Alfonso González-Paullada Guerrero
González-Paullada Domínguez, Mexico City
alfonso@gplaw.mx

José M. Ramírez Álvarez
González-Paullada Domínguez, Mexico City
jose.r@gplaw.mx

---

Please note that this article is direct and speaks about matters that are usually left out of the conversation to avoid discomfort.

---

Mexico is becoming one of the most attractive destinations for mergers and acquisitions (M&A) for global investors, thanks to its strategic trade position and economic growth. However, if not properly carried out, a due diligence process may become very cumbersome. To begin with, a well-crafted checklist is your most important ally against the obstacles that you may encounter. Mexico’s maze of formalities, over-regulation and cultural nuances are the most relevant factors as to why you need to change your mindset when entering the Mexican M&A market.

Hidden obstacles

Corporate opacity, contracts, assets and other key business operations

The local culture, including a trend towards over-formalisation, are the most important factors as to why corporate structures may be opaque. When entering into due diligence, bear in mind that the smaller the company, the dimmer the corporate structure; this tends to worsen when talking about family-run businesses. Other key business elements such as contracts, assets and operations often lack transparency.

Shareholder agreements may be informal or unwritten, and public records in the Public Registry of Commerce are often outdated because of strict notarial and registration rules. Hidden owners and other related-party deals tend to surface just before closing. While this is not a critical factor, such matters may generate trust issues, which don't help towards closing.

Contracts – such as supplier agreements or customer-related contracts – may be poorly documented, incomplete or subject to verbal amendments, making it hard to assess their enforceability, value and if they will survive post-closing. Assets, including intellectual property, equipment or inventory, can often not be properly registered or archived, or could be encumbered by undisclosed liens.

In general, business operations might rely on informal practices, which tend to pass unnoticed in a boilerplate due diligence checklist. These issues, often uncovered just before closing, can disrupt deals and erode trust.

The trap

Assuming corporate records, contracts, assets and business operations are well-documented and easily accessible.

The Fix

Go beyond the paperwork. Include as the first item in the checklist to have conversations with key players and stakeholders to uncover informal control or corporate structures and request all side agreements. Also, this will help map informal control structures and informal contracts, and assist in understanding the operational practices of your target.

Request all side letters, amendments and supporting documents for contracts. Verify asset ownership through registries (eg, for intellectual property or equipment) and request access to liens or encumbrances. Review financial records and operational workflows to identify informal practices.

Understand how the company is being run in order to identify further documentation or the lack thereof. Double-check records held by the sell-side and directly in registry searches; bear in mind Mexico’s formal requirements and avoid last-minute surprises.

Land and real estate nuances

Real estate acquisitions in Mexico are complex, over-regulated and over-formalised. Real estate is subject to regulation in all three jurisdictions: municipal, state and federal. Each serves a specific purpose, and highly depends on the intended use and background history of the property. Buy side must be aware of all of the background, which shall be obtained not only from the sell side, but from multiple offices. Within the Public Registry of Property you may find ownership, liens and documents regarding physical affectations such as subdivisions and mergers, as well as in general documentation that require registration. On the other hand, there are permits, licences and authorisations that are not registered; they can be regarding the property or its activities within.

If the checklist requests property title and a no-lien certificate of the properties, the complete picture will be completely missed. For example, environmental laws require strict compliance when dealing with special or hazardous waste, having consequences for the owner, regardless if the past owner or tenant were responsible for any spill or general non-compliance.

The Trap

Trusting basic registry extracts or simple title reports.

The Fix

Carry out physical on-site inspections, cross-reference cadastral data, trace ownership histories, carry out subsoil analysis, delve into past activities, obtain unregistered permits, licences and authorisations. Consider your due diligence as a form of title insurance, and keep the deal moving with the right questions and inquiries.

Labour obligations and bureaucratic rigour

Mexico’s labour laws have a reputation for a reason. From mandatory profit-sharing (PTU), severance obligations, union agreements and laws overprotecting employees, employers face strict rules. For instance, the 2021 reform to the Federal Labor Law reinforced regulations for outsourcing practices, generating administrative burden while outsourcing employees from any third party (regardless of said third party being a subsidiary).

Labour claims are usually difficult to navigate due to the uniqueness of the judicial procedure, in which, for example, the employer is handed a higher burden of proof than the employee within the legal procedure to evidence its defence. Thus, undisclosed labour claims or non-compliant outsourcing often surface late, derailing closings. Labour authorities demand precise, formal documentation, leaving no room for error.

When dealing with an ill-crafted labour due diligence checklist, its execution will cause a loss of sight, creating a bad strategy for transition, with this being the most common post-closing problem (often in the form of labour lawsuits filed by employees). It can be avoided by delving into the target’s complete labour strategies, practices, documentation and compliance.

In transitioning from one employer to another (asset purchases), or control group changes (share purchases), approaching the employees to avoid confusion as to their stance, salary and benefits is crucial. You need to clearly identify the target’s practices, culture and legal structures, then you will have the information to strategise on transition.

The trap

Treating labour checks as a checkbox exercise, rather than a toolkit to inform you of every aspect of your target’s labour practices.

The fix

Human resources (HR) interviews are one of the most important items to start with – include them in your checklist and be sure you understand your target’s labour structure. Audit PTU compliance, investigate union ties and confirm Secretariat of Labor and Social Welfare (STPS) registrations. Identify benefits being granted to employees, verify general compliance and hiring strategy, and avoid dealing with aggressive labour practices. This ensures you meet all formalities and avoid delays and post-closing issues.

Tax scrutiny and administrative hurdles

Mexican tax laws provide robust regulation, often rendered as one of the most efficient collection tax systems in the world. The Tax Administration Service (SAT) has a very long reach and access to information. Audits by the SAT are frequent, and penalties for issues such as transfer pricing or VAT errors are steep. Documentation supporting the operations as disclosed in the tax returns requires notarised documents or the use of digital signatures (e.firma) which provides a real date (to prevent from forging and pre-dating operations). Anti-money laundering rules also demand thorough checks on funding sources.

Cultural aspects in regards to running business in Mexico often are reflected in the level of tax compliance; again, the bigger the company, the better it tends to be managed. When dealing with small transactions, or acquiring family-owned companies, tax due diligence is one of the most relevant.

Unresolved tax debts, sloppy filings, aggressive tax strategy or accounting practices that provoke issues with the tax authorities, are issues that can come to light just before closing, causing major hold-ups and post-closing issues.

The SAT issues an opinion regarding each taxpayer’s status: it can either be positive or negative. However, it often only takes into consideration if the taxpayer filed its tax returns in a timely fashion and if it has paid monthly and annual taxes, as per the filed declarations. Thus, if positive, it does not mean that target is completely covered.

The trap

Assuming a compliance certificate issued by the SAT means the target is in the clear.

The fix

Scrutinise tax filings and audit at least the last five years, verify there's no simulation strategy or other aggressive tax practices, ensuring all formalities are met. Bring in tax experts early to spot hidden liabilities, aligning with global due diligence standards.

Environmental risks and regulatory compliance

Mexico’s environmental regulations, overseen by SEMARNAT, are strict, especially for industries such as mining, energy and in general for manufacturing processes that use pollutants or handle hazardous materials and waste. Permits for environmental impact, waste management or water use involve complex, time-sensitive processes. Missing permits or non-compliance often surfaces late on, encumbering deals. Federal land use rules, particularly for ejidos or restricted zones, add more complexity.

It is very common, due to cultural aspects, to find non-remedied pollution, a lack of or expired permits and other types of red flags. There are ways to quickly find such red flags, for which it is highly important to enter into due diligence with a checklist that includes specific disclosures.

The trap

Not giving the details in respect to environmental due diligence the necessary attention.

The fix

Start with on-site visits and interviews with key employees to identify the level of environmental regulatory burden; be sure that a biologist or environmental engineer makes their way to the site to analyse operations and premises. In parallel, ask for all permits (especially SEMARNAT), check compliance with environmental standards, carry out Phase 1 and 2 analysis and review land use restrictions.

Antitrust approvals

Often it is believed that only the biggest transactions must be subject to antitrust analysis by specialists. It is true that, in order for a transaction to be submitted for antitrust approval from the Federal Economic Competition Commission (COFECE), the transaction must tick various boxes. However, transactions in sectors such as energy, telecoms or agriculture often require antitrust approval from the COFECE.

It is highly important to identify the aspects of the transaction that may trigger the obligation to seek the COFECE’s approval.

These processes are highly formal, demanding notarised submissions and adherence to strict statutory timelines. Missing or incomplete COFECE approvals, often discovered just before closing, can significantly delay or disrupt transactions.

The trap

Relying on vague assurances that no antitrust approvals are needed.

The fix

Engage regulatory counsel with COFECE expertise early to assess whether approval is required and navigate the formal submission process. Ensure all documentation meets COFECE’s stringent requirements to prevent last-minute delays.

Building a better checklist

For smooth navigation of Mexico’s complexities and to avoid last-minute delays, you need to verify that the due diligence checklist is carefully and mindfully crafted for the specific target and deal. Clarity and consciousness while preparing the checklist are the key elements for success. Here are some considerations in this regard:

• prioritise communication: the last thing you should do is suppose that you know about the target only by requesting general documentation. Prioritise communicating with key stakeholders, employees, directors or people who are involved with the different areas within the target company. This will help you identify specifics and avoid last-minute hurdles.
• hire local expertise: partner with local law firms and other key specialists, such as environmental experts who understand local formalities, processes and cultural details. Their insights, combined with business goals and global M&A practices, will help you spot risks in early stages.
• be thorough and specific: your checklist should cover corporate records, contracts, assets, operational practices, labour compliance, tax audits, environmental permits and antitrust requirements. Specify applicable requirements; avoid sharing a global boilerplate as a first approach; and, in case of lack of information, request calls and interviews with key players in order to develop a well-crafted due diligence checklist. This, in the long run, will shorten time and identify and avoid risks.
• keep clients informed: clear and periodic communication with the client is key. The client must be able to know what part of the process is being carried out, and why we should spend time on each item of the checklist.

Conclusion

Mexico’s M&A market is full of potential, but it may turn into a very difficult journey for those unprepared or unfamiliar with the Mexican culture and legal framework. Standard due diligence checklists usually fall short in a landscape defined by over-formalisation, opaque business practices, tight labour and tax regulations, environmental complexities and antitrust complications. As global experts we seek to emphasise that the biggest risks – hidden liabilities, missing approvals, or non-compliance – often surface right before closing, sometimes creating dead ends or deal-breaking positions by the parties.

By crafting a tailored checklist with local expertise, a comprehensive scope, a business-oriented approach and a deep focus on prioritising communications with all parties involved while keeping clients in the loop, navigating Mexico’s M&A challenges will become a successful journey.