Mexico: The New Frontier

Thursday, February 20, 2014 - 17:40

The Editor interviews Fernando de Ovando, Partner-in-Charge of Jones Day’s Mexico City office.

Editor: Please describe your office in Mexico City and the new organization of Jones Day’s Latin American offices.

de Ovando: With respect to Mexico, we became integrated with Jones Day in 2009. At that time, we had eight partners, who continue with the firm to this day. We have added five new partners, who are extremely talented. Among them is the former general counsel for Mexico’s Central Bank, Héctor Tinoco, who has been a regulator for the financial industry for the last 30 years. His addition reinforces our banking and finance practice. We also have incorporated a small boutique of attorneys headed by Mauricio Llamas with an environmental practice who also have deep experience in government environmental regulation, which includes health and safety. This practice nowadays is much needed, especially with the large energy projects that Mexico is participating in, including the renewable and generation of electricity sectors. Now with the structural changes taking place in the oil and gas industry and other energy generators, we expect as a firm to participate actively in these industries. We also have added Antonio González, a seasoned litigator, who is well established locally in handling global disputes. He brought with him a complete team of litigators, providing us with a full commercial litigation practice, which supplements our administrative litigation practice. We now have a full litigation service except for criminal law. We also added Alberto de la Parra, who was a former general counsel for Grupo Mexico. Grupo Mexico is a very large mining, railroad, and infrastructure concern. He has bought some new, very significant matters to the office. We have also increased our capital markets practice, with the addition of Alejandro Chico.

The growth of Jones Day in Mexico has been very significant. When we joined Jones Day, we had 23 fee earners (composed of a mix of attorneys and trainees); as of today, we have over 60. We are expecting to continue our hiring efforts to add whole practices, permitting us to cover additional areas of the law.

The firm has also opened offices in São Paulo and in Miami. Miami has a large footprint not only in the U.S. with its large economy (fourth in the U.S.), but its impact reaches deeply into Central and South America. We believe that the links between Miami and São Paulo will start to give a wider coverage to an array of services that we provide throughout Latin America. Mexico is historically more closely linked to Texas, California, and New York than Miami, but nonetheless, the Miami office and the São Paulo office will give us a competitive advantage over global firms established in Mexico because our presence in Latin America is unmatched.

Editor: Please tell our readers about some of the deals you have recently closed since we last interviewed you in October 2012.

de Ovando: We have a very large list, some of which have not closed yet. Of significant relevance is the Sherwin-Williams/ Consorcio Comex transactions that are in the process of further deliberation by Mexican authorities on antitrust matters. In the area of banking and finance, following the merger of Banorte with Ixe (the latter being one of our clients), Banorte commissioned our firm to assist in the acquisition of Afore Bancomer, which is now, together with the former Afore, a retirement fund owned by Banorte, the largest retirement fund in the country. That was a very significant transaction. We have been active in the capital markets in representing Espirito Santo Investment Bank in the issuance of $50 million aggregate principal amount of 7 percent senior notes issued by Grupo Famsa, S.A.B., a specialty retailer. We have been active with private equity firms such as Alta Growth Capital Mexico Fund, L.P. in its acquisition of 80 percent of Operadora Capital de Estacionamientos, S.A. de C.V., a manager and operator of parking garages in Mexico City. We have represented Grupo Gigante, S.A.B. de C.V. in their formation of a joint venture with Petco Animal Supplies, Inc. and in their $690 million acquisition of the remaining stake in Office Depot de Mexico S.A. de C.V. The list of deals continues to fill several pages.

Mergermarket, an agency that searches worldwide markets, ranks Jones Day from the period of 2009 to 2013 as number one in the number of M&A transactions, which is very significant since the firm opened activities with us that same date.

Editor: In December 2013 the Mexican Congress and a majority of the Mexican states approved sweeping reforms to the Mexican Constitution, which have now been signed by the President into law. What are the reforms and how far-reaching are they?

de Ovando: The most significant of the reforms is that of the energy sector, putting an end to the Mexican state’s monopoly of energy. Also, we are undergoing structural changes in electricity, telecom, antitrust, financial, freedom of information and educational matters. All of the laws recently passed are subject to further regulation by secondary laws for which the Congress has set very tight deadlines for enactment. These are going to be critical issues because interest groups will make major efforts to preserve their own privileges. Congress must enact these secondary laws, which will set forth the authority to be given to the regulatory agencies.

If the secondary laws include the progressive principles that the Constitution mandates, Mexico will become a different country. Now foreign and local investment participation will be permitted in oil, gas, and electricity. A strong fight against telecom monopolies has been fought resulting in changes in the Constitution to terminate those monopolies. I truly believe it’s a spectacular change. We are obviously a somewhat skeptical about the secondary laws because of our background of watering down progressive legislation, but if this constitutional mandate goes forward, you will see a different country. It would be tremendous for the country.

Editor: Which of the reforms will have the largest impact on your clients?

de Ovando: Due to the original orientation of our firm, the financial reform will have the largest impact. But the most important for Mexico will be energy reform, allowing local and foreign entities to enter. Notwithstanding that Pemex, the fourth-largest oil production company in the world, is an oil monopoly owned by the government, it has very little in the way of resources to go into deep waters, to take advantage of new technologies and to drill for shale gas. The possibility of establishing businesses in those areas is formidable.

Editor: How will the new employment laws affect Mexican industry?

de Ovando: The significance of this change will be very limited. We have a very paternalistic labor law that gives very strong protection to employees, which implies heavy costs. At-will labor contracts are nonexistent. If you terminate the relationship, which is not easy, you have to pay severance. The only two business-friendly additions of significance are: the opportunity to hire technical or managerial employees for 180 days, during which time their employment does not become permanent, giving the employer the opportunity to verify if the person is fit for the job; another significant improvement is the shortening of the terms during which the employer must pay wages to one year’s salary from the former situation, which included the entire term of the litigation – which could be drawn out for years.

Editor: Is it likely that foreign companies with interests in maquiladoras will pull out of Mexico owing to the imposition of taxes?

de Ovando: We are afraid it will have this effect. The maquiladora program (a tax-free inducement for foreign companies to open facilities at the Mexican border) was a program establishing a lot of incentives for maquiladoras. The change in the law is expected to be quite burdensome. For example, the law is now charging a value-added tax on temporary imports, notwithstanding that a tax credit is generated against other taxes. It impacts cash flow very heavily. Yes, we believe maquiladoras will not be happy.

Editor: Referring to your earlier article in this newspaper, have there been further anti-corruption measures passed by Mexico’s federal or state governments? How well is the federal Anti-Corruption Law passed in 2012 being enforced?

de Ovando: Yes, new laws have been passed. The law on money laundering is a very complex law. The U.S. has a very simple system requiring the reporting of transactions over certain amounts. In Mexico you have to file information on all of your clients and on multiple alternative transactions. I believe there will be some difficulty in enforcing the law. 

I believe that most subsidiaries of foreign corporations are very cautious in respecting enforcement of the laws, especially foreign corruption laws enacted in their home jurisdictions, but I do not see Mexican companies proactive in this area.

Editor: Have you seen more Mexican companies implementing anti-bribery and anti-corruption laws as a result of the federal Anti-Corruption Law’s passage?

de Ovando: Many of them will be forced to obey the law by making the necessary filings with the government. Much depends on whether the approach in enforcing the law will be effective.

We now have new transparency laws, the equivalent of the Freedom of Information Act in the U.S., which enhance the rights of individuals to request information from public entities, such as monies received by unions from federal funding. That’s very important because the unions are very strong in their position against disclosing information on how they are handling the money received from federal or other governmental agencies.

I believe all those efforts will be positive. However, I also believe we still have a distance to go at a local level. All of the money laundering legislation follows guidelines from OECD. I assume that once they measure the impact of the laws enacted, they will adjust them as needed to make them effective.

Editor: I assume that unions are much stronger in Mexico than in the U.S.

de Ovando : In Mexico, unions have the right to unionize businesses – a very strong right.

Editor: Do you expect to see an increase in international investment in Mexico as a result of the reforms introduced by the Peña government as well as the opening up of the oil and gas industry?

de Ovando: Definitely, yes. I have seen that foreign businesses are skeptical because they want first to see the secondary laws. However, the interest expressed in seeking information and exploring possibilities is quite amazing.

Editor: There is a vast potential in your country for business investment.

de Ovando: Definitely. Mexico enjoys great benefits in terms of its proximity to the U.S., its developed infrastructure, and its approach to the rule of law. It gets very high marks!

 

Please email the interviewee at fdeovando@jonesday.com with questions about this interview.