New national security scrutiny for foreign investment: Foreign investment law reform initiative defines national security sectors

Executive Summary:

The President of the Republic presented to the Senate the Initiative with Draft Decree to amend, add to and repeal various provisions of the Foreign Investment Law (the “Initiative”), which proposes to eliminate the Commission’s generic power to prevent acquisitions by foreign investment for reasons of national security, and to incorporate a special national security scrutiny mechanism for foreign investment to participate, directly or indirectly, in a percentage greater than 49% of the share capital of a Mexican company, when a threshold of assets – to be defined – is exceeded and the company carries out activities in sectors sensitive to national security.

The proposal also includes a special authorization procedure before the National Foreign Investment Commission (the “Commission”) where three new State Secretariats are incorporated, and four permanent invited government entities when national security issues are analyzed, establishes the tacit refusal for these requests and a reinforced sanctioning regime.

The Initiative's main focus is to establish a prior control mechanism, analogous to the systems of foreign investment screening from other jurisdictions, so that foreign investment can participate, directly or indirectly, in a percentage greater than 49% of the share capital in Mexican companies whose economic activity is one of those defined by the Law itself as national security.

These activities include (i) Strategic infrastructures (whether physical or virtual, linked to the energy, transport, health, communications, mining, data processing or storage, digital systems, aerospace, defense and sensitive facilities sectors, including land and buildings essential for such infrastructures); (ii) Critical technologies and dual-use products (such as artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defense, energy storage, quantum and nuclear technologies, nanotechnologies and biotechnologies); (iii) Essential inputs (including energy supply, raw materials and food security); and (iv) Sensitive information (in particular, personal data, or the ability to control such information).

The Initiative has not been approved and, therefore, does not constitute current law. Its content could be modified during the legislative process.

1. New National Security Scrutiny

The Initiative proposes repealing the article of the Law that granted the Commission the generic power to prevent acquisitions for reasons of national security, without clear parameters, and replacing it with a detailed regime. If the initiative is approved, a favorable resolution from the Commission will be required when certain conditions are met. three cumulative conditions:

• Foreign participation exceeding 49%Foreign investment intends to participate, directly or indirectly, in more than 49% of the share capital of a Mexican company.
• Asset threshold. The total value of the target company's assets exceeds the amount determined by the Commission through a general resolution. This threshold must be issued and published in the Official Gazette of the Federation within 180 calendar days from the day following the publication of the decree.
• Sensitive activity. Mexican society carries out some of the activities defined in the initiative itself as national security.

The Initiative provides for a submission mechanism volunteer When the intended percentage of participation exceeds 49% but the value of the assets does not reach the established threshold. This provision would provide legal certainty to investors who wish to obtain early termination in transactions below the threshold.

It is unclear whether the Initiative's inclusion of the reference to indirect participation triggers scrutiny of transactions agreed upon entirely between foreign parties that, as a result of a change of control at a global level, modify the indirect ownership of a Mexican subsidiary operating in one of the sectors listed as national security, and whether the express reference to indirect participation makes it relevant to analyze the ownership structure through the different levels of the corporate chain and/or pyramiding, in order to determine whether, considering said structure, the foreign participation exceeds the 49% threshold.

This is because the Initiative does not establish a specific methodology for calculating such indirect participation, as the Law does for economic activities and companies that are exclusively reserved for Mexicans or Mexican companies with a clause excluding foreigners, or where foreign investment may participate in different percentages, where foreign investment is restricted from participating indirectly through trusts, agreements, social or statutory pacts, pyramid schemes, or other mechanisms that grant them control or any participation.

2. Sensitive Sectors and Activities

The Initiative lists five categories of economic activities that trigger national security scrutiny that resemble systems of foreign investment screening from other jurisdictions, in addition to analogous or similar economic activities or sectors that the Commission may determine at its discretion:

• Strategic infrastructures. Physical or virtual infrastructures linked to the energy, transport, health, communications, mining, data processing or storage, digital systems, aerospace, defense and sensitive facilities sectors, including land and buildings essential for said infrastructures.
• Critical technologies and dual-use products. Artificial intelligence, robotics, semiconductors, cybersecurity, aerospace technologies, defense, energy storage, quantum and nuclear technologies, nanotechnologies and biotechnologies.
• Essential supplies. Supply of energy, raw materials and food security.
• Sensitive information. Access to sensitive information, particularly personal data, or the ability to control such information. The proposed wording is not limited to personal data, so its potential scope is considerably broad.

The discretionary power that is intended to be given to the Commission to determine other analogous or similar economic activities or sectors within the scrutiny, through the simple issuance of general resolutions of a public nature, is questionable from a constitutional standpoint.

This power would considerably expand the potential universe subject to scrutiny and could generate regulatory uncertainty, by allowing the incorporation of sectors not expressly listed, in addition to being subject to the obligation of justification and motivation and to eventual jurisdictional control.

3. Possible Resolutions

Within the analysis of a foreign investment application in national security activities, the Initiative provides that the Commission may resolve in one of three ways:

• Viability. Determine the absence of risks or threats and declare the acquisition viable.
• Mitigation. Make the acquisition conditional on modifying the project to mitigate the identified risk.
• Impediment. Prevent acquisition for reasons of national security.

The feasibility and mitigation resolutions would include specific terms and conditions, which could involve periodic reporting by the parties and assessment of compliance with the national legal order.

4. New Expanded Integration of the Commission

The Initiative proposes to expand the Commission's integration with three new secretariats whose permanent members will have voice and vote:

• Ministry of National Defense.
• Secretariat of the Navy.
• Secretariat of Security and Citizen Protection.

It is also proposed to incorporate the following as new permanent guests, with voice but without vote and only in sessions dealing with matters of national security:

• General Prosecutor of the Republic.
• National Intelligence Center.
• Service tax administration.
• Financial Intelligence Unit.

5. Possible Fines

The Initiative adds fines of five thousand to two hundred thousand times the daily value of the Measurement and Update Unit (UMA), which could imply fines of more than 23 million pesos for (i) the transfer of shareholding without authorization with denial, or (ii) non-compliance with mitigation actions.

If you have any questions regarding the content of the Initiative, please do not hesitate to contact us.