A due diligence process is performed whenever there is a joint venture, financing or refinancing, or the purchase of shares or assets, and it is decisive in the structuring of the corresponding agreements, particularly for those parties with the financial charge of the transaction.
The purpose of a due diligence process for the purchase of shares or assets is decisive in the structuring of the corresponding purchase agreement for the benefit of the purchaser. Depending on the industry sector in which the company whose shares are to be acquired or the location of the assets to be acquired, a specific due diligence list should be generated covering, the relevant points for the protection of the purchaser of such shares or assets.
The most relevant aspects in any due diligence process are: (i) corporate, (ii) labor, (iii) contractual, (iv) intellectual property, (v) regulatory, (vi) tax, and (vii) litigation. Below is a brief explanation of each of these aspects, in respect of what should be reviewed and covered by the due diligence process.
Due to its importance in a stock purchase, it is necessary to review that all the corporate documentation of the company to be acquired, including without limitation, the stock certificates and corporate books. Likewise, it will be important to verify that the company has approved the financial statements for each fiscal year and that the members of the board of directors have been ratified.
It should be verified that there are no liens or encumbrances or any other limitation of ownership over the shares or assets.
The individual employment agreements and collective bargaining agreement (if any) should be reviewed, to confirm that they comply with applicable legal provisions, as well as all information and documentation necessary to verify the compliance with labor and social security obligations for all employees. Likewise,
the existence or non-existence of labor disputes by existing employees of the company must be confirmed. For such purposes, the purchaser must request a certificate issued by the legal counsel of the seller.
Note should be taken that there are several risks associated to previous and existing outsourcing schemes used in Mexico due to recent amendments to Mexican labor law and therefore a conscious review must be carried out.
The review of the contracts will be relevant to identify that there are no conditions affecting the ordinary course of business and there are no clauses or provisions limiting or preventing for the closing of the transaction, such as change of control, non-competition, exclusivity, etc.
The review of the intellectual property rights will be indispensable to prove the ownership of the trademarks, patents, software licenses and other rights applicable to be transmitted in the purchase transaction. An independent investigation must be performed to verify the status of these rights before the corresponding authorities (i.e. Mexican Institute of Industrial Property, National Copyright Institute, etc.).
In this area, the review shall comprehend those permits, licenses and/or authorizations necessary for the ordinary course of business, including those in environmental matters by virtue of the purchase transaction. As part of the due diligence process, it will be necessary to identify whether such permits, licenses and/or authorizations are transferable or not in accordance with applicable legal provisions, in order to avoid a possible delay in the closing of the purchase transaction.
During the due diligence process, it must be verified that all tax returns have been filed, whether federal, state or municipal, within the periods established by applicable legal provisions. Likewise, it will be necessary to verify that invoicing has been done correctly and that there has not been any incorrect invoicing to companies blacklisted by the Mexican authorities which could be a high risk for the transaction.
The existence of litigations, claims or conflicts in civil, mercantile, admin-istrative, criminal or any other matter against the company or any of its officers, that could cause damage or create a contingency, should be disclosed for purposes of closing the purchase transaction.
Furthermore, independent investigations as part of the due diligence process may be carried out in order to identify other possible risks that could exist related to the purchase transaction.
Regarding the due diligence report to be delivered, the most important thing is that this document contemplates the main risks identified in the due diligence process, proposing possible solutions and advising on the possible consequences in the event that these risks have no solution.
Since in Mexico the majority of the companies are family owned and managed, the common practice is that these types of companies are not always duly organized with their information and documentation. Therefore, it is advisable to perform a detailed and structures due diligence regardless of the type of transaction.
Article by Luis Gerardo Ramírez Villela, CBA Associate in Mexico City