Employment issues in M&A transactions in Mexico

Pursuant to Mexican employment law and binding judicial criteria, when a share deal takes place there are no legal proceedings to be carried out before the authorities or employers, as the employer remains the same (assuming any labour obligations were assumed by the company and not by its shareholders as individuals).

1. Check whether:

• It is recommendable to ensure that there are not, or the company has at least not been informed about, any pending litigations, proceedings, debts and obligations arising from working relationships as a share transfer translates into the acquisition of assets and liabilities with no distinctions.

2. Prepare the following in draft form:

N/A

3. Inform / Notify

N/A

4. Consult

N/A

5. Implement

N/A

1. Check whether:

N/A

2. Prepare the following in draft form:

N/A

3. Inform / Notify

N/A

4. Consult

N/A

5. Implement

N/A

Pursuant to Mexican employment law, when an asset deal takes place and most of the assets that constitute the economic legal entity are transferred, meaning the transfer of the business centre that encompasses the elements allowing the continuity of the employees’ labour conditions and activities, an employer substitution occurs. An employer substitution implies the survival of the employee-employer working relationship, with the latter being replaced by the purchaser.

1. Check whether:

• Prior to the transaction, it is recommendable for the seller to ensure compliance with regard to social security, the housing fund and any other obligations towards the employees arising from the working relationship. Since, as explained above, the former and new employer remain jointly liable for a certain period, depending on the nature of the obligations, indemnities concerning labour claims dated before the purchase are most likely to be set in the corresponding sale and purchase agreement; notwithstanding the purchaser’s possibility of claiming liquidated damages, in case indemnities are not set.

• It is recommendable to duly inform the purchaser about the employees’ current labour conditions, which may include providing the individual or collective employment agreement. Indemnities in the sale and purchase agreement may be set and disputes brought before courts may arise from misinformation, attributable to the seller.

2. Prepare the following in draft form:

• It is recommendable to draft an internal document or note regarding the deal, in order to inform the employees about the employer substitution, as well as to avoid any conflict by means of notifying that their employment agreement will not, and cannot, suffer amendments to their detriment.

3. Inform / Notify

• Ensure that the purchaser notifies the employees of the employer substitution arising from the purchase deal for the sake of the certainty of the beginning and end of the joint liability period.
• Where applicable, ensure that the purchaser notifies the union of the employer substitution for the purpose of certainty with regard to the joint liability period.
• The seller shall notify the IMSS about the termination of their working relationship with the employees no later than 5 days after the purchase, otherwise sanctions such as fines may be imposed. Likewise, this notice will represent proof of certainty regarding the purchase date.
• The seller shall notify the INFONAVIT about the employer substitution no later than 5 days after the purchase to avoid sanctions and to ensure the certainty of the asset transfer.

4. Consult

• Pursuant to Mexican employment law, the seller is not obliged to carry out a consultation period for the transaction.

5. Implement

• See sections 1, 2 and 3.

1. Check whether:

• Review whether there is any pending litigation regarding the employees’ reinstatement. Pursuant to Mexican law, when a former employee demands reinstatement, they cannot be definitively substituted. The definitive substitution of an employee in this circumstance may result in additional costs for the purchaser, as well as unlawful conduct.
• Take into consideration that pursuant to Mexican employment law, at least 90% of the employees in each place of business shall be Mexican. Foreign employees may be hired, justified in light of their expertise and suitability; however, foreign employees in each technical or professional category shall not exceed an amount equal to 10% of the company’s employees in that area or field.
• Take into account that employment agreement conditions, whether individual or collective, shall not be modified without the employees’ consent, as the substitution of the employer does not initiate a new working relationship.
• Any pending litigation or debts with regard to the employees, detected while auditing the target, shall be taken into consideration in order to avoid costs and liability. Pursuant to Mexican employment law, the new employer becomes liable for any pending issues concerning the employees, even when the issue originated or arose prior to the acquisition or is a result of a previous situation attributable to the former employer.
  For a period of six months after the purchase, the former and new employer will be jointly liable for said issues; after the aforementioned period, only the new employer will be liable for any labour-related obligations, whether this was assumed before or after the purchase.
• The liability risk for the new employer, regarding situations prior to the purchase, is also applicable to the employees’ social security. Any prior debt or social security obligation valid at the time of the purchase pending compliance and assumed before the acquisition may be borne by the new employer.

2. Prepare the following in draft form:

Although pursuant to Mexican employment law the new employer is not obliged to inform the employees and union of anything other than the employer’s substitution, it is common practice in Mexico to confirm by means of a notice that the new employer will honour the employees’ current benefits, employment conditions and seniority. In this regard, it is recommendable to prepare a draft notice with information that may be considered of the employees’ interest.

3. Inform / Notify

• Pursuant to Mexican employment law, the purchaser shall notify the employees of the employer substitution arising from the purchase deal. Such notice is important since it constitutes proof of the exact purchase date. The six-month joint liability period for the former and current employer will start to run from the date of the notice.
• If the target’s employees are affiliated to a union, the purchaser shall notify the union of the employer substitution. This notice constitutes proof of the purchase date, the importance of which relies on the calculation of the joint liability period.
• Pursuant to Mexican employment law, all employees shall be registered with the Mexican Social Security Institute (IMSS) in order to be entitled to medical attention. The purchaser shall notify the IMSS about the employer substitution no later than 5 days after the purchase in order to avoid the imposition of fines.
• Also, since the registration of the employees with the referred institute is maintained through a fee paid by the employer, any debt concerning this matter will be considered under the six-month joint liability period, which will begin to run from the date of this notice (for social security purposes).
• All employees shall be registered with the National Employee Housing Fund Institute (INFONAVIT), which represents an obligation for the employer. In this regard, the purchaser shall notify this institute about the employer substitution no later than 5 days after the purchase, otherwise fines may be imposed. All the obligations assumed before the purchase by the former employer will be considered under a two-year joint liability period, which will be calculated from the date of this notice.

4. Consult

• Pursuant to Mexican employment law, the purchaser is not obliged to carry out a consultation period for the transaction, neither with the employees nor any government entity.

5. Implement

• See sections 2 and 3.

Whenever a merger or division of companies occurs, business centres may be acquired by the merging entity or the entity resulting from the division. In this regard, employer substitution takes place; therefore, the legal proceedings and recommendations outlined in section A of this jurisdiction’s guide are applicable equating the purchaser to the merging entity or the company resulting from the division.