IAn Acquisition as the Assumption of a Legal Position
Acquiring a company means assuming a legal and economic position with respect to an organization that has its own history, contracts, obligations and contingencies. The value of a business depends not only on its financial statements or its visible assets, but also on its contracts, permits, employment relationships, intellectual property, corporate structure and degree of regulatory compliance. Understanding that reality before closing the transaction is the core function of due diligence.
The analysis begins with a review of the target company's corporate structure: incorporation, amendments to the bylaws, shareholding, corporate books, powers of attorney, management bodies and shareholders' meeting minutes. It must be verified that those participating in the transaction have sufficient authority to approve and execute it. This review is especially important where there is a history of reorganizations, capital increases or reductions, mergers, spin-offs (escisiones) or significant changes to the corporate structure.
1.1Material Contracts and Change-of-Control Clauses
The contract review is one of the elements of due diligence with the greatest economic impact. Customer and supplier agreements, financing arrangements, leases, and distribution, services and license agreements must be analyzed not only to identify the obligations they impose, but also to determine whether they contain provisions that may be triggered by the acquisition.
Change-of-control clauses, preemptive rights and rights of first refusal, restrictions on the transfer of shares, and early termination provisions are frequent sources of unanticipated risk in M&A transactions. A distribution agreement that terminates automatically upon a change of control can mean a significant loss of revenue for a buyer that failed to detect it before closing.
1.2Real Estate, Employment and Regulatory Matters
Where the company's operations depend on specific real properties, a review of title, liens and encumbrances, leases, land use permits and registry status is indispensable. A business that has been legally acquired may not be operationally viable if the properties that support it are subject to restrictions that went unidentified.
The employment review —benefits, unions, collective bargaining agreements, contingencies arising from terminated employment relationships— and the sector-specific regulatory analysis complete the risk map the buyer needs to make an informed decision.
IIIntellectual Property and Intangible Assets
In certain industries, a company's principal value lies not in its physical assets but in its intangibles: trademarks, patents, software, trade secrets, copyrights, databases and proprietary technology. In these cases, due diligence must determine who owns those assets, whether they are properly registered or protected, and whether the existing agreements allow them to be used after the acquisition.
A frequently overlooked check is the review of agreements with employees, developers and suppliers who took part in creating the intangible assets. If those agreements do not contain a clear assignment of intellectual property rights to the company, the buyer may discover that an asset it believed belonged to the target company is in fact owned by the individuals who created it.
IIIFrom Analysis to Structure: How Findings Reshape the Transaction
One of the most common mistakes in M&A transactions is treating due diligence as an informational stage prior to negotiation rather than as an integral part of it. The findings of the legal review can and should change the economic and legal structure of the transaction.
Depending on its nature and magnitude, a contingency identified during the review may warrant any of the following adjustment mechanisms:
- A reduction in the purchase price, where the contingency has a value that can be quantified with reasonable certainty.
- A holdback of part of the price as security (escrow), released subject to the resolution of the contingency.
- Specific representations and warranties from the seller, with separate indemnification regimes for identified risks.
- Conditions precedent to closing, requiring the resolution of a given contingency before the transaction is consummated.
- The exclusion of specific assets or liabilities from the transaction, where the contingency is confined to particular items.
- Representations and warranties insurance (W&I insurance), an increasingly common instrument in mid-size and large transactions in Mexico.
3.1The Purchase Agreement as a Mirror of Due Diligence
The definitive transaction documents —the share purchase agreement (SPA) or asset purchase agreement— must accurately reflect the results of due diligence. The seller's representations and warranties, the conditions to closing, the pre- and post-closing covenants, the indemnification obligations and the time limits for bringing claims are the mechanisms through which the parties legally allocate the risks identified during the review.
A well-structured SPA does more than protect the buyer against known contingencies: it anticipates potential disputes and establishes resolution mechanisms that avoid post-closing litigation. In transactions with international components, the choice of governing law and of the dispute resolution mechanism —institutional arbitration versus litigation in national courts— has practical consequences that must be assessed during the negotiation, not after closing.
About the author
Antonio Megía Flores
Antonio Megía Flores is a corporate lawyer and the founder of Megía Flores, S.C., a boutique firm specializing in business, corporate and transactional advisory work, with a presence in Monterrey and Madrid. He holds a law degree from the Universidad de Monterrey (UDEM) and is currently studying Spanish law at the Universidad Internacional de La Rioja (UNIR). He is a member of the Barra Mexicana, Colegio de Abogados (Mexican Bar Association).
The views expressed in this article are for informational purposes only and do not constitute legal advice. For the analysis of specific cases, we recommend consulting a specialized attorney.