Recently, the Supreme Court of Justice of Mexico, upheld the right of creditors of companies seeking to merge to judicially oppose the process and to have the merger suspended until the opposition is resolved.
The Court confirmed the constitutionality of Article 224 of the General Business Company Law (LGSM). However, the primary lesson this ruling offers is that the most critical stage is not the meeting approving the merger but the preliminary outreach to creditors.
This right of opposition is established in Article 224 of the LGSM, which stipulates that a merger becomes effective three months after the merger agreements of the involved companies have been recorded in the Public Registry of Commerce.
During that term, creditors may file an opposition and halt the merger until a court declares the opposition unfounded and the resulting judgment becomes final and non-appealable. Only if the term expires without any opposition being filed can the merger proceed.
The Court ruled that this article is constitutional and does not infringe upon the freedom of association of the company that challenged it. The Court concluded that the creditors’ right to oppose the merger guarantees their legal certainty and protects their rights.
Its purpose is to prevent the extiction of the merging entities from affecting the ability to collect outstanding debts or illegitimately deteriorating the creditors’ assets.
This resolution confirms the level of due care that directors and officers of companies seeking to merge must observe, even before the shareholders’ meetings take place.
The law does allow a merger to take effect immediately upon the registration of the agreements—without waiting the three-month period—if the payment of all company debts is agreed upon, the amount of said debts is deposited in a bank, or the express consent of all creditors is obtained.
To mitigate the risks of a potential judicial opposition, we suggest that before the merger, meetings be held with creditors to explain the process and, where appropriate, document their consent. Another option is to negotiate the specific terms for the payment of their credits in advance.
In the best-case scenario, a judicial opposition can delay the effects of the merger. In the worst-case scenario, it can block it entirely until a payment agreement is reached—an outcome that can be achieved through proper planning of the process.
Adequate planning will help identify and anticipate various risks even before issuing the call for the general meeting to approve the merger.