Among the laws that regulate the management of Mexican business entities, the General Law of Business Associations (LGSM) states that the bylaws of a Mexican entity will regulate how the entity will be managed. Some key items one should consider for the appointment of non-Mexican persons to serve as directors and managers of Mexican entities include the following:

•    The LGSM states that individuals who own an interest in the entity, or individual third parties, may be appointed to serve as directors. It also states that individuals who are banned from carrying out commercial acts may not be appointed as directors. In addition, the Mexican Commercial Code states that non-Mexican individuals referred to as foreigners may exercise commercial acts according to the treaties entered into by Mexico and the country where that individual resides and in accordance with the laws that regulate their rights and obligations.

•    Also, the LGSM states that directors may act as legal representatives of the entity, and that they may carry out any acts allowed under the corporate purposes stated in the bylaws of the entity (unless the laws or the bylaws themselves provide otherwise). A key item to keep in mind is that unlike other jurisdictions such as the U.S., in general, the representation authority in Mexico must be expressly granted. Therefore, such authority is neither implied nor automatically granted as a consequence of the appointment. As such, the express terms of the authority of a director must be set forth in either the bylaws or a specific appointment.

•    The appointment of a director is a personal designation. Therefore,  the role may not be carried out through a representative.

In general, directors have the following obligations:

•    To maintain confidentiality regarding the information received as a director (except if such is public or is required by a government authority).

•    Directors are jointly liable to the company for the following:

(i) The contributions to the corporate capital made by members or shareholders.

(ii) Compliance with the law and the bylaws regarding the payment of dividends.

(iii) The existence and maintenance of mandatory accounting, governance, records, archives, and information systems.

(iv) Compliance with the resolutions taken in shareholders’ meetings.

•    The LGSM also states that the directors will be jointly liable with the prior directors for any wrongdoing if, after being made aware of such, they do not report the wrongdoing to the statutory auditor of the company.

•    Any conflict of interest must be reported and the director shall refrain from carrying out any act in connection with such matter. If not reported, the director will be liable for any losses and damages caused to the company.

•    To create the reserve fund, which will be made and maintained from the net profits of the company equal to an amount  of one fifth of the corporate capital while having a full and joint obligation to deliver the same amount to the company in the event such fund is not increased after an increase in corporate capital.

Finally, it is advisable to consider the following items:

•    In general terms, the appointment of a Mexican business entity’s director does not create an employment relationship in Mexico with such entity; however, it is advisable to carefully review the role, responsibilities, and manner and place where the director’s activities will be performed so that proper documentation of the relationship is prepared and actions can be taken to mitigate any related risk.

•    To perform an analysis of the Mexican tax impact regarding such appointment and the director’s exercise of his or her role to determine what obligations could arise for the company and for the director. For example, if the appointment and related actions are to be exercised in Mexico, tax residency in Mexico for the director could be triggered.

•    To analyze relevant Mexican immigration laws and regulations to determine if the exercise of the responsibilities of the director, including visits and stays in Mexico, could generate any type of obligations for the company and/or for the director.

In any case, based on the above, it is advisable to consult a Mexican attorney to determine the considerations and actions to be taken on a case-by-case basis.

As a result of the effects caused by nearshoring in Mexico, the industrial real estate market has seen an increase in the demand for the acquisition and leasing of industrial space, thus creating a “sellers and landlords market”.

The limited availability of ideal conditions for certain projects has caused a significant increase in the cost per square meter of land, as well as in existing and  in progress industrial buildings, which has caused changes in both the negotiating dynamics of new real estate purchase projects and in lease renewals.

A Letter of Intent (also known as LOI) should be a useful tool for the subsequent legal implementation of a transaction in a more agile and functional process. It is therefore important to better understand the legal nature of the Letter of Intent in Mexico.

The Letter of Intent comes from the Anglo-Saxon legal system, in which it is used as a way of establishing a series of previous economic and business understandings for the negotiation of a specific agreement, granting the parties a level of certainty regarding the essential terms of the transaction to be implemented, including details such as the location and asking price for negotiating a lease or purchase and sale of real property. Generally, in Anglo-Saxon law the Letter of Intent is not binding on the parties, but it implies a good faith set of principles for the negotiation to be based on the preliminary understandings contained therein.

In Mexico, in general, the Letter of Intent is not regulated specifically by civil law; however, considering the rules of interpretation of contracts, it is established that the general rules for the most similar contract would apply.

It is important to clearly establish which parts of the Letter of Intent are binding and which are not, precisely in order to prevent a Letter of Intent from being construed as a promise to make an agreement, by which the parties agree to the terms of the final intended agreement to be executed in a certain time, or construed as a definitive agreement, due to assumed agreed definitive terms therein contained.

For the above reasons, it is common to establish in the Letter of Intent that it is not binding except for certain specific sections, such as confidentiality, the exclusivity period for negotiation, and to establish in good faith a period for negotiations between the parties to reach an agreement and execute the intended definitive and binding contract.

Some provisions that are commonly included in a Letter of Intent for real estate transactions include the following:

a. Term;
b. Simple identification of the real property;
c. Intended price;
d. Expectations, availability and access to utilities (Water, sewer, electricity, gas, etc.);
e. Intended use of the property;
f. Legal “Due Diligence” Period for the buyer or tenant to carry out their own research on the real property;
g. Confidentiality for the information provided by the parties and the confidentiality term;
h. Exclusivity period for negotiation, with the temporary withdrawal of the real property from the market during the term of Letter Of Intent;
i. Binding and non-binding provisions or clauses; and
j. Applicable law and jurisdiction for disputes, specifically for binding provisions.

The Letter of Intent grants a good opportunity to establish the essential business aspects for the parties to enter into formal negotiations and which promotes progress in the expectation of reaching a commercial and legal agreement. However, in Mexico it is essential to precisely establish the binding and non-binding provisions to avoid it being construed as a promise to make an agreement or the intended final agreement itself.

In recent months, Mexico has seen an increase in the assignment of electricity demand rights (“kVAs”) as a result of growing nearshoring investments. For purposes of this article, a kVA is the unit that measures the voltage transformation capacity needed to receive a safe and reliable electricity supply. This is important because, as is now more often the case, end users demand transformation capacity to be applied in electrical circuits at industrial parks and buildings in Mexico. Therefore, the growth in the assignment of kVAs within the framework of the relocation phenomenon is not surprising: there is a great demand for kVAs; however, a shortage of capacity exists in the country’s electrical infrastructure.

For this type of assignment there is an official template agreement in force issued by the Energy Regulatory Commission (“CRE”) and published in the Official Journal of the Federation just two months prior to the entry into force of the Electricity Industry Law. This template is called the Agreement for the Assignment of Electricity Demand Rights in Medium Voltage Services. Given the date of its issuance, such template still contains the terminology used in the Executive Rules for the Electricity Public Service Law regarding Contributions, published in 1998, and which continues in force in these cases. Under the terms of the official assignment agreement template, CFE appears as the owner of the distribution and transformation infrastructure.

On the other hand, on March 22, 2018, a draft measure sought to establish the General Administrative Provisions on Contributions, which was published on the website of the National Commission for Regulatory Improvement (“CONAMER”). Through August 26, 2022, a dozen comments had already been submitted to this draft; however, the last change in  draft’s public file was the request to withdraw such. Later, on December 9, 2022, the CRE started a new public consultation where a few comments have been submitted through July 21, 2023.  

Given what has occurred to date, unfortunately there is no current and duly regulated process for the assignment of kVAs. This causes assignment procedures to become very long and cause major uncertainty. In addition, in procedures for new load center connections, as well as for increases in existing loads, industrial park developers are forced to make significant investments in conduction lines and substations, mainly because the CFE has not invested sufficiently in those areas in recent years. Data exist showing that in the Apodaca distribution area the price per kVA is around $350 dollars, while in the Tijuana area, the price is up to $500 dollars per kVA. This stands out compared to prices published in the CFE Price Catalog, which serves as a parameter for the acquisition of kVAs, showing a price of around $125 dollars.

We therefore hope that, on one hand, the CRE finally establishes a regulated but dynamic procedure so that end users may assign voltage transformation capacity  with promptness and certainty; and, on the other, that CFE fully exercises its mandate as the exclusive provider of required public services of transmission and distribution of electricity. This can only occur through new investments which allow Mexico to maximize potential economic growth offered by nearshoring.

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Timeshare transfers in Mexico have become more common in recent years, and unfortunately several forms of scams have been used to victimize timeshare owners. This article lists some important considerations to take into account when receiving an alleged offer to purchase a timeshare interest.

For purposes of Mexico’s Federal Consumer Protection Law (“LFPC”), a timeshare service consists of making available to a person or group of persons the use, enjoyment and other rights agreed on a property or part of such, in a variable unit within a specific class, for previously agreed periods of time, upon payment of some amount, without involving a transfer of real property ownership. However, it is important to note that obtaining a capital gain for said right acquired by the user of the service is difficult to occur, since it can be understood as an advance payment or financing of a lodging right.

One of the major considerations to review is the agreement with the timeshare service provider, since it establishes the mechanisms to be followed for the assignment of rights of said agreement, which, most likely establishes that any assignment of rights may not occur without the consent of the service provider. If you do not have a copy of the timeshare agreement, it is easy to gain access to it because the LFPC and Official Mexican Standard NOM-029-SE-2021, “Commercial practices-Informative requirements for the provision of timeshare services” (“Prácticas comerciales-Requisitos informativos para la prestación del servicio de tiempo compartido”) require timeshare service providers to record the agreement before the Public Registry of Adhesion Contracts of the Federal Consumer Attorney's Office. This recording must include the documents for which they sell said timeshare services to users.

If planning to consider an offer of purchase for a timeshare agreement, it is important to consider taking the following actions:

1.    First, one should question the authenticity of the offer received by the timeshare owner, as usually these unsolicited offers are disguised as agents who claim to have clients ready to buy your timeshare, and the vast majority of these timeshare purchase offers are scams.

2.    Second, one should perform an exhaustive search of the offeror for the interest.

3.    Next, the timeshare owner should contact the timeshare services provider using the contact details contained in the timeshare agreement and confirm the necessary procedure for assigning the timeshare rights. One should also confirm if there is any fee for the transfer of timeshare rights under the agreement, which should be paid and performed directly with the timeshare provider and not with third parties or escrow agents.

4.    Finally, one should never deposit funds in escrow for alleged taxes and/or fees for the sale of the timeshare interest. Usually this request is made with the excuse of expediting the process with the promise of reimbursement at the time of closing.  These types of requests in the vast majority of cases have no basis in fact and further demonstrate the intent to commit a fraud or scam on the timeshare holder.

5.    Contact an attorney if you have any suspicions about the procedure that is being proposed and/or if you think you have a serious buyer.

On February 20, 2023, a draft of Official Mexican Standard (“NOM”) PROY-NOM-002-1-SCT-SEMAR-ARTF/2021 (the “Draft One”) was published on the Official Journal of the Federation (“DOF”) regulating the official list of hazardous substances and materials (hazardous goods), including instructions and use of packaging/containers, intermediate bulk containers (RIG), large packaging/containers, portable tanks, multi-element gas containers and bulk containers for transporting hazardous goods.

Similarly, on March 3, 2023, another draft NOM titled PROY-NOM-003-SCT-SEMAR-ARTF-2021 (the “Draft Two”, and together with Project One, the “Drafts”) was published, which addresses marking and labeling of packages containing hazardous goods, labeling (signage) and marking of transport units and bulk containers that transport hazardous goods.

The two Drafts are designed to increase security in the transport of hazardous goods which move through the different general transit routes under federal jurisdiction in various modes of transportation (land, sea, rail and air).

Currently, the transport of hazardous goods is regulated by other NOMS; however, in contrast to such current NOMS, the Drafts include recommendations on the transit of hazardous goods issued by the United Nations Organization to increase safety during the operations, transportation, and commercialization of hazardous goods in Mexico.

It is important to point out that both Draft One and Draft Two have already been approved by the corresponding Mexican transportation authorities in all four modes of transit, and that the two Drafts have been published in the DOF.  Any interested party may submit comments for consideration by the committees that proposed the Drafts within a period of 60 (sixty) calendar days from their respective publication.

If you have any questions about the scope of the Drafts and/or if you want to submit comments to any of the two Drafts, please do not hesitate to contact the authors.

The integration of commercial trade within North America is moving forward, and companies are looking to take advantage of the benefits that Mexico has to offer. With the rise in labor and transportation costs in China, ongoing trade wars, the war in Ukraine and growing concerns over resiliency, many supply chains have been disrupted. As a result, nearshoring has emerged as a preferred alternative and Mexico has become a focal point for global companies. This is especially true for U.S. companies, given Mexico’s strategic location, lower costs, skilled labor force, infrastructure, wide range of free trade agreements and strong economic outlook.

As of today, Mexico is the United States’ second largest trading partner in goods. In 2022, the two countries’ bilateral trade of goods was US$779.3 billion, an increase of 15.21% from 2021, making Mexico United States’ second largest export market. Foreign direct investment (FDI) in Mexico increased 12% in 2022 to US$35.29 billion, and the United States continues to be Mexico’s top source of FDI, contributing 42.5% of all inflows to Mexico.

Main Advantages of Nearshoring in Mexico

Mexico's strategic location allows for easy access to the U.S. market and industry, offering an unrivaled competitive advantage in the global market through its ability to leverage advanced U.S. technology with a skilled and cost-effective Mexican workforce and technical staff. The country shares a 1,954-mile land border with the United States, which is a key market for many international businesses. This means that companies can take advantage of the close proximity to their clients in the United States, which can help reduce shipping times and costs.

With its proximity to the United States, nearshoring in Mexico allows for shorter lead times for product delivery, which can result in cost savings and increased customer satisfaction. Moreover, Mexico's proximity to the United States provides certain advantages over inbound freight from China, with fewer touchpoints, less complexity, and reduced risks. Also, by establishing operations in Mexico, U.S. companies can shorten their supply chain and foster closer communication with plant management. 

Mexico's labor costs are generally lower than those in the United States, making it an attractive option for businesses looking to reduce their operating costs. The minimum wage in Mexico is currently around US$1.50 per hour, which is lower than in many other countries, and in 2020 the average manufacturing labor cost in Mexico was US$4.80 per hour, compared to US$6.50 per hour in China.

With a highly educated and motivated workforce that possesses a wide range of industry-specific knowledge, from manufacturing and engineering to accounting and finance, companies can achieve cost savings without compromising productivity or quality. Further, establishing manufacturing operations in Mexico provides the added benefit of retaining U.S. personnel in key areas, including administration, research and development, warehousing and product finishing. 

Another advantage of establishing business operations in Mexico is the ability to effectively own, manage and control a Mexican entity and its operations. This includes the right to acquire ownership of land and buildings for industrial operations in both the border zone and throughout the rest of the country. This allows companies to have a greater degree of control over their operations and assets, and to obtain financing in Mexico.

Mexico boasts a well-established transportation and logistics infrastructure, which facilitates business activities by simplifying the transportation of goods and materials to and from the country. In addition, streamlined customs clearance procedures between the United States and Mexico further enhance the convenience and speed of cross-border trade. These advantages can be particularly valuable to companies that need to move large volumes of goods with efficiency and reliability. As an example, transporting goods from Mexico to New York can take about 6 – 12 days while going from Shanghai to New York can take about 35 days. Mexico to Los Angeles is 4 days where Shanghai to Los Angeles is 22 – 26 days.

While Mexican roads have undergone significant improvement over the past few decades, certain areas still face limited improved roads and bridges, and security concerns persist in certain regions. Railways offer a slower but somewhat more reliable transportation option to the border, with ongoing infrastructure plans set to make significant improvements in rail infrastructure to benefit North American manufacturers and distributors.

Mexico has one of the broadest networks of free trade agreements in the world, affording businesses hailing from Europe, Latin America and Asia the opportunity to export goods to the U.S. and Canadian markets, thereby enjoying the many benefits of the United States-Mexico-Canada Agreement (USMCA), NAFTA's successor.

Mexico currently enjoys a unique opportunity, making it a compelling option for companies seeking to nearshore their operations to stay competitive in the global market. For international companies, especially U.S. companies, looking to nearshore their businesses, Mexico may be an attractive option based on its strategic location, low costs, skilled labor force, robust logistics infrastructure, wide range of free trade agreements and positive economic outlook. By understanding the applicable legal considerations and taking advantage of the benefits that Mexico has to offer, international businesses can stay competitive in the global market.

In general, it is common for the legal due diligence of a Mexican company’s operations in cross-border or international transactions to cover the period up to the time a potential buyer requests information from the company. Such situation may or can result in a delay of the sale, reduction of the price, withholding of the price until the seller meets certain conditions or, potentially, express exclusions in the insurance policies used for the purchase of the business.

In most cases, preparing the Mexican operation for a legal due diligence is convenient and profitable. Such preparation may result not only in the reduction of time and expenses for the implementation of the sale, but also in the maximization of the purchase price and the value received by each party. In the end, the main purpose of preparing the operation for a legal due diligence is to identify potential issues before the business is put up for sale and to find solutions or actions that mitigate such, which in any form will be helpful for purposes of making proper disclosures in the purchase and sale documents. Moreover, this preparation can generate value to the business itself, as it will allow the seller to understand the status of the business at a deeper level.

That being said, some of the suggestions one should consider in these types of transactions include the following:

1. Timing and efforts. The suggestion is: (i) appointing one or two individuals or an internal team of the company who knows the Mexico operation at a deeper level. In more detail, the suggestion is that the team has members that are based at or have worked at Mexico; (ii) assign sufficient authority to obtain and organize company information, and (iii) carry out these efforts three to six months in advance to the potential sale.

2. Include an external legal counsel in advance. Many times, one may think that including an external legal counsel ahead of the sale can be costly or redundant. However, such inclusion can result in relevant savings and the involvement tends to be minor. Such means that if the company already has a local team with a certain degree of experience and knowledge regarding the company’s operations, the involvement of external legal counsel tends to be reduced significantly. Further, legal counsel should focus only on providing guidance to the local team on those items that are most relevant, such as: (i) who is the potential buyer; (ii) what type of questions or documents the potential buyer may do or request; (iii) what areas of the operation in Mexico are most sensitive for legal purposes, such depending on the industry, products and services, and type of business model, and (iv) how to organize the information that the potential buyer may request?

3. Planning around key areas of the legal due diligence. It is suggested to review what areas are key or most relevant for a legal due diligence depending on the operation. An external legal counsel would be able to guide the parties on which areas are most important, and provide extensive checklists of information and documents. Typically, the key areas that are most relevant in Mexico, and the related questions, include:

a. Corporate. Where are the corporate documents of the Mexican operation located (public instruments, shareholders and management resolutions, corporate books, etc.), and are such up to date?

b. Labor and Social Security. Is there a list of all the employees and their benefits? Are those employment relations properly documented, and documents are available? Is there a list of specialized service providers?

c. Material agreements. Is there a list of contracts and purchase orders with customers and suppliers in Mexico? Does the company have documents to support those relations? What precautions need to be taken regarding confidentiality or restrictions on the potential sale of the business?

d. Compliance and foreign trade. Does the company have proper evidence related to the purchase or importation of all the assets into Mexico? What are the licenses, programs, permits and authorizations used for the Mexican operation? Which ones can represent a  potential advantage against competitors?

e. Real estate, and machinery and equipment. Is there a list of real estate owned, leased or used for the Mexican operation, as well as the documents to support such, either property titles, lease or bailment agreements, among others? Is there a list of machinery and equipment, as well as the documents evidencing its ownership, use and possession?

f. Tax. Are there any active (or potential) audits and what is the status of such? Does the Mexican operation have an existing tax and accounting advisor who has the experience on how to sell a business?

g. Litigation. Is there a list of active and past litigation matters and a report as to their status?

4. Mini-audit. With the assistance of a specialized external legal consultant, it is suggested to consider the option of carrying out mini audits with regard to certain areas of the business or the operation in general for those situations where there are substantial legal issues or a lack of legal documentation. Even when this could be seen as a costly practice, the remediation efforts will be seen very positively by potential buyers and their advisors. Such practice could also result in the maximization of the purchase price and the mitigation of risks related to the sale of the business.

5. Searches. On the other hand, it is advisable to carry out research in the different public registries in Mexico, as well as different databases owned by private service providers. Such practice will give a good idea of the type of information that the potential buyers could find related to the operation.

6. Virtual Data Room. It is advisable that an external legal advisor provide guidance on how the documents should be organized for a legal due diligence, including how the files, sub-files, and documents should be named. This will reduce the time needed for review by the potential buyers and their advisors, which can result in recued times for the implementation of the sale.

In any case, consulting a Mexican attorney specialized in mergers and acquisitions on how to prepare an operation for legal due diligence can yield many benefits. In the majority of the cases such consultation could increase the purchase price and reduce the time needed to implement the sale. Also, if the sale does not take place, in most cases the due diligence review will result in a more efficient exit for the company as it will be better positioned against its competitors.