Legal guide for company directors and CEOs in Mexico

The Exchange Market Act (Ley del Mercado de Valores) establishes the corporate governance of listed companies and outlines the duties of diligence and loyalty that directors must comply with in order to take care of a company’s business.

The duty of loyalty obligates directors to consider the best interest of the company and its employees prior to taking decisions related to their responsibilites. Directors need to consider that decisions will be scrutinised with ESG in mind.  

The duty of diligence imposes the following obligations on directors:

1. Develop decisions in good faith and in the best interests of the enterprise
2. Be qualified and informed in relation to any relevant aspect required for the correct management and performance of the company
3. Lead the use of the company’s resources and organisation to ensure it operates at the best possible efficiency.

The Mexico Constitution sets out that public, social and private sectors all have social responsibility with regard to national economic development. These sectors must take care of the environment when carrying out their activities.

Private pension funds (Administradoras de Fondos para el Retiro) must consider and evaluate ESG issues prior to making investments.

The Environmental Responsibility Act (Ley Federal de Responsabilidad Ambiental) establishes that companies are liable for all environmental damage caused by officers and directors during the course of company operation.

Alongside the different laws related to corporate governance, the Mexican Chamber of Representatives has considered establishing an obligation to directors and boards of directors to identify any climate change risk within a company’s day-to-day operations or activities by means of appointing an expert team; this team would be responsible for identifying and bringing any major issues to the company’s CEO and board of directors.

Due to the fact that any climate risk can be taken as a material event, public companies are required by the Exchange Market Act to disclose to the public all relevant information about this specific risk.

Recently, several Mexican companies listed on the Mexican Stock Exchange have decided to follow the practice of disclosing all potential climate risks to their shareholders, or to include these risks within the company’s annual report.

The management of a corporation can be vested in a sole administrator or a board of directors consisting of any number of members as determined by the shareholders’ meeting.

Mexican laws do not set forth a role of supervisory directors; however, a surveillance body will need to be appointed. Depending on the type of company, this can be either an external audit committee or a statutory auditor; surveillance is obligatory for stock corporations (including the ones ruled by the Securities Market Law) and optional partnerships. The role of the surveillance body is to supervise the acts and operations carried out by the company, in order to detect anything that may go against the interests of it.

Mexican law highlights the personal nature of the position of director. Hence, a director’s responsibilities cannot be performed through an agent or a representative and can only be performed by an individual.

Directors must be at least 18 years old, as this is the legal age in Mexico. There are no nationality restrictions on directors. However, foreign directors must comply with the applicable immigration rules and permits.

Also, the law prohibits persons from managing a corporation who are not permitted to conduct business by law,
e.g. persons subject to interdicts, and commercial or public notaries.

The members of the board of directors are appointed by the general ordinary shareholders’ meeting, usually by the majority of the shareholders in attendance. A shareholder or a group of shareholders representing 25% of the capital stock of stock corporations, or 10% of publicly traded companies, can appoint one member of the board.

Directors can only be removed by resolution of the shareholders’ meeting, or pursuant to a resolution by a government authority including a judicial authority or, in the case of specifically regulated entities such as banks, the corresponding administrative regulator.

A director is a sui generis figure who has management responsibilities, legally represents the corporation and has the power to execute corporate arrangements.

In addition to a director’s important powers of management and representation, he/she also has the power to implement the decisions taken at shareholders’ meetings, prepare financial statements of the corporation for submitting to the ordinary shareholders’ meeting, appoint managers and agents, and delegate his/her powers.

Directors are required to act on behalf of the corporation and never on their own behalf. There is a presumption that acts performed by directors are valid, and if a subsequent meeting overrides these acts, they will remain valid against third parties unless it is established that they were made in bad faith.

In the case of a sole director, he/she is in charge of each and every one of the acts relating to the management and representation of the company, whether established by law, statutory provision or agreement of the shareholders’ meeting. He/she is also personally responsible for the fulfilment of his/her obligations with due diligence and in a timely manner.

On the other hand, a board of directors is a collegiate body that functions as such. The board of directors legally manages and represents the corporation, subject to any limitations imposed by a company’s bylaws and except where the bylaws indicate that special powers of management and/or administration are to be specifically granted to one or more directors.

In order to operate the company, its directors are required to hold a board meeting. Other than where the bylaws provide otherwise (by granting power to individual members), no act or decision of the board of directors will be valid if made outside of a properly established meeting. For a meeting of the board to be valid, it must be called by the president or the secretary of the board, and directors must receive timely notice of the meeting. The notice of the meeting must contain the date, place and time of meeting, the meeting’s agenda and be signed by the person calling it, except in the case of meetings of all directors where all concur and agree at the beginning of the session on the agenda submitted to them by the president.

For the meeting of board of directors to be legal, the majority of its members must attend. For resolutions to be passed, there must be a majority vote in favour by the directors present at the meeting. In the event of a tied vote, the president can intervene and have the casting vote unless any provision of the bylaws apply and deprive him/her of it. In such circumstances, the matter will be brought before the shareholders’ meeting and they will make the final decision.
The quorum required for a meeting of the board may be increased by an express clause in the company’s bylaws. In practice, most companies’ bylaws contain a requirement of a high majority, either to form a meeting of the board of directors and/or to adopt resolutions.

The bylaws may also provide a right of veto as a means to protect the minority. Many companies use this as a way to ensure that the power of control over the corporation favours minority shareholders.

It is common practice for bylaws of a company to provide for alternate directors. In the absence of the relevant director the alternate is entitled to vote and be counted in the quorum for all legal purposes. The alternate director is subject to the same requirements, guarantees and responsibilities as that of the original director.

The board of directors of a corporation is a part of and a manifestation of the corporation; its constituent members are considered a special instrument to provide services of the company. As a result, they are not subject to labour law in the same way that the rest of the employees. Instead they form a means or a legal instrument for the corporation to operate, manifest itself and act.

Mexican law contains an obligation on shareholders to abstain from voting when the item under discussion may create a conflict of interest. This principle also applies to directors because they are required to act in good faith and protect the interests of the corporation, which would be damaged if a director asserted his/her own interests over those of the company. However, if a director does vote on a matter involving a conflict of interest, the vote will not be void. The director may be liable for damages to the company if his/her vote would have been decisive or necessary for the decision to be approved.

In order to avoid a potential conflict of interest, directors cannot vote on resolutions concerning the adoption of the annual accounting report submitted to the ordinary shareholders’ meeting.

The board of directors has two functions: first, the management or administration of the company and second, the company’s representation with third parties. The first is internal, between the shareholders and employees of the corporation, and generally does not extend outside the corporation; however, it is an important function because it ensures that the corporation works in a timely manner and complies with its objectives.

The representative function of the board of directors exists so that the corporation may contract with external or third parties and provides the means for the corporation to operate with third parties, sign agreements, acquire rights and assume obligations.

Directors fulfil these two functions through taking decisions and passing resolutions at meetings. It should be noted that these two functions are considered separate, although in reality they often overlap.

The director or board of directors owe duties to the corporation itself

Under Mexican law, directors’ duties suffer no change during financial difficulties, although this may be regulated within each company’s policies. However, if such financial difficulties turn into insolvency, and a concurso mercantil (insolvency proceeding) is carried out, directors’ duties may be transferred to a conciliator as regulated under the Mexican Bankruptcy Act.

A director may be liable to compensate an affected party for damages caused to it as a result of a breach of the director’s obligations and authority. In addition, a director may commit an offence in failing to comply with his/her obligations and authority and incur criminal liability, including imprisonment.

The board’s liabilities can be divided into two categories: (i) responsibility towards the corporation (internal); and

(ii) liability towards third parties (external).

As a general principle, the corporation holds the board liable for its actions, as it is usually the corporation that is the wronged party. Consequently, law requires shareholders to approve any action against the board and to give authority to an individual to bring the action.

In order to protect minority interests, law gives shareholders representing at least 25% of the capital of the corporation the power to directly bring an action for liability against the board, as long as the following conditions are satisfied:

the alleged infringement was committed against the corporation as a whole, and is not brought about to assist the personal interests of the minority group; and

the petitioner did not vote in favour of any relevant shareholders’ resolution concerning the matter.

Although there is no provision under Mexican corporate law regulating the liability of the board towards third parties, it is possible that unlawful conduct of the board may result in individual liability of a director, as well as of other persons or entities outside the corporation.

Liability towards third parties may be brought under the Civil Code. It should be noted that certain unlawful conduct could be considered a criminal offence and members or third parties affected may bring a claim.

It is important to note that the board has a wide scope of obligations, authority and responsibilities. Therefore, actions of the board must be recorded, from the incorporation of the company up to its liquidation, or risk the cancellation of the company’s registration.

The liabilities of directors, internal and external, can be classed as civil, criminal or tax.

Civil Liability

A director may incur civil liability for acts committed when managing the business of the corporation which were carried out carelessly or negligently, or if the culpable act failed to implement the decisions of the shareholders’ meeting.

The principal characteristics of civil liability of company directors are as follows:

• to establish liability under civil law, malice or negligence must be proven. This does not necessarily include breach of law
• a claim for damages is brought against the individual director directly, and only indirectly against the corporation
• civil law claims can also be brought against other parties, including parent companies.

Civil law includes an obligation to repair damage done in order to restore the situation to that prior to the breach, or to provide pecuniary compensation for damages. Civil liability gives rise to two forms of claims:

1. compensation in nature: to restore the situation to that prior to the breach
2. equivalent compensation: to pay an equity value to the affected party equal to that it was deprived of and to indemnify the affected party by providing equivalent rights or interests.

Criminal Liability

Certain conduct can lead to criminal liability under the Criminal Code. The main characteristics of criminal liability are as follows:

• criminal liability can only be established when a law has been breached and malice or negligence are proven
• a director may be liable to repair the damage and may also face imprisonment
• to determine the damages under criminal liability, the law takes into account the damage caused to the corporation.

Tax liability

The Federal Tax Code provides that directors are jointly and severally liable with the corporation for any contributions due and not retained by the company during a director’s term of office.

Tax obligations are not limited to payment contributions but compliance with other obligations imposed by law, including matters relating to accounting, cooperation with the tax authority to provide information and not withholding contributions from third parties.

Although the law is not entirely clear on the matter of joint and several liability, it establishes that the liability of the board of directors can be established from the illegal conduct of any of its members, in which case all directors will incur joint liability. The corporation will also be jointly liable with the directors for damages caused by their unlawful acts during the exercise of their functions. The company will also be responsible for any excess amount of compensation not ratified by the shareholders’ meeting.

According to Mexican law, companies may include within their bylaws provisions to limit liability for damages caused by their directors and officers arising from the acts they perform or the decisions they take, provided that  they are caused by wilful misconduct or bad faith, or that such acts are illegal under Mexican laws.

Law provides directors with an exclusion from liability if the director at fault expressed his/her disagreement at the time of the resolution to approve the act in question.

Additionally, directors can obtain insurance against personal liability, and companies can pay for the insurance premium against personal liability incurred by directors in the performance of their duties.

Solvency

The highest priority is to address the short- and long-term financial sustainability of the company. This will require a careful assessment of projected cash flow solvency as well as balance sheet solvency. Directors must ensure that they have up-to-date management information on which to base their decisions, together with a firm grasp on how the company’s markets and prospects are likely to be affected by the crisis. Uncertainty over the timetable for exit from current lockdown rules, and the speed of economic recovery, means that directors will have to plan for a variety of different scenarios, and develop alternative plans that can be implemented as necessary, particularly if the worst case outcomes seem likely. Directors of companies threatened with insolvency should: (i) seek specialist advice, both legal and financial; (ii) ensure that all directors and key stakeholders are kept informed and onside; and (iii) keep a clear record of their decision-making and the materials available to them to review.

Risk and emergency response

Even if the company’s solvency is not in question, directors are likely to be faced with a number of difficult decisions as they develop their strategy for the company. For example, the need to ensure safe working conditions for staff will often conflict with purely commercial objectives. Consumer-facing companies will also have to manage new reputational issues as public expectations of those companies shift as a result of the crisis and ensure their communication strategy is adequately prioritised. Directors need to find a way to balance these competing considerations in the long-term interest of the company.

Logistics and communication

Directors should address the logistical challenges which international lockdown rules and social distancing create. Existing operations including supply and distribution chains, and internal processes such as accounting, reporting and HR management, will be disrupted.

Low-amount credits are being granted by the Federal Government; however, this will only be applicable to small- or medium-sized companies and credits will be up to MXN 25,000 (approximately USD 1000). This was subject to the condition of not having laid off employees in the first three months of 2020.

Mexico City Local government offered micro credits of MXN 10,000 to small companies with a maturity of 24 months.

The Federal Government also granted loans to small businesses up to MXN 51,000 with a maturity of up to 36 months with no interest accrued during the term of the loan.

Support by Local Governments regarding the payroll tax that depends on each state approving: i) Longer term to cover this tax; ii) Reduction on the final amount to pay of this local tax, or iii) Forgiveness of payment.

Mexican banks introduced measures to allow loan holders to defer payments for up to 6 months under a relief plan put forward by the country’s banking association (ABM) amid the COVID-19 crisis. The measures will apply to credit cards, automotive credit, payroll loans, mortgages, small- and medium-sized companies and personnel, and will benefit those clients who request it if they have been directly or indirectly affected by COVID-19.

The states of Jalisco, Guanajuato, Guerrero, Aguascalientes and Oaxaca have already implemented measures to ease the impact of the crisis on the financial sector including, among other initiatives, loans and funds for self-employed workers.

The Mexican Government expedites issuance permits for the import and export of all health inputs. Due to the declaration of “Sanitary emergency due to Act of God” by the Mexican Government, contracts entered with suppliers, clients, distributors or any other third parties may be subject to an Act of God provision.

Due to the declaration of “Sanitary emergency due to Act of God” by the Mexican Government, a temporary suspension of labour obligations for both employer and employee is established.

In general, state and local tax authorities in Mexico are providing tax relief in response to the COVID- 19 pandemic including extending the deadlines for filing reports or paying taxes and to comply with providing certain reports or documents requested by the supervisory authorities, as well as extending the deadline for the filing of administrative appeals or to comply with social security obligations. The reliefs will vary for each company depending  on its location and its applicable regulatory frame.

No official legislative or executive act has been issued by the Federal Government.