In a July 24, 2008 post, Mexico Law Blog questioned the viability of the ambitious 6,000-unit Loreto Bay tourist development project called Loreto Bay, located on around 8,000 acres adjacent to the hamlet of Loreto on the east coast of the Baja peninsula. Although the project, particularly its goal of self-sustainability, is impressive, its timing is unfortunate.
The San Diego Times has reported that the project developer, TSD Loreto Partners, S. En C. por A. (”TSD“), has sold fewer than 800 units and suspended construction and operations. The report also said that Fonatur, Mexico’s tourism development agency, was asking for “custody” of the project so that it could reopen a golf course and a hotel while TSD searches for a buyer. The principal lender for the project is Citigroup Property Investors. Whether TSD has breached its loan covenants is unknown, but highly probable.
StarkSilverCreek.com reports that TSD is subject to a lawsuit in Arizona, in which Baja Developments, LLC, a New York limited liability company, alleges breach by TSD of a services agreement and seeks damages in excess of $7,000,000. According to a detailed article about the Loreto Bay project in the Phoenix Business Journal, Baja Developments, LLC was a company formed by The Trust For Sustainable Development (note the “TSD” initials), a Canadian non-profit, federally chartered land and community development corporation, that arranged financing for the Loreto Bay project.
Based on the above-referenced lawsuit, TSD appears to have been legally structured as a S. En C. por A., which is a limited partnership represented by shares (sociedad en comandita por acciones). The use of this type of Mexican entity is extremely unusual and an odd choice of entity for the developer of a significant real estate project because the S. En C. por A. imposes joint and several liability on its active partners (socios comanditados) for the debts and obligations of the company. See Article 207 of the General Corporations Law of Mexico (Ley General de Sociedades Mercantiles).
Most businesses in Mexico, whether destined for real estate development or otherwise, are structured as S. de R.L. de C.V.s (sociedad de responsabilidad limitada), S.A. de C.V.s (sociedad anonima de capital variable), or S.A.P.I.s (sociedad anonima promotora de inversion) because the shareholders of such entities are generally liable only for the amount of their capital contributions to the entity.
The U.S. Commercial Service in Guadalajara, Mexico has issued a report discussing opportunities for foreign companies in Mexico’s agribusiness industry. A copy of the report is available here.
The report says that there are opportunities for foreign companies seeking to sell products and services in the following areas of Mexico’s agriculture sector:
Volume 17, Number 2 of The California International Law Journal (available here) contains three articles on Mexico as follows:
I recently wrote a very short article for a newsletter published by the Greater Hispanic Chamber of Commerce of Austin, Texas discussing a few of the key issues businesses should consider when contracting with sales representatives and distributors in foreign markets. An excerpt from the article is below:
Many businesses successfully expand their international sales of goods and services by contracting with sales representatives or distributors in foreign markets. These arrangements involve special considerations.
Know Your Partner. Before drafting any contract, research and investigate prospective foreign business partners’ expertise and financial capability to perform the duties under the contract. Is the prospective business partner a good citizen? A thorough inquiry enables many companies to avoid disastrous international business relationships.
Be Specific. The contract should clearly specify the duties to be performed by the sales representative or distributor as well as the rights and obligations of both parties. For example, it should include comprehensive provisions regarding protection of intellectual property, confidentiality, purchase orders, manner and method of payment for goods or services (e.g., letters of credit), shipping and risk of loss of goods, compliance with local laws, warranties and disclaimers of warranties, management of customer warranty claims, breach of contract and remedies for breach, termination, dispute resolution, governing law, and other provisions.
Understand Your Remedies. If a business partner is located in a foreign jurisdiction, enforcement of contractual rights and guaranties may be limited by law, expense, time, or other factors. The only practical remedy in certain situations may be to terminate the contract.
The U.S. Commercial Service in Mexico City has released a market research report on the Mexican apparel industry, a copy of which is available here.
The report discusses market size and demand drivers, Mexican apparel manufacturing companies, market prospects, barriers to entry, trade events, and provides other useful apparel industry information.
Mexican investors are estimated to have held approximately US$1.4 billion of certificates of deposit and other supposed investments in the alleged US$8 billion fraud at Stanford Financial Group Co., according to David Cibrian, a partner at Strasburger & Price, LLP (”Strasburger“) who is representing numerous Mexican investors in their claims against Stanford Financial Group and its affiliates, including Antigua-based Stanford International Bank (collectively, “Stanford“).
On February 17, 2009, the U.S. Securities and Exchange Commission (the “SEC“) filed a lawsuit against Stanford in the U.S. District Court for the Northern District of Texas (the “Dallas Court“) accusing Stanford of running a multibillion-dollar fraud. The Dallas Court has frozen Stanford’s worldwide assets and appointed Ralph Janvey (”Janvey“) as a receiver to act on behalf of investors in recovering assets from Stanford. Certain Stanford investors filed separate lawsuits against Stanford in the U.S. District Court for the Southern District of Texas (the ”Houston Court“).
On March 16, 2009, Janvey and the SEC filed a motion with the Dallas Court opposing the requests of investors to join the SEC’s action against Stanford in the Dallas Court. They also asked the Dallas Court to reject the request of Stanford investors for appointment of an examiner to oversee Janvey’s work and to bar Stanford creditors from filing liens against its assets until Janvey had filed a plan to accomodate all claims against Stanford’s estate. The Dallas Court has not yet ruled on the motion.
Cibrian said that Strasburger would work to support the efforts of Janvey as he pursues claims against Stanford in the Dallas Court, which the judge has ordered be the exclusive forum for claims against Stanford. He said that investors who filed lawsuits against Stanford in the Houston Court or other courts will probably need to transfer or remove them to the Dallas Court before they can proceed, although Janvey is now trying to prohibit interventions in the SEC action due to the enormous distraction it would create.
Cibrian, who was one of the lead attorneys among those who pursued claims of Mexican and other investors in a similar investment fraud action by the SEC against InverWorld, Inc. and its affiliates said that “although the investment amounts inthe Stanford case are larger than in Inverworld, the legal concepts will be equally complex. The Stanford matter will take a long time to resolve and the receiver needs to be aided, not distracted, by law firms advising their clients.”
Bloomberg has reported that Janvey has obtained approval from the Dallas Court to release US$4.6 billion from about 28,000 frozen brokerage accounts to Stanford customers and that about 62 percent of Stanford brokerage customers seeking to join the SEC’s case had been given access to their money. The report also said that Janvey was working on a plan that would allow Stanford customers whose accounts are frozen to submit online applications to request their money. However, if a customer’s account contained fraudulent proceeds, the account would not be unfrozen and the customers would have the option of participating in non-binding mediation or appealing their claims directly to the judge.
The author of Mexicolawblog.com, John Dorsey, regularly works with David Cibrian on cross-border and other transactional legal matters.
Mexico has imposed trade sanctions in the form of tariffs ranging from 10-20% on approximately 90 categories of agricultural and industrial products that are shipped from the U.S. to Mexico (whether or not the products are of U.S. origin) in retaliation for suspension by the U.S. of the U.S. Department of Transportation’s ”demonstration project“, which allowed Mexican trucks to make deliveries in the U.S. as required by the North American Free Trade Agreement (NAFTA). The sanctions, which were authorized by a NAFTA panel ruling several years ago, are are expected to affect approximately $2.4 billion in U.S.-Mexico trade.
The affected products include certain Christmas trees, onions, cabbage lettuce, almonds, dates, grapes, pears, apricots, cherries, strawberries, nut mixes, uncooked pasta, peanuts, fruit juices, vegetable juices, soy sauce, soups and broths, mineral water, wines and other fermented beverages, dog and cat food, oilcake and other solid residues, paints, manicure and pedicure products, make-up and beauty products, oral or dental hygiene products, shaving products, tableware and kitchenware, toilet paper, statuettes and other ornaments, notebooks and diaries, printed books and brochures, tarn, carpets, glassware, jewelry and precious metals, furniture mountings, refrigerators and freezers, coffee and espresso makers, laundry machines and other electrothermic devices, telephones, batteries, sunglasses, metal furniture, arcade games, pens, pencils, and certain other goods.
The complete list of affected products and the tariff rates imposed was published in Mexico’s Official Daily (Diario Oficial) on March 18, 2009.
U.S. exporters to Mexico who believe their products may be subject to the tariffs should contact their international trade attorneys and/or customs brokers.
The demonstration project was terminated under a rider to the Omnibus Appropriations Act that President Obama signed on March 11, 2009 (Public Law 1118, division I, title I, 123 Stat. 524). The Federal Motor Carrier Safety Administration issued a notice of termination effective March 11, 2009.
Thanks to my colleagues Mark Andrews and Ken Siegel of Strasburger & Price, LLP and to Doug Jacobson of tradelawnews.com for providing certain background information for this post; Mexicolawblog.com remains solely responsible for its content.
As the U.S. Congress begins its review of the U.S.-Mexico border trucking demonstration program and the global financial crisis continues to ripple through Mexico, U.S. and Canadian cargo transportation companies and other investors may wish to consider distressed asset investment opportunities in Mexico’s cargo transportation industry.
The following is a rough outline of the laws and rules governing foreign investment in Mexico’s cargo transportation industry, all of which (along with other laws) should be carefully considered in consultation with a licensed Mexican attorney (which I am not) before making any investment:
International Cargo Transportation Services
Mexico’s Foreign Investment Law (Ley de Inversion Extranjera) allows foreign companies to own 100% of the equity of a Mexican company that performs international cargo transportation services in Mexico, where “international cargo transportation services” generally means services involving the transport of cargo between points in Mexico and the United States or Canada but excluding services involving the transport of cargo between points within Mexico.
However, a permit from the Ministry of Communication and Transportation (Secretaria de Comunicacion y Transportes- SCT) is required to perform such international cargo transportation services and the SCT is not currently granting such permits. Indeed, the SCT has rejected all recent requests by Mexican companies with U.S. and other foreign shareholders seeking to engage in the international cargo transportation business. Several of the rejections are being contested in litigation in Mexico.
Although the requesting companies are expected to prevail in the litigation because the SCT’s rejection of their permits appears to be contrary to applicable Mexican law, the litigation could continue well into 2009 or 2010.
Domestic Cargo Transportations Services
Under the Foreign Investment law, a foreign company is not permitted to own any interest in a Mexican company that performs domestic cargo transportation services, where “domestic cargo transportation services” generally means services involving the transport of cargo between two points within Mexico.
The exception to that rule is that a foreign company may make an investment in a Mexican company that performs domestic cargo transportations services (and/or international cargo transportation services) in Mexico, provided that the investment is neutral and the Ministry of the Economy (Secretaria de la Economia) approves of the neutrality of the investment in advance. “Neutral” in this case usually means that the foreign company may own only preferred stock in the Mexican company with voting rights limited to material matters such as a change in corporate purpose, merger, acquisition, sale of assets, spin-off, etc.
The Ministry of the Economy has recently approved such neutral investments by U.S. investors in Mexican transportation companies. The Ministry almost invariably rejects the first application and requests additional information from the applicant regarding the proposed investment. The second submission of the application is often accepted. The Ministry of the Economy has 30 days to respond to each application for approval of neutral investment but generally responds within 15 days.
Demonstration Program
A third option for U.S. and Canadian cargo transportation companies that wish to do business with Mexico but not to make a direct investment in a Mexican company is to make application to the SCT for enrollment in the Mexican equivalent of the U.S.-Mexico border trucking demonstration program (programa demostrativo), which allows a U.S. or Canadian transportation company to enter Mexico with its own trucks, drivers, and trailers to perform international cargo transportation services. (The U.S. demonstration program, as promulgated by the U.S. Congress and the Department of Transportation, has allowed Mexican carriers to make deliveries into the interior of the U.S. since 2007.)
Two key requirements of the Demonstration Program are that the truck drivers of the foreign applicant be bilingual and the foreign company be a registered transportation company with the U.S. Department of Transportation or its Canadian counterpart. The applicant must provide a substantial amount of supplementary information with the application. Applications are typically adjudicated within 3-4 months after submission.
As Mexican billionaire Carlos Slim Helu continues his buying spree of large stakes in distressed U.S. companies, commentators have started to question the possible impact of his expanded influence on U.S. business and politics.
In the last year, Slim, through his family members and affiliated companies Banco Inbursa and Inmobiliaria Carso, has acquired:
- $250 million of six-year notes of The New York Times (NYSE: NYT) bearing interest at 14% per annum coupled with warrants convertible into common shares (this is in addition to the $128 million of NYT common stock Slim bought in September 2008 and representing 6.4% of NYT common stock; after the exercise of the warrants Slim’s NYT stake would rise to 17%);
- A 18% stake in luxury goods retailer Saks, Inc. (NYSE: SKS), which prompted the company’s board of directors to enact anti-takeover measures (rumors have suggested Slim is interested in the Saks’ real estate holdings); and
- A $150 million stake in Citigroup common stock (NYSE: C), which aroused speculation that Slim would seek to take over Citigroup’s Mexican subsidiary Banamex; Slim promptly denied interest in Banamex.
Andres Martinez, a Mexican native and journalist, suggested that Slim’s investment could pose serious conflict of interest problems for the NYT that could threaten its journalistic integrity.
At this juncture, Mr. Martinez’s view seems to be a stretch. Even after Slim exercises his warrants to acquire 17% of NYT common stock, Slim will have no representation on the NYT board, and no special voting rights. The Ochs-Sulzberger family owns 19% of the company, which it controls through a special class of supervoting shares.
The view of Armand Peschard-Sverdrup, a senior associate of the Center for Strategic and International Studies, is more on point: ”by having a stake in the New York Times, [Slim is] basically projecting himself as a powerbroker in this country, regardless of how his investment does.” His investment in NYT, which yields a 14% annual return, appears that it will do very well.
The Mexico Institute and the Woodrow Wilson International Center for Scholars at Princeton have launched a new website/blog called The Mexico Portal, which according to the site, “provides the most comprehensive and timely news, analysis and studies on Mexico. It covers a wide range of critical issues, including migration, security, the economy, development, energy, and elections.”
“We hope that The Mexico Portal helps the U.S. public follow events that occur in Mexico and in the Mexican community in the United States, as well as permit access to new studies, articles and reports that explore the significance of those issues,” said Andrew Selee, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, in a press release cited in a Sentido Comun report.
The Mexico Portal is a welcome addition to the growing number of Mexican-related news and information sites.
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