M&A IN THE NEW NORMALITY

A situation occurred earlier this year that would unfortunately affect life as we knew it. The advent of the SARS-CoV2 virus, or coronavirus denominated COVID-19, represented a challenge not only for the health sector, but also for the “traditional” way of interacting with people that we knew up to that moment, in all sectors.

Along with the health crisis, the economic crisis developed, consequently affecting the transactional sector. In just the first quarter of 2020, according to information provided by the Transactional Track Record (TTR) platform, the number of mergers and acquisitions as well as private equity transactions decreased in Mexico by 25% in comparison to last year during the same period.

Regardless of the uncertainty and lack of knowledge of how the current situation will affect corporate valuation forms, the current trend revolves around gradual deconfinement, market reopening and, consequently, possible economic reactivation; hoping that such situation will have a positive impact within the transactional sector. However, this may not occur under the terms or practices that existed prior to the pandemic, since it must be developed within the so-called “new normality”.

Any sector that intends to function properly under the new normality will encounter obstacles or challenges to overcome; the transactional sector will not be the exception, as it is based primarily on “face-to-face” interaction. In light of this situation, we must question ourselves what are the challenges and possible solutions that the transactional sector will find in the new normality, specifically with regard to the negotiation and execution of transactions?

All transactions within the mergers and acquisitions field (“M&A”) typically begin with a kick-off meeting with the interested client, where the client states its intentions and the characteristics of the transaction it intends to carry out. As the people who are used to M&A transactions are well aware of, these meetings, which until the beginning of this year were face-to-face, usually include several persons who want to know how the transaction in question will be carried out, leading to meetings with a considerable quorum where various topics will be discussed. In these meetings we can find a first obstacle, because they are definitely no longer an option in the new normality due to the risk that the agglomeration of persons represents. This obstacle is relatively easy to overcome, as there are applications such as Zoom, Microsoft Teams, Skype, among many others, that facilitate the interaction and/or communication of persons at a distance, although the limitations of the platforms themselves impose restrictions on the direct interaction among participants.

In addition to the initial meeting, several negotiation meetings are necessary during the course of the transaction. Taking into account the same arguments set forth in the preceding paragraph, such meetings can no longer be carried out in person and it will be necessary to resort to applications such as Zoom or Microsoft Teams.

Currently, these applications present several obstacles that decrease their usefulness for the purposes in question. On one hand, these applications do not have effective security filters to access conferences, making it easy for someone to impersonate another person simply by changing their username and have access to confidential information. There have been instances where accounts external to virtual meetings access such meetings and upload vulgar images or videos unrelated with the meeting. It is important to find solutions to these problems to make such applications a viable and safe option within the transactional sector; without a doubt, it will be necessary to develop security measures so that they can be used without posing risks for both to the parties involved in the transaction and the confidentiality of the information handled therein.

In addition to the problems described in the previous paragraph, another important point to consider when using digital platforms to hold conferences is how the meeting will be conducted. It will be important to establish rules to participate in a meeting before it is conducted, some kind of turn system, an obligation to silence the microphone when it is not a person’s turn to speak, even the possibility to include a moderator who establishes order within the meeting.

Not only must face-to-face meetings between clients and attorneys change in light of the new normality.  Transaction closings must also operate differently than before. It will be necessary to find options that can substitute a meeting room full of people signing a transaction’s documents.

The ability to use electronic signatures in documents instead of autograph signatures would seem like a useful solution for such cases. It is not new that in all transactions within the transactional sector there is distrust towards the other party involved, which is why it is advisable to use advanced electronic signatures; that is, “the set of data and characters that allows identifying the signor, which has been created through electronic means under such party’s exclusive control, in such way that it is linked only to the signor and to the data to which it refers, which allows any subsequent modification thereof to be detectable, which produces the same legal effects as the autograph signature[1]. Currently, the Mexican legal system provides for the use of electronic signature with some limitations in different laws such as the Second Title of the Commerce Code and Advanced Electronic Signature Law, published in January 2012; in addition, Article 210-A of the Federal Civil Procedure Code provides valuation rules for electronic documents.

The use of an advanced electronic signature in agreements between private parties would facilitate their execution by not requiring the physical presence of the parties, offering a practical solution that would provide greater legal certainty to the parties involved. When using applications and services relating to this issue, it is important to verify that such comply with the requirements provided under both the Third Chapter of the Second Title of the Commerce Code and Official Mexican Standard NOM-151-SCFI-2016.

Another option that may not be as secure as the previous one, but which would certainly facilitate the practice of distance closings, is that, prior to closing, the parties agree that t documents will be signed with an autograph signature delivered to the other party in PDF form through the emails that the parties agree on and in accordance with (i) the procedure agreed upon thereunder, in order to authenticate the corresponding data message; and, (ii) the applicable legal provisions set forth under the second title of the Commerce Code.

An important question worth considering along with or after this analysis is: Would it be advisable to use an electronic signature on absolutely all documents included in a transaction, such as negotiable instruments or public instruments (deeds and notarized instruments)? And if so, other questions arise such as whether using electronic signatures in negotiable instruments would violate the characteristics and rules to which they are subject? And, should a reform be considered for the entire notarization and commercial notarization system to modernize it? Without a doubt, the analysis to formulate an answer to these questions would go beyond the purposes of this article, but it would be important to identify how the need to function within the new normality could positively change the way the transactional sector had been operating.

The possibility of closures occurring without the parties being physically present forces us to take into account other aspects of the transaction that would change if distance closing is carried out. Generally, when a face-to-face closing occurs and depending on the transaction in question, it is at such time that the parties exchange, inter alia, assets, negotiable instruments and certificates. If the closing is at distance, it will be important to agree on how to comply with the obligation to deliver such documents, carefully specifying as of when the parties will consider themselves as holders thereof, since they will no longer be able to receive the documents immediately, as would happen in a face-to-face closing. Other options may be considered such as the parties agreeing to delivery of such documents, prior to closing, to the attorney of the party that must receive them; such attorney must agree, by signing an agreement, to not deliver such documents until the transaction has concluded; such situation is similar to the one discussed in the next paragraph.

It is very common in transactions within the transactional sector that at closing the parties wait in the meeting room for the money from the transaction to be funded in the respective account(s). Within the new normality, it is not feasible to think that a large group of people will gather for several hours waiting for the disbursement of sums of money by one of the parties; that is why it will be necessary to consider options that provide security for the parties and avoid such situations. A viable option is the execution of an Escrow Agreement, for the purpose of making a third party responsible for delivering the sums of money after certain conditions previously agreed upon by the parties  are met or satisfied and otherwise, returning them in case of any breach.  Even before the pandemic, it was becoming increasingly common to see Escrow Agreements in transactions, due to the security they offer to the participating parties, which leads us to confirm the usefulness of this legal figure in transactions.

The issues do not end after the transaction documents are executed; in most cases it is necessary to comply with various “post-closing” obligations such as filing notices, documents and notifications, among others, with different authorities. In many cases these filings need to be carried out face-to-face before the office of the parties of the relevant authority. The represents another challenge in the new normality, since the need to avoid physical contact between persons involves seeking a new way to comply with all “post-closing” obligations in an efficient and timely manner that does not jeopardize the health and integrity of the parties involved, including the attorneys who participated in the transaction. As in most situations, a solution that is both useful and practical will be to use digital platforms that have advanced security systems to file all the corresponding notices or notifications.

In light of the health emergency caused by COVID-19, some authorities such as the National Banking and Securities Commission have implemented administrative measures that allow filing of documents and notices electronically[2]; ideally, however, all or at least most authorities should allow this, making it a permanent practice.  

As can be seen, there are many situations or practices that should change and be replaced by much more modern alternatives if we want the transactional sector to continue to function and grow during and after the pandemic. Honestly speaking, one of the advantages that the new normality has brought is that we have been forced to seek or design new practices or measures to replace the old practices that are outdated, tedious and, in many cases, impractical to carry out transactions. It is also important to take advantage of and benefit from the technologies we currently have.

All of the foregoing must be understood under the idea that uniform and effective regulation will be needed from many sectors, to allow transactional practice to function correctly and to ensure that the new normality, instead of harming the transactional sector, favors it and makes it much more practical, thereby generating greater confidence for all its participants.


[1]Article 2 of the Advanced Electronic Signature Law

[2] See “RESOLUTION establishing the administrative measures to continue the activities of the National Banking and Securities Commission to tend to the matters filed before it, during the health contingency caused by COVID-19” Published on July 15, 2020 in the Federal Official Gazette.

Authors