Key issues

Preparation

What measures should be taken to best prepare for a corporate reorganisation?

A company should first and foremost engage tax, accounting and corporate advice in order to analyse the best strategy to conduct the corporate reorganisation. A company should also have a clear focus of its ultimate business objective, in order for counsel to be able to suggest a proposed approach to the corporate reorganisation that is consistent with such business objective.

As a general rule, a company should ensure that its corporate and tax records are up to date and in order before conducting its corporate reorganisation. Whatever the type of reorganisation being sought, the company will most probably need to make notations in its corporate books, and make filings with tax and other authorities. Failure to maintain up-to-date books and records could result in a process more complex than necessary for a reorganisation that could have been simple in the outset.

Due diligence will not typically be conducted where the corporate reorganisation does not involve a third party (eg, a potential third-party buyer). In exceptional circumstances, an incumbent non-controlling shareholder intending to acquire control as part of the corporate reorganisation would require some level of due diligence, the extent of which may vary depending on the circumstances.

Employment issues

What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?

Mexican labour law is particularly protective of employees, compared with other jurisdictions. While outsourcing schemes are permitted, the Mexican labour authorities will deem that the person effectively receiving the services also retains labour liability towards the outsourced employees. If the company subject to a corporate reorganisation maintains any such outsourcing scheme, it should be aware of this statutory liability. Additionally, newly elected President López Obrador and MORENA, his party in almost total control of Federal Congress, have stated their intention to further limit the availability of outsourcing schemes. The content and scope of such limitations is still uncertain and being debated in Congress.

A transfer of employees in Mexico is conducted through a process whereby the Federal Labour Law provides that the new employer will assume all the labour liabilities towards employees (including severance and seniority) from the former employer, and that the former employer will retain labour liability for a six-month term following the effectiveness of the ‘employer substitution’. Indemnities between the new and former employers are acceptable and effective solely among the parties.

Social security authorities should be informed of any change of employer in order to avoid potential liabilities for the new employer.

Technically speaking, it is not necessary that the new employer executes new employment contracts with its employees - the substitution is effected as a matter of law upon notice of the substitution to the employees. However, an analysis should be made case by case to verify the need or convenience of including additional documents to avoid unnecessary liabilities.

Also, care should be taken if the company maintains a labour union. The union should be kept informed at all times of the potential transaction - subject to confidentiality terms - and be part of the process, to the extent possible, in order to avoid potential contingencies related to union relationships.

What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?

Through the employer substitution scheme provided for in the Federal Labour Law, the new employer will assume all existing employment liabilities, including pensions and any other benefits granted by the former employer, in the exact same terms provided by such former employer. If a new employer intends to change any benefits previously granted by the former employer, advice from specialised employment and labour counsel should be sought to avoid unnecessary contingencies.

Financial assistance

Is financial assistance prohibited or restricted in your jurisdiction?

Financial assistance by a company for the acquisition of its own issued shares is not restricted under Mexican law. Thus, a Mexican company may validly lend funds to a prospective purchaser of its own shares to fund the acquisition. A different scenario would be where the funding is made by the company to an existing or prospective shareholder for the subscription of newly issued shares. In this scenario, Mexican law expressly prohibits this type of funding. The rationale is that, by funding the subscription of its own shares, a company could be artificially increasing its stockholders’ equity. This prohibition does not extend to the funding of the subscription of shares in its holding company.

Common problems

What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?

A company seeking a corporate reorganisation will typically require assistance in connection with the most efficient tax structure for the transaction. Failure to obtain proper tax advice may result in overlooked liabilities to the buyer or the target.

Also, proper employment and labour advice should be obtained in order to avoid unwarranted liabilities with employees, labour or social security authorities.

Accounting and tax

Accounting and valuation

How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?

A target may account for goodwill as an intangible asset in its balance sheet as a result of a corporate reorganisation, in an amount equal to the excess between the purchase price and the net asset value of the target. The rules for accounting for goodwill are found in [NIF] B-7, the Accounting Principles issued by the Mexican Board for Financial Information Rules.

The valuation of assets and businesses may be conducted through any of the international market-standard procedures (eg, fair market value, investment value and intrinsic value) considering expected cash flows of the target or other considerations on a case-by-case basis. Mexican law does not provide for a specific valuation method when considering a potential acquisition.

Tax issues

What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?

The tax issues to be considered will depend on the structure being analysed for the potential reorganisation. For example, the parties should understand whether the target carries losses from previous tax years, and the value at which the stock was originally purchased by the seller (to determine whether income will be incurred as a result of the sale and, therefore, whether any withholding obligations will arise). The buyer may also need to understand the intercompany balance of the target and make sure that such transactions were performed at arm’s length. Transfer pricing studies may be useful to avoid potential tax liabilities.

Withholding by the buyer will not be required if the seller obtains a report from a publicly certified accountant stating that the price at which the stock is sold is lower than the price at which the seller originally acquired such stock. Specialised tax advice is recommended in all types of corporate reorganisations to verify exact compliance with tax laws and whether or not withholding will be required.

Some types of corporate reorganisations will not necessarily have a tax effect on the target or the parties involved. Tax advice should be obtained in advance to ensure whether the ultimate objective of the company seeking reorganisation may be obtained through a tax-efficient structure.