billion, both transactions representing a big leap in the value of the transactions in 2014.
As a result of various structural reforms approved in 2013 that permitted greater competition and openness in telecommunications, Mexico has seen strong activity in this sector. According to the M&A ranking of Dealogic,3 the telecommunications industry stands out among other M&A transactions in Mexico. From January to mid-May of this year, Dealogic registered that this sector accumulated US$545 million with just three transactions, which represented more than one-third of the total value of M&A. The telecommunications sector was followed by the chemicals industry, due to the purchase of Grupo Fertinal by Pemex for US$255 million.4
The telecommunications reform is making this sector one of the most attractive for Mexican and foreign investors. Furthermore, an important step was taken in relation to foreign investment with the reform of the Foreign Investment Law (LIE), in which the Congress of the Union approved 100 per cent foreign investment in telecommunications and 49 per cent in broadcasting (subject to ‘reciprocity’). The fruits of the reform began to be seen during 2014. The telecommunications sector continues to be one of the focal points, with the purchase of Television Internacional by Televisa for US$378 million being the highest-priced transaction up to mid-May. Along with telecommunications and chemicals, the real estate, infrastructure and industrial sectors have been the most active sectors in M&A in the first third of 2016.
Finally, as expected, the energy and mining sectors are stood out in 2015. An increase in M&A is expected as a result of the structural reforms in this area. In spite of the global fall in oil prices, which has made energy industry companies cautious, in 2015, FEMSA acquired 227 gas stations from Pemex, and is planning to purchase more in the future via the trademark Oxxo Gas. Since the opening of the energy reform, every gas station group can stop trading with Pemex’s franchise and start promoting their own trademark, under the condition that Pemex continues being the hydrocarbons supplier.5
Taking into account Mexico’s economy, factors such as the devaluation of the peso against the dollar, the oil crisis and the possible increase in interest rates will cause more caution and analysis for M&A to take place. However, according to Saúl Villa, Mexico’s leader of M&A of KPMG, the total number of M&A transactions is expected to reach US$30 billion this year.6
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
Mexico operates under a codified legal system; therefore, M&A are regulated through statutes and regulations. There are different laws that regulate M&A transactions from different points of view. As a consequence of the dynamism and constant evolution of Mexican law, new laws have been amended and approved.
As a result of the structural reforms initiated in Mexico in recent years, innumerable changes have taken place to activate the Mexican economy. Among the most important reforms that have direct repercussions on M&A in Mexico are the financial reform, the energy reform, the telecommunications reform, the economic competition reform, tax reforms and reforms of various commercial laws.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
Our commercial legislation has not kept up, in comparison with other regions, with the major economic changes resulting largely from the evolution of technology. To address corporate law needs in Mexico, on 13 June 2014, the reform of the General Business Organisations Law (LGSM) and the Commercial Code (CC), inter alia, was published in the Official Federal Gazette (DOF), the purpose of which is to implement best international practices to encourage competition and productivity in commercial enterprises through the modernisation and simplification of their management; eliminate transaction costs and fees to incentivise the creation of new businesses, new investments and the formalisation of existing businesses; and modernise the public registries.
The above will be accomplished through the implementation of best practices, following the ‘international guidelines and experience in commercial and trade matters formulated by the World Bank, recognising that administrative simplification promotes and projects the competitiveness of companies, since it allows them to engage in all types of commercial activity more rapidly, efficiently and at lower cost’.7
Some major aspects of the commercial reform are as follows:
i Expansion of the free will of shareholders
With the reform of the LGSM,8 shareholders are allowed to include in the articles of incorporation or by-laws of stock corporations certain resolutions regarding the corporate rights of the shareholders of a company. Recognising the free will of the shareholders, it is now possible in stock corporations to have resolutions regarding:
- a restrictions on the transfer of shares and rights;
- b causes for exclusion of partners or for exercising rights of separation, withdrawal or to redeem shares, as well as the price or the basis for its determination;
- c shares with special rights (that do not confer voting rights or that restrict the vote to certain matters, grant non-economic corporate rights other than the right to vote or exclusively the right to vote, or confer the right to veto or require a favourable vote of one or more shareholders with respect to the resolutions of the general shareholders’ meeting);
- d implement mechanisms to follow in cases where the shareholders are deadlocked on specific matters;
- e expand, limit or deny the right of preferential subscription;
- f limit the liability of officers of the company;
- g resolutions to exercise the right to vote;
- h sales of shares in a public offer; and
- i implementing stock purchase or sale options.
The intention is to include concepts of US law, such as ‘tag along’ and ‘drag along’. In this regard, the reform of the LGSM accommodates for stock corporations permissions established in the Securities Market Law for Investment Promotion Stock Corporations, and also includes some practices that were already being followed under the old law.
Recently, the First Chamber of the Mexican Supreme Court upheld (by a majority vote) the by-laws of a publicly traded corporation that included provisions to prevent takeovers, prohibiting any shareholder to acquire more than 10 per cent of the capital stock of the company. The Supreme Court ordered a shareholder that acquired more than 10 per cent of the capital stock to sell by, means of a public offer, all the shares needed to reduce its participation to 10 per cent, thereby enforcing the company’s by-laws. Similar decisions were adopted decades ago by US courts: in The Supreme Court of Delaware in Moran v. Household International, Inc (1985), they upheld a shareholder’s rights plan (also known as ‘poison pills’), as a legitimate exercise to respond against ‘hostile takeovers’. This is the first important ruling issued from the Supreme Court regarding hostile takeovers. Hostile takeovers are rare in Mexico, partly because companies favour restrictions in their by-laws, and partly because controlling ownership is often concentrated in groups or blocks, making it hard for investors to negotiate controlling ownership in a public market.
ii Minority rights
The percentage to exercise certain minority rights was reduced from 33 to 25 per cent. Therefore, holders of shares representing at least 25 per cent of the capital stock may directly exercise a civil liability action against the administrators of a company; request the postponement of the vote in a shareholders’ meeting for three days without need for a new call; and exercise the option of opposition.
However, the requirement of representing at least 33 per cent of the capital stock is maintained to request a call to hold a general shareholders’ meeting.
iii Publications in the electronic system of the Ministry of Economy
A free electronic system was implemented by the Ministry of Economy on which all the publications established in the LGSM may be made, and which previously were made through long and costly procedures in the official gazettes or major newspapers. As of 15 June 2015, all publications are made through this system.
In addition, on March 2016, a reform of the LGSM took place to include a new type of business organisation: the simplified joint-stock company (sociedad anónima simplificada (SAS)).9 The purpose of this reform is to promote the creation of companies by implementing a quicker and cheaper process. Even though these new companies will work similarly to stock corporations, there are several distinctions between an SAS and other business organisations, among which the following stand out:
- a an SAS can be constituted by one or more individuals;
- b its incorporation no longer requires a certifying public officer (notary public or commercial notary public);
- c it is incorporated online using the electronic system of the Ministry of Economy; and
- d its annual income may not exceed 5 million pesos.
Simplified joint-stock companies will come into force on 14 September 2016. Although this is a significant step for commercial law in Mexico, the SAS will not have a significant impact in M&A transactions due to the above-mentioned limitations.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
In Mexico, foreign investment is regulated through the LIE, which determines the activities that are exclusive to the state, activities exclusively reserved for nationals, activities with limited foreign participation and activities that may be freely engaged in by foreign investors. It is important to take these provisions into account, since they exist in different areas with significant restrictions that may hinder or even prevent M&A transactions.
The following activities are exclusively reserved to the state:
- a exploration and extraction of oil and gas and other hydrocarbons;10
- b planning and control of the national electrical system, as well as the public service of transmission and distribution of electricity;
- c generation of nuclear energy;
- d radioactive minerals;
- e telegraphs;
- f radiotelegraphy;
- g mail;
- h issuance of money;
- i minting of currency; and
- j control, supervision and oversight of ports, airports and heliports.
In 2013, a constitutional reform of energy matters was passed through which the energy market was opened to Mexican and foreign investment. As a result, the following year the LIE was amended to adjust it to the new constitutional framework and to open the energy market. Previously, the Constitution had established that all activities related to oil and gas and other hydrocarbons were considered strategic activities and therefore reserved exclusively for the state. Now, only the exploration and extraction of oil and gas are considered strategic activities. Distribution, refining, storage, transfer and first-hand sale may be freely undertaken by the private sector.11 The reform will also allow foreign investment in the exploration and extraction of oil and gas through exploration and extraction contracts.
The LIE also established activities reserved exclusively to Mexicans or Mexican companies with a clause excluding foreigners. The activities that may include a percentage of foreign investment vary depending on the type of activity, and range from foreign investment of 10 up to 49 per cent. Because of the recent reforms, most activities allow up to 100 per cent foreign investment. In 2014, the LIE was amended to permit 100 per cent foreign investment in the following economic activities:
- a insurance institutions;
- b bond institutions;
- c foreign exchange firms;
- d public bonded warehouses;
- e retirement fund managers; and telecommunications.
All other activities may be undertaken with Mexican or foreign capital.
M&A transactions in 2015 were carried out mostly on international grounds. Only 47 per cent of transactions that year were made between Mexican companies, which in total added up to US$8.69 billion. That same year, foreign firms’ transactions in Mexico amounted to US$7.98 billion, whereas Mexican firms purchasing abroad reached US$1.4 billion.12
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
Since the reforms in 2013, the most important M&A transactions have mostly focused on telecommunications. Other factors have been influential, such as the opening to foreign investment in this sector. From January to May 2016, three of the 10 largest transactions were related to telecommunications: Televisa’s purchase of Television Internacional and two others derived from last year’s purchase between AT&T and America Movil.
As previously mentioned, chemicals, real estate, infrastructure and industrial sectors have been the other important sectors for M&A in Mexico this year. Globally, 2016 appears to be a promising year for M&A; specifically in Mexico, M&A will continue last year’s unfinished negotiations and begin new ones, taking advantage of opportunities derived from GDP growth forecasting and the opening of our economy.13
After the constitutional reform in telecommunications was passed in 2013, the following year saw the secondary laws that give form and functionality to the structural reform being amended and promulgated. The new Federal Telecommunications and Broadcasting Law regulates, inter alia, matters such as single converging concessions, the management and assignment of radio electric spectrum, the interconnection of networks, substantial power in the market and dominant economic agents, the sharing of the local network and content. With this, the aim is to promote foreign investment, free enterprise, the generation of new agents in the market and the offering of a competitive, high quality service.
As a result of the energy reform, this will be another sector to watch in the next few years, having gone from being a closed activity in Mexico exclusive to the state to one of the most attractive industries to invest in in Mexico. Beginning in 2014, the energy market was opened up to private investment, allowing activities such as the distribution, storage, refining, transfer and first hand sale of oil and gas and other hydrocarbons. The exploration and extraction of oil and gas continue to be strategic activities of the state. However, through the constitutional reform and secondary laws, the private sector will be allowed to participate in these activities through the kinds of contracts established in the constitutional reform: service contracts, profit-sharing contracts, shared production contracts, licence agreements, or any combination of these.
The state carried out ‘Round Zero’ in 2015, which involved the areas that Petróleos Mexicanos (Pemex) may keep for exploitation, and disclosed the zones that it will invite private investment into in ‘Round One’, through which licences and shared production contracts were offered. The necessary bidding procedures will be carried out during 2016 to choose the companies that will develop, together with Pemex, the first 14 fields that Pemex has chosen for this purpose.14
Notwithstanding the above, this sector has been seriously strained by the low price of oil, which has affected the energy industry throughout the world. For the specific case of M&A in the energy sector in Mexico, it will not have the same impact as in other sectors of the industry due to the fact that the energy industry in Mexico is relatively new. As previously mentioned, all activities related to oil and gas were activities reserved to the state, and the only entity that could carry them out was Pemex. However, this year the energy sector saw two of the most important M&A transactions: one between Pemex and Grupo Fertinal, the other one between World Bank and Citla Energy. In addition, Oxxo Gas has already obtained 270 permits from the Energy Regulatory Commission for their acquired gas stations from Pemex to sell gasoline, a sector that it appears will be a key trend in future transactions.
With respect to activities in the mining sector, both the Oil and Gas Revenue Law (LIH) and the Oil and Gas Law (LH) establish certain advantages for holders of mining concessions that are interested in activities of exploration and extraction of natural gas, making investment in this sector extremely attractive.
In the LH, the possibility of directly awarding (without needing to carry out a bidding process) contracts for the exploration and extraction of natural gas to the holder of mining concessions is foreseen. However, such contracts must be granted exclusively for the exploration and extraction of the natural gas contained in the mineral coal vein and produced by it.
For its part, the LIH provides as an incentive that if the price of natural gas in the international market is equal to or below 5 dollars per million British thermal unit, royalties will not be paid.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
One of the structural changes in the legal framework was the financial reform, published in the DOF on 10 January 2014. It is based on four primary goals:
- a increasing competition in the financial sector;
- b promoting credit through the Development Bank;
- c expanding credit through private financial institutions; and
- d maintaining a solid and prudent financial system.
i Increasing competition in the financial sector
The financial reform establishes a series of measures to promote competition in the financial system. The powers of the National Commission for the Protection and Defense of Users of Financial Services and of the Federal Economic Competition Commission (COFECE) are strengthened.
ii Promoting credit through the Development Bank
Previously, the Development Bank maintained a conservative policy in the granting of credit, focused on maintaining high levels of capitalisation. After the reform, the Development Bank is offered a regulatory framework that allows it to implement policies to create and preserve investments. The purpose of the amendments is to encourage credit and promote the financial inclusion of the general population.
In the energy sector, both the full-service banking institutions and the Development Bank, in view of the recent reforms in the area, have shown great interest and have established programmes to finance projects.
iii Expanding credit through private financial institutions
In relation to M&A, this point is particularly relevant since it is one of the most common ways to finance projects. The financial reform seeks to expand financing to the private sector. In 2013, it represented only 28 per cent of the GDP, below the average in the OECD (158 per cent).15
The low credit penetration rate in Mexico is largely due to long and deficient procedures for enforcing commercial contracts judicially; therefore, the aim is to combat this problem through the specialisation and improvement of the commercial proceedings and the strengthening of the guarantee schemes. The financial reform is intended to detonate economic growth and expand credit, but it also seeks to reduce past due portfolios through dissuasive schemes for potentially defaulting clients.
In this regard, in amending the CC the financial reform seeks to give legal certainty to institutions that offer credit in order to facilitate collection and execute the guarantees in an expedited fashion in cases of non-compliance. To achieve this objective:
- a the processing of commercial proceedings is accelerated by reducing certain time periods;
- b adjustments have been made to improve the legal security in commercial proceedings;
- c improvements have been made to commercial executory proceedings; and
- d matters were included that will be under the jurisdiction of the federal commercial district courts.
In addition, the commercial insolvency proceedings regime has been improved. The financial reform expressly introduces protection of the rights of the creditors as one of the purposes of the commercial insolvency proceeding; facilitates the commercial insolvency proceeding process by technological and accounting mechanisms; and opens the possibility of contracting ‘emergency loans’ to maintain the ordinary operation of the company and liquidity during the commercial insolvency proceeding.
According to Luis Videgaray, Minister of the Department of Treasury and Public Credit, the financial reforms of 2014 that modified 34 codified laws have already yielded results.16 The Minister has explained that credits granted for small and medium-sized companies have already expanded 15 per cent. Furthermore, banks continue to incorporate in granting this credit. He also pointed out that the Development Bank now plays a fundamental role with other financing credits thanks to its new regulatory framework.
The market of stock-based exchange market investment promotion companies was strengthened by increasing, from three to 10 years, the time they can remain listed on the Mexican Stock Market before they have to become publicly traded companies. A threshold of 250 million UDIS was also established in terms of net worth, upon which stock exchange investment promotion companies must be listed as publicly traded companies.
The financial reform intends to maintain a solid and prudent financial system that will contribute to the economic development of Mexico. In the area of M&A, the financial reform will play a central role for both the financing of projects and the development of companies of the financial sector.
VII EMPLOYMENT LAW
The Federal Labour Law (LFT) establishes the minimum labour standards in Mexico. In November 2012 a major reform took place. Since it is a very important and recent reform, and its repercussions in the area of M&A are considered significant, we analyse the key points below.
Among the implementations are new modes of contracting and the regulation of subcontracting. To provide for greater efficiency and specialisation, there are now new modes of contracting such as trial, initial training and seasonal contracts. Furthermore, the concept of ‘labour subcontracting regime’ is incorporated into the LFT to establish that:
- a services contracts must be in writing;
- b they cannot cover all the same activities that are carried out in the workplace;
- c there must be a justification for specialisation; and
- d the beneficiary of the services will have to verify the economic solvency of the outsourcing company.
The employment law differs in cases of a merger or an acquisition. In the case of a merger, vehicles should be structured bearing in mind the labour structure of the companies being acquired and the best manner for the transfer of the employees, taking into account the most beneficial labour conditions available in light of the LFT.
VIII TAX LAW
With respect to tax matters, most of the latest reforms have been in effect since 1 January 2014, and although they do not refer directly to M&A, they should be taken into account in terms of the consequences they will have on the day-to-day operations of Mexican entities.
It should be mentioned that such reform amended various existing tax regulations, and eliminated certain taxes such as the flat business tax and the tax on cash deposits. One of the primary changes is related to income tax, for which a new law was issued.
Notwithstanding such changes, it is important to mention an additional 10 per cent income tax is calculated on the amount of dividends paid to residents abroad. Such tax must be withheld by the issuer, and implies the importance of avoiding double taxation.
IX COMPETITION LAW
In May 2014, a new Federal Economic Competition Law (LFCE) entered into force. The most important changes relate to the structure, organisation, composition and functions of the new COFECE, and new faculties for the IFT to authorise M&A for economic competition matters in telecommunication-related operations. In relation to substantive aspects, the new Law continues with the guidelines established in the prior law in relation to the handling and analysis of monopolistic practices, and adds concepts such as barriers to competition and access to basic necessities.
Regarding M&A, the LFCE will consider as a concentration all mergers or acquisitions of control between competitors, providers, clients or any other related economic agents. The COFECE is the responsible authority in matters of concentrations; therefore, it may grant or deny authorisations for concentrations, and will investigate and sanction those concentrations whose purpose or effect is to diminish, harm or impede competition.
It will only be necessary to request the authorisation of the COFECE when the concentrations surpass certain monetary amounts established by the LFCE. However, it is possible to give voluntary notice. Economic agents who intend to carry out a concentration must corroborate two premises: that the transaction has effects in Mexico and that the monetary value related to the transaction does not surpass any of the amounts indicated by the LFCE.17
During 2015, 173 concentration matters were recorded. Of these, 149 matters were concluded, of which 141 were authorised, three were conditionally approved, one was objected to and four were withdrawn by the economic agents. Pemex Fertilizantes-Fertinal was one of the most important concentration matters in 2015. Twenty-four matters are pending resolution during 2016.18
As mentioned previously, the IFT also has powers to authorise concentrations, but only in the case of the telecommunications sector. At the beginning of 2016, the most important concentrations in the telecommunications sector have been authorised in their entirety or subjected to certain commitments.
In recent years, major structural reforms have taken place in Mexico and, as discussed above, those in the financial, commercial, telecommunications, energy, economic competition and other sectors are beginning to bear fruit: for example, the acquisition of Televisión Internacional by Grupo Televisa and the purchase of Grupo Fertinal by Pemex. Mexico is currently implementing structural changes, and major developments are expected shortly in the sectors that were strengthened through these reforms. The impact on M&A transactions is developing, as can be seen in the transactions at the beginning of 2016. With these reforms, the government is seeking to promote domestic and foreign investment in Mexico, and to activate the economy through the sectors that are considered strategic.
1 Luis Burgueño and Andrés Nieto are partners at Von Wobeser y Sierra, SC.
2 ‘Fusiones y adquisiciones en México en 2015, casi 50% menos valiosas que en 2014’, El Financiero, 7 January 2016: www.elfinanciero.com.mx/economia/fusiones-y-adquisiciones-
en-mexico-en-2015-casi-50-menos-valiosas-que-en-2014.html (last visited on 27 June 2016).
3 Dealogic is a platform used by global and regional investment banks worldwide to help optimise their performance and improve competitiveness.
4 ‘Telecom mantienen vivas las fusiones y adquisiciones’, El Economista, 22 May 2016: (date of consultation: eleconomista.com.mx/industrias/2016/05/22/telecom-mantienen-vivas-las-
fusiones-adquisiciones (last visited on 27 June 2016).
5 ‘Obtiene Oxxo Gas 270 permisos de la CRE’, Forbes México: www.elfinanciero.com.mx/monterrey/obtiene-oxxo-gas-270-permisos-de-la-cre.html (last visited on 7 July 2016).
6 ‘Fusiones y adquisiciones en México alcanzarán 30,000 mdd durante 2016’, Forbes México: www.forbes.com.mx/fusiones-y-adquisiciones-en-mexico-alcanzaran-30000-mdd-durante-2016 (last visited on 29 June 2016).
7 Gaceta Parlamentaria 3622-II, Year XVI, of the LXII Legislature of the Chamber of Deputies, 11 October 2012.
8 Articles 91 and 198 of the LGSM.
9 Amended by publication in the DOF on 14 March 2016.
10 Section amended by publication in the DOF on 11 August 2014.
11 The permits will be granted by the Energy Regulatory Commission and the National Oil and Gas Commission gradually from 2015 to 2017.
12 See footnote 2: ‘Fusiones y adquisiciones en México en 2015, casi 50% menos valiosas que en 2014’.
14 Secretaría de Energía (sf): www.energia.gob.mx/rondauno/index.html (last visited on 19 June 2015).
15 Martínez Corres, Luis Dantón et al., ‘La Reforma Financiera Comentada’, Nacional Financiera SNC, México, 2014.
16 ‘Fórmula Financiera entrevista a Luis Videgaray. Reforma Financiera está dando resultados’, Grupo Fórmula: www.radioformula.com.mx/reproductor.asp (last visited on 4 July 2016).
17 ‘Guía para la notificación de concentraciones’, COFECE: www.cofece.mx/attachments/article/46/Guia_para_la_Notificacion_concentraciones.pdf (last visited on 25 June 2015).
18 Segundo Informe de Seguimiento al Plan Estratégico 2014-2017 de la COFECE: www.cofece.mx/cofece/images/Informes/II_Informe_PE_2014-2017.pdf (last visited on 4 July 2016).