Law Firm Leaders Discuss the Current Environment in Mexico

Editor’s Note: The authors of this post lead the Latin American team of Major, Lindsey & Africa, a legal recruiting firm.

By Jeffrey Liebster and Joshua Dull of Major, Lindsey & Africa

At a recent conference in New York City sponsored by Major, Lindsey & Africa and HSBC, a panel of leading lawyers and industry professionals discussed the opportunities and obstacles faced by law firms doing business in Mexico. The panel consisted of leaders from indigenous Mexican firms, as well as prominent partners with Mexican facing practices from international firms with and without offices in Mexico. Diego Spannaus Head of Multinationals Commercial Banking for HSBC in Mexico, provided a keynote presentation on the robust state of the manufacturing, energy and telecommunications sectors of the Mexican economy.

What was clear from the discussion following the economic overview is that Mexico’s landmark energy reforms are bolstering an already strong business environment. Our neighbor to the south is attracting a greatly increased amount of foreign investment from all over the world, a significant amount of which is from private equity firms. Under the newly implemented legislation that ended the Mexican government’s 75 year energy monopoly, an extensive bidding process for private investment has been implemented, and the initial blocks have been awarded. It has been said that if the Mexican government does even half of what it intends to do, we can expect awards of 180 blocks for exploration and production of gulf and land-based energy resources over the next two years. Although the price of oil has impacted the initial rounds, there has been a significant amount of new legal work for domestic and international law firms.

Elisabeth Eljuri, Head of Latin America for Norton Rose Fulbright and one of the world’s leading oil & gas lawyers who personally maintains her office in Venezuela but travels extensively in the region, praised the Mexican government and those responsible for drafting the energy reform contracts.

“The government deserves a lot of credit for reaching out to the industry for intelligence and feedback during the drafting process,” said Eljuri. “The reform is happening and is opening the door to O&G.”

Eljuri, who represents a member of the consortium that was awarded one of the initial blocks, believes there are some lingering issues pertaining to dispute resolution, the cost of letters of credit and others that could slow some of the momentum, but said companies that come in early while oil prices are low and the market is not as hot will realize greater returns.

Her beliefs about the scale of the opportunity was echoed by New York-based Taisa Markus, one of the leaders of Paul Hastings’ Latin America Practice. Markus stressed that the reforms will entail a process but the outlook in the long term looked promising adding that there are risks attendant to all pioneering efforts, particularly in emerging markets and in commodity businesses. She also dismissed the notion that the drop in oil prices is an impediment in the long term to investment in Mexico’s energy industry.

“Companies from all over the world including Russia, Asia, Europe, the U.S. and Latin America have expressed interest in the bid rounds. These companies have to take a long term investment approach.”

Several members of the distinguished panel also praised PEMEX, Mexico’s state-owned oil company, for its efforts to reorganize internally.

According to Carlos Aiza, a name partner at one of Mexico’s elite law firms, Creel, García-Cuéllar, Aiza y Enriquez, S.C., “Management at PEMEX, which has been very engaged in the reforms, is working hard to position the company to attract much needed investment and remain competitive. For law firms, this means lots of work in Capital Markets, M&A, Regulatory and Corporate Finance.”

But law firm leaders remain concerned about the rule of law and security issues in Mexico. The Mexican court system has begun to implement reforms, but as of today, the form of contract mandates that disputes be litigated in Mexican courts. One of the panelists commented that the absence of the right to resolve disputes in international courts could create diminished confidence in certain potential investors. As new blocks for deep water drilling are released that by law will require significant operating capital (US$1 Billion), some of the bigger players such as global IOC’s that meet those requirements may be hesitant to make a big investment if the only recourse in the event of conflicts is the Mexican courts.

However, two of Mexico’s legal icons offered comments that provide some relief to concerns about rule of law. When asked why companies should feel comfortable investing in Mexico, Michell Nader, founding partner of Nader, Hayaux y Goebel S.C., said that Mexico has successfully become a major player in the global economy with a track record of fair and evenhanded conduct in its relationships with foreign operators and investors. While Nader believes that arbitration for certain infrastructure projects is the best alternative, he stated that courts in general are becoming more sophisticated and dependable.

Speaking of its ability to effectively interact with business partners around the world, Nader added, “Mexico has a wealth of international experience as evidenced by its relationships under more than 40 free trade agreements.”

Manuel Galicia, a dean of the Mexican bar and founding partner of Galicia Abogados, S.C., also represented parties to the bidding process. Galicia commented on the government’s right to enforce the administrative rescission/early termination which could be seen as expropriation: “This right is not new, it has been in our legal system [for years] and in that context I recommend that investors consider precedents to become comfortable with the fact that this government’s right has not been used as a means to cancel contracts unilaterally. The Mexican State understands the implications of abuse in exercising such remedy vis-a-vis foreign investment. In reality, there have been very few examples of the government actually cancelling contracts.”

As to security, many on the outside that read the headline-grabbing stories of tragic gang related violence in Mexico remain on the sidelines, reluctant to invest in Mexico. The vast majority of the panelists acknowledged the concerns but stated that most of the crime is geographically limited to border towns, farming regions and other Mexican gang strongholds. Several commented that the business environment is much better than in almost all “emerging markets” around the world and that those with awareness and an appetite for significant returns are not deterred.

Everyone agreed that that they are very comfortable visiting and doing business in Mexico City, where security has improved over the last decade. Markus shared that she has witnessed this improvement first-hand during her 20+ years of doing business there. Today, she feels very comfortable getting around the city’s many parks or walking at night in the major business centers and districts like Polanco.

The panelists were generally bullish on their outlook for the Mexican energy market and believe there are massive opportunities for law firms and their clients that are investing, regardless of the perceived obstacles that exist. Timothy Powers, Managing Partner of the powerhouse Texas firm Haynes and Boone that has had a Mexico City office since 1994, is confident that the drop in oil prices has created opportunities for the right types of investors. Many of his clients share this belief.

“To get in early and buy low, could mean huge returns,” he said.

Eljuri agrees, “Companies that really understand the market and come in early should realize greater returns, especially while oil prices are low and the entry cost is lower.”

All agree that there are new and significant opportunities for law firms operating in Mexico. Aiza commented, “What is amazing is the volume of transactional work that traditionally was closed off to business that is now out there for law firms. There is already more workflow...and the end is nowhere in sight.”

Nader summed up the general feeling of experienced practitioners in the region, “Law firms are servicing work I never thought I would see in my lifetime.”