Mergers & Acquisitions legal considerations in Mexico: Reverse Due Diligence for Intercompany Mergers - Part I

By: Luis Gerardo Ramírez Villela

The merger procedure of commercial companies in Mexico is regulated by the General Law of Commercial Companies (Ley General de Sociedades Mercantiles) (the “LGSM”) and the Federal Tax Code (Código Fiscal de la Federación) (the “Tax Code”).

Merger should be understood when a company is extinguished by the transfer of its assets to another pre-existing company, or when it is established with the contributions of the assets of two or more companies that merge in it.

In terms of what is provided for by the LGSM, the merger of several companies must be decided by each of the companies through a meeting of shareholders/partners.

The merger agreements must be registered in the corresponding Public Registries of Commerce (Registro Público de Comercio) and published in the electronic system of the Ministry of Economy (Secretaría de Economía). Likewise, each company must publish its latest balance sheet before carrying out the merger, and the merged company must additionally publish the system that will be used to extinguish its liabilities.

It is important to mention that the merger will not take effect until three months after the registration of the merger agreements in the corresponding Public Registries and that, during said period, any creditor may judicially oppose the merger. If there is no opposition to the merger, it will be carried out, and consequently, the merging company will take charge of the rights and obligations of the merged company.

Preliminary Considerations

In the specific case, a vertical merger would be carried out. A vertical merger is the merger of two or more companies involved in different stages of the supply chain process for a common good or service.

The purpose of the merger is to increase synergies, gain greater control of the supply chain process and increase business operations. A vertical merger can be upward or downward.

Ascendant - The company that is the majority shareholder of the company or the companies that merge with it subsist. In this merger, the assets, rights and obligations of the merged company are incorporated into the surviving company, but the assets are only increased with the minority participation of third parties in the merged companies, these third parties becoming its shareholders/partners.

Descendant - The company whose shares were majority owned by the company or the companies that merge into it subsists. In this merger the assets, rights and obligations of the merged corporation - except the shares of the surviving company - are incorporated into the surviving company.

This type of merger reduces competition and gives the new single company a greater market share. The success of the merger is based on whether the combined entity has more value than each company separately.

Depending on the corporate structure of the group and the intention of the merger, specific analysis will also be required from a competition perspective in order to comply with any notices to be given to antitrust authorities in Mexico.

Restructuring

Müggenburg, Gorches and Peñalosa's restructuring practice includes representation of corporate debtors, hedge funds, in various industries, etc., in restructuring proceedings and bankruptcy equivalents (insolvency proceedings).

Mergers & Acquisitions

We provide services in acquisitions, sales, mergers, spin-offs, reorganizations and co-investments, representing national and foreign clients operating in various industrial and commercial sectors.

Corporate /Transactional

At Müggenburg, Gorches y Peñalosa we provide legal services in all aspects of corporate law practice. Our group of professionals in this area has years of experience providing services to both national and international clients, with the most diverse needs and the highest standards of demand and sophistication in the service. Among our clientele are leading companies in their sectors worldwide, such as automotive, cosmetics, hotels and tourism, food industry, aeronautical industry, computer programs and systems, suppliers of the oil industry, technology, among others.

We advise our clients on the constitution of Mexican companies (commercial and civil) and associations, attending to the needs derived from the industry and/or commerce segment in which they focus their activities and their medium and long-term plans, also providing services for compliance with the regulatory requirements that may apply, including those derived from direct foreign investment, economic competition and obtaining the necessary licenses and permits for its operation. Our services also extend to the provision of corporate services within the ordinary course of business of our clients, including advice on the preparation, review and negotiation of all types of civil and commercial contracts, and the custody, updating and maintenance of corporate books. . We also provide services related to the opening and management of branches in Mexico of foreign companies.

We represent national and foreign corporate and/or investment groups in the acquisition of, and/or merger with, Mexican business entities, and on other occasions we also represent acquired Mexican entities. In both cases, we provide legal audit services to foresee possible contingencies of the operation, locate areas of opportunity and help determine the value of the company to be acquired. Likewise, in representing the acquirer, we prepare the legal documentation of the operation (specifically contracts for the sale of shares and/or association, with all its annexes and accessory contracts), and we carry out their negotiation with the counterparty. Likewise, in these cases we participate directly in the processing and obtaining of any authorizations, permits, licenses and concession titles required for the operation of our clients, and we advise on notices and notifications to government entities, including notifications of resolutions and opinions of the Federal Economic Competition Commission.

We provide advisory services for corporate restructuring and reorganization, also including international corporate groups with a presence in Mexico. In these cases we have worked in coordination with groups of financial and accounting advisors both from Mexico and abroad, and we have coordinated legal audits of subsidiaries of entities acquired in several Latin American countries (Argentina, Brazil, Chile, Colombia and Peru, among others, with local legal advisers in each case).

We advise on operations of association in participation, "joint-ventures", preparation and negotiation of agreements between shareholders, merger and spin-off of legal entities, establishment of trusts of any type, constitution of guarantees on any type of property, repurchase of shares by of companies listed on the Mexican Stock Exchange, as well as in the structure of purchase option plans and other types of specialized corporate operations.

We also provide services for the development of mechanisms that allow the efficient and effective anticipation and management of potential conflicts between shareholders; in this regard, we have represented groups of shareholders of Mexican companies in the implementation of corporate actions to defend their interests against the rest of the shareholders and the Company itself on internal corporate control issues, generally in coordination with litigation areas in matters commercial and civil.

Depending on each particular project or operation, we rely on other specialty areas of the Firm, in order to provide comprehensive services, under the highest standards of quality and efficiency.

Mergers & Acquisitions

We provide services in acquisitions, sales, mergers, spin-offs, reorganizations and co-investments, representing national and foreign clients operating in various industrial and commercial sectors.

Restructuring (Corporate and Financial)

Müggenburg, Gorches and Peñalosa's restructuring practice includes representation of corporate debtors, hedge funds, in various industries, etc., in restructuring proceedings and bankruptcy equivalents (insolvency proceedings).