- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
The level of M&A activity for 2011 was very similar to 2010 in the number of transactions. The difference is that in 2011 the value of transactions exceeded those in 2010. Since the Mexican economy is very much tied to the US, the recovery of the US economy has also improved the Mexican economy. This, together with a good and sound financial position, has helped to maintain reasonable growth. This year, despite the crisis in Europe, Mexico will achieve 3.5 to 4 per cent growth. As a result of the above, and by being close to the United States, Mexico continues to retain a solid position as one of the main investment destinations in Latin America.
- 2.Which industries do you expect will see the most M&A activity in 2012?
We shall continue to see M&A activity in the manufacturing, mining and services sectors.
Even though 2012 will be an election year, we expect to maintain the same level of activity.
- 3.What types of deals do you expect to see?
We expect to see some reorganisation, including the sale of some family oriented companies as the need for alternate sources of capital means the need to obtain funds through third parties, the stock market or through other companies.
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.With regards to pure domestic deals, as mentioned in question 3, Mexican companies are generally managed under the ‘family’ structure. However, highly competitive and dynamic markets set the pace at which these entities shall restructure themselves. As a result of the foregoing, throughout 2011, diverse Mexican entities were constantly implementing corporate reorganisations in order to adapt to modern times and markets. It is expected that in 2012 this tendency will continue due to the new economic crisis.
Notwithstanding that Mexican foundations have been under continuous economic and financial strengthening processes, deals commonly involve foreign acquirers taking Mexican companies as target. However, it is expected that in the future, Mexican companies will take steps to invest and carry out M&A deals outside Latin America.
- 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
Private equity funds have been participating actively in Mexico, especially during 2011. We are currently working with funds in some transactions. Therefore we shall continue to see funds investing in Mexico.
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
Although there is financial liquidity, banks are cautious in granting loans due to worldwide economic conditions.
- 7.Do you expect more M&A activity involving financially troubled companies?
Unfortunately, companies that are overleveraged and unable to meet their debt to service burdens – but could still generate acceptable operating cash flows given their internal resources and market opportunities – have become increasingly significant in M&As due to the current economic situation, bankruptcies and insolvencies. Some are still in the market, but there are fewer than in 2008 and 2007.
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
Yes, it is possible under the Mexican Insolvency and Bankruptcy Law, for insolvent companies to be reorganised, subject to agreement with the company’s creditors and the court supervising the insolvency. Under Mexican law, insolvency and bankruptcy proceedings normally pass through two stages; a conciliation stage (roughly similar to chapter 11 under United States law, for example) and a bankruptcy stage. The first stage is when a reorganisation would take place but if creditor and court approval cannot be obtained, then the insolvent company would pass to the next stage when it would cease being a going concern but rather be broken up and its assets sold.
The sale would normally be by a judicial public auction, although in some cases the company may be purchased directly without a judicial sale.
- 9.What other types of activity are resulting from the economic situation?
We shall continue to see corporate reorganisations and debt restructurings.
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
Hostile takeovers are very rare in Mexico, since publicly traded companies are few and are mainly controlled by one or a very small group of shareholders. In this regard, we can say that there are not many precedents or significant activity regarding hostile takeovers and we do not expect to see more in the near future.
For the reasons mentioned above, we do not foresee an increase in hostile activity in the restructuring and bankruptcy areas.
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
Although directors are becoming more aware about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation, there is still a lot of room to grow in this respect , especially in close corporations.
The General Corporations Law (GCL) and the Securities Law (SL) deal with directors and officers liability issues, the first applying to all companies and the second to publicly-traded companies, among others. The GCL provides that the board of directors has the duties imposed by law and the company’s by-laws. The members of the board of directors, as the legal representatives of the company, must manage the business of the company with the same care that would be expected to be exercised in the management of the members’ personal business.
The GCL provides that any director with an interest opposed to that of the company must give notice of such interest to the rest of the directors and abstain from discussing and voting on any decision related to the issue in question.
The present Securities Law (SL) establishes that, with respect to an issuing company, its directors must refrain from discussing and voting on any matter that may involve a conflict of interests and must keep the matter under discussion confidential. It also provides that directors have a duty to exercise reasonable care in the oversight of the company’s affairs, and when making decisions, they have a ‘duty’ to place the best interests of the company above their own personal interests.
The SL introduces the concepts of ‘diligence’ and ‘loyalty’ with respect to directors and officers, considering them as fundamental principles in governing their conduct. Diligence is considered to mean a duty of care to act as if it the company’s business were the director’s own business to create value or benefit for the company. Loyalty is understood to mean putting the interests of the shareholders and of the company ahead of the personal interests of the director concerned, to reach goals fixed by the company or obtain benefits for the company.
A breach of the duty of loyalty refers to taking part in decision making when involved in a conflict of interest, favouring a particular shareholder or group of shareholders, approving transactions with related people without complying with the provisions of the law applicable in such cases, or taking advantage of business opportunities lying within the scope of the company’s operations without the consent of the company.
The SL contains excuses for breach of the duties of diligence and loyalty. For purposes of fixing liability, a distinction is made between conduct arising from poor management for lack of diligence and conduct resulting in a personal benefit or benefit to third parties.
A claim for damages for breach of the duties of diligence or loyalty may be brought in favour of the company. The company by-laws or shareholders’ meeting may limit the liability of directors and officers for breach of the duty of diligence, provided that the conduct in question is not fraudulent, in bad faith or illegal.
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
Indeed there is a big difference between domestic and cross-border transactions and how both are carried out.
The type of purchase agreements used in Mexico for local or internal purposes significantly differs from the international style or type of agreement. Mexico has a civil law legal system and civil and commercial codes that regulate civil and commercial transactions with the result that many matters specifically dealt with in international agreements are not so dealt with in purely Mexican agreements as the parties are aware that many of the specific clauses that would normally be included as terms and conditions of the international agreement are implied by statute, and so it is not necessary to repeat them or enter into the detail which is necessary for international agreements. Consequently, contracts made according to Mexican legislation are shorter and not as detailed as international agreements.
Mexican legislation allows agreements that are subject to foreign laws and proceedings, and therefore it is common that cross-border transactions, where the buyer or seller is a foreign company, to have such transaction subject to the law of the country where the buyer or seller is resident. This, in turn, usually results in the agreement following an international format. The result of the foregoing is that, based in our experience, most cross-border transactions entered into by Mexican companies use international style agreements.
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
For international buyers or investors looking at deals in Mexico, we would advise the following:
- legal and accounting advisors have experience in M&A transactions, especially full services law firms that can deal with all the areas of law. This becomes important, especially in dealing with family-run businesses, not used to following normal corporate and other procedures and therefore whose records and documents may not be in order. The same applies to the tax effects of the transaction where it is important for the Mexican seller to realise the effects in advance.
- to prepare a complete purchase agreement that would deal with all areas of the transaction. This is often time-consuming and laborious process. Especially when dealing with Mexican parties, the issue of whether the agreement will have to be in more than one language often must be addressed. Having two-language versions of the agreement can be a very difficult and laborious process as well, and is often left to the last minute, thus jeopardising time schedules.
- during the transaction and when considering post-closing operating issues, cultural and legal differences between the foreign jurisdiction where the purchaser may reside and Mexico should not be over looked. For example, to change employees and appoint foreign personnel is often very different in Mexico from what applies, for example, in the United States. It is important to spend time to understand these cultural differences in order to define the best course of action to take.
In addition to the foregoing, antitrust, environmental, and immigration issues should be borne in mind.
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
There have not been any recent changes in the process of how M&A transactions are conducted in Mexico; however, we consider that the current financial crisis will lead to new M&A regulations that will change some of the processes that are currently applicable.
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
On the regulatory side, in the case of financial amendments, it is important to mention that there is a financial instrument called a real estate trust (FIBRA), which is an instrument created to finance the development of real estate projects, offering to its holders periodic payments obtained from the lease of the real property held in trust and with the possibility to obtain additional proceeds from the increase on the surplus value of the real estate. Although the regulation of the FIBRAs has existed for a few years, it was not until 2011 that the first FIBRA was authorised and placed in the Mexican Stock Exchange (FIBRA UNO).
FIBRA UNO is a trust with fifteen real estate properties and the lease rights of an additional real estate property of industrial, commercial and business nature and it intends to expand its real estate portfolio by acquiring three additional commercial properties. The FIBRA UNO was placed in the Mexican Stock Exchange on 17 March 2011 obtaining approximately MX$3,615,018,089 pesos from its public offering.
In antitrust matters, there were important amendments to the Mexican Federal Economic Competition Law in 2011. Set out below are what we consider to be the most significant amendments:
- The maximum fine for incurring in an absolute monopolistic practice is increased to up to 10 per cent of the income of the economic agent.
- The maximum fine for incurring in a relative monopolistic practice is increased to up to 8 per cent of the income of the economic agent.
- Criminal liability for those incurring in absolute monopolistic practices.
- The Federal Competition Commission may issue a preventive injunction when investigating monopolistic practices or forbidden concentrations.
- The Federal Competition Commission may conduct dawn raids at the offices of the economic agents.
These amendments became effective on 11 May 2011.
Additionally, the Federal Procedures Code was also amended in order to allow class actions against the economic agents that incur in monopolistic practices. The amendments will become effective in March 2012.
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
There have not been any regulatory developments affecting M&A involving securities or the securities market regulator. With regard to competition and antitrust, however, amendments have taken place as described in quesetion 15 above.
In addition, in August 2008, an amendment to the Foreign Investment Law was approved by Congress, by which foreign investors are now allowed to invest in Mexican credit unions. Previous to such reform, investment in credit unions was limited to Mexicans only.
Contributing Authors
Contributing Editor
Paul Schnell
Skadden, Arps, Slate, Meagher & Flom LLP
Questions
- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
- 2.Which industries do you expect will see the most M&A activity in 2012?
- 3.What types of deals do you expect to see?
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America. - 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
- 7.Do you expect more M&A activity involving financially troubled companies?
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
- 9.What other types of activity are resulting from the economic situation?
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
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