Corporate Governance 2020 Comparisons

Last Updated June 22, 2020

Law and Practice

Authors



Canales, Dávila, De la Paz, Enríquez, Sáenz, Leal, S.C. is a boutique law and financial advisory firm with a solid reputation in Mexico. From the main office in Monterrey, the firm's six partners, 15 associates and two financiers are strategically located to continue serving the needs of domestic and foreign clients. The team has focused on corporate and transactional practice, advising clients in their day-to-day business, as well as participating in the design, structuring, implementation and start-ups. In 2018, as part of the firm's evolution and the needs of clients, the firm integrated a financial practice into the provided services, adding a highly qualified team of financial advisers who are highly regarded by the market to the firm's wider team.

In Mexico, according to the General Law of Business Corporations (Ley General de Sociedades Mercantiles) published in 1934, the principal forms of corporate organisations able to legally and appropriately conduct businesses are the following:

  • the Sociedad Anónima or SA (a Stock Corporation equivalent);
  • the Sociedad de Responsabilidad Limitada or S de RL de CV (a Limited Liability Company equivalent).

Moreover, as of June 2006, with the entry into force of the Mexican Securities Law (Ley del Mercado de Valores), three other principal forms of organisations to conduct business were adopted:

  • the Sociedad Anónima Promotora de Inversión or SAPI” (an Investment Promotion Stock Corporation equivalent), which can be incorporated as a Stock Corporation, adopting the quality of investment promotion later in their development;
  • the Sociedad Anónima Promotora de Inversión Bursátil or SAPIB (a Stock Market Investment Corporation) which subscribes values in the National Securities Registry (Registro Nacional de Valores) in which case, it will become a listed corporation; and
  • a Sociedad Anónima Bursátil or SAB (Public Stock Corporation equivalent) which is a publicly traded corporation.

Additionally, in every entity, the capital is commonly established as “variable”, which means that said capital is susceptible of increase by subsequent contributions of the existence shareholders or partners, or even by admission of new shareholders or partners, as well as decrease by partial or total withdrawal of the contributions.

The sources of corporate governance requirements in Mexico are:

  • the General Law of Business Corporations;
  • the Mexican Securities Law and, in order to comply with the best practices worldwide;
  • the Best Corporate Practices Code as a set of recommendations issued by the Business Coordinating Council (Consejo Coordinador Empresarial) to improve corporate governance practices of companies; and
  • the Principles of Corporate Governance (Principios de Gobierno Corporativo) implemented by the Organization for Economic Cooperation Development.

The corporate governance requirements for publicly traded corporations, such as a Public Stock Corporation include the following:

  • the board of directors shall be constituted of a maximum of twenty-one directors, of whom at least 25% must be independent. In no case, may the directors of the Public Stock Corporation be the persons who have held the position of external auditor of the company or of any subsidiary or affiliate, during the twelve months immediately prior to the appointment date; and
  • the board of directors shall designate a secretary who shall not form part of said corporate body, but still be subject to the obligations and responsibilities of the Mexican Securities Law.

As stated before, subject to different requirements established in the Mexican Securities Law, the Investment Promotion Stock Corporation may request the registration in the National Securities Registry of the shares representing their capital, in order to be able to be consider public regardless of public offerings. The Investment Promotion Stock Corporations that obtain the inscription of their securities in the National Securities Registry, must modify their name, adding at the end the word "Bursátil" (Stock Market Investment Corporation), consequently being subject, in its majority, to the regime established for the Public Stock Corporations.

Investment Promotion Stock Corporations

Investment Promotion Stock Corporations that may adopt for their administration, only the regime applicable to Public Stock Corporations regarding integration, organisation and operation, in which case, the requirement of independence of the directors will not be mandatory for Investment Promotion Stock Corporations.

By adopting the aforementioned regime, the directors and the executive director of the company shall be subject to the provisions regarding the organisation and responsibilities applicable to Public Stock Corporations; otherwise, they will be subject to the organisation and responsibilities regime provided in the General Law of Business Corporations.

The board of directors shall be assisted by one or more committees in matters of corporate and auditing practices, shall be constituted exclusively of independent directors and by a minimum of three members appointed by the board itself. In the case of Public Stock Corporations that are controlled by a person or group of people who have fifty percent or more of its capital, the corporate practices committee will be constituted, at least, by a majority of independent directors.

In addition to the requirements established by legislation, be it the General Law of Business Corporations or the Mexican Securities Law, there are the several provisions established by the Business Coordinating Council in the Best Corporate Practices Code and the Principles of Corporate Governance implemented by the Organization for Economic Cooperation Development.

Non-public Corporations

Regarding non-public corporations, in Mexico, one of the broadest corporate bases are family-controlled business. However, the latter tend to disappear due to the lack of succession of said corporations to foreign acquirers. Families tend to be very jealous of their work, therefore, instead of selling and undertaking another project, they usually stick to this one project and become stagnate.

Today, the General Law of Business Corporations has integrated several provisions to help family-controlled corporation establish a better corporate governance in order to preserve and perpetrate their companies.

Publicly Trading Corporations

However, attending publicly trading corporations – setting aside the crisis generated by the spread of COVID-19 – in recent years, the stock market in Mexico has had significant growth, promoting the creation of the second Mexican stock exchange in September 2017, the “Bolsa Institucional de Valores” or BIVA.

Later in 2017, the General Law of Administrative Liabilities (the Ley General de Responsabilidades Administrativas) along with the Federal Anti-Money Laundering Law (the Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita) of 2013, have been enforcing several provisions to which Mexican corporations have had to adapt in order to fulfil their legal obligations and avoid committing money laundering and/or bribery acts, in which case, they would set into implementation sanctions such as disqualification or liquidation of the corporation. 

In 2018, the National College for Independent Counsels was created as a consequence of the Best Corporate Practices Code update. Although the Best Corporate Practices Code is not compelling for corporations, it does aid companies to acquire certain institutionalisation, therefore, helping them to become competitive and enabling them to earn trust and recognition among the corporate business life.

Funding Methods

Finally, it is important to mention that in recent years, several funding methods such as FIBRAS (a Fideicomiso de Infraestructura y Bienes Raíces - an Infrastructure and Real Estate Investment Trust equivalent) and AFORES (Administradoras de Fondos para el Retiro - a Retirement Funds Administrator equivalent) have needed the implementation of strategic corporate governance structures in order to carry out such kinds of investments.

In Mexico, companies are not required by law to report any environment, social and governance (ESG) issues, however, companies may acquire such obligations by contract. For example, in practice, financial institutions and listed entities require companies with whom they settle agreements to comply with certain standards of ESG as a covenant.

There are no special measures that have been officially or unofficially implemented by the Mexican government or the administration bodies of companies in Mexico in terms of governance to address any COVID-19 impacts or restrictions.

The principle bodies involved in the governance and management of a company are the shareholders’ meeting (general partners’ meeting for Limited Liability Companies), which is the supreme decision-making body, and the board of directors (board of managers for Limited Liability Companies) appointed by said shareholder’s or partner’s meeting.

According to Mexican legislation, decision-making bodies can be identified in the different types of corporations as following:

The Shareholders' or Partners' Meeting

This meeting will decide all the actions and operations of the corporation through ordinary meetings in which they appoint and remove directors (or administrative body) and commissioners (or surveillance body) and/or the discussion, approval and/or modification of the reports rendered by the latter, among other issues.

Extraordinarily, the shareholder’s or partner’s meeting may address any of the following issues through an “extraordinary meeting”:

  • extension of the company’s duration;
  • early dissolution of the company;
  • increase or decrease in share capital (in its fixed part);
  • change of social purpose;
  • change of nationality of the corporation;
  • transformation of social type;
  • merger with another corporation;
  • issuance of privileged shares;
  • redemption of own shares and issuance of special shares;
  • bond issuance;
  • any other modifications to the social contract; and
  • other matters for which the law or the bylaws requires an elevated quorum.

The Administrative Body

Also known as the board of directors, who represent the corporation and are responsible of the corporation’s administration and other issues trusted to them by the bylaws or the shareholder’s or partner’s meeting.

The Surveillance Body

Commonly known as “Comisarios” in Spanish and who, depending on the social type, can be an external auditor, a committee or statutory auditor. It is relevant to keep in mind that Stock Corporations must include a surveillance body, whereas this body is optional for partnerships.

A Direction Body

Publicly traded companies should establish a direction body, which is generally comprised by an executive director who attends to the day to day operations regarding the decisions made by the board of directors or administrative body.

In practice, the decision-making process, either by the shareholders' meeting or the board of directors, involves a call where the agenda and the date and time of the meeting are proposed.

Subsequently, on the day of the meeting, attendance is taken and each of the agenda’s issues raised in the call is discussed, approved or modified. Finally, a special delegate is appointed to carry out the agreements made and the record of the meeting is entered in the corresponding corporate book.

When necessary, under exceptional circumstances, the meetings can be partially or completely formalised before a notary public, after which, the meeting’s record should be integrated to the corresponding corporate book.

The administration structure of a corporation can be trusted upon one or more directors chosen temporary and revocably, who may or may not be shareholders of the corporation.

This optative structure can be adopted in Stock Corporations, Limited Liability Companies and Investment Promotion Stock Corporations, whereas, Public Stock Corporations or Stock Market Investment Corporations, the administrative structure must necessarily be composed of a board of directors and an executive director.

However, it is important to note that in Limited Liability Companies, if the administration is trusted upon a board of directors, these will operate in a plural uncollegiate form, whereas all other board of directors will operate collegiately.

Typically, the board of directors’ roles are the ones established in the corporation’s bylaws, which, in practice, tend to be President, Secretary, Treasurer and Council Members. However, the only recognised role by the General Law of Business Corporations is the chairman position.

The other role recognised by the Mexican Securities Law, is the executive director, whose role is necessary in the integration of the board of directors of a Stock Market Investment Corporation and Public Stock Corporation.

Additionally, members of the board of Limited Liability Companies are known as managers or “gerentes” in Spanish.

According to the General Law of Business Corporations, currently, there are two general requirements to be considered as candidate to be elected as a board member:

  • to not be restricted to practice acts of commerce by a legal resolution; and
  • to guarantee the development of their duties, which can or cannot be waived by the corporation.

That aside, there are no other special composition requirements for boards of directors for Stock Corporations, Limited Liability Companies and Investment Promotion Stock Corporations, however, the board of directors of a Stock Market Investment Corporation or a Public Stock Corporation can be integrated by a maximum of 21 directors, of whom at least, 25% must be independent with regards to the terms of the Mexican Securities Law.

Directors and officers are first appointed in the company’s incorporation articles. Afterward, directors and officers are appointed and removed by ordinary shareholder’s or partner’s meetings.

Pursuant to the General Law of Business Corporations, it is encouraged that shareholders or partners be part of the board of directors or the administrative body of the corporation, therefore, there are no special rules regarding their independence, since the role of director involves an intimate interest between the individual and the corporation.

However, the General Law of Business Corporations does state that directors who in any operation have interest opposite to the corporation’s must manifest it to the other directors and abstain from any deliberation and resolution. A director who contravenes this provision will be responsible for liquidated damages caused to the corporation.

Stock Market Investment Corporations and Public Stock Corporations

While the latter is applicable to Stock Corporations, Limited Liability Companies and Investment Promotion Stock Corporations, in Stock Market Investment Corporations and Public Stock Corporations, no person who has held the position of external auditor of the corporation, or of any of the legal entities that conform the business group or consortium to which it belongs, may be appointed director during the 12 months immediately prior to the appointment date.

Moreover, as it was exposed before, the Mexican Securities Law establishes that a Stock Market Investment Corporation and/or a Public Stock Corporation’s board of directors can be integrated by a maximum of 21 directors, of whom at least, 25% must be independent.

Directors of any corporation in Mexico have the duties inherent to their mandate and those derived from the articles that their bylaws impose on them. Moreover, according to the General Law of Business Corporations, directors’ main duties are:

  • to fulfill and act in accordance to their corporation’s bylaws;
  • duty of confidentiality for their term of office and one year after, respect to the information and matters that they become aware of due to their position whether said information or matters are not of a public nature; and
  • to avoid conflicts of interest.

Furthermore, directors will be jointly and severally liable to the corporation for:

  • from the reality of the contributions made by the shareholders' or partners;
  • compliance with the legal and bylaws requirements established with respect to dividends paid to shareholders or partners;
  • the existence and maintenance of the accounting, control, registry, archive or information systems provided by law; and
  • the exact fulfillment of the resolutions of the general shareholders' meetings.

On the other hand, according to the Mexican Securities Law, Stock Market Investment Corporations and Public Stock Corporations director’s primary duties involve the following:

  • duty of diligence, in other words, duty to care to act as if the corporation’s business was one’s own, therefor to create value or benefit for the corporation; and
  • duty of loyalty, which refers to the duty to subordinate individual or personal interests to the shareholder’s or partner’s interests in the corporation.

Generally, directors owe their duties to the shareholder’s or partner’s meeting. In other words, therefore, any wrongful acts and its liability can be instanced by the corporation or a third party in case they were injured.

Directors must not take into consideration anyone’s special interest while discharging their duties but the ones entrusted to them by the shareholders' or partners' meeting, respectively, for, they are responsible for the daily management of the corporation.

A breach of the director’s duties can be enforced by the following:

  • the corporation itself through it liquidators, which, in order to do so, the shareholder’s or partner’s meeting shall approve and appoint a delegate to do so;
  • the shareholder’s meeting by the 25% of the capital stock in a Stock Corporations, by the 15% of the stock capital in Investment Promotion Stock Corporations and by the 5% of stock capital in Public Stock Corporations;
  • third parties who have suffered any damages due to the director’s wrongful acts; and
  • corporation’s creditors after of bankruptcy declaration.

As for Limited Liability Companies, the action belongs to the general partners' meeting and to every partner individually, however, the latter may not be exercised when the meeting, with a favourable vote of three quarters of the stock capital, has absolved managers of their responsibility.

In Mexico, the liability of a director can be limited by the incorporation deed of the company, if the performance of the duties of said director is not caused by wilful wrongdoing, fraud or a crime in terms of the applicable legislations. However, litigation against directors is not very common, unless a crime is committed. Generally, if a claimant cannot prove the director’s failure, they shall not be liable.

Director’s fees could be first stated at the incorporation deed of the corporation, however, in practice, this is generally determined by the shareholder’s or partner’s meeting. Considering this, the meeting may approve whether the directors will receive any emolument or remuneration at all and, if applicable, the amount, restrictions and modalities to receive it.

In Mexico, a company’s incorporation deed is a public document, therefore, is directors frees are there stated, they are of public knowledge. However, if the incorporation deed is absent in such a matter and the shareholder’s or partner’s meeting addresses the issue, the latter should be integrated to the corporation’s corporate books, therefore, the fee will not have a confidential character.

Currently, there is no legal provision that compels corporations to disclose or maintain private the details regarding director’s fees or benefits payable.

The most important and legal relationship exists between shareholders and a corporation itself, for it derives from the capital contributions in exchange for their respective shares. Some of the main motivators for becoming a shareholder in a company are, without a doubt, generating wealth, creating formal jobs and promoting the development and economy of their environment.

The shares hold different types of rights and can be divided into corporate and economic rights.

Corporate Rights

Voice and vote

This right can be put minimum, or directly exclude some type of shares (in exchange for a privileged economic regime, the so-called non-voting shares). In principle, decisions are made by majority and based on the capital represented by the titles that each one owns, but qualified majorities or certain types of privileged shares may be required, depending on what is established in the company's bylaws.

Information

Shareholders', regardless of the percentage of their participation, have the right to know and analyse the information concerning the administration and operation of the company, such as the annual financial statements, the report of the board of directors or equivalent, the report of the commissioner, if applicable, of the executive director and, in general, to any document that must be approved in the general shareholders meeting.

Announcement

Those shareholders' representing at least 33% of the subscribed and exhibited share capital in the Stock Corporation, 10% individually or collectively of the share capital of an Investment Promotion Stock Corporation, and 10% of the capital may call general meetings and be the holder of shares with voting rights, even limited or restricted for Public Stock Corporations and Stock Market Investment Corporations.

Opposition

Shareholders' who consider that the resolutions made in the meeting violate or harm their rights, are contrary to the law, their bylaws or the corporate interest, may judicially challenge said resolutions, in accordance with the process and requirements established in the General Law of Business Corporations.

Economic Rights

Dividend

The shareholder has the economic distribution right that, as a result of the operations, the company delivers, of course, based on the capital contributed by each one. The payment of dividends is an exclusive decision of the general shareholders' meeting.

Pre-emptive right

Shareholders' will have a pre-emptive right, in proportion to the number of their shares, to subscribe those issued in the event of an increase in the share capital.

Transmission

The shareholders' of mercantile companies can establish transmission rights in the bylaws to transfer their shares to other shareholders' or third parties as established there, they may also establish different transmission rules commonly known, as “Put”, “Call”, “Drag -Along”, “Tag-Along”, exit procedures such as “Buy-Sell”, “Texas Shoot-Out”, among others.

Separation

Any shareholder who has voted against (in general extraordinary meetings) regarding the “change of purpose of the company”, “change of nationality of the company” and/or “transformation of the company”, will have the right to separate and obtain the redemption of their shares. With respect to publicly traded companies such as Public Stock Corporations and Stock Market Investment Corporations, there is no specific separation process established, but they may be separated by selling their shares on the stock market.

In Stock Corporations, Investment Promotion Stock Corporations and Limited Liability Companies, shareholders and partners participate in the corporation’s management actively and directly through their respective meetings, however, in Stock Market Investment Corporations and Public Stock Corporations, administration is typically trusted to a board of directors, although the corporation’s management will always belong to the shareholder’s or partner’s meeting. Moreover, in Limited Liability Companies, when there is no board of director’s appointment, all partners' will tend to the administration.

Pursuant to the General Law of Business Corporations, ordinary shareholder’s meetings should be held at least once a year, within the first four months following the closing of the fiscal year. The call for the meetings should be made by the administrator or the appointed member of the board of directors, through a notice published in the electronic system established by the Ministry of Economy (Secretaría de Economía) with the anticipation established in the bylaws or, failing that, 15 days before the date indicated for the meeting.

Every call should contain the agenda of the meeting and be signed by whoever calls. In that sense, in order for an ordinary shareholder’s meeting to be considered legally assembled, during the attendance, at least half of the share capital should be represented and resolutions will only be valid when passed by a majority of the votes present.

Extraordinary Shareholders' Meeting

An extraordinary shareholders' meeting will be considered legally assembled when, during attendance, at least three quarters of the share capital are present and the resolutions only be valid when taken by favourable vote of the number of shares that represent at least half of the share capital.

A meeting will be considered as extraordinary when the call addresses one or more of the following issues:

  • extension of the company’s duration;
  • early dissolution of the company;
  • increase or decrease in share capital (in its fixed part);
  • change of social purpose;
  • change of nationality of the corporation;
  • transformation of social type;
  • merger with another corporation;
  • issuance of privileged shares;
  • redemption of own shares and issuance of special shares;
  • bond issuance;
  • any other modifications to the social contract; and
  • other matters for which the law or the bylaws requires an elevated quorum.

The law confers the shareholders or partners the right to oppose the decisions made by the board of directors, therefore, allowing them to review the reviews made by the latter, in which case, they are entitled to share any irregularities they find with the statutory auditor.

Shareholder’s representing at least 25% of the share capital may directly exercise civil liability against directors pursuant to the General Law of Business Corporations, whereas the Mexican Securities Law states that this action can be taken by the 15% of the stock capital regarding publicly traded companies. It is important to mention that the latter will only be executed when the requirements established by the law for the damage caused to the totality of the capital stock are met, and if the corporation does not release such liabilities to the directors in terms of the General Law of Business Corporations.

In Mexico, the Securities Exchange Commission (Comisión Nacional Bancaria y de Valores) is the entity that sets the requirements regarding the transparency of information that flows through publicly traded corporations. In this sense, in order for a company to retain admission to listing on the securities exchange market, it must comply with applicable, ongoing obligations to disclose financial reports and provide the dissemination of relevant events as per the terms of the Mexican Securities Law.

The board of directors of any corporation, must, within the first four months of every year, present to the shareholders' meeting a financial report which includes, but is not limited to, the following:

  • a report of the progress of the corporation throughout the year, along with the policies that the director follow on existing projects;
  • a report explaining the main accounting and information principles and criteria followed in the preparation of the financial report;
  • a statement showing the financial situation of the corporation as of year-end closing;
  • a statement showing the results of the corporation during the reporting year; and
  • the necessary notes to complement the information provided by the previous statements.

The commissioner or commissioners (surveillance body) must render a report on the veracity, sufficiency and reasonableness of the information presented by the board of directors to the shareholders' meeting. The report must include the commissioner's opinion on whether the accounting and information principles and criteria followed by the corporation is adequate and sufficient. Moreover, the report should state if those policies and criteria have been consistently applied in the information presented by the director, and if the information presented by the latter reflects sufficiently the financial situation and the results of the corporation.

In Mexico, publicly traded companies must disclose financial information every quarter of the year, which to not need to be audited, or annually, which will  need to be audited.

Additionally, corporations should draft and publish:

  • an annual financial statement;
  • an annual report of the corporation and its subsidiaries operations, as well as any corporate group restructures; and
  • any relevant event that may influence the securities’ price and/or share transfer.

In México, filings are publicly available for third parties since all corporations are obliged to be registered in the Public Registry of Commerce (Registro Público de Comercio) after their incorporation. Corporations are compelled to register any changes in the corporation’s structure, bylaws amendments, share transfers, mergers, splits or any other extraordinary shareholder’s or partner’s meeting resolution, as well as certain powers of attorney.

In Mexico, a statutory auditor may draft the corporation’s financial statements for non-public corporations, however, as said before, there is no need to audit such statements, therefore is not compelling to name an external auditor, for, the appointment of the latter to comment on the corporation’s financial statements is left to the board of directors.

The external auditor or auditors of the company may be called to the board of directors’ meetings, as guests with a voice but no vote. Furthermore, auditors must abstain themselves from being present on meetings in which the agenda’s issues may pose any conflict of interest or compromise their independence.

Directors must report to the auditing committee and external auditor the irregularities that, during the exercise of their position, are known to them and are related to the corporation or legal entities that the company controls or has a significant influence in. However, regarding publicly traded companies, the board of directors must appoint an external auditor to evaluate the performance of their duties and to analyse the judgement opinions and reports.

Directors are required to supervise the operation and management of the corporation and the legal entities they control. Therefore, they must evaluate the main risks to which the corporation and its legal entities are exposed, based on the information presented by the committees, the executive director and external auditors, as well as accounting and internal audit, internal control, registry, filing and/or any other information systems.

Director’s may be required to make a deposit in escrow to guarantee the fulfilment of their office, although this provision can be, and is generally, dismissed. Additionally, a corporation’s bylaws can limit director’s authorities in order to establish internal control for decision-making that may compromise the corporation’s assets.

Canales, Dávila, De la Paz, Enríquez, Sáenz, Leal, S.C.

Ricardo Margain 240, 3er. Piso
Col. Valle del Campestre
San Pedro Garza García
C.P. 66265
México

+52 81 837 818 87

mauricio.montes@canales.com.mx www.canales.com.mx
Author Business Card

Law and Practice in Mexico

Authors



Canales, Dávila, De la Paz, Enríquez, Sáenz, Leal, S.C. is a boutique law and financial advisory firm with a solid reputation in Mexico. From the main office in Monterrey, the firm's six partners, 15 associates and two financiers are strategically located to continue serving the needs of domestic and foreign clients. The team has focused on corporate and transactional practice, advising clients in their day-to-day business, as well as participating in the design, structuring, implementation and start-ups. In 2018, as part of the firm's evolution and the needs of clients, the firm integrated a financial practice into the provided services, adding a highly qualified team of financial advisers who are highly regarded by the market to the firm's wider team.