Contributed By Aziz & Kaye Business Law
The relevant merger control legislation in Mexico comprises;
The relevant legislation, the Foreign Investment Law (Ley de Inversión Extranjera), governs foreign investments and states the sectors that are reserved to the state, as well as setting limits to foreign investment in additional sectors.
The Foreign Investments Commission (Comisión Nacional de Inversiones Extranjeras) enforces foreign investment laws in Mexico.
There is a constitutional appeal (amparo lawsuit) – before administrative district, federal judges specialised in competition, telecommunications and broadcasting – in the event that COFECE or IFT blocks or enforces remedies in a transaction reviewed under merger control procedure. The decisions of these judges can be appealed before administrative circuit tribunals specialised in competition, telecommunications and broadcasting.
Regarding whether the notification is compulsory or voluntary, it is necessary to mention that the LFCE requires compulsory notification if the transaction between the merging entities exceed any of the three thresholds set forth in Section 86 of the LFCE:
However, even if merging entities do not exceed the aforementioned thresholds, according to the LFCE they are entitled voluntarily to file for clearance (ie, compliance matters).
Please find the list of exceptions to the notification in 2.3 Types of Transaction, below.
(*Note: all amounts in dollars in this article are considered on a MXN/USD exchange rate of 19 pesos per dollar.)
There are penalties for those entities that do not notify a transaction that exceed any of the three thresholds set forth in the LFCE and receive clearance before closing; penalties range from approximately USD21.2 million up to 5% of the parties’ annual incomes.
In 2015, COFECE sanctioned Alsea, a Mexican multi-brand restaurant operator, and Grupo Axo, a clothing distributor for luxury brands, for a total of USD1.35 million for a transaction that exceeded the aforementioned thresholds and required the consequent approval of COFECE.
In 2016, COFECE started two investigations into the production of raw milk and the production, distribution and commercialisation of pasteurised milk and its derivatives. These two dockets are confidential, so it is impossible to determine if these transactions should have or should not been notified to COFECE.
In June 2017, COFECE fined Mexico Multifamily Fund VIII (MMF), Invex, CIbanco, HSBC and Monex MXN365,000 each , but what is more significant is that it was the first time that COFECE sanctioned a notary public with a MXN8.5 million fine for formalising a merger without COFECE’s approval.
In addition, in 2019, IFT started an investigation in provision of Pay TV and audio-restricted services, fixed and mobile telephone, and broadband internet in national territory. This docket is also confidential, so it is impossible to determine if the investigated transaction should have or should not been notified to IFT.
It is important to point out that another consequence of not notifying a transaction is that the competition authorities could investigate and fine if the transaction is considered illegal. The fine will be around 8% of the incomes of the parties, regardless of civil liability.
Acts carried out without notification shall be null and void, without prejudice of the economic agent's administrative, civil or criminal liability and that of the persons who ordered or contributed to the execution thereof, as well as the notary public (who may receive a maximum fine of MXN14.5 million) or attesting official who may have intervened.
The resolution, entity and the amount of the sanctions are public and available on the competition authority’s website; the authority also issue press releases in order to report the highlights of the cases.
The following types of transactions are caught:
The LFCE does not define control. The Supreme Court has defined that an entity can exercise “decisive influence” or “control” on others to act in the markets, either by the law, in the following cases: (i) ownership of the majority of an entity’s stock; (ii) power to name the majority of the members of the board of directors or any administrative or managing body or official within an entity, administration of the economic activities of an entity through a long-term agreement, or by (a) the capacity of a minority shareholder to obtain majority approval considering attendance, or (b) the position of other shareholders or financial interests.
It is important to consider the provisions contained in the authorities' merger control guidelines, to determine if the transaction gives either one of them control, meaning the ability to decide on the activities performed by another entity.
There are no special jurisdictional thresholds applicable to particular sectors.
The guidelines for merger control states that the jurisdictional thresholds should be calculated taking into consideration the financial statements. The financial statements, mainly the balance sheet and the income statement, contain most of the information necessary to determine the value of the assets, sales or income and the capital of the companies involved in a concentration.
In case the sales or assets are booked in a foreign currency, the Regulations state that authorities must consider the smallest exchange rate published by the Bank of Mexico from the five days before the parties file the notification.
Regarding the value of the assets, the competition authorities state, in their merger control guidelines, that the highest figure that results from the following possibilities must be considered: (i) total value of the assets stated in the balance sheet in Mexico, which is part of the companies' financial statements, without making exceptions among the items that make up the assets; and (ii) the commercial value of the assets in Mexico, which may differ from the value assigned in books. In this case, the commercial value of the assets is equivalent to the price paid in the transaction.
Please refer to 2.1 Notification, above.
Foreign-to-foreign transactions are subject to merger control if there are any effects in Mexico, and the competition authorities will run a local effects test considering only the assets and/or sales in Mexico of the entities involved in the transaction.
No market share jurisdictional threshold is provided by the LFCE.
The joint ventures are subject to merger control whenever they exceed the thresholds established by the LFCE.
Notwithstanding, in Mexico, there is no legal figure that allows granting exemption from the application of the LFCE to collaboration agreements (joint ventures) between competitors.
The criteria of the competition authorities states that the definition of "merger" includes acts that do not necessarily mean obtaining control via shares or that do not derive from an act of transfer of assets or shares, but that have analogous effects, as is the case of some collaboration agreements between competitors.
In this regard, COFECE's guidelines for collaboration among competitors states that the competitors participating in a collaboration agreement, with the characteristics of a merger, may opt to notify it voluntarily to the competition authorities for analysis, in terms of the provisions of the last paragraph of Section 86 of the LFCE. If the collaboration agreement has already been made, the Commission may investigate it as an illegal concentration or as an absolute monopolistic practice, the latter when the entities remain competitors.
The power that the competition authorities have to investigate a transaction that does not meet the jurisdictional thresholds is limited to reviewing the transaction for one year after its execution.
Nonetheless, authorities have no power to review transactions that have already received clearance, unless they were cleared based on false information or subject to remedies after their execution.
On the other hand, for those transactions that were not notified when they should have been, the authorities have ten years to investigate, since said investigation may consider that the transaction was illegal as its purpose or effect was blocking, reducing, damaging or impeding free enterprise and competition.
The implementation or execution of a transaction must be suspended until there is clearance from the authorities.
There are penalties in case the parties close the transaction before the clearance. These penalties imply that the transaction did not produce any legal effects. Additionally, there are sanctions to the public notary and the officials that participated in its execution.
The authorities might also consider it an unlawful transaction subject to penalties of up to 8% of the parties’ assets and/or ordering the partial or total divestiture of the transaction.
As of yet, there is no record of any penalties to parties for executing a transaction before the authorities’ clearance.
There are no general exceptions to the suspensive effect provided by the LFCE or the applicable legislation. Since it is not possible to avoid the suspensive effect, it is important to convey to the authorities the urgency of closing transactions and to provide all necessary information to the authorities in order to speed up the process as much as possible and obtain the clearance.
There is no circumstance that allows the closing of a transaction before the clearance. On the contrary, if the parties involved in a global transaction lack the clearance of the Mexican competition authorities, it is possible to separate the businesses or assets in the Mexican jurisdiction and implement global closing. These proceedings may implicate additional information to ensure that it will not have effects in Mexico until they receive the clearance.
Lastly, the parties should inform the competition authorities of their intention to do so, before closing the global transaction.
According to the LFCE and the applicable legislation, all notifiable transactions must be filed before their execution.
The penalties for not notifying a transaction that exceeds the thresholds provided by the LFCE are the same as the ones for closing the transaction before clearance, which is up to 5% of the parties’ annual income; if the authorities consider the transaction as unlawful, they may also fine the parties up to 8% of their assets and/or order partial or total divestiture of the transaction.
It is not required to submit a binding agreement prior to the notification, but parties may submit a letter of intent, a memorandum of understanding or a similar document that evidences the details of the transaction in the understanding that, after the execution of the transaction, the parties must submit the final documents evidencing the transaction.
Before COFECE, the filing fees required for the notification of a transaction in 2018 are approximately USD8,700, as determined by the Federal Law of Rights and the Fiscal Miscellaneous Resolution for 2018.
Parties must attach proof of payment of the filing fees at the filing moment. COFECE will not accept any merger notifications that do not comply with this requirement.
The parties responsible for the filing are those who directly participate in the transaction (ie, seller and buyer). The agreement or document on which the transaction is based should determine who are the entities that directly participate in the transaction. Competition authorities considers the signing entities to be the ones that directly participate in the transaction.
The information required to be included in a filing is the following:
All documents must be submitted in Spanish or, if the documents were produced in a different language, must be filed attached with a certified translation of their main provisions.
The authorities will require the parties to submit all pending information in case the notification is deemed incomplete.
The parties shall submit missing information within ten business days after the authorities notified the request. If such term expires and the parties did not submit all the necessary information in accordance with the LFCE or with the authorities’ requirement, the authorities will consider the notification as not filed. This implies that the parties shall file a new notification.
We are not aware of precedents that confirm if the authorities apply these provisions.
We are aware that there is at least one case where COFECE considered the notification as not filed.
The penalties provided by the LFCE in case that the parties submit inaccurate or misleading information in the filing is a fine of approximately USD742,369, regardless of the criminal liability incurred.
We are not aware of precedents that confirm if the authorities apply these provisions.
Section 90 of the LFCE sets out the filing procedures as stated below.
In Mexico, the parties are able to engage in informal pre-notification discussions with the competition authority and this process is treated as confidential.
Requests for information are very common, and are becoming generally very burdensome. For stop-the-clock matters, see 3.8 Phases of the Review Process, above.
Parties may request an accelerated procedure for reviewing the transaction as provided for in Section 92 of the LFCE, for which the notifying parties shall bring to the Commission information and the corresponding elements of conviction that clearly demonstrate that the transaction will not hinder, damage or impede free market access and economic competition.
It is clear that a transaction does not have as its purpose or effect to hinder, damage or impede free market access and economic competition when the acquiring party has no participation in markets related to the relevant market in which the transaction takes place, or is not an existing or potential competitor of the acquired party and, in addition, any of the following circumstances occur:
Within the five-day period following submission, COFECE shall issue its decision on its admissibility, or, pursuant to the last paragraph of Section 92 of the LFCE, order its inadmissibility and for the case to be processed under Section 90 of the LFCE.
The Board of Commissioners shall resolve whether the transaction complies with the criteria of clearly not hindering, damaging or impeding free market access and economic competition, as foreseen under Section 92 of the LFCE, within a period no greater than 15 days following the admissibility decision.
Upon conclusion of said timeframe without the Board of Commissioners issuing a resolution, it shall be understood that there is no objection to the transaction.
When the Commission considers that the concentration does not fall under the criteria of one of the bullet points above, or the information provided by the parties is incomplete, COFECE shall issue a decision for processing the case under article 90 of the LFCE.
The substantive test employed by the authorities in order to review a transaction is whether the transaction may reduce, inhibit or prevent the process of competition and the free market.
This is applicable if the merged entity may acquire sufficient market power that will allow it to raise prices or restrict output in the relevant market, if the merged entity may displace or block competitors from entering the relevant market and/or if it increases its possibility to engage in relative monopolistic practices, abusing its market share or position.
In accordance with competition authorities criteria for analysing horizontal mergers, using the Herfindahl-Hirschman Index (HHI), by which it considers that a merger is unlikely to raise competition concerns in the relevant market when (i) the HHI increase value is fewer than 100 points, (ii) the HHI value of the merged entity is below 2,000 points, or (iii) the HHI value of the merged entity is between 2,000 and 2,500 points, the HHI increase value is between 100 and 150 points, and the merged entity is not one of the four biggest participants in the relevant market
In order to determine which markets may be affected by the transaction, the competition authorities analyse the products or services where the parties overlap – for example, it confers or may confer substantial market power.
In addition, and in accordance with the competition authorities criteria for analysing horizontal mergers, using the Herfindahl-Hirschman Index (HHI), by which it considers that a merger is unlikely to raise competition concerns in the relevant market when (i) the HHI increase value is fewer than 100 points, (ii) the HHI value of the merged entity is below 2,000 points, or (iii) the HHI value of the merged entity is between 2,000 and 2,500 points, the HHI increase value is between 100 and 150 points, and the merged entity is not one of the four biggest participants in the relevant market.
Usually, competition authorities do not use definitions from other jurisdictions but, in our experience, may sometimes do so in global transactions or in transactions that involve advanced technology.
Competition authorities will analyse any actual or potential unilateral, co-ordinated and conglomerate effects, as well as vertical concerns or elimination of potential competition.
LFCE states that authorities shall consider gains in efficiency that favourably impact upon the process of competition and free market, to overcome possible anticompetitive effects in a merger, such as:
Applicable legislation does not allow competition authorities to analyse non-competition issues when reviewing a merger. In addition, both authorities were created as constitutional government bodies, shielding them from political influences that the former antitrust authority suffered.
There are currently no precedents evidencing that competition authorities have considered non-competition issues in a merger review.
Currently, joint ventures have no special consideration in the LFCE.
Co-ordination issues are usually analysed by the authorities between joint venture partners. Additionally, COFECE has issued recommendations to avoid illegal co-ordination, including guidelines for information exchange between entities. Furthermore, COFECE is about to publish its guidelines for co-operation among competitors.
Competition authorities are empowered to prohibit or interfere with a transaction. The authorities’ decision may block or condition the transaction to the compliance of certain remedies to prevent potentially damaging effects to the process of competition and the free market. If that is the case, when the competition authorities condition the transaction, they shall explain how such conditions prevent negative effects, therefore conditions must be proportionate to the needed correction of the effects of the merger.
The parties have the possibility to propose and negotiate remedies, including divestitures or behavioural remedies.
Competition authorities may only impose or accept remedies that are directly related to the correction of the effects of the merger. The conditions that are imposed or accepted must keep proportion with the correction that is intended.
The legal standard that remedies must meet in order to be deemed acceptable are divestitures or behavioural remedies. Remedies are not required to address non-competition issues.
Parties may begin negotiating remedies with the authorities from the moment they file the merger and up to one day after the transaction is listed for the Board of Commissioners review. In case the remedy proposals are not filed with the transaction filing, the authorities’ review term will restart. Authorities may propose remedies on their own, as explained in 5.1 Authorities' Ability to Prohibit or Interfere with a Transaction, above.
When the date of the potential ruling from the Board of Commissioners is imminent, the competition authorities usually inform the parties of any potential competition concerns, since at this moment it is more likely for the authorities to have detailed information on the transaction and the relevant market.
Competition authorities encourage the parties to file their own remedies proposals, since the parties have a greater and better knowledge of the market and how to correct any potential competition concerns effectively, even though competition authorities have the legal ability to impose remedies on their own.
In general, the parties are able to complete the transaction before remedies are complied with.
The penalty for those who do not comply with the conditions and remedies stated in the final ruling of the transaction are fines of up to 10% of the parties’ annual income.
A formal decision permitting, conditioning or prohibiting the transaction is issued to the parties.
A version of the decision is available on the official websites of the competition authorities; this is obliged to omit information determined as confidential by the authorities.
Some recent cases include:
A clearance decision may cover related arrangements in the competition analysis, particularly in the case that the competition authorities consider there may be potential spillover effects in other markets.
In the case that the execution of an ancillary restraint involves a transaction that exceeds the thresholds provided by the LFCE, the parties related to such transaction shall file a new and separate notification.
Third parties may file a claim against a transaction if they consider it illegal. However, the authorities will deny any claim for a filed transaction that has not been cleared by the authorities, in which case the complaint will be filed under the merger file. The complainants may file information that will be taken into consideration by the authorities.
It is important to clarify that unrelated third parties, including complainants, are not allowed to access the merger file, making it more difficult to address a complaint. For more information, please refer to 3.8 Phases of the Review Process, above.
The rights of the third parties are protected by constitutional appeal (amparo lawsuit), before administrative district, federal judges specialised in competition, telecommunications and broadcasting.
It is common that the competition authorities require additional information from third parties as part of its review process, including other public authorities, without these being considered as parties under the procedure.
Typically, the information will be required through official communications. The competition authorities will typically not “market test” any remedies offered by the parties.
The transaction is made public, but not its detailed content. A competition authority publishes its rulings on its website in a period of 20 business days after the notifying parties are informed of the decision.
The parties may request that the information they submit be considered confidential or reserved, explaining the reasons behind such request and providing redacted versions of the documents, if possible.
Confidential information will only be available to the submitting party, while reserved information will only be available to the parties with a legal standing in the procedure.
The authorities shall not reveal or publish confidential information, which is kept in a separate file only available to the public officials reviewing the transaction. In addition, competition authorities’ officials are impeded from making public statements or revealing information regarding the transactions they are involved in.
Mexico has entered into several international agreements that include co-operation between competition authorities in countries such as the USA, Canada, Japan, Chile, Russia, South Korea and Israel, among other jurisdictions.
Mexican competition authorities cannot share confidential information with other authorities, unless the notifying parties explicitly allow sharing such information through specific waivers.
In the event that COFECE or IFT blocks or enforces remedies in a transaction reviewed under merger control procedure, there is a constitutional appeal (amparo lawsuit), before administrative district, federal judges specialised in competition, telecommunications and broadcasting. The decisions of these judges can be appealed before federal administrative circuit tribunals specialised in competition, telecommunications and broadcasting.
Generally, the constitutional appeal (amparo lawsuit) has a duration of between six and 18 months, but it can take years to issue the final judgment.
It is extremely uncommon to have appeals on a merger procedure. One exception is Bio Pappel, who filed an amparo lawsuit against COFECE's resolution in 2015, since the company considered that the remedies imposed in the resolution were illegal.
Theoretically, a third party has the right to challenge a resolution through an amparo lawsuit.
We are aware that a civil association (AMEDI) filed an amparo lawsuit against the decision of the competition authority, in which the transaction between Televisa and Iusacell was authorised. This amparo lawsuit was not successful.
Regarding the LFCE, there has not been any significant amendments to said legislation since its entry into force.
In February 2018, COFECE published the amendments of the Guidelines for Merger Control (Guía para la Notificación de Concentraciones).
Also, as stated above in 1.1 Merger Control Legislation, in August 2017 the IFT published the Guidelines for the Control of Mergers in the Telecommunications and Broadcasting sectors (Guía para el Control de Concentraciones en los Sectores de Telecomunicaciones y Radiodifusión).
In early 2017, COFECE fined Soriana, a Mexican supermarket and warehouse chain, for failing to comply with the authorised divestiture programme in order to purchase its competitor, Comercial Mexicana.
In June 2017, COFECE fined Mexico Multifamily Fund VIII (MMF), Invex, CIbanco, HSBC and Monex MXN365,000 each, but what is more significant is that it was the first time that COFECE sanctioned a notary public with a MXN8.5 million fine for formalising a merger without COFECE’s approval.
In Mexico, the competition authorities are extremely exhaustive in their analysis of a notified transaction, even beyond the overlaps that exist between the parties. Moreover, COFECE is quite interested in government public bidding markets.