By Jerry Gumpel, Jeralin Cardoso and Larissa Calva-Ruiz


The type of transaction and the purpose behind the transaction will largely shape the focus of the due diligence process. Due diligence is about uncovering hidden risks and reducing further exposure. Whether the transaction involves the sale of a company or the purchase of assets, it is imperative to determine what you, as the Purchaser, are seeking to get out of the deal and to structure the due diligence review in a manner that will further such goal. The location of the company or the assets being purchased will also impact the due diligence process by determining which laws will govern your review.

As the number of transactions between American and Mexican companies continues to grow it is important to recognize that the legal systems in both countries are decidedly different and the due diligence list will vary depending on the location of the company and/or the assets. Therefore, to ensure a successful international transaction the differences between conducting due diligence in the United States and in Mexico should be acknowledged. This article highlights a few of those differences.

General Corporate Governance and Compliance:

Companies in Mexico

The incorporation of an entity in Mexico, the granting of general powers of attorney, the appointment of members of the board of directors, mergers, and the creation and elimination of liens, are some of the corporate acts that must be recorded before the Mexican Public Registry of Property and Commerce (the “Public Registry”) in order for the acts to be valid or to be recognized by third parties. As such, it is necessary to confirm with the Public Registry that the company has recorded all relevant acts. The failure to register these corporate acts may bring about serious complications to the company or the assets for the Purchaser.

Various corporate documents and acts of a Mexican company often require formalization before a Notary Public in Mexico. Some of the corporate acts that need to be formalized before a Notary Public include the incorporation of an entity, any amendments to the entity’s bylaws, the merger or split of an entity, as well as the appointments and resignations of members of the board of administration. Several of these acts may also require registration before the Public Registry in order for the act to be effective before third parties.

Companies in the United States

In the United States, companies are required to file their organizational documents, any amendments thereto, and record merger transactions, in their state of incorporation. Besides complying with the filing and reporting requirements of the state in which the company is incorporated, American companies must also apply for qualification to do business in any other states where it has substantial ties and/or it transacts business. Failure to properly qualify to do business in a particular state or to pay the appropriate taxes and fees imposed by that state can cause the company to lose its standing to conduct business in a particular jurisdiction. As such, it is necessary to confirm, with the appropriate state agencies, that the company is properly qualified to do business in the various states, where applicable, and that all fees and taxes have been paid in a timely manner. The failure to be properly qualified may be rectified by reapplying for qualification and/or paying any unpaid fees. The liability that may result from failure to pay appropriate fees can range from minor to quite substantial so it is important that the Purchaser investigate the company’s standing in each relevant jurisdiction prior to closing.

Unlike its Mexican counterparts, most corporate acts by an American company do not need to be presented before a Notary Public. It is often sufficient for the act to be authorized by the board of directors and recorded in the internal corporate minutes. Sometimes, a more formal process is required in which an officer of the company must certify through a signed declaration that the documents in question are correct. As a result, when reviewing the due diligence materials for an American company it is important to review the internal corporate records and minutes to ensure that the actions taken by any agent were properly authorized.

Foreign Investment in Mexico

In Mexico, the Ministry of Economy through the Mexican Foreign Investment Registry (the “Foreign Investment Registry”) is in charge of maintaining a record of the foreign investment flow that comes into the country. During the due diligence process of a Mexican entity, it is extremely important to confirm whether the company is registered with and up-to-date before the Foreign Investment Registry, if applicable. Failure to properly register with the Foreign Investment Registry and/or failure to file the relevant documents within the legal timeframe (such as trimester reports or annual economic reports) may result in penalties. Although these infractions do not impose major consequences for the company and are relatively easy to fix, they do impose a payment of what can be considerable economic sanctions.

Securities Compliance in the United States

All sales or offers of securities in an American company are required to be registered with the Securities and Exchange Commission (the “SEC”) unless there is an exception or exemption for that particular offering.   In many cases, the company will qualify for an exception or exemption but certain actions must have been taken in order to rely on such exemption and in some cases documents may still need to be filed with the SEC. Therefore, if the transaction involves the purchase of an American company it is important to review the history of the sale of securities to ensure that all securities laws and exemptions have been properly applied. State securities laws may also be implicated based on where the security was sold and where the investor resided at the time of the transaction.

Labor Issues

In Mexico

Labor laws in Mexico tend to impose obligations towards the employer that consist of the payment of fees/contributions for the benefit of the employees; many of these fees are not contemplated in the United States.

When purchasing a Mexican company that maintains employees in Mexico, the company must be registered as an employer before the Mexican Institute of Social Security (Instituto Mexicano del Seguro Social, or IMSS), the Mexican Institute for Workers’ Housing (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, or INFONAVIT), and the Workers’ Retirement Fund (Sistema de Ahorro para el Retiro, or SAR), and pay the corresponding contributions in favor of their employees pursuant to the applicable law. The nonpayment of contributions to such funds will result in the employer paying various fines imposed by the authorities (including tax fines), as well as expose the employer to the risk of having a lawsuit filed against it by its employees. Another aspect to be reviewed is the payment of employee participation in the company’s profits during the fiscal year, which is contemplated by Mexican law. Finally, any collective bargaining agreements executed between the employer and workers’ unions must also be evaluated to avoid future conflicts.

In the United States

Employers in the United States must comply with both state and federal labor laws. If a company retains employees in several states, each state’s labor laws will need to be reviewed to ensure compliance.

When determining compliance with state labor laws, it is important to review (1) the various termination notice requirements, (2) mandatory severance obligations, and (3) any state overtime pay regulations, that could be triggered by the transaction. Under federal labor laws, employment eligibility and proper employment classification will also need to be reviewed. American companies are required to verify employment eligibility within three days of an employee’s start date. This verification is done by submitting an I-9 Form.  The failure to submit an I-9 Form, to properly complete an I-9 Form, and/or to maintain a current I-9 Form for the required length of time can result in civil penalties. Misclassification of an employee as an independent contractor can also result in penalties for the employer, including fines, back taxes, back wages issuing employee benefits retroactively.

Another issue that is prevalent under both state and federal labor laws, is the Worker Adjustment and Retaining Notification Act (“WARN Act”) and its state counterparts. The federal WARN Act may be triggered if there is a plant closing or mass layoffs thereby imposing notification requirements on the company. Compliance with the federal WARN Act does not protect a company from a state WARN Act violation. Under California law, for example, the state WARN Act may be triggered even if the Purchaser retains all the employees after closing but the duties, work schedule, pay, and benefits of the employees are not substantially similar to those before the sale. Not all companies are subject to the federal WARN Act and/or the state equivalent but the criteria threshold should be reviewed to determine if the company is subject to compliance and if the contemplated transaction is likely to trigger a WARN Act issue the parties should consider addressing the allocation of damages in the event of a violation prior to closing.

Tax Issues

One of the most important areas to review during the due diligence process, whether the target involves an American or Mexican company, are the tax issues the company may be subject to, whether it be tax regulations imposed on the company or the tax consequences of the contemplated transaction. In any case, tax matters should be carefully reviewed at the beginning of the due diligence process as the tax implications can effect the structure and ultimate outcome of a transaction.

With regard to a Mexican company, the first matter that should be checked is the company’s registration before the Federal Tax Payer Registry. Mexican companies are also required to keep an After-Tax Earnings Account (Cuenta de Utilidad Fiscal Neta, or CUFIN), a Capital Contributions Account (Cuenta de Capital de Aportación, or CUCA) and previously, a Reinvested After-Tax Earnings Account (Cuenta de Utilidad Fiscal Neta Reinvertida, or CUFINRE); this last account was only required from the years 1999 to 2001 and companies currently do not generate a balance in CUFINRE. However, there is always the possibility that the company that is being purchased has a pending balance in the referred account. Distributions of dividends, mergers and any decrease in the corporate capital of a company have an impact in the accounts mentioned above. For this reason, any merger, distribution of dividends or change in the corporate capital of the company must be carefully analyzed during the due diligence process for any potential tax liability.


The issues discussed in this article are only a small sample of the general differences between the due diligence items to be reviewed in the United States and in Mexico. The type of transaction and the particular facts and circumstances involved in a deal will largely affect the focus of your due diligence review and the items that are uncovered may effect how the transaction is inevitably structured. As a result, it is of great importance to be aware of the current laws and regulations governing a particular transaction and to protect your client in any cross border transaction he/she chooses to enter into.

For more information please contact  Jerry Gumpel, Jeralin Cardoso or Larissa Calva-Ruiz. Jerry Gumpel is a partner in the Corporate and Securities Practice Group in the firm’s Del Mar office. Jeralin Cardoso is a associate in the Corporate and Securities Practice Group in the firm’s Del Mar office. Larissa Calva-Ruiz is an foreign associate in the Business Trials Practice Group in the firm’s Orange County office.