Distressed M&A Transactions In Mexico

• Published date: 20 July 2020
• Subject Matter: Corporate/Commercial Law, Criminal Law, Insolvency/Bankruptcy/Re-structuring, M&A/Private Equity, Corporate and Company Law, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Mayer Brown
• Author: Mr Javier Garibay and Maria A. Alevras-Chen

This article analyzes the complex and emerging Mexican regulation governing the acquisition of distressed businesses. In some sections, it engages in a comparative analysis with Spanish bankruptcy law for purposes of analyzing the challenges that the acquirer would face, before or during the different stages of the bankruptcy process under Mexican law.

Article One of the Mexican Bankruptcy Law (Ley de Concursos Mercantiles, "Bankruptcy Law") cites the tension between the public interest in preserving bankrupt companies and the public interest in protecting the creditors of companies in general default of their payment obligations. Given the significant social and economic burdens associated with these conflicting interests, distressed mergers and acquisitions ("M&A") transactions may offer creative solutions that traditional debt restructuring is unable to deliver Specifically, distressed M&A transactions may present an efficient solution that is attractive to both the company and its creditors because it preserves the business and saves jobs while also seeking to maximize creditor recovery. Despite the merits of a distressed M&A strategy, the Bankruptcy Law offers no clear rules concerning the different methods and mechanisms for disposing of assets of a company that is undergoing a bankruptcy process aside from the overriding principles of the preservation of a going concern (in the reorganization stage) and value maximization (in the liquidation stage).

This article seeks to analyze the complex and emerging Mexican regulation governing the acquisition of distressed businesses. In some sections, the article discusses the problems that the acquirer would face under Mexican law, before or during the different stages of the bankruptcy process, through a comparative analysis with Spanish bankruptcy law. Countries such as the United States (with the sales procedure provided in Section 363 of the U.S. Bankruptcy Code) and the United Kingdom (and its pre-pack administration rules) provide guidance to establish clear rules regarding the sale of business assets to maximize creditor realization in a bankruptcy scenario. However, as Spain and Mexico are both civil law jurisdictions, Spanish law better navigates the interplay between the bankruptcy regime and other complementary civil law regulations.

While in Mexico a business is generally acquired through either the purchase of the shares of the company that owns such business or the purchase of the assets that make up the business, a share purchase is rarely a viable alternative for a distressed company because the buyer would directly acquire all of the assets and liabilities of the company in question (whether known or unknown) and not only those that are of its interest.

Additionally, the sale of the shares of the bankrupt company is not an alternative that offers solutions in an insolvency situation since the shareholder and not the company would receive the proceeds of the sale. Therefore, it is unlikely that a sale of the bankrupt company's shares would help to meet the goal of rescuing the bankrupt company. Accordingly, this article only analyzes the second of these alternatives: namely, the sale of assets.

The sale of assets of a company going through financial hardship can take place in four different time frames:

1. In the vicinity of insolvency;
2. During the reorganization stage;
3. During the execution of the reorganization plan; and
4. During the liquidation stage.

This article analyzes each of these stages and explain both the advantages and disadvantages of disposing of the bankrupt company's assets under the Mexican legal framework.

DISPOSING OF ASSETS IN THE VICINITY OF INSOLVENCY

Avoidance Powers Rules

There is no de facto prohibition on the sale of distressed assets owned by a business close to insolvency under the Bankruptcy Law. However, the main risk that any acquirer of such assets would face is the related asset purchase agreement being considered a...