It is essential for foreign companies or individuals considering investing or doing business in Mexico, to understand certain basic concepts and facts of the country’s legal framework and its enforcement.
A modern substantive legal system is useless if it cannot be enforced in an effective, predictable and transparent manner. Potential investors in Mexico need to understand the “rules of the game” and how those rules will be enforced. Such enforcement is only possible through efficient and transparent judicial function.
Mexico is a democratic and federal republic. Commercial and business activities are subject to federal legislation, although local laws may also apply. It is imperative, therefore, that both bodies of law be consulted in evaluating an investment, as well as the negotiation and execution of any agreement.
Mexico’s legal regime is based on the cival, codified tradition, which is dramatically different in many ways from the common law system – “the code precedes judgments; the common law follows them.”Mexican law is largely codified and legal precedents, or case law, have little or no practical impact on succeeding court decisions, except where the Supreme Court or circuit courts have handed down five consecutive rulings on the same legal subject and have declared the pertinent judgment to constitute binding precedents (jurisprudencia). Courts also often quote the opinion of legal authorities supporting a decision.
The court system is similar to that of the US but does not use the jury system. Resolutions are rendered by a single judge at the lower levels and by a majority of those hearing the case at the appeal level. As discussed below, generally speaking, the courts can usually be relied to render a fair decision based on the facts and applicable substantive and procedural law. However, lengthy delays and backlogs are common.
The Mexican legal system is comprised of a large number of federal and local laws, regulations and rules covering a wide variety of aspects of our economy, society and politics. The basic laws and their regulations that would normally affect investments or business transactions govern, inter allia, corporate entities, commercial transactions, financial services, foreign investment, intellectual property, labor, taxes, environmental, antitrust and securities markets.
Corporate Governance
Corporate law is of federal application and contains a relatively comprehensive set of provisions and guidelines on corporate governance, shareholder rights and related issues. A foreign investor must be aware that several of its provisions differ from those applicable to corporations in the US and other countries.
For example, in Mexico, all holders of the same class of stock have equal rights, and shareholders, not the board of directors, have the authority to alter the organization, structure, purposes and capital structure of a company. Further, redemption of shares is subject to strict rules that need the consensus of all shareholders of a given class of shares. Consequently, schemes used in the other countries, such as shareholder cash outs or exchanges of common stock for other securities, are limited by rules governing redemption of shares in Mexico.
Also, “squeeze-outs” of minority shareholders in private companies are virtually impossible to achieve, and hostile take-overs, although possible in theory, would encounter obstacles that make them impractical. If the target company is listed on the Mexican Stock Exchange, in addition to corporate law, securities market legislation also applies.
Moreover, foreign investment legislation also would be applicable in certain sectors and activities. Foreign investment law and its regulations govern domestic and foreign investment in Mexico and in general, foreign investors may invest in both listed and unlisted Mexican companies, subject to a limited number of restrictions on investment in certain economic sectors and activies which are specifically reserved to the Mexican government or to Mexicans.
In addition to the legal framework, investors should also be aware of several issues affecting law enforcement in Mexico. It is clear that legal security and certainty are one of the most sought after protections and assurances in making an investment in a given market. While Mexico is an attractive investment destination, doubts exist about the effectiveness of judicial remedies.
A myth has evolved that Mexico is a good place to invest in – subject to attaining and maintaining a smooth and friendly relationship with Mexican partners and government officials. Although Mexico has traditionally been a non-litigious society, once any legal difficulty arises there is a widespread notion that Mexican authorities are inefficient, and that the law is enforced in an arbitrary manner.
Despite this reputation, Mexico is undergoing a deep transformation in every aspect of daily life. Changes have come not only at the top of the establishment, through democratic elections. Mexico is being rebuilt from the base upward by a demand for change among the people.
Before entering into the merits of law enforcement, it seems appropriate to briefly summarize the judicial function in Mexico, and how it is distributed.
Although the Mexican constitution recognizes the principle of the division of powers, inherited from the American constitution and the French Revolution, both of which were inspired by Montesquieu, this principle is far from being absolute. What do we mean by that? Simply that not every administrative unit belongs to the executive branch, not every legislative attribution belongs to Congress, and finally not every court belongs to the judiciary.
This apparent complexity does not bring chaos as one might think, and Mexico’s courts have already accepted that such principle is not absolute, and that if such mixture of powers is expressly recognized by the constitution, then it is understood as an exception to the general rule. We state this in order to distinguish two branches of the judiciary; the judicial and the jurisdictional.
The judicial branch is composed by the courts belonging to the judicial branch, which comprises the Supreme Court, circuit courts, “constitutional courts” which resolve constitutional claims known as amparos, as well as criminal, civil and commercial courts.
On the other hand, the jurisdictional branch includes a series of courts, tribunals and agencies under the executive branch, that rule on matters as broad as labor, agrarian, tax, industrial property, copyrights, trade, competition, administrative concessions, etc. It is generally into this second category that most issues involving foreign investment are dealt with.
Leaving the myth of corrupt public officials and politically influenced resolutions of certain matters, we can recognize some important improvements in justice distribution in Mexico. Great efforts have been made in the past decade to attract more qualified and talented public officials in charge of resolving administrative matters, under the supervision mostly of the comptrollership ministry.
Although the level and quality of the resolutions might not be as good as we would like, progress is evident. This is partly thanks to the strengthening of the judiciary, which since the constitutional and legal reform of 1994, has been able to demonstrate its independence and the quality of its rulings.
The new supreme court has been characterized for the seriousness of its rulings, and the eradication of long-established practices, such as accepting interference from the executive branch. Not all its rulings have been popular, such as the court’s as finding in favor of capitalizing interest by Mexican commercial banks, but none have been challenged as outright illegal.
Góngora Pimentel, the chief justice, has acknowledged that that the supreme court and the judicial branch are attentive to the phenomenon of globalization, and through the continuous training, better economic conditions and a respect to the judicial career, they have been able to keep the pace of the changes demanded by Mexican society.
Mexican justice has succeeded in developing through the judicial review of amparos issued by administrative courts. Until a few years ago, institutions such as “resolution enforcement incidents” were inoperative. It was not until this new supreme court took office that we first heard of a high officer of the Mexico City government being dismissed for not enforcing an amparo resolution. It was only recently that we heard the courts threatening to dismiss the minister of land reform, and his officials being subject to criminal prosecution for failing to enforce an amparo relating to a plot of land in the state of Baja California Sur.
Winds of change are blowing in Mexico. These changes are not only the product of the good intention and will of President Vicente Fox and his newly-elected democratic government. They are also the result of a social and popular demand for change that started only a few years ago with a deep reform of the judicial system. This has enabled every citizen of Mexico and every investor coming to Mexico to have the tools to defend itself and to enforce their rights.
Although this may seem an optimistic view of this complex matter, we do acknowledge that there is much still to accomplish. But no one can deny that Mexico has taken some important steps in the right direction. A fully reliable and self-standing law enforcement system seems to be within reach. LF
Carlos Creel is the managing partner at Creel, Garcia-Cuellar y Müggenburg, a leading Mexican law firm.