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

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”).

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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.

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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.

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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.

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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.

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Preliminary Considerations

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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.

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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.

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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.

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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.

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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.

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