Joint Ventures 2024 Comparisons

Setting up a joint venture (JV) is one of the main strategies for companies seeking to navigate the complexities of the Mexican market while leveraging local expertise. Activities related to JVs have recently been impacted by several factors outlined below.

Currency Fluctuations

The peso’s strong performance has complicated matters for foreign companies seeking cost-efficient participation in JVs. This has made acquisitions and partnerships potentially more expensive for international investors. However, the recent presidential election in Mexico and the upcoming election in the United States may impact the Mexican currency and cross-border transactions.

Geopolitical Factors (Nearshoring)

Tensions between the United States and China have played a significant role in companies needing to explore alternative substitute markets, with Mexico emerging as an attractive option. In our experience, foreign companies interested in entering the Mexican market are assessing three main approaches:

• establishing a buyer-seller relationship;
• forming a JV; or
• pursuing an acquisition.

Therefore, global relocation activities, such as nearshoring, will impact JV activity in Mexico, as partnerships or strategic alliances may be considered by many companies as suitable paths to test the challenges of the Mexican market.

Mexican Presidential Election and Upcoming Changes

The recent presidential election in Mexico played a significant role in the decision of several local and international investors to wait for results before making investment or expansion decisions.

Even with certainty about the Mexican presidential election’s results, investors remain cautious about next steps. The ruling party, having acquired considerable power after the election, has included a judicial reform in its agenda, and there is concern that the reform and other institutional changes may allow the next president to govern with little checks and balances.

US Presidential Election

Given that the USA is Mexico’s main commercial partner, the upcoming presidential election in the United States will impact the Mexican economy and the need or appetite for cross-border transactions, including JVs. Likewise, it is anticipated that the election will also play an important role in currency fluctuations.

Regulatory Impacts on Mexico-US Trade Relations

The landscape of Mexico-US transactions, including nearshoring initiatives, is significantly influenced by evolving regulations and executive actions from both countries. A notable example is the recent policy introduced by the Biden administration to counter the practice of tariff evasion on steel and aluminum products that are routed through Mexico.

The real estate sector demonstrated notable strength during 2023. Although this does not directly translate to JV activity, it suggests a robust environment for property-related partnerships, potentially extending to areas such as commercial real estate development and industrial parks.

As the nearshoring trend continues and foreign investment increases, we expect to see a diversification of JV activities, with the industrial and manufacturing sectors likely leading the way. 

JVs in Mexico are typically established through one of two main structures: a contractual arrangement (contractual JV) or a company (corporate JV).

The choice between these alternatives depends on various factors, which are discussed in 2.2 Choice of Vehicle.

Contractual JV

In a contractual JV, parties pool their efforts and resources through a formal agreement. This can take the form of a collaboration, co-investment, profit-sharing, trust or any other type of agreement that outlines each party’s responsibilities, benefits, and contributions to the project.

For more information on the content of these documents, see 6.1 Agreement Documentation. 

Corporate JV

The parties may choose to become partners or shareholders in a dedicated legal entity. In this case, the rights and obligations of the parties are typically defined in the by-laws of the corporate JV and in a separate shareholder’s or partner’s agreement.

The most common types of entities used as corporate JVs in Mexico are outlined below.

Corporation

In corporations (sociedades anonimas), shareholder liability is limited to their share value, and ownership is represented by freely transferable share certificates. They offer specific minority shareholder rights, such as board representation and the ability to call meetings or challenge resolutions, based on ownership percentages. Publicly traded corporations can be structured as either stock corporations (SAB) or stock promotion investment corporations (SAPIB), subject to additional regulations.

Promotion investment corporation (SAPI)

Promotion investment corporations blend features of traditional corporations with enhanced flexibility for investors. SAPIs are designed to attract capital risk investments. They offer greater leeway in shareholding agreements and foster stronger corporate governance standards.

The choice between a corporation and a SAPI depends on various factors. Compared to regular corporations, SAPIs typically offer lower thresholds for minority rights, are allowed to acquire their own shares and to restrict profit sharing with shareholders.

Limited liability company

Limited liability companies (sociedades de responsabilidad limitada) can have up to 50 partners, whose liability is restricted to their capital contributions. Limited liability companies are not required to issue the equivalent of stock certificates; instead, ownership is represented by equity interests that are not freely transferable. Partner approval is required for admitting new members or transferring equity holdings, except in certain cases, such as inheritance. This type of entity often appeals to US investors due to potential pass-through tax treatment.

Any of these types of entities may be incorporated or converted into a variable capital company. Variable capital companies are preferred because there are fewer formalities for modifying the variable portion of their capital stock.

Choosing the appropriate JV vehicle involves analysing several factors, including:

Tax Strategy

Tax consequences often play a decisive role in choosing between setting up a contractual JV or a corporate JV. Key considerations include:

• the potential addition of an extra taxable layer or level when incorporating a corporate JV;
• the possibility that tax authorities may consider (and, therefore, tax) a contractual JV as an implied corporate JV, even without formal incorporation; and
• the overall feasibility and profitability of the project after accounting for tax effects.

It is crucial to have tax experts review any proposed JV structure to assess its implications for all parties involved.

Long-term Vision

The intended duration and depth of the partnership significantly influence the choice of JV vehicle:

• Long-term, deeply integrated partnerships often favour the formation of a corporate JV.
• Exploratory or temporary collaborations may be better suited to a contractual JV.
• The perceived importance of each party’s contribution to the project’s success can influence the level of commitment and, consequently, the chosen structure.

Decision-Making Processes

When a project requires frequent collaboration, discussion, and agreement between parties on operational decisions, a corporate JV often provides a more structured framework for governance.

A corporate JV is typically preferred when partners anticipate the need for a robust, long-term decision-making framework that can adapt to changing project needs and partner dynamics over time.

In addition to structuring the corporate JV’s board of directors, partners or shareholders can implement several mechanisms to facilitate effective decision-making. These include setting up committees, establishing a list of major decisions that require a qualified majority or unanimity for approval, implementing dispute resolution mechanisms (including deadlock provisions) and applying reporting and information sharing protocols.

While a contractual JV can also include decision-making provisions, it may lack the formal organisational structure that a corporate JV provides. This can make it more challenging to implement complex governance systems. However, certain contractual JVs, such as trust agreements, may include decision-making provisions and bodies in which JV members participate.

Allocation of Profits and Losses

A corporate JV might be more efficient for allocating profits and losses and for maintaining accounting records and tracking income and expenses, especially in projects with intensive operations.

Liability Protection

When selecting a JV vehicle, parties also consider associated risks and liability exposure. The corporate veil offered by a corporate JV typically provides an additional layer of protection for the parties involved. This may also occur in certain contractual JVs, such as trust agreements, where the execution of the agreement results in a legal structure that, through the intervention of a third party (such as the trustee), can carry out certain acts without the JV members directly intervening.

However, in cases where one party primarily contributes funds while the other handles operations and client interactions, a contractual JV might be preferred. This structure allows for clearer assignment of liability for fronting activities, including regulatory compliance, to the party performing these functions.

Nature and Extent of Contributions

The type and value of contributions from each party can guide the selection of an appropriate structure. Substantial investments or contributions of several or significant assets often lead to the formation of a corporate JV.

Regulations

In some scenarios, industry regulations may be the deciding factor in assessing the most suitable JV vehicle. When foreign parties are involved and depending on the activity of the JV, foreign investment regulation should be reviewed to confirm that no provision restricts the participation of foreign shareholders and partners in the corporate JV’s capital stock.

Additionally, certain projects, such as those derived from public bidding, may require the formation of a corporate JV to comply with regulatory requirements.

Market Perception

If the project’s success depends on leveraging an established track record, the parties may opt for a contractual JV. In this case, they might appoint the party perceived as most experienced and reputable to interface with clients or customers.

Exit strategy

Discussions about exit strategies are crucial in determining the JV structure. In a contractual JV, an exit typically results in the termination of the agreement. For a corporate JV, planning for the parties’ future separation usually requires designing provisions that address the valuation of each party’s holding and the acquisition of shares or equity interests. These may include put and call options or drag-along and tag-along clauses.

Additional valuation and exit mechanisms may be necessary when assets are transferred to or acquired by the corporate JV.

In Mexico, there is no specific regulation governing JVs. The regulatory framework applicable to a JV transaction depends on the type of vehicle chosen and other factors. If the transaction requires approval by or notification to the Federal Economic Competition Commission or the Federal Telecommunications Institute, these authorities will serve as regulators.

In such cases, the main statutory provisions will be the Federal Economic Competition Law and, in certain cases, the Federal Telecommunications Law. For more information, see 3.4 Competition Considerations.

All JV transactions are subject to general civil and commercial regulations. If the vehicle is a corporate JV, the primary statutory provisions will be the General Law of Business Companies. When a SAPI is involved, the Securities Market Law will also apply.

Regardless of the JV structure, the vehicle will be bound to comply with other regulations, including labour, tax, environmental, financial, intellectual property, and data privacy laws, depending on its activities.

For corporate JVs, restrictions may apply regarding foreign participation in the company’s capital stock. Additionally, foreign investors are required to obtain approval from the National Commission of Foreign Investments to hold, directly or indirectly, more than 49% of a company’s capital stock if the company’s assets exceed a value set annually by the authority. For 2023, this threshold was set at approximately USD1.4 billion (using an exchange rate of MXN18 for USD1).

The main anti-money laundering regulations (“AML Regulations”) applicable in Mexico are:

• the Federal Law for the Prevention and Identification of Illicitly Funded Transactions;,
• the Regulations to the Federal Law for the Prevention and Identification of Illicitly Funded Transactions; and
• the General Rules issued by the Tax Administration Service.

The AML Regulations provide the framework applicable to individuals and entities (including financial institutions) that carry out economic transactions in Mexico that are deemed prone to illicit funding or to financing organised crime or terrorism. Said economic transactions are therefore considered vulnerable activities.

The Tax Administration Service and Financial Intelligence Unit are the main authorities in charge of overseeing and enforcing the AML Regulations. However, depending on the specific nature of each vulnerable activity, it may be subject to additional regulations and oversight from other authorities, such as, for example, games and gambling.

There are no restrictions on co-operating with JV partners in Mexico as a consequence of sanctions laws.

There are no specific national security regulations or considerations that apply to the formation of a JV in Mexico.

The main regulators for antitrust matters in Mexico are the Federal Economic Competition Commission (FECC) and the Federal Telecommunications Institute (FTI). The FTI specifically oversees the broadcasting and telecommunications sectors.

Under the Federal Economic Competition Law (FECL), the following practices are prohibited: monopolies, monopolistic practices, unlawful mergers, and barriers that diminish, damage or hinder economic free competition in any way.

A JV may qualify as a merger under the FECL, which defines a merger as the acquisition of control or any act resulting in the union or combination of companies, associations, shares, equity interests, trusts rights, or assets between economic agents.

The Mexican antitrust authorities will not authorise mergers that diminish or damage competition and free market participation for equivalent goods or services. Such mergers may be investigated and sanctioned.

According to the current FECL and subject to certain exceptions outlined in the law, mergers exceeding certain thresholds must be notified to the Mexican antitrust authorities (FECC and FTI, as applicable) before their effects take place in Mexico.

The thresholds are as follows:

• transaction value: when the event or series of events, regardless of their place of execution, represent an amount in Mexico, directly or indirectly, that exceeds approximately USD108.5 million (using an exchange rate of MXN18 for USD1);
• acquisition of shares: when more than 35% of a company is acquired, and the company’s annual sales originating in Mexico or assets in Mexico represent an amount that exceeds approximately USD108.5 million (using an exchange rate of MXN18 for USD1);
• transactions between company groups: when sales or assets exceed the legal threshold and represent an accumulation of assets to any of them beyond the established amount, under the following conditions:
1. the event or series of events represents an accumulation in Mexico of assets or capital stock in an amount that exceeds approximately USD50.6 million (using an exchange rate of MXN18 for USD1); and
2. the merger involves two or more economic agents (including the economic group to which they belong) whose annual sales in Mexico or assets in Mexico represent an amount that exceeds approximately USD289.5 million (using an exchange rate of MXN18 for USD1).

Nonetheless, economic agents involved in transactions that do not meet the established thresholds may voluntarily notify such mergers to the antitrust authorities. This is due to the authorities’ power to investigate transactions in certain cases, except for those that have received a favourable resolution from the antitrust authorities and those that do not require prior notification to FECC or FTI, once a year has passed since their closing.

It is worth noting that certain types of transactions may receive different treatment. For example, in the context of strategic alliances between airlines, FECC has indicated that even if these alliances do not surpass the notification thresholds, they could still be subject to review. This is due to the potential and significant impact on market dynamics and competition, especially in a market as sensitive as air transportation. FECC highlighted in a formal opinion that such alliances may lead to co-ordinated practices or market foreclosure effects, thus justifying the need for a thorough examination to prevent any anticompetitive outcomes. 

In general, FECC and IFT, as applicable, must issue a resolution within 60 business days after confirming that the file subject to review is complete and all information requirements have been satisfied by the economic agents.

While Mexican antitrust authorities will regularly issue a resolution within the 60-day period provided by the FECL, in exceptionally complex cases, the authorities may extend the 60-day period for issuing their resolution by up to an additional 40 business days.

The transaction must not be closed before the authorities’ approval or deemed approval (no resolution within the applicable term). Non-compliant transactions will be considered null and void.

There are no specific rules in Mexico concerning listed party participants to JVs.

In Mexico, recent amendments to the Federal Tax Code have included “person with control” disclosure requirements that align with international standards aimed at enhancing transparency and combating tax evasion. It is important to note that Mexican law does not make a distinction between “person with control” and “person with significant control”.

These regulations mandate that all legal entities, including contractual arrangements, identify and disclose information about individuals with control or that derive ultimate benefits from their participation in the entity.

A “person with control” (PC) is defined as an individual or group of individuals who, directly or indirectly:

• obtain a benefit from their participation in the entity or any legal act;
• exercise ultimate rights of use, enjoyment, exploitation, or disposition of an asset or service;
• conduct transactions on behalf of the entity; and
• ultimately control the entity or legal arrangement, even if this control is exercised contingently.

Control is further defined as follows:

• the ability to impose decisions at shareholders’ meetings, partners’ meetings, or their equivalents;
• the right to appoint or remove the majority of the board of directors, administrators, or their equivalents;
• the power to exercise more than 15% of the voting rights of the entity;
• the capability to direct the administration, strategy, or main policies of the entity or any other legal arrangement; and
• for trusts, the settlor, trustee, beneficiaries, and anyone who can exercise control over the trust agreement are included.

Entities are required to collect and maintain updated records of PCs. This includes detailed information regarding the chain of ownership and control when an indirect structure is involved, as well as the identification and documentation of control exerted through other legal arrangements, such as trusts or fiduciary structures.

In cases where a PC cannot be identified, it is presumed that control is exercised by the sole administrator or all members of the board of directors.

Unlike other jurisdictions, Mexico does not maintain a centralised register of PCs or UBOs. However, the tax authority has the right to request this information at any time, and it must be included as part of the entity’s accounting records. This obligation is not limited to entities registered with the tax authority; it is a general requirement for all entities, regardless of their tax obligations in Mexico.

Entities must keep their accounting records, including information on PCs, for at least five years. Certain documents, such as the articles of incorporation, partnership agreements, records of capital increases or decreases, merger or split documents, and any certificates issued or received by the entity, must be retained for as long as the entity exists.

Failure to comply with PC disclosure obligations can result in substantial penalties, including fines and administrative sanctions. Entities must also implement internal control procedures to ensure the accuracy of the information related to their PCs, which should be readily available upon request by the tax authorities.

The purpose of these regulations is to align with international efforts to curb illicit financial activities and to ensure that tax authorities have access to comprehensive and reliable information regarding the individuals who ultimately benefit from and control legal entities operating within the jurisdiction.

In October 2023, the General Law of Business Companies was amended to include provisions that allow business companies to use digital platforms and any other real-time technologies to hold remote shareholders’, partners’, directors’ and manager meetings.

In December 2023, the Securities Market Law was amended to allow SABs to issue shares with different rights and restrictions, offering founders of companies the flexibility to issue shares with limited or different rights to new investors when going public.

In the negotiation stage of a JV transaction, parties typically begin by exchanging a mutual non-disclosure agreement (NDA) to facilitate the sharing of sensitive information. If the parties wish to proceed, they often draft a preliminary document outlining their intentions and the basic conditions for closing the transaction.

This preliminary document usually takes the form of a letter of intent (LOI) or a memorandum of understanding (MOU). While the specific contents may vary depending on the nature of the proposed JV, these documents generally include several key elements:

• Identity of the parties: Firstly, they identify the parties involved in the potential transaction. This section provides clarity on who the main stakeholders are and their respective roles in the proposed venture.
• Project: Secondly, the document describes the project or transaction that the parties intend to undertake. This description outlines the core purpose of the JV and sets the stage for more detailed negotiations.
• Contributions: The LOI or MOU also typically specifies the contributions expected from each party to the project. These contributions may include financial investments, intellectual property, technical expertise, or other resources crucial to the venture’s success.
• Type of vehicle: The LOI or MOU typically specifies the intended structure for the JV, which may be either a contractual JV or a corporate JV. In cases where the parties have not yet decided on the specific vehicle, the document usually outlines the process or criteria for making this decision.
• Corporate and economic rights: When the chosen vehicle is a corporate JV, the preliminary document often delineates the corporate and economic rights to be held by each party. These rights are fundamental to the governance and operation of the JV and usually include voting rights, the approval process of major or material items, the right to appoint members to management and surveillance bodies, and profit distribution rights.
• Due diligence: In cases where the JV vehicle already exists and one party is considering becoming a shareholder or partner, the document often outlines the due diligence process. This process allows the incoming party to thoroughly assess the existing business before committing to the partnership.
• Conditions to closing: Furthermore, the preliminary document usually lists the conditions that each party requires to close the transaction. These conditions might include regulatory approvals, financial benchmarks, or other specific criteria that must be met before the JV can be finalised.
• Exclusivity: An important element often included is an exclusivity clause. This provision establishes a period during which the parties agree not to initiate, enter into, or in any way negotiate with third parties regarding any project similar to the one under discussion. This clause helps protect the interests of all parties involved and ensures focused, good-faith negotiations.
• Applicable legislation and jurisdiction: While LOIs and MOUs are generally non-binding in their entirety, as parties are typically unwilling to fully commit before certain conditions are met, some provisions are often explicitly made binding. These binding elements commonly include the exclusivity clause, as well as confidentiality provisions (if not already covered by a separate NDA), terms regarding notices, and stipulations about applicable legislation and jurisdiction. Therefore, it is essential to assess suitable legislation and jurisdiction (or, if appropriate, arbitration) provisions for resolving any potential dispute concerning the preliminary document’s binding provisions.

While there is no general regulatory requirement to disclose a JV transaction in Mexico, specific disclosure obligations may arise depending on various factors. These factors include the nature and industry of the venture, the transaction value, the parties involved, and their respective market shares.

For instance, compliance with the FECL may be necessary under certain circumstances. If the JV qualifies as a merger under the FECL and exceeds the specified thresholds, the parties would be required to notify the relevant antitrust authorities before the transaction takes effect in Mexico. This notification process effectively serves as a form of disclosure, albeit to regulatory bodies rather than the public. See 3.4 Competition Considerations).

Additionally, if any of the parties involved are publicly traded companies, they may be subject to additional transparency requirements mandated by securities laws. These obligations could require public announcement of material business transactions, which might include the formation of a JV.

In exceptional cases, foreign investment participation in corporate JVs may require governmental approval. See 3.1 Regulators.

In a contractual JV, the parties must execute the relevant agreements to bind themselves to the project, in some instances as detailed in the negotiation documents. See 5.1 Negotiation Documentation. Typically, collaboration agreements, profit-sharing agreements, or co-investment agreements do not require execution before a public notary. However, the parties may choose to notarise the documents or have their signatures ratified by a public notary for added legal certainty. While uncommon, any transfer of assets involved in the contractual JV may require notarisation.

For a corporate JV, the parties must first select the type of legal entity that best aligns with the intended rights and obligations of each party. For instance, if profit-sharing restrictions apply to one of the parties, the JV vehicle will likely need to be a SAPI, as this type of entity allows for the exclusion of certain shareholders from revenue sharing.

Once the entity type is chosen and the terms of the corporate JV’s by-laws are agreed upon (along with the terms of the shareholders’ agreement and any ancillary documents, if required), the parties must incorporate the corporate JV before a public notary. This incorporation process results in the legal existence of the corporate JV, evidenced by an incorporation deed containing the entity’s by-laws and the first resolution of the shareholders or partners. The deed must then be registered in the public registry corresponding to the company’s corporate domicile as specified in the by-laws.

Typically, the shareholders’ agreement and any other transaction documents are executed simultaneously with or immediately following the incorporation of the corporate JV.

If the corporate JV has foreign shareholders or partners, it must also be registered with the National Registry of Foreign Investments.

The documentation required for a JV varies depending on the type of vehicle chosen.

Corporate JV

In a corporate JV, the primary documentation consists of the company’s by-laws and, frequently, a shareholders’ or partners’ agreement. These documents typically include the following terms:

• relevant or major decisions: key decisions requiring unanimous approval or a qualified majority vote from shareholders or the board of directors; such decisions often include modifying capital stock, amending by-laws, dissolving or liquidating the company, entering into material agreements, granting specific powers of attorney, and altering the dividend policy;
• share or equity transfer restrictions: various mechanisms, such as pre-emptive rights, drag-along, and tag-along provisions;
• change of control: mechanisms to prevent indirect transfers of ownership through changes in the control of shareholder or partner entities; 
• deadlock mechanisms: procedures for resolving situations where required approval percentages are not met after multiple attempts; see 6.4 Deadlocks;
• buy/sell procedures: exit strategies for parties in case of disagreements, often integrated into deadlock mechanisms;
• board of directors: provisions for the appointment of board members and, if applicable, independent directors;
• committees: formation of committees to support the board, often modelled after audit and corporate practices committees of publicly traded companies;
• funding commitments: agreements on future capital contributions, including funding calendars or milestone-triggered obligations; see 6.3 Funding;
• dividend policy: clear rules regarding profit sharing among partners or shareholders;
• non-compete obligations: restrictions on shareholders or partners competing with corporate JV, including negotiations on post-exit non-compete terms;
• confidentiality: obligations to maintain confidentiality regarding corporate JV information, typically surviving a party’s exit;
• intellectual property: provisions for IP ownership or licensing arrangements; see 8.2 Licensing and Assignment;
• related-party transactions: provisions governing the discussion and approval of transactions between related parties;
• exclusivity and territory: rules regarding the territory on which the corporate JV will operate and any applicable exclusivity; and
• dispute resolution mechanisms: agreed-upon methods for resolving conflicts, often including choice of law (typically Mexican) and venue, with some parties opting for arbitration over court proceedings.

Contractual JV

In a contractual JV, the collaboration, co-investment, profit-sharing, trust, or other relevant agreement will contain similar provisions regarding:

• key decision-making processes;
• deadlock resolution;
• funding commitments;
• allocation of expenses and income;
• non-compete obligations;
• related-party transactions;
• exclusivity and territory;
• intellectual property rights; and
• dispute resolution mechanisms.

Decision-making in the JV entity must be clearly defined in the JV documents – ie, in the contractual arrangement chosen by the parties in a contractual JV or in the by-laws of the company in the case of a corporate JV. Please refer to 2.1 JV Vehicles for an explanation of the differences.

Contractual JVs allow more flexibility in designing decision-making rules. Some relevant considerations to be included in the contractual arrangement include:

• whether each party will have a differentiated role with specific obligations or key performance indicators within the JV and their level of involvement;
• if specific issues will require a majority or unanimous vote; and
• if the parties will have equal or differentiated decision-making rights depending on their contributions.

In Mexico, corporate JVs are subject to the particular rules of the chosen company type. See 2.1 JV Vehicles for the most commonly used types of companies in JVs. In general, the shareholders’ or partners’ meeting is the ultimate governing body within a company and certain decisions are reserved for the shareholders’ or partners’ meeting, including, among others:

• balance sheet approval;
• appointment and removal of directors;
• profit distribution;
• amendments to the by-laws;
• capital reductions and increases; and
• dissolution of the corporate JV.

As a general rule, decisions within the shareholders’ or partners’ meetings are made by a simple majority quorum and vote, unless the applicable laws and the by-laws require a higher percentage or unanimity. The shareholders or partners of a corporate JV may decide to include in the by-laws additional decisions to be reserved for the shareholders’ or partners’ meeting, as well as any special quorum and voting requirements.

On the other hand, operational decision-making is typically in the hands of the board of directors and their decisions are made by a simple majority quorum and vote, unless otherwise provided in the by-laws.

In any case, and particularly in a corporate JV, it is fundamental to detail in the JV documents which decisions are made by the shareholders’ or partners’ meeting and the board of directors, any special quorum and voting requirements, as well as deadlock provisions. See 6.4 Deadlocks for more information.

Corporate JV

In a corporate JV, funding is typically accomplished through equity contributions. In many cases, initial equity commitments are modest, but funding is expected to be provided in the short or medium-term either by the JV members or by third parties.

The nature and timing of the equity funding commitments may vary based on the project’s needs:

• Parties may agree to provide funds upon the corporate JV’s creation.
• If immediate capital is not required, parties often agree on a funding schedule aligned with the corporate JV’s projected needs or predetermined milestones.
• When initial funding or a fixed schedule is not established, parties usually implement a capital call mechanism detailing how and when funds will be requested.

To provide financial certainty, a budget or maximum call amounts are typically established, regardless of the chosen funding method.

Capital call provisions often include mechanisms to prevent dilution or unwanted changes in the ownership structure. This can be achieved through various means:

• issuing shares that are subscribed by the parties but not fully paid, with payment made pursuant to capital calls;
• implementing subscription premiums; and
• issuing shares with special corporate or economic rights based on their series.

It is advisable to include provisions addressing unforeseen circumstances requiring additional funds and to discuss potential effects on the ownership structure.

While equity funding is most common, debt funding or a combination of debt and equity may also be employed. In such cases, transfer pricing analysis guided by a tax specialist becomes crucial, as transactions between related parties will be scrutinised to ensure taxable income and authorised deductions are determined based on comparable transactions between unrelated parties.

Contractual JV

Funding in a contractual JV typically depends on a tax and accounting assessment to determine the most efficient way to allocate costs and distribute revenue without a shared legal entity.

Common approaches include:

• Each party covers the expenses of their assigned activities, with these contributions factored into the allocation of the project’s profits.
• One party may charge fees to offset the cost of certain activities or services.

As with corporate JVs, contractual JV’s transaction documents usually include a budget and outline each party’s funding commitments and the milestones triggering disbursements. Debt funding may be provided by one of the parties, though this would also require careful tax assessment and potentially transfer pricing analysis if the JV members are considered related parties.   

A deadlock occurs when the board of directors or the JV partners issue equal numbers of votes in favour or against a decision or if a particular issue requires a unanimous vote that is not achieved. A deadlock is sometimes considered to have occurred when the board of directors or the shareholders’ or partners’ meeting fails to achieve a legal quorum on successive occasions, preventing the body from being officially convened.

Deadlock provisions are therefore a way to resolve such conflict by setting the rules in the JV documents that will allow the board or partners to move forward.

There are different ways to break a deadlock; some of the more commonly used include:

• mediation by a neutral third party or arbitration proceeding;
• one of the partners electing to sell its participation on the JV or buy the other partners’ participation (known as Russian Roulette or Shotgun terms);
• third-party buyout;
• liquidation or winding-up of the JV, as a last resort measure; or
• if the deadlock occurs at board level, submitting the issue to the shareholders’ or partners’ meeting for resolution.

Notwithstanding the variety of deadlock-solving mechanisms, it is convenient to try to avoid them, for example, by including in the JV documents the appointment of an odd number of directors and/or by entrusting a person with a casting vote. 

A JV structure often necessitates documentation beyond that which establishes the vehicle and outlines the rules governing the relationship between the parties.

For instance, the parties may need to transfer certain assets to the corporate JV, requiring the execution of a contribution agreement or a purchase and sale agreement. In cases where the corporate JV, or one of the parties in a contractual JV, needs to use an asset owned by another JV member or a third party, a lease or bailment agreement may be necessary. For agreements related to intellectual property, see 8.2 Licensing and Assignment.

Furthermore, in both corporate JV and contractual JV structures, the execution of services, distribution, or supply agreements may be required. These agreements delineate the operational relationships between the JV and its partners or external entities.

When the structure includes debt funding, the transaction documents will also encompass a loan agreement and associated collateral documents.

The structure of the board of directors in a corporate JV is a matter of negotiation between the parties and shall be included in the by-laws or partners’ agreement, however, specific rules may apply depending on the entity type chosen by the partners:

• Corporation: Minority shareholders representing at least 25% of the capital stock have the right to appoint at least one director, when the board is comprised of three or more members.
• SAPI: Every individual shareholder or group of shareholders with voting rights (including limited or restricted voting rights) may appoint one director for every 10% of stock ownership.
• SAB and SAPIB: The board of directors should have a maximum of 21 members, of which at least 25% should be independent.
• Limited liability companies: Directors in limited liability companies are called managers. There are no specific rules or considerations applicable to the appointment of managers. If no managers are appointed, all the partners will participate in the management of the company.

Weighted voting in the board of directors is not recognised in Mexico.

In Mexico, the board of directors oversees the administration of the company. In general, the aim of the board of directors is to protect the interests of the company. Therefore, the board of directors has fiduciary duties to the company; namely, loyalty and diligence duties in public listed companies.

Regardless of any competing duty that the director may have to the JV participant that appointed them, the director shall not act when there is a conflict of interest. See 7.3 Conflicts of Interest.

Directors are joint obligors with the company in the following matters:

• the veracity of shareholders’ or partners’ contributions;
• compliance with legal and by-law requirements regarding profit sharing;
• existence and upkeep of accounting, record and information keeping as required by law;
• exact compliance with the resolutions of the partners’ meetings; and
• maintenance of the legal reserve.

The company’s b-ylaws may provide for the creation of committees to aid the board in its functions; however, the board’s authority may not be delegated. Specific rules apply for the operation of the board in publicly listed companies.

Likewise, the appointment as a director is personal and may not be delegated or executed by proxy.

Mexican law provides that any director with a conflict of interest must disclose such conflict to the board and refrain from discussing and voting on said matter. In case of a breach, the director with a conflict of interest will be liable for the damages caused to the company.

The Manual for Best Corporate Governance Practices of the Entrepreneurial Coordinating Committee (ECC, Consejo Coordinador Empresarial) suggests that the aforementioned provision shall be applied to real and potential conflicts of interest. Although not required by law, the ECC suggests that companies create strong internal policies to define what constitutes a conflict of interest, how to disclose it efficiently and prevent it.

In Mexico, there are no restrictions on being a member of the board of directors of the corporate JV in virtue of the director’s position in the JV participant.

In any JV, the parties must carefully assess the intellectual property (IP) rights required for the project’s success. The approach to managing these rights can differ between a corporate JV and a contractual JV.

In a corporate JV structure, the parties may opt to assign or license certain IP rights directly to the company. Conversely, in a contractual JV, the execution of a license agreement is more common as it allows the original rights holder to maintain ownership while granting usage rights to the JV. See 8.2 License and Assignment.

A key factor in determining the IP strategy is the importance of using an established and reputable trademark for the venture. Even when IP rights are not the most critical aspect of the project, it is standard practice for the parties to clearly outline the use of their IP rights by the corporate JV or other JV members. This documentation typically clarifies that any authorised use does not constitute an assignment of rights.

The decision between licensing and assigning IP rights is influenced by various factors, including the nature of the project, the significance of those rights to the venture, the long-term vision of the parties, and any existing or prospective contractual arrangements with third parties.

IP rights assignment is more prevalent in corporate JVs, as the JV members retain influence over the use of such rights through their involvement in the company. Additionally, transaction documents for corporate JVs usually include mechanisms to prevent the unauthorised disposition of assets, including IP rights.

Licensing of IP rights is common in both corporate JV and contractual JV structures when the rights holder intends to continue using the IP or has licensed or plans to license the rights to other third parties. This approach allows the JV to use the IP as needed while maintaining the rights holder’s ability to leverage these assets in other contexts.

By carefully considering and structuring the management of IP rights, JV partners can ensure that their intellectual assets are protected while still being effectively utilised to support the venture’s objectives.

In Mexico, environmental, social, and governance (ESG) standards are established through a combination of mandatory regulations and voluntary compliance guidelines. These metrics are increasingly recognised for their correlation with improved sustainability, risk management, and financial performance. As a result, they play a crucial role in attracting investors and consumers and, therefore, many JVs may be motivated to adopt these standards even when not legally obligated to do so.

In March 2023, the Ministry of Finance and Public Credit issued a Taxonomy Sustainability Report outlining environmental and social goals, including climate change mitigation and adaptation, and support for gender equality. While this report does not constitute formal regulation or public policy, it serves as a voluntary guide for private sector investment strategies, the development of financial products, and the provision of sustainability-related services.

A recent amendment to Mexico’s Securities Market Law empowers the Ministry of Finance and Public Credit to issue guidelines promoting sustainable development and gender equality practices. These guidelines are intended to foster best practices among securities issuers, stock exchanges, brokerage firms, institutions for securities deposits, central securities counterparties, and rating agencies. The development of these guidelines involves consultation with key financial regulatory bodies, such as the National Banking and Securities Commission and the Mexican Central Bank.

The Mexican Senate has proposed a reform to the Law of Business Chambers and Confederations, aiming to encourage responsible business practices, particularly in areas of human rights and environmental protection. Although not yet enacted and potentially voluntary in nature, this reform could influence the conduct of businesses associated with these chambers.

Currently, the National Commission of the Retirement Savings System requires retirement fund managers to adhere to ESG standards in their investment decision-making processes. This requirement may indirectly impact JVs seeking public financing, as these fund managers often serve as long-term investors active in public financial markets.

Moreover, numerous environmental and social regulations must be complied with depending on the industry and activities of the JV. These include the General Law of Ecological Equilibrium and Environmental Protection and the Federal Labor Law.

The ways to terminate a JV, depending on whether it is a contractual JV or corporate JV, are mainly:

• corporate JV: dissolution of the vehicle or transfer of the parties’ participation; and
• contractual JV: termination of the agreement.

In any case, the main considerations should be liquidation of debt, distribution of profits, assets and losses, as well as tax consequences. It is also possible for a JV to be terminated with respect to only some of its parties, but the same considerations apply.

Transfer of assets between JV participants should be addressed in the shareholders’ or partners’ agreement or the corresponding contractual arrangement, taking special care of including the value or valuation procedure.

For purposes of transfers, Mexican law does not distinguish between assets that have been originally contributed to the JV by a participant and assets originating from the JV’s activities. In practice, the most relevant consideration, in the first case, should be how to replace or continue the legal use of the assets in question if needed by the transferor; for example, by means of a lease or a license in favour of the transferor or the JV, as applicable. In the second case, the most straightforward way is to set terms of any applicable transfer between JV participants in the JV documents.