Joint Ventures in Mexico

Joint Ventures are not defined in the Mexican legal framework. After analyzing other legislation we can define a joint venture as a legal organization that takes the form of a short-term partnership in which persons or companies jointly undertake a transaction for a profit. Generally, each person contributes assets (such as money, expertise, etc,) and from time to time they share risks. Like a partnership, joint ventures can involve any type of business transaction.

Even though that there is no special regulation for the joint ventures, the vehicles through which the joint ventures may operate are regulated in the Mexican legislation (further detailed), there are no relevant differences in the regulation of vehicles used for international and domestic joint ventures.

The two main forms of structuring a joint venture in Mexico are the following:

  1. Incorporate a new entity
  2. Executing a partnership agreement

Incorporating a separate legal entity (a company or a trust) is the most commonly joint venture used in Mexico.

Legal entities are regulated by the following laws:

  1. General Law of Commercial Companies (Ley General de Sociedades Mercantiles): this is a Federal law that, among other things, defines certain types of commercial entities and the right and obligations of its partners or shareholders.
  2. Securities Exchange Law (Ley de Mercado de Valores): this is a Federal law that this is a Federal law that, among other things, contemplates the Sociedad Anónima Promotora de Inversión (defined below).
  3. Mexican Competition Law (Ley Federal de Competencia Económica): this is a law governs antitrust matters and addresses merger reviews, meaning acquisitions and other forms of combinations between competitors or other economic agents.
  4. Commerce Code (Código de Comercio): this regulates all the commerce acts at Federal level.
  5. Civil Code: there is a Federal Civil Code (Código Civil Federal) and also the Federal District and each state has its own civil code, (all of the in general terms are similar to the Federal Civil Code). The Civil Code covers, among other, property (such as real state, possession and easements) and obligations (such as contracts, agency, mortgages and public registries).
  6. Banking Law (Ley de Instituciones de Crédito): this regulates all the matters in respect of all the matters related with trusts.

These are the most relevant forms of entities used to structure a joint venture:

  1. Stock corporation (sociedad anónima) this is the most commonly used corporation in Mexico, it statutory governance rules are not flexible.
  2. Investment promotion stock corporation (sociedad anónima promotora de inversión) this is a form of corporate entity that offers substantial flexibility with tailored made provisions agreed by their investors.
    3. Limited-liability company (sociedad de responsabildiad limitada) this is a form of Company that doesn´t have flexibility for investors, however it has some tax advantages.
  3. Business trust (fideicomiso empresarial).The trust is incorporated by the investors but is administrated by the trustee and directed by a Committee.

The second most common form to structure a joint venture is by executing a undisclosed partnership agreement (which is commonly known as the asociación en participación), this agreement does not create a new entity, however, according to the Tax Law it creates a “new entity” (only for tax purposes). The structure of this agreement is divided by the active partners and silent partners, the active partners has liabilities before third parties and the silent partner does not have any liability, it only contributes funds and is involved in the management of the business.

This agreement is ruled by the General Law of Commercial Companies (described above). It describes the undisclosed partnership agreement as an agreement whereby one person grants to other persons, who in turn contribute assets or services, a participation in the profits and losses of a business or a commercial transaction.

Quick overview of Petróleos Mexicanos (“Pemex”) legal framework

On August 11, 2014, a package of reforms to Mexico’s secondary energy laws (the “Energy Reform”) was published. This Energy Reform stems from the amendment to Articles 25, 27, and 28 of the Constitution and the corresponding inclusion of 21 transitory articles, (effective as of December 21, 2013 (the “Constitutional Reform”).

In addition to the modification of various existing laws, the Energy Reform contemplated the issuance of the Petróleos Meixcanos Law (the “Pemex Law”).

The Pemex Law establishes that Pemex is a productive state-owned company, exclusively owned by the Federal Government, with legal capacity and its own property, and it shall have technical, operational and managerial autonomy, as provided by the Pemex Law, additionally establishes that, Petróleos Mexicanos shall be subject to the provisions of the Pemex Law, its Regulations and the provisions therefrom. Commercial and civil law shall be supplemental.

As a result of the Pemex Law, Pemex Board of Directors created the Corporate Office of Alliances and New Businesses, the purpose of this Office is to define and direct domestic and international alliances and new businesses for Pemex, their productive state-owned subsidiary companies and in the event affiliate companies, taking care of the guidelines and general policies approved and issued by the Pemex Board of Directors.

The Pemex Board of Directors, approved and issued on April 29, 2015 and becoming effective on June 15, 2015, the “Policies and General Guidelines for Investment, Associations and Strategic Alliances of Petróleos Mexicanos, State-productive subsidiaries companies and affiliate companies” (the “Guidelines”).

The purpose of the Guidelines is to establish the priorities related with investments, strategic partnerships and alliances (“ISA”) with Pemex, their State-productive subsidiaries companies and affiliate companies.1 The relevant points of the Guidelines among others are the following:

  1. They define: (i) Investment (direct or attracted) as the resources provided by Pemex and/or third parties, in a pro rata proportion, intended to create, maintain or increase the economical value of the company, and (ii) Partnership and Strategic Alliances as the agreement with one or more persons with the purpose of develop investments or exchange knowledge in an efficient way for Pemex.2
  2. All of the ISA granted by Pemex or through third parties shall be aligned in accordance with the Business Plan approved by Pemex Board of Directors.
  3. The shareholders agreements will be carefully analyze by Pemex, always protecting the interests of Pemex.
  4. Each of the ISA should be sustained with a business case, describing the profitability, financing schemes, among others.
  5. Each of the ISA should contain a risk analysis, and it proper mitigation plan.
  6. All the long term relations in which Pemex is involved, shall have a reasonable exit clause for Pemex and always containing the minority rights clauses in favor of Pemex.
  7. All the investments may contain a pre investment budget, so Pemex could analyze the business case.
  8. In case that the state-owned productive subsidiary company, affiliate (with or without the participation of a third party in such company) or a company (in which Pemex participates with 49% or less) grants a corporate guaranty. The corporate guaranty shall be limited only to the state-owned productive subsidiary company, affiliate or the company (in which Pemex participates with 49% or less), and it is not considered that Petróleos Mexicanos by any reason may be a joint obligor.
  9. Any potential threat to the investment shall be immediately notified to Pemex.
  10. The investments are classified as follows: (i) equity investment projects funded by Pemex or its affiliates; (ii) productive projects developed by third parties as per request of Pemex or affiliates; (iii) equity investments from other companies; (iv) investments with funding access and (v) investments in real estate for administrative support.

1 For the purposes of the Guidelines affiliate company is define as such companies in which Pemex may participate directly or indirectly, in more than a fifty percent, even that if such company is incorporated in accordance with an international legislation.

2 The name Pemex refers as well to Pemex Subsidiaries and Affiliates.