Mexico: Merger Control
What is commonly known in the antitrust legislation of some countries as 'mergers and acquisitions' are known as 'concentrations' under the Mexican antitrust statute. Article 16 of the Federal Economic Competition Law (the Law) defines a 'concentration' as 'the merger, acquisition of control, or any other action between or among competitors, suppliers, customers or other economic agents to consolidate corporations, associations, stock holdings, partnership interests, trusts, or assets in general'. The Law further mentions that the Federal Competition Commission (the Commission) 'shall oppose and penalise any concentration having the purpose or effect of restraining, injuring or preventing the free and open competition in the market of equal, similar or substantially comparable products and services'. In order to be in a position to analyse which transactions may have these effects, article 20 of the Law establishes the following economic thresholds, which, if exceeded, notice of the transaction must be given:
- when one or a series of transactions gives rise to a concentration, regardless of where the transactions take place, whose value in Mexico, directly or indirectly, exceeds an amount equivalent to 18 million times the general minimum wage in effect for the Federal District (946.620 million Mexican pesos, approximately US$91 million);
- when one or a series of transactions gives rise to a concentration that results in the accumulation of 35 per cent or more of the assets or capital of an economic agent, whose annual assets or sales in Mexico exceed the equivalent of 18 million times the general minimum wage in effect for the Federal District (see above); and
- when one or a series of transactions gives rise to a concentration that results in the accumulation in Mexico of assets or share capital equivalent to 8.4 million times the general minimum wage in effect for the Federal District (441.756 million pesos, approximately US$42.5 million) and two or more economic agents whose assets or annual sales volume, together or separately, are greater than 48 million times the general minimum wage in effect for the Federal District (2.52 billion pesos, approximately US$243 million) take part in the concentration.
Prior to making the filing, government fees of 124,849 pesos (approximately US$12,000) must be paid.
Pursuant to article 26 of the Regulations to the Law, transactions exceeding any of the above thresholds are exempted from the pre-merger notification requirement if:
- they are transactions with respect to shares or membership interests in foreign companies, when the economic agents involved in the transactions do not thereby acquire control of a Mexican company or accumulate in Mexico shares, membership interests, an interest in a trust, or assets in general, additional to those which, directly or indirectly, they possessed prior to the transaction; and
- one of the companies involved has held directly or indirectly during the past three years or since the incorporation of the other companies involved, or since the Commission approved a transaction involving such companies, 98 per cent of the capital stock of the companies involved in the transaction.
In this case, only a notice of the corporate restructuring has to be filed with the Commission and this must be done within 15 business days following the date on which the transaction took place.
Notice of the transaction must be filed with the Commission at any time prior to its consummation. The Regulations to the Law clearly establish that the filing must be accompanied by a draft of the agreement to be executed by the parties and basic corporate and financial information, together with some general market information. Within the 10 days following the date the filing is made, the Commission may order the economic agents involved in the transaction not to close until the Commission issues its ruling. If the Commission does not issue such an order, the transaction may be closed before the Commission issues its ruling, subject to the risk that the Commission may subject the transaction to conditions that may be unacceptable or order the modification or elimination of certain terms and conditions of the sale agreement, including transferring to third parties specific assets, rights, or shares of stock.
Any filing made under the above terms can be considered as an 'ordinary filing'. In the event of complex transactions by which the acquiring party will substantially increase its market share or where, beforehand, it is known that the transaction will raise antitrust concerns, instead of the above information, a questionnaire issued by the Commission ought to be filed in which much more detailed information is provided, such as a list of suppliers, installed capacity, list of customers, transportation networks, and similar matters. This filing can be referred to as a 'full-fledged filing'. The risk of not filing this questionnaire in complex cases is that if only an ordinary filing is made, the Commission may later request much of the same information contained in the questionnaire, but with only a limited time to file this additional information (as explained below). The consequence may be a delay in the Commission issuing its ruling.
If a filing is not considered as either 'ordinary' or 'full-fledged', and if the economic agents involved submit evidence to the Commission that it is unquestionable that the transaction will not have the purpose or the effect of increasing substantial power in the relevant market or of diminishing, damaging or impeding free and open competition, then they need only submit basic corporate and financial information, but no market information is required. This can be referred to as a 'fast-track' or 'abbreviated' filing. The Commission will consider that it is unquestionable that the transaction will not have the purpose or the effect of increasing substantial power in the relevant market or of diminishing, damaging or impeding free and open competition when:
- the transaction is a corporate restructuring in which the economic agents involved are part of the same economic group and no third party takes part in the concentration;
- the transaction results in the acquirer being in the relevant market for the first time and there is no change to the structure of the relevant market but only a substitution of economic agents. The parties involved in the concentration may not be involved in markets related to the concentration or be potential competitors in the relevant market or any related market; or
- the holder of shares or equity interests has the control of a company and increases its relative share of the capital of such company.
Even though the Regulations to the Law establish this 'fast-track' procedure, unfortunately in practice, when notifications have been filed under this 'fast-track' procedure, based on the fact that it is the first time the acquiring party is involved in the relevant market, the merger review has in fact not been expedited. This is for one simple reason: in many cases it takes weeks for the Competition Commission to determine what is the relevant market so as to be able to confirm that the acquiring party will be entering the relevant market for the first time as a result of the transaction. As a result, in most cases today, it is better to give notice of the transaction as an ordinary filing rather than as a 'fast-track' filing, since clearance will be obtained sooner under the first option.
As a result of the above, in practice now only corporate restructurings and transactions where the acquiring party is increasing its shareholding in the target company are notified under the 'fast-track' procedure. Notice of all other transactions is given under the ordinary filing procedure, in which case, market information must be filed.
Missing or additional information
The Commission may advise the filing parties that not all required information has been provided and require that the missing information be provided within the following five business days. The Commission may also request additional information or documentation during the 15 business days after the filing is made.
It must be noted that if the missing or additional information is not provided within the required term, the notification will be deemed abandoned.
Analysis by the commission
The concern of the Commission in any given transaction is whether the result of such transaction might harm the market. This might occur if: a single economic agent is created from the transaction that could exercise monopoly power; or the likelihood that economic agents may collude among them is increased. For purposes of determining whether a transaction may have either of these effects, the Commission should follow the steps mentioned below. It should be noted that if the result of the analysis of steps (ii) to (vi) does not raise an anti-competitive concern, no further analysis will be required and the transaction will be approved:
(i) Define the relevant market. In Mexico, as in many other jurisdictions, the relevant market will consist of the product market and the geographic market. In general terms, the product market definition includes the goods or services manufactured or marketed by any given seller and their possible substitutes. The geographic market is that region where a firm can increase its price without enticing new sellers to enter the market or without losing many customers to alternative suppliers outside that region.
(ii) Measure and assess concentration in the market resulting from the transaction. For this purpose, the Commission will calculate the concentration indexes (HHI and the Dominance Index) resulting from the transaction. In the event the transaction does not fall within any of the parameters considered by the Commission as raising antitrust concerns, the Commission will approve the transaction without further analysis. On the contrary, if the transaction falls within any of such parameters, the Commission will continue with the following step.
(iii) Possible anti-competitive effects. The Commission will analyse whether as a result of the transaction there will be a single economic agent that may exercise monopoly power or whether as a result of the transaction the remaining agents in the market will be able to collude among themselves. In analysing whether collusion might result, the Commission will look at, among others, whether the product market is homogenous (such as rice or petroleum) or heterogeneous (such as cars or dolls). Generally, it is easier to collude if the product market is homogeneous.
(iv) Entry barriers. The Commission will analyse whether there are any significant entry barriers for other participants to operate in the relevant market. Entry barriers can be the need for a significant investment to enter in the market, developed distribution networks, significant advertising investment, or limited availability of raw materials, customs tariffs, among others.
(v) Efficiencies. The Commission will analyse whether the efficiencies resulting from a transaction outweigh any other anti-competitive effect. The efficiencies must: result specifically from the transaction; and need to be passed on to consumers.
(vi) Failing company. The Commission will authorise the transaction if the target company will otherwise in danger of going bankrupt and leaving the market.
Ruling by the Commission
The Commission must issue a ruling within 35 business days following receipt of the notification or of the additional documents requested, if any. Should the Commission fail to issue a ruling within this period, it is deemed that no objection to the transaction has been raised by the Commission. In its ruling, the Commission may: approve the transaction, oppose it or subject its closing to certain conditions. Article 17 of the Regulations provides that the conditions that the Commission may impose may include, but not be limited to:
- carrying out or abstaining from specific conduct;
- transferring to third parties specific assets, rights, or shares of stock;
- eliminating a specific line of production;
- modifying or eliminating terms or conditions from the contracts or agreements that the economic agents intend to or have entered into;
- taking any action designed to induce competitors to participate in the market, or give access or sell assets or services to such competitors, or both;
- any other conditions intended to ensure that the concentration does not diminish, damage or impede free and open competition.
The Commission may not impose conditions that are not directly linked to correcting the effects of the concentration. Any conditions imposed must be commensurate with the correction desired.
As mentioned before, in the event of the fast-track notification the Commission must issue a ruling within 15 working days following the order admitting the transaction for processing by the Commission.
The authorisation of the transaction is valid for three months and if the transaction is not closed within this period, the parties may request an extension for an additional three-month period.
We should note that the penalty for failure to give notice of a transaction as set out above, apart from the risk of the Commission later objecting to the transaction is that a fine can be imposed up to the amount of 21.036 million pesos (approximately US$2.02 million).