The 2022 statistics relating to foreign investment showed an increase from 2021, in spite of the fact that in the last quarter of 2022 investment flows and transactions failed to keep pace with the first three quarters of that year. 2023 is showing a significant increase in economic activity and interest by foreign investors in Mexico as a hub for nearshoring.

Joint venture activity in 2022 was, and 2023 is, fuelled by a combination of domestic and international factors. The most important exogenous factor in deciding whether to invest in Mexico is Mexico’s attractive position as a nearshoring partner with the USA; the most important endogenous factors are the stability of Mexico’s macroeconomic indicators and the stability of the Mexican peso, as well as the investment protection and trade agreements to which Mexico is a party. The war in Ukraine has played a minimal role, according to this assessment.

The most important sectors receiving investment and the attention of investors were fintech, software, e-commerce, manufacturing, health and tourism.

The investment and investor attention in all of these sectors is attributable mainly to nearshoring, except for tourism, where it is attributable to Mexico’s appeal as a tourism destination.

The most common JV vehicles in Mexico are (a) the limited liability company (sociedad de responsabilidad limitada, or SRL) and (b) more recently, the revised joint stock company (sociedad anónima, or SA) and (c) the investment promotion corporation (sociedad anónima promotora de inversión, or SAPI). Unincorporated JV agreements (such as the asociación en participación) are no longer in use on account of their neutral or adverse tax considerations.

The SRL, the SA and the SAPI typically include a variable capital feature in order to facilitate the injection of additional capital (via one or more rounds of capitalisation) into each of these corporate vehicles.

Regardless of the JV vehicle used, it is more common than not to also subscribe a shareholders’ agreement to address a series of issues which may not be appropriate to resolve within the bylaws, as these are generally available for public consultation, for example, intellectual property, secondment of employees, schedule of capital contributions, among others.

The advantage of the SRL is that it is treated as a partnership, and is thus a pass-through vehicle for US tax purposes and therefore tends to be preferred by the US investor. It is recommended that the features incorporated into the SRL’s bylaws be vetted with US counsel in order to determine whether such features do not defeat the objective being sought as to its US tax treatment.

The advantage of the SA is that it is the most familiar vehicle in Mexico for a closed corporation. While, in the past, the SA structure expressly prohibited the incorporation into its bylaws of most of the covenants or restrictions which would typically be the subject matter of agreement among JV partners, and the incorporation of any such covenants into a separate shareholders’ agreement was also suspect, the revised SA can now incorporate all those covenants, rights and/or restrictions which JV partners usually reserve for a shareholders’ agreement.

The SAPI shares the flexibility of the revised SA and is suitable for more complex projects with multiple JV partners, such as high-calibre infrastructure projects, which may be looking to bring in outside investors via private or public capitalisation rounds.

All three vehicles (SRL, SA and SAPI) provide limited liability to their stakeholders, except in the case of fraud or gross negligence.

As regards capital contributions, both the SA and SAPI issue shares, which are freely transferable unless otherwise provided in the bylaws; the SRL, on the other hand, issues equity interests, which are undocumented and not freely transferable, which is not to say that an SRL would be at a disadvantage relative to an SA or SAPI.

The primary drivers for choosing the appropriate JV vehicle are as follows:

• nationality of the foreign investor: if a US company holds a substantial or controlling interest, the likelihood of choosing an SRL is extremely high due to US tax considerations;
• if there is a multiplicity of investors which is likely to require addressing in its management, decision-making, control structures and capitalisation rounds, then the most likely vehicle will be the SAPI; and
• a non-US investment in a “closed” JV partnership scenario will probably result in choosing an SA.

Neither the SRL, the SA nor the SAPI provide tax or regulatory advantages from a Mexican perspective.

There are two types of regulatory hurdles which may come into play in structuring and operating a JV in Mexico. First, the Foreign Investment Commission (FIC) must approve projects which entail the participation of foreign investor(s) in more than 49% of projects where investment is over and above an amount deemed appropriate to national interest projects due to the size (in dollar terms) of foreign investment (Article 9, Foreign Investment Law) (“FIC Approval”). The FIC Approval process has largely operated as a formality, and the structure, market or business plan of the proposed JV has rarely been questioned.

The second type of regulatory hurdle will vary depending on the sector and the percentage of foreign investment in the capital of the JV company. For example, in order to participate as an investor holding more than 49% of the equity of a JV company in sectors such as education, railways, or internal, coastal or ocean navigation, a separate FIC authorisation is required; in certain instances, the granting of concessions to operate the intended JV business will be required from other governmental authorities such as, for example, the Federal Telecommunications Institute.

Mexico has put in place an anti-money laundering (AML) regulatory framework consistent with FATCA and EU principles. The Mexican AML statute dates back to 2013 and applies to individuals and business entities that operate or have business connections in Mexico. The statute lists a number of activities deemed vulnerable and subject to either record-keeping or reporting requirements.

The Mexican Banking and Securities Commission, the Mexican Tax Administration System and the Attorney General’s Financial Intelligence Unit are in charge of implementing and enforcing the law.

There are no restrictions on co-operation with JV partners in Mexico as a consequence of, for instance, sanctions laws, and there are no national security regulations or considerations that apply to the formation of a JV in Mexico.

The Mexican antitrust legislation dates back to 1992 and was substantially revised in 2014. In order to adequately implement an antitrust structure in Mexico, it was deemed necessary to incorporate the basic antitrust principles contained in the law into the Mexican constitution.

There are two types of regulations which apply to JVs in Mexico. The first type relates to the determination of the JV as a dominant player in its intended market, which determination may be initiated ex officio or upon the application of a competitor and may carry general restrictions aimed at the protection of its competitors and the market in general. The second type prohibits specific conducts of a JV vehicle in connection with its commercial dealings with one or more parties (for example, the use of exclusivity agreements for the distribution of its products), in case of which conducts an aggrieved party will have a course of action whereby to seek redress.

The Federal Competition Commission is the regulator in charge of implementing the antitrust legislation.

There is a list of suspect entities which are deemed tax havens, and the impact of their participation in a JV in Mexico is primarily tax-related.

Consistent with FATCA and EU models, the Federal Tax Code of Mexico has adopted a beneficial owner reporting requirement.

Pursuant to the applicable regulations, a beneficial owner (BO) is defined as the person who, directly or through others or through any legal instrument (eg, by contract), obtains the benefit derived from their participation in a legal entity or who ultimately exercises the rights of use or disposal of a good or service, or in whose name a transaction is done, or who, directly or indirectly, exercises control of the legal entity. The individual or group of individuals has control when, through securities, contract or other instruments they can, directly or indirectly: (a) dictate decisions at shareholders’ meetings (or equivalent) or appoint or remove most of the directors (or equivalent); (b) exercise the voting rights on more than 15% of the corporate capital; (c) direct the administration, strategy or main policies of the legal entity.

When the BO determination is not a result of direct ownership but rather of control, the chain of control must be identified. If a controlling beneficiary cannot be identified, then the board of directors or the manager if there is no board will be considered the BO by default.

There have been no recent significant court decisions or legal developments relating to JVs. However, it is worth noting that “transactional regulation” of ESG has emerged as a more common than not feature, particularly when one of the JV partners has a material relationship with an ESG-regulated entity in a different jurisdiction or when the JV entity seeks financing.

Mexican practitioners usually follow the market standards of the USA and its models and checklists applicable to JVs, and will adapt them to meet any Mexican law requirements.

Disclosure must be made at the time of closing, since Mexico does not typically entertain unincorporated JVs.

Setting up a JV requires: (i) agreement as to the articles of incorporation and bylaws of the company; (ii) agreement as to the content of the shareholders’ agreement; and (iii) notarisation of the articles of incorporation and bylaws of the company. In many cases the shareholders’ agreement is also notarised in order to provide it with a date for tax purposes.

There are two key JV structural documents. The first is the articles of incorporation and bylaws of the JV, and the second is the JV shareholders’ agreement.

It is not uncommon for the articles of incorporation and bylaws of a JV to be extremely thin and devoid of most of the covenants of a JV, and in these cases it would also be common for the bylaws to include an express reference to the applicability (and controlling feature) of that which has been agreed to in a shareholders’ agreement executed simultaneously with the articles of incorporation and bylaws of the JV company.

The main terms the shareholders’ agreement is expected to cover in detail are the following: the scope of the JV (territorial and business), exclusivity, partners’ covenants and prerogatives, business plan, budget, capital contributions (mandatory or otherwise), applications for permits or concessions, personnel, branding of services, intellectual property, structure of board, CEO and other officers, employee secondment, schedule of authorisations, matters requiring partner approval, relations between partners, tax and accounting matters, dividend restrictions, transfer restrictions, agreement not to retire, agreement not to compete, winding up and liquidation of partnership, dispute resolution, indemnification, limitation of liability, transfers and specific performance.

Under Mexican law, the resolutions adopted by the shareholders/equity holders take precedence over those of the board of directors. Hence, the day-to-day decisions of the JV are in many cases left up to the board, and the shareholders/equity holders have exclusive authority to discuss and pass resolutions over everything else. To the extent that the JV is a closed company, it will be more likely that most if not all the important decisions will be made by the JV partners; conversely, to the extent that the JV is a multiparty venture, it will be more likely that a sizeable number of the important decisions will be made by the board of directors (assuming, in this case, that the board proportionately represents and that its decision-making process adequately protects the controlling partners).

A JV has to be initially funded by equity, typically a de minimis participation to begin with. This may be followed by subsequent sizeable capital contributions, and it may be funded by debt as well. The JV’s bylaws and the shareholders’ agreement may provide for future funding via a schedule of capital contributions.

The typical language in the bylaws reflects that capital contributions can be called and if passed are mandatory, and the typical JV agreement similarly provides that future capital contributions be mandatory. Under Mexican law, the failure of a JV participant to comply with its capital contributions will result in automatic dilution of its stake. It is also not uncommon to afford a compliant JV participant the right to subscribe and pay the unsubscribed funding, thus increasing their stake in the capital of the JV company.

Deadlocks are usually addressed by affording one or more opportunities to resolve the issue, and if this is not possible then (a) in the case of a deadlock at the board level, the shareholders/equity holders will resolve the issue, and (b) if the deadlock is at the shareholder level, then a common solution is that the approved business plan, as amended from time to time, controls.

Depending on the type of JV and the type of assets transferred, IP licences, lease agreements, personnel secondment agreements, service agreements and other material agreements may be required.

Under Mexican law, the percentage of participation in the board of directors of a company must be directly related to the percentage of participation in the equity of the company.

A director has a fiduciary duty to the JV company.

Mexican law provides that a director appointed by a JV partner must disclose any conflicts they may have in connection with the analysis or resolution of a matter before the board and the director must refrain from voting on that matter.

The JV board can avail itself of the advice of subcommittees, but cannot delegate its functions to subcommittees or other third parties.

There are two types of conflicts of interest a director may have: that relating to their own personal preferences or business, or that which arises out of their relationship to or position in the JV participant.

As stated above, a director has a fiduciary duty to the JV company. The practical application of this principle regarding the first case (personal conflict) appears simpler to resolve: the director must disclose the conflict and refrain from voting. This principle is considered by many not to be applicable in practice to the second case (conflict arising as a consequence of their position in the JV participant) where the JV is a closed venture, since typically in these cases the directors of the JV are directors or officers of each of the JV partners. In addition, disqualifying a director may just put the issue in the hands of the partners whose vote is unrestricted, except if the JV provides for corporate opportunity restrictions.

Key IP issues relate to: (a) the ownership and licensing of IP rights at the time of the JV’s formation, and subsequently if so agreed to by the IP-JV participant, limited to a territory and business operations; (b) the IP developed as a consequence of either collaboration between the licensor and licensee, or that developed by the licensee on its own as a consequence of its use of the licensed IP; and (c) obligation of the licensee to notify the licensor of any potential infringement of its IP rights in the territory.

IP rights are typically licensed, not assigned, to the JV entity. The implication is that upon the dissolution of the JV entity the licensor would retain title and control of the licensed IP rights, which would not be the case if the IP rights were assigned. Any assigned rights would be subject to the liquidation procedures agreed upon by the JV parties in the bylaws of the company, which might make it more difficult for the initial owner of the IP rights to regain them. The bylaws of the JV company and the JV agreement usually provide a right of first option or a right of first refusal to the IP licensor over the IP developed by the JV company in the event of liquidation.

Mexico is slowly but definitively moving in the direction of the adoption of ESG principles.

While Mexico has taken some actions that show its adoption of ESG principles such as the regulation of carbon emission certificates, Mexico, unfortunately, has yet to implement comprehensive ESG regulations. There are no cases which create a precedent regarding ESG.

While ESG in Mexico is not a regulatory imperative, it is currently a transactional imperative. Therefore, JV participants should cause the JV entity to take measures relating to ESG, as this is likely to impact its ability to do business.

A JV terminates primarily due to the exhaustion of its business purpose, the inability to do business, financial distress, cancellation of licences to operate, or expiration of the JV agreement. In all of these cases, the termination of the JV should address: (a) audit and valuation of the JV assets; (b) rights of preference over certain JV assets; (c) disposition of intellectual property rights of the JV (other than those that are licensed to it); (d) tax compliance; and (e) dispute resolution.

Whenever a distinction is made between assets originally contributed to the JV by a participant versus assets originating from the JV itself, it is not uncommon to afford the contributing JV partner the preferential right to reacquire the assets originally transferred by said JV partner to the JV at a pre-agreed valuation formula (or at the price determined by an expert valuer).

As regards assets originating from the JV itself, it is also not uncommon to afford the JV partner who is in the same business as or a similar business to the JV a preferential right to acquire such assets at a pre-agreed valuation formula, or as above at a price determined by an expert valuer.

Any assets not subject to a preferential right will be earmarked for liquidation.

Note that all assets are subject to creditors’ rights and preferences.