In Mexico, non-public corporations are principally regulated by the General Corporations Law, which states that there are seven different types of corporations that can be adopted, although only two types are commonly used in Mexico:
Furthermore, Mexican companies can also adopt a variable stock corporation modality, in which capital variations can be carried out without amending the company’s bylaws.
The Mexican Securities Market Law, effective as of June 2006, introduced three new types of corporations:
Such companies are common among investors, considering the benefits they provide, the possible wider range of rights that can be granted to shareholders, and their structural flexibility compared to a regular S.A.
As explained before, corporations in Mexico are mainly regulated by the General Corporations Law and the Securities Market Law.
The General Corporations Law includes certain corporate governance principles regarding minority rights, statutory auditors (which is optional for partnerships and mandatory for stock corporations) and having corporate books and records to document all actions occurring during the corporate life of the company. However, if a company ruled by the General Corporations Law wishes to execute additional corporate governance principles in the development of its corporate life, such company must include such principles in its bylaws in order to make them enforceable.
It is important to take into consideration that the Business Co-ordinating Council (Consejo Coordinador Empresarial – CCE) issued guidelines entitled “The Code for Best Corporate Practices” (Código de Mejores Prácticas Corporativas), which are commonly followed by companies in their corporate governance application. Likewise, in 1994 Mexico subscribed to the OECD Principles of Corporate Governance, which are non-binding principles that were used by CCE as the base for the Code of Best Corporate Practices, and are followed by most Mexican companies that implement corporate governance in their corporate structure.
In 2006, the New Securities Market Law incorporated the guidelines of the Code for Best Corporate Practices (having an audit committee and independent consultants, statutory rights of minority shareholders, voting limitations, shareholders' duties, among others) as mandatory for publicly traded companies.
Companies with publicly traded shares are listed as public stock companies and follow internal regulations of the Mexican Stock Exchange (BMV for its Spanish Acronym). To list a company as a public stock company, the following requirements must be met:
Furthermore, the following corporate governance requirements shall be met by publicly traded companies:
In the first instance, the company shall comply with the General Corporations Law and the Code for Best Corporate Practices, including independent counsels and a support committee. In the second instance, the company shall operate pursuant to the Securities Market Law and the international guidelines on corporate governance (as OECD principles), having more independent counsels in all the committees and separation of committees. Finally, a good model of corporate governance shall include transparency in all its activities, strong monitoring and balance, and an increase in fiduciary duties.
It is important to take into consideration that SAB corporations must comply with the special laws for the financial system, if applicable.
In addition to the aforementioned laws and guidelines, the National Banking and Securities Commission (CNBV for its Spanish acronym) published the “Provisions of a general character applicable to the issuers of securities and other participants in the security market”, which set certain transparency rules in order to increase investor confidence in the stock market.
In addition, through its Code of Best Corporate Practices, the Business Co-ordinating Council states that a company must meet the following requirements in order to be fully compliant with the corporate governance requirements.
Family-controlled companies were formerly one of the bases of the Mexican economy, but most such companies have disappeared due to the lack of succession structures or being sold to foreign acquirors.
Nowadays, Mexican family-owned companies comply with the corporate governance requirements in order to secure their permanence, and in certain scenarios to be listed on the Mexican Securities Market.
In addition, on 29 August 2017 the Mexican Institutional Securities Market was created in order to give some competence to the Mexican Securities Stock Market. Therefore, the Securities Market had a significant increase.
It is important to note that the National College for Independent Counsels was created in 2018, and an updated third version of the Best Business Practices Code was issued.The first measure intends to train and update the performance of the independent counsels that take part in the corporate governance of companies. The second measure took into consideration the needs and characteristics of Mexican companies, including their origins and corporate structures, and the importance of certain groups of directors in their administration. The Code attempts to institutionalise Mexican companies, helping them to become competitive and permanent, enabling them to access diverse financing funds and earn trust among national and international investors.
Notwithstanding the above, the Anti-Money Laundering Law and the General Law of Administrative Liabilities have been enforceable towards Mexican companies since 2013 and 2017, respectively, providing certain requirements to be fulfilled in order to avoid committing money laundering and bribery acts, and setting applicable sanctions that may result in the liquidation or disqualification of a company.
As a result, Mexican companies now note the importance of having a structure that includes certain policies and internal controls in order to avoid breaching any Mexican legislation.
Finally, certain funding methods other than being a public company had arisen in the form of FIBRAs (public financing for the acquisition and construction of properties, private equity funds, institutional investors (as AFORES)), and such funding methods require the application of corporate governance in the companies that have such kinds of investment.
Pursuant to Mexican legislation, the bodies that form a corporation are as follows:
Shareholders'/partners' meetings: this is the supreme decision-making body of the company, as it may take any decision that the company may need by means of an ordinary/extraordinary meeting, such as to approve financial statements, grant dividends, extend the company’s duration, dissolve the company, increase/reduce capital stock, change the nationality or domicile of the company, merge or split the company, or transform the type of company, among others. Depending on the matter, an ordinary or extraordinary meeting may be required.
Administration body: the board of managers/directors shall also adopt resolutions in meetings. The authorities of the board are established in the company bylaws. If the company has a sole director/manager, he/she will be able to adopt any decision as long as they are acting within the scope of the authorities granted by the company’s bylaws.
Surveillance body: the findings of this body are shared with the board of managers/directors or partners'/shareholders' meetings, as the case may be, so they can take the corresponding action.
Direction body: the decision-making in the day-to-day operations of the company can be performed by officers of the direction body, following the guidelines and strategies previously approved by the administration body.
Intermediate bodies: as explained before, these non-mandatory bodies do not intervene in the company’s operations.
Shareholders'/partners' meetings: in order to take a decision, a call for a shareholders’/partners’ meeting shall be publicised in the Electronic System of the Economy Ministry; such call must include in its order of business the items to be discussed. Once called, the meeting must be held in the corporate domicile of the company. Every time that at least 50% of the capital stock for an ordinary meeting is duly represented, decisions will be valid with a majority percent of the present votes. In extraordinary meetings, which are the meetings that will decide any major change (such as extension of the company’s term, dissolution and liquidation of the company, increase or decrease of the capital stock, change of the corporate purpose, transformation to another type of company, change of nationality, merger or split of the company, any amendment to the company’s bylaws, bond issuance, share redemption, issuance of privilege shares, and any other matter as provided by company’s bylaws), at least 75% of capital stock must be represented, and more than 50% of the capital stock must vote in favour in order for resolutions to be adopted. The aforementioned requirements may be modified in the company bylaws for a higher percentage.
If provided in the company’s bylaws, shareholders/partners may take decisions by means of a resolution taken in lieu of a meeting, every time that such resolution is approved by the totality of the shareholders/partners.
Administration body: if the company is administrated by a board of directors/managers, decisions will be adopted by means of a meeting or a resolution taken in lieu of a meeting, if it is taken by the totality of the directors/managers and is within the scope of the authorities granted by the company’s bylaws. If the company has a sole director/manager, he/she will be able to take any decision as long as it is acting within the scope of the authorities granted by the company’s bylaws.
Surveillance body: the task of this body is to supervise the performance of the administrative body and the company’s operation; it does not take decisions.
Direction body: the decision-making of the day-to-day operations shall be in accordance with administration body guidelines.
Intermediate bodies: these bodies do not make decisions, but can make recommendations that may affect the decision-making of other bodies.
The board of directors/managers can be made up of a single individual or a group of individuals, which may be shareholders/partners of the company or a third party.
The board of directors/managers will have the authorities that are stated by the company bylaws. As such, companies may sometimes have different roles for their board members, but chairman, secretary, treasurer and members are most commonly used. The only title recognised by the General Corporations Law is the chairman position.
There are two requirements to be a member of the board of managers/directors:
Furthermore, the Code for Best Corporate Practices contains recommendations and advice regarding corporate governance for Mexican companies, including the following:
Directors and officers are first appointed in the articles of incorporation of the company. Afterwards, ordinary shareholders'/partners' meetings may be carried out to appoint and/or remove them.
The position of director is personal and cannot be performed by proxy. Nevertheless, the board may appoint from among its members a delegate to execute concrete acts. In the absence of special designation, representation shall correspond to a chairman. The administrator or the board of directors and the managers may, within their respective powers, confer powers on behalf of the company, which will be revocable at any time.
Pursuant to the General Corporation Law, any director that has an interest that is diverse to the company’s interest shall declare it to the other directors and abstain from deliberating and resolving such matter. If a director contravenes this provision, he or she shall be liable for liquidated damages caused to the company.
In addition to the above, the Code for Best Corporate Practices sets out the following recommendations:
The Securities Market Law requires S.A.P.I.B. to have at least one independent consultant, and for at least 25% of board members in an S.A.B. to be independent consultants; this last requirement is optional for S.A.P.I.
Those independent consultants shall be free of any conflict of interest, and free of any personal, equity or economic interest. Additionally, those members of the board of directors that may have a conflict of interest for any reason whatsoever must abstain from participating and being present in the deliberation and voting of such matter. Otherwise, they will be liable against any liquidated damages that may arise, and the breach of this provision will be considered as a disloyalty cause.
Finally, the National Commission of the Stock Market shall issue special provisions for the prevention of conflicts of interest in the resolutions of the technical committee.
Directors'/officers' legal duties are the same as any legal representative or agent acting on behalf of a third party, as well as the responsibilities and powers that the bylaws impose, and those liabilities regulated by the General Corporations Law and the Securities Law. Typically established duties are the management, representation and administration of the company.
Generally, directors’ or managers’ duties (and their liability for any wrongful acts) correspond to the company and its shareholders, unless a third party is injured by such wrongful act, in which case such third party may also be entitled to sue for damages (mainly creditors, employees and tax authorities). The board of directors is responsible for the daily management of the business of the company and is subordinate only to the general shareholders’/partners’ meeting; therefore, directors or managers must take into account the interest of the shareholders/partners of the company following the best interests of the company.
The following persons can enforce a breach of the directors' duties:
The consequences of a breach may be that the offended files a claim for the damages caused to the company, its shareholders or a third party.
As a general rule, if the claimant cannot prove that the director has failed to meet the required standard of conduct, the director shall not be liable. It is also important to note that the General Corporations Law provides that the directors shall be exempt from liability if they opposed a resolution taken by the rest of the board at the time of the voting. In Mexico, litigation against directors is not very common, unless a crime had been committed. Therefore, mediation, negotiation, conciliation and arbitration are sometimes used to avoid litigation.
The liability of a director or officer can be limited by the incorporation deed of the company, as long as the performance of the duties of such directors and/or officers is not caused by wilful misconduct, fraud or a crime pursuant to the applicable legislation.
The remuneration of administrators and officers is usually provided in the company’s bylaws. However, if there is a lack of determination of such remuneration, shareholders can approve such remuneration in the Annual Shareholders’ Ordinary Meeting.
The Incorporation Deed is a public document and the remuneration payable to directors and officers is usually included in such deed, or by a shareholders’ meeting which is passed to the company’s records, therefore, such consideration does not have a confidential character.
Dividends may not be assigned to ordinary shares without first being paid to voting shares limiting a 5% dividend. When in any fiscal year there are no dividends or less than said 5%, it will be covered in the following years with the indicated priority.
In the social contract, it may be agreed that limited dividend shares will receive a dividend higher than ordinary shares. The holders of the limited voting shares will have the rights that this law confers upon the minorities to oppose the decisions of the assemblies and to review the balance and books of the company.
The relationship between the company and its shareholders/partners will be based on the participation in the capital stock that such shareholder/partner has in the company.
In the case of a stock corporation, a shareholder will prove its condition by having a share certificate and by being duly enrolled in the shareholders’ registry book. In the case of a limited liability company, the enrollment will be sufficient to accredit its partner condition.
Shares will be of equal value and confer equal rights; however, the bylaws may stipulate that the capital is divided into several classes of shares with special rights for each class. In addition to that, profit distribution shall be made in proportion to the participation of the capital stock of a shareholder/partner.
Usually, shareholders/partners with higher participation will have more votes; however, certain minority rights protect minorities' interests, such as naming a statutory auditor, claiming liability against administrators, and requiring a call for a meeting, among others.
Finally, it is important to note that a shareholder will only be liable for the amount of its participation in the Company.
The administration of a company will be in charge of one or several temporary and revocable directors/managers, who can be shareholders/partners or third persons. The administration of the company is typically vested into one or more directors, elected by the shareholders' meeting. It is a shareholder's right to participate as a member of the board of directors and as an officer of the company.
If a shareholder acting as director/manager has a conflict of interest, he/she must abstain from participating and being present in the deliberation and voting of such matter; otherwise, he/she will be liable against any liquidated damages that may arise, and the breach of this provision will be considered a disloyalty cause.
In order to take a decision, a call for a shareholders’/ partners’ meeting shall be publicised in the Electronic System of the Economy Ministry, and must include in its order of business the items to be discussed. Once called, the meeting must be held in the corporate domicile of the company. Decisions are carried out by a meeting if at least 50% of the capital stock for an ordinary meeting is duly represented, and decisions will be valid with a majority percentage of the votes present. In extraordinary meetings, which are the meetings that will decide any major change (such as an extension of the company’s term, the dissolution and liquidation of the company, an increase or decrease of the capital stock, a change of the corporate purpose, transformation to another type of company, a change of nationality, the merger or split of the company, any amendment to the company’s bylaws, bond issuances, share redemptions, the issuance of privilege shares, and any other matter as provided by the company’s bylaws), at least 75% of capital stock must be represented, and more than 50% of the capital stock must vote in favour in order for resolutions to be adopted. The aforementioned requirements may be modified in the company bylaws for a higher percentage. The bylaws may provide that the resolutions taken in lieu of the meeting unanimously by the shareholders shall have, for all legal effects, the same validity as if they had been adopted in a general ordinary or extraordinary meeting, if they are confirmed in writing. The General Shareholders' Meetings are ordinary and extraordinary. Both will meet at the registered office, or they will be void, excepting Acts of God or force majeure events.
The rights conferred by law on shareholders/partners include the rights to oppose the decisions of the meetings and to review the balance sheets and the minute books. Any shareholder may also denounce in writing to the Statutory Auditor any irregularities, and should mention the complaints in their reports to the Statutory Auditor through a General Meeting of Shareholders. Shareholders representing at least 25% of the share capital may also directly exercise civil liability against the directors, when the requirements stipulated by law for the damage caused to the totality of the capital stock are met, and if the company does not release such liabilities to the directors, pursuant to the General Corporations Law. Pursuant the Securities Markets law, in a public traded company such percentage decreases to 15%.
In order for the company to retain admission to listing on the securities exchange market, it must comply with certain applicable ongoing obligations, such as annual financial reporting and dissemination of information. It is also expected to act in accordance with the applicable codes and guidelines on corporate governance; such guidelines consider transparency as one of the main bases in order to give certainty to future investors. The Securities and Exchange Commission sets the requirements for the transparency of information. It is important to mention that pricing processes shall be set with transparency in the application to become a publicly traded company as well.
Mexican legislation states that companies have the obligation to carry out an ordinary annual shareholders'/partners' meeting during the first four months after the closure of each financial year, in which the financial statements of the last fiscal year are approved as well as all the tax obligations of the company in the previous fiscal year.
A company and/or the shareholders of a publicly traded company shall disclose financial information each quarter of the year (without the need to be audited) or annually with an audited financial statement; an annual report of the company and its subsidiaries operation; any kind of restructuring made in the corporation group; any event that might affect the securities price; and any significant share transfer.
It is an obligation for a company to be enrolled in the public registry of commerce after its incorporation, and to register any change in the company’s structure, amendment to the corporate bylaws, transfer of shares, merger, split, or any other extraordinary meeting resolution, as well as certain powers of attorney (for credit instruments). Filings are publicly available to any third party.
A statutory auditor may prepare the financial statements for non-public companies; however, as there is no need to audit such statements, it is not obligatory to name external auditors, although they may be appointed following corporate governance principles. It is also advisable that the companies that have an accrued income in the prior year higher than MXN$122,814,830.00 million, and the value of its assets was not higher than MXN$97,023,720.00 million, to audit their statements, which report must be prepared following Federal Tax Code provisions.
For publicly traded companies, the board of directors must contract an external auditor to evaluate the performance of its duties and to analyse the judgement opinions and reports. For such effect, the board shall request the presence of the auditor when deemed convenient, without prejudicing the annual meeting with him/her.
The opinion of the external auditor shall be prepared on the basis of auditing standards and procedures issued or recognised by the Commission and, in any case, shall relate to:
Directors/managers may be required to make a deposit in escrow to guarantee the fulfilment of their charge, although this provision can be dismissed.
In addition, company bylaws may limit certain directors’ authorities in order to set certain internal controls (such as executing a board resolution, acting jointly, or requiring shareholders’ approval) for any decision that may compromise the company’s assets.
The Mexican securities market experienced a relatively active environment during 2018, particularly in connection with the public offering of Certificados de Proyectos de Inversión, better known as CERPIs. However, the traditional IPO market has been dry. Regulatory authorities and other members of the financial community regularly express interest in promoting the listing of new issuers in either of the two stock exchanges authorised in Mexico and, at the same time, express concern as to why the number of listed companies not only does not grow but continues to experience some delistings, most recently Rassini, S.A.B. de C.V. in its final stage.
According to a number of potential issuers, the Mexican IPO market will remain passive as long as the current legal framework continues to impose unnecessary burdens on issuers, allowing excessive discretionary authority on Mexican regulators, and as long as the Securities Market Law and regulations are not amended to reflect the many necessary demands of the current environment.
In particular, potential issuers insist on their specific interest to go public with capital stock structures that permit the offering of instruments bundling voting with limited-voting or non-voting stock, or even with limited voting or non-voting stock on a stand-alone basis. In the past, several issuers made successful offerings with these type of structures. There are a number of important family-owned companies that have driven the Mexican economy for decades and that, with an appropriate regime, would be willing to go public without excessively diluting their voting power, while granting economic benefits to public investors.
With divided opinions among regulators, a significant reform to the Mexican Securities Market Law was adopted in 2004, prohibiting the use of those structures in the Mexican securities market. These prohibitions were later adopted in the current Securities Market Law, effective since 2006. Many well-developed securities markets in other countries allow these structures and there are many arguments that support them. Under a clear legal framework, including the right disclosure requirements, it might be reasoned that Mexican companies should be allowed to go public with these types of instruments.
The current Mexican Securities Market Law permits Mexican companies to issue limited voting or non-voting stock for up to 25% of the company’s float, and a percentage above such threshold if the limited voting or non-voting stock is converted into common stock within a period of time to be authorised by the Mexican Banking and Securities Commission (CNBV) which in no case shall exceed five years. This alternative has proven, however, to be of no practical use, since the market capitalisation of the relevant issuer would need to be very high in order to allow that a percentage of the issuer’s float represented by stock with voting restrictions has sufficient liquidity. Likewise, the mandatory conversion of the limited voting or non-voting stock into common stock does not present an attractive scenario for controlling shareholders from a dilution standpoint.
Likewise, according with the Mexican Securities Market Law, the CNBV may also authorise the issuance of limited voting or non-voting stock for a percentage in excess of 25% of the company’s public float, in the event of shares or other investment structures where voting rights are limited as a result of the stockholders’ nationality. This alternative proved to be a good tool for companies where foreign investment participation was restricted to a percentage of the relevant company’s capital stock. It has been the case, however, that the regulator’s criteria has changed over time and it has been difficult to obtain specific authorisations to issue limited voting or non-voting stock under these provisions.
IPOs involving any of these instruments would allow companies and their controlling shareholders to be less concerned about losing control and, therefore, less concerned in the implementation of anti-takeover provisions in their by-laws that, in certain cases, create lengthy discussions with the underwriters since, in their view, such provisions make it difficult for investors to make significant investments in the relevant issuer’s stock. In addition, the Mexican regulator would need to dedicate less time to reviewing and authorising complex by-law provisions intended to avoid the concentration of material equity positions by a single or a related group of investors.
In addition, some participants in the Mexican securities market express significant concern with respect to other provisions of the legal framework applicable to Mexican issuers and which clearly need to be amended to reflect current market and worldwide conditions. For example, there are a number of sections of the Securities Market Law and its regulations that govern corporate restructurings (reestructuraciones societarias), tender offer processes and disclosure of information, which have been subject to interpretation by the Mexican CNBV, where such interpretation is not necessarily shared by members of the financial and legal community. Some of these provisions include events triggering thresholds that meet a reestructuración societaria or a tender offer scenario, and events that, in the opinion of the CNBV, require disclosure to the public where such disclosure may create in certain cases contingencies for the issuer, the loss of a potential business or the negative effect on a strategic decision, among others, which may ultimately result in an adverse effect on the company and its shareholders.
In sum, it appears that the Mexican securities market framework needs to be revised, reaching some level of consensus with the real players and endeavouring to adapt to current conditions, making the Mexican market more competitive in relation to other similar markets.