REFORMS TO THE MEXICAN FOREIGN
INVESTMENT LAW
By:
Javier Jiménez
New York
On December 24, 1996, the Mexican Government published reforms (the "Reforms") to the Foreign Investment Law of 1993. The Foreign Investment Law was enacted in December 1993 and derogated the "Law for Promoting Mexican Investment and Regulating Foreign Investment," which had severely restricted foreign investment in Mexico by forbidding or limiting foreign participation in over 160 different economic activities. The Foreign Investment Law significantly reduced the number of activities in which foreign participation is forbidden or restricted. It divided restrictions on foreign investment into four categories:
(i) activities that are reserved to the Mexican State and in which neither foreign nor Mexican private investment may participate;
(ii) activities that are reserved exclusively to Mexican nationals and Mexican companies that exclude foreigners;
(iii) activities in which foreign investment may participate up to a prescribed percentage (10%, 25%, 30% or 49%, depending on the activity); and
(iv) activities in which foreign participation may exceed 49% with prior approval from the Mexican Foreign Investment Commission (the "Commission").
Investment in any activity which does not fall within the above categories is not restricted. The Foreign Investment Law also contains provisions prohibiting the circumvention of these restrictions through trusts, shareholders' agreements, stipulations in the by-laws of the companies, pyramidization schemes, or any other means. The Reforms increased the limit of foreign participation from 30% to 49% in companies controlling financial groups, in banks, in brokerage houses and in stock market specialists. This change was made so that the Foreign Investment Law would be consistent with more specific legislation in the financial sector that had already increased these limits. The Reforms also added construction, operation and exploitation of railroads and the performance of railroad transportation services to the list of activities in which foreign participation may exceed 49% with prior approval of the Commission. These changes were made to make the Foreign Investment Law consistent with the 1995 Law Regulating Railroad Services, which already permitted foreign investment up to 49% without approval from the Commission and over 49% with such approval in companies engaging in these activities. The most important change made by the Reforms was to Article 4. Pursuant to this amendment, indirect foreign participation made through Mexican companies effectively controlled by Mexicans, in activities in which foreign participation is restricted, will no longer be considered for purposes of compliance with such participation restrictions. For example, a foreign investor will be able to form a joint venture company with a Mexican company to participate in an activity in which foreign participation is restricted to 49%. Such foreign investor will be able to participate directly, as a holder of ordinary shares of the joint venture company, up to 49%, and will also be able to participate in the capital of its Mexican partner with ordinary shares up to 49%, provided that corporate control of such Mexican partner remains with its Mexican shareholders. Prior to the enactment of the Reforms, that structure would have been illegal because the foreign investor would have been deemed to own a total of 49% directly and 49% of 51% indirectly. Previously, the only foreign investment that was not taken into account for purposes of compliance with the Foreign Investment Law's restrictions was the so-called "neutral investment," or shares that confer economic rights but only limited corporate rights.
The application of Article 4 of the Foreign Investment Law will largely depend on how it is interpreted in the regulations which are expected to be enacted soon, and in the meantime, on its interpretation by the Commission. The anti-circumvention provisions already contained in the Foreign Investment Law were not modified by the Reforms. Thus, an apparent contradiction arises between the anti-circumvention rules and the Reforms to Article 4, which appear to allow pyramidization schemes. What the Commission will consider as permissible indirect participation and what will be considered an unlawful pyramidization scheme is not completely clear. In addition, the concept of "control" is not defined in the Foreign Investment Law and will be subject to interpretation by the Commission. With respect to the acquisition of real estate, before the Foreign Investment Law was enacted neither persons nor Mexican companies that did not include a clause of exclusion of foreigners in their by-laws could acquire direct ownership of real property in Mexico within an area of 100 km from its borders and/or 50 km from the coasts (the "Restricted Zone"). Although that is still the case for foreigners (foreigners may only acquire direct ownership of real property outside the Restricted Zone and with authorization from the Commission), the Foreign Investment Law allowed Mexican companies without a foreigners exclusion clause to acquire property in the Restricted Zone as long as the property was not used for residential purposes. The Foreign Investment Law also expressly allowed both foreigners and Mexican companies to acquire a beneficial interest, for whatever purpose, in real estate within the Restricted Zone held in trust by Mexican fiduciary institutions. All of the above, however, was subject to obtaining permits and a series of permit, filing and reporting requirements. The Reforms include several changes designed to simplify these administrative procedures, shortening the statutory deadlines by which the Commission must resolve petitions and adopting the concept of Afirmativa Ficta (a civil law concept pursuant to which if a petition is not resolved by the authority within the statutory deadline, it is considered approved) in almost all cases in which it had not done so from its enactment. The Reforms also introduced changes designed to simplify other administrative procedures, such as petitions for permission to issue "neutral investment" in Mexican companies, permits to incorporate Mexican companies or to change the by-laws of Mexican companies to eliminate the clause of exclusion of foreigners, and permits to allow foreign companies to engage in commercial activities in Mexico on a regular basis.
