Sanctions for Failing to Notify Mergers: A Reminder of the Importance of Compliance

The merger notification regime serves as a key tool for competition authorities to analyze and approve certain mergers before they are completed, thus preventing those that could have anticompetitive effects. Essentially, this is a preventive mechanism.
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Economic agents involved in a transaction that (i) qualifies as a “merger” under the Federal Economic Competition Law (LFCE)—a broad concept encompassing, among other things, any union of companies or assets, or change of control; (ii) exceeds any of the thresholds established in the LFCE; and (iii) does not fall under any of the exceptions provided therein (such transactions meeting the criteria in (i) to (iii) are referred to as “Notifiable Mergers”), are required to notify the transaction to the Federal Economic Competition Commission (COFECE) and/or the Federal Telecommunications Institute (IFT, collectively referred to as the “Competition Authorities”) and obtain their approval before proceeding.
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Failing to secure authorization before completing a Notifiable Merger constitutes a serious violation of the LFCE, as it prevents the Competition Authorities from analyzing the transaction in advance, thereby hindering their ability to fulfill their constitutional mandate: to protect economic competition and free market access. Such non-compliance can lead to significant penalties, including fines of up to 5% of the annual income of the economic agents required to notify, and in the case of a merger deemed illegal due to anticompetitive effects, fines of up to 8% of the annual income of the involved parties.

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Common Reasons for Failing to Notify a Notifiable Merger

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It is increasingly common for Competition Authorities to initiate investigations into transactions that were completed without prior approval and subsequently impose the corresponding sanctions. These cases, often referred to as "gun-jumping" cases, involve proceeding with a Notifiable Merger before receiving the necessary approval (analogous to jumping the gun before the starting signal).

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There are various reasons why an obligation to notify a Notifiable Merger might be overlooked, ranging from a simple lack of awareness of the LFCE's requirements to highly complex situations involving the specific circumstances of a case, such as interpretative issues regarding notification thresholds or the completion of the Notifiable Merger.

It’s important to note that the majority of cases in which COFECE has sanctioned economic agents for carrying out a Notifiable Merger without prior approval involve instances where a merger notification was indeed made beforehand.

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Here are some scenarios where sanctions might be imposed by one or both of the Competition Authorities for completing a Notifiable Merger without securing prior approval. The first scenario covers cases where no prior notification of the merger was made, while subsequent scenarios involve instances where there was a clear and explicit intent to comply with the LFCE.

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1. The most obvious reason for non-compliance is ignorance of the LFCE, which can range from a complete lack of knowledge about the notification obligation to a belief that (i) the transaction does not qualify as a “merger” under the LFCE; or (ii) even if it does, it does not exceed any of the thresholds provided in Article 86 of the LFCE.
   
   There are mergers where it may not be entirely clear whether they qualify as a “merger” under Article 61 of the LFCE; however, it should be emphasized that the concept is very broad, and therefore it is crucial to understand its scope to correctly determine whether a transaction falls within this expansive definition.
   
   Analyzing the notification thresholds is a complex task that requires a deep understanding of their content and the way Competition Authorities interpret them in practice. It is also essential to properly understand the financial information needed for this threshold analysis.
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2. Cases where the parties close a transaction different from the one authorized by the Competition Authorities. After obtaining approval from the Competition Authorities and completing the Notifiable Merger, there is an obligation to confirm the closing with the authorities so that they can verify that the transaction was carried out under the terms that were notified and approved. If the terms are altered, it means that the actual Notifiable Merger was not the one analyzed and approved, but rather another, unauthorized transaction took place.
   Examples of this include completing a Notifiable Merger with a different entity—not wholly owned by the economic agent that notified the transaction as the buyer—even if both entities belong to the same economic group. Another example is changing the essential terms of the authorized transaction, such as the content of a non-compete clause, as COFECE recently sanctioned in a particular case.

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3. Taking actions aimed at completing the Notifiable Merger before obtaining authorization. In some cases, the parties might engage in preparatory steps to complete the Notifiable Merger before receiving authorization, which may involve the buyer gaining some influence over the companies or assets subject to the merger, leading to a partial completion of the Notifiable Merger.
   
   In international transactions where there is a sense of urgency to complete the Notifiable Merger as quickly as possible, sometimes approvals from competition authorities in some jurisdictions are still pending. In such cases, the parties might consider partially closing the transaction in jurisdictions where approvals have been obtained and delaying the closing in jurisdictions where approvals are still pending. This approach, often implemented through the restructuring of operations (carve-out), ensures that the first closing does not involve the transfer of companies or assets in countries where approvals have not yet been obtained. In such cases, it is crucial to separate the business (including companies and assets) in Mexico to ensure that closing in other jurisdictions does not imply closing in Mexico before obtaining the necessary approvals from the Competition Authorities—this was even a case sanctioned by COFECE in 2023.

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Merger Notification Thresholds

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According to Article 86 of the LFCE, mergers that exceed one or more of the established thresholds must obtain prior approval from the Competition Authorities. These thresholds are set in units of Measurement and Update Units (UMAs), which are updated annually. Consequently, the threshold amounts are adjusted each year. For 2024, the value of the UMA is MXP$108.57.

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• Section I: Transactions involving a value exceeding eighteen million UMAs (MXP$1,954,260,000, or approximately USD$97,713,000) in the national territory.
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• Section II: Accumulation of 35% or more of the assets or shares of an economic agent with annual sales or assets in the national territory exceeding eighteen million UMAs (MXN$1,954,260,000, or approximately USD$97,713,000). Two aspects must be verified, both of which need updating.
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• Section III: Accumulation in the national territory of assets or capital exceeding eight million four hundred thousand UMAs (MXN$911,988,000 or approximately USD$45,599,400), and the merger involves economic agents with annual sales or assets exceeding forty-eight million UMAs (MXN$5,211,360,000 or approximately USD$260,568,000). Both aspects must be updated.

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The threshold analysis must be conducted using the financial information of the involved economic agents contained in their audited financial statements—or internal statements if audited ones are not available—for the fiscal year immediately preceding the one in which the transaction is intended to be carried out. It is equally important to consider the interpretation criteria of the thresholds by the Competition Authorities, including those provided in their respective merger notification guidelines, which, although not binding, are useful for conducting the threshold analysis.
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Depending on the specifics of each case, this analysis can be highly complex, requiring an in-depth understanding of the thresholds, knowledge of the Competition Authorities’ criteria, and their precedents to determine how they should be applied to each specific case.

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The Importance of Expert Legal Advice

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As outlined above, compliance with the merger regime under the LFCE requires a comprehensive and thorough analysis to (i) determine when a Notifiable Merger is involved (i.e., when a transaction qualifies as a “merger,” exceeds thresholds, and does not fall under any exceptions); (ii) ensure that the transaction is completed under the terms authorized by the Competition Authorities; and (iii) avoid actions that could imply the completion of the Notifiable Merger before obtaining the necessary competition approvals.
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Failure to comply with these requirements can result in severe penalties for the involved economic agents.
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Having a specialized law firm is crucial for handling merger notifications and avoiding sanctions. When planning a transaction, it is essential to conduct a threshold analysis and ensure that no gun-jumping occurs, even when the Notifiable Merger has been notified to the Competition Authorities.
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At Mijares, we support our clients from the planning stage of a transaction, analyzing whether there is an obligation to notify it to the Competition Authorities, and throughout the entire process until the completion of the transactions, thereby helping our clients avoid sanctions. Our experience allows us to provide comprehensive and integrated advice to clients seeking both specific advice in economic competition matters and those seeking a full-service approach to their transactional operations. Proper legal advice in economic competition is far preferable to facing hefty fines.