What are Mergers and Acquisitions?

A merger or acquisition is an agreement between two separate businesses combining into one entity. Although these terms are often used as synonyms, they have different legal definitions. A merger consists of two companies combining to form one new entity. Acquisitions occur when one business takes control over the acquired company’s shares or equity and assets.

In Mexico, a great example of a major acquisition occurred in 2014, Anheuser Busch InBev, the world's biggest brewer, took over Mexico's Grupo Modelo for $20.1 billion, giving it dominance in Latin America's second-largest economy and adding to its brands Corona, the top-selling imported beer in the United States.

Pursuant to applicable laws in Mexico, although such concepts are not expressly defined, both actions are expressly contemplated in the General Law of Commercial Companies (Ley General de Sociedades Mercantiles or GLCC. In practice, a merger is a contract that implies that two or more companies are consolidated and form a new company (or that one of them disappears and is absorbed by the surviving entity); thus, this action results in the merger of assets and shareholders or partners of the companies involved in the transaction. On the other hand, an acquisition is the partial or total purchase of shares or equity interests of a company, normally to gain control. In practice, a potential competitor or a minor company is usually bought out to attain a more relevant influence on a specific market.

It is worth mentioning that there are supplementary laws applicable to mergers and acquisitions. Depending on the type of transaction, the participation of foreign investors of the relevant target entity should be reported before the National Registry of Foreign Investments of the Ministry of Economy (Registro Nacional de Inversiones Extranjeras), as provided for in the Foreign Investment Law (Ley de Inversión Extranjera). Mergers and acquisitions are further regulated through the Economic Competition Law (Ley Federal de Competencia Económica) and other laws regulating different industries (i.e., Federal Law on Telecommunications and Broadcasting (Ley Federal de Telecomunicaciones y Radiodifusión)) and the Credit Institutions Law (Ley de Instituciones de Crédito). The main regulatory authority for mergers and acquisitions’ transactions is the Mexican Federal Competition Commission (Comisión Federal de Competencia Económica or COFECE), which has legal attributions to enforce merger control. Transactions in which entities merge, acquire, whether totally or partially, equity in other companies, or associate or perform transactions aiming to consolidate are deemed to be “consolidations”. Such consolidations must be informed to COFECE if certain economic thresholds are reached and/or exceeded, so COFECE evaluates the impact of the relevant transaction on the market and any potential risk for competition. In conclusion, depending on various technical factors and elements, COFECE may authorize, deny or condition the consummation of mergers and acquisitions’ transactions.

As to acquisitions of public entities, these activities are regulated under different legal regulations and authorities, such as the Securities Market Law (Ley del Mercado de Valores), and the applicable regulations issued by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público), and Mexican Stock Exchanges.

Also, it is relevant to mention that certain activities are restricted as they prevent participation of foreign investment, pursuant to the Foreign Investment Law, by prohibiting or limiting the percentage of allowed participation that a foreign investor may own in a Mexican entity. Thus, if permitted in terms of such law, foreign investors must obtain an authorization that is issued by the Mexican National Foreign Investments Commission (Comisión Nacional de Inversiones Extranjeras) to participate (i.e., through an acquisition) in a Mexican entity. In addition, approval from such Commission must be obtained for transactions in which foreign investment intends to participate in a percentage of, or exceeding 49% of a Mexican entity, provided that only in those cases where the value of the total assets of the target company exceeds the amount that the abovementioned Commission determines each year. 

At Pani Abogados we provide top legal advice regarding M&A deals of Mexican target companies or merging entities, focusing on giving thorough and pragmatical advice always prioritizing quality, legal and transactional creativity, responsiveness and risks’ contention for our clients and all parties involved.

Joaquín Pani