Legal guide for company directors and CEOs in Mexico

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

 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, its shareholders and its employees prior to taking decisions related to their responsibilities. Directors need to consider that decisions will be scrutinised with ESG in mind.   

The duty of diligence imposes the following obligations on directors: 

• Develop decisions in good faith and in the best interests of the enterprise.
• Be qualified and informed in relation to any relevant aspect required for the correct management and performance of the company.
• 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 regarding 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 oversee the acts and operations carried out by the company, in order to detect anything that may go against the interests the company or its shareholders. 

Pursuant to Mexican law, only individuals / natural persons can be appointed as directors. Director’s responsibilities cannot be performed through a third party, such as an agent or legal representative of the appointed director. 

As for the eligibility criteria, the directors of a company may be shareholders or individuals that are related or not to the company. They must be at least 18 years old, as this is the legal age in Mexico. There are no nationality or residence restrictions on directors. However, any foreign director with residence in Mexico 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 directors are appointed by the general shareholders’ meeting. 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 company and has certain faculties to execute corporate arrangements. 

Directors may represent the company jointly as a board of directors or individually when there is a sole director appointed. Only if otherwise established in the bylaws of the company, a director does not have individual powers of attorney or authority to represent the company. On the other hand, a sole director will have full powers and authority to represent the company. The company’s bylaws may set forth different structures and directors may be individually vested with powers of attorney. 

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, 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 or pass unanimous written resolutions. 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 otherwise. 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 to protect the minority. Many companies use this to ensure that the power of control over the corporation does not affects the rights of the minority shareholders. 

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

The sole director or board of directors of a corporation is part of and a manifestation of the corporation; they 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 employees of the company. Instead, they enable the corporation to operate, manifest itself and act. 

Mexican law contains an obligation on directors to inform the other directors and abstain themselves  from voting, when the item under discussion of the board of directors may create a conflict of interest. This obligation is related to their requirement to act in good faith and  in the best interest 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, his/her vote will not be void and that director shall be liable for any damages caused to the company. .

In order to avoid a potential conflict of interest, directors cannot represent shareholders and vote in their behalf in a shareholders´ meeting regarding 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 function 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 mercantile (insolvency proceeding) is carried out, directors’ duties may be transferred to a conciliator as regulated under the Mexican Bankruptcy Act. Likewise, if the company is in a winding-up process by way of an early dissolution, the directors are removed and the company passes to the administration of a liquidator appointed by the shareholders’ meeting. 

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: 

1. responsibility towards the corporation (internal); and
2. 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, among others. 

Civil Liability

A director may incur in 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 main 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 criminal 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 affected party. 

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. 

Please note that there are some additional cases where the director may incur in liability such as antitrust matters where the director may face penalties and disqualification to act as a director. 

According to Mexican law, companies may include within their bylaws provisions to entitle directors to an indemnity provided by the company, for charges, expenses and liabilities incurred by their directors when, in the performance of their duties, it is proven they acted in the best interest of the company.. 

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