Corporate Governance 2020

Last Updated June 22, 2020

Mexico

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
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Trends and Developments


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.

Introduction

Liability for directors is such an important topic when it comes to having good corporate governance, whether it is in Mexico, Colombia or the USA.

Directors play a very important role in corporate law since they oversee managing both the company and its property. As directors are in the most appropriate position to make decisions that are taken in the best interest of the company, they have to guarantee a successful performance by doing so. They possess the experience, information and have the judgment to make the best decision for the company regarding any topic or scenario.

However, success in business decisions of the modern world does not always occur and in certain cases a business decision made by a director can lead to repercussions for the company. By analysing business decisions of directors that lead to damages for the company, shareholders could and should be able to find principles of administrator liability that were breached. Therefore, it is extremely important that laws in Mexico, Colombia and the USA state these principles or duties that regulate the behaviour of directors.

Without these types of rules stated in laws or precedents, it would be difficult to ask a judge to hold an administrator responsible for violating a principle that is not contained in law and because of that, it would be impossible to ask for a compensation.

It is important to state that one of the special ways in which civil liability works and regulates social life is by establishing the parameters of behaviour, the duties of diligence and care and the duties of compensation for the damages or detriments that we cause in the realisation of our everyday activities. Therefore, applying the above to corporate law and directors, which could be said to be the principles, parameters or limits that regulate directors and their decisions in the company? Three countries are studied in this article, so that their laws can be analysed and the most important precepts that regulate the issue raised here extracted.

Legislation in Mexico and Colombia comes from Roman Law, which means that laws in these countries are materialised and grouped in codes written in paper. In these countries, laws are created by legislators and have to be written down in codes by categories and subjects. In the USA, legislation is based on Common Law. Common Law means that laws are created or emerge mainly from judges and their decisions in courts.

In this brief study of liability for company directors and the principles based in which they should perform, the laws from Mexico and Colombia on one hand, and jurisdictional decisions from USA cases on another hand, will be analysed.

Company Management and Administration

It is important to state that the administration or management of a company in Mexico, Colombia and the USA may be collegiate (a board of directors) or single (a sole administrator/sole director). For the purpose of this article, the word “director” will be used to refer to those who manage the company and make business decisions.

As a general rule, and after analysing the regulation of Mexico, Colombia and the USA, it is possible to state that the business decisions of directors are mainly guided by laws and bylaws. Bylaws are specific rules shareholders agree on when creating a company and are applicable to its members. But the true issues surrounding the liability of directors arise when companies face this scenario: What happens to the director who, for example, invests in an uninformed way and causes damages to the company?

Considering that in the taking of this decision no bylaws or the law itself was breached, it would be difficult to impute responsibility to the director, unless, for example, the due diligence that was to be made prior the investment was specifically regulated. If this duty was regulated, the discussion should centre on the transgression of the duty of diligence if shareholders had proof that the director was not diligent enough in the taking of that decision. Therefore, shareholders could demand some compensation for the suffered damages.

What is difficult about this scenario is that if these principles or duties regarding the performance of directors are not stated or interpreted from bylaws or laws, it could not be argued that a transgression took place.

The General Law For Business

After analysing Mexico’s legislation, the General Law for Business Corporations (Ley General de Sociedades Mercantiles) is not very efficient in terms of regulating the issues stated here. To find the principles that regulate director’s behaviour and performance in decision-making we must analyse laws that do not directly apply to business entities and this creates legal uncertainty for directors and shareholders.

For example, to analyse these principles for directors of a “Sociedad Anónima” (a Stock Corporation equivalent) in Mexico, laws such as the the Commerce Code (Código de Comercio) or the Federal Civil Code (Código Civil Federal) need to be analysed in order to try to find these principles; the General Law for Business Corporations is just not enough. Simply by comparing the General Law for Business Corporations with the Mexican Securities Law (Ley de Mercado de Valores), most of the principles analysed in this article can be found. But should not these principles, that apply only to public corporations, also be regulated and applied to general corporations?

This is a constant and relevant debate encountered by Mexican lawyers. Some say that the Mexican Securities Law is much more complete as a law (or act) as it is more recent than the General Law for Business Corporations and includes a proposal to allow for modification so legislators can implement new precepts. However, there are Mexican lawyers that affirm that public corporations are more complex and have more requirements and rules than a stock corporation and, therefore, they try to justify the difference between these two laws.

Liability of Directors

Although Mexico faces great challenges regarding the regulation of liability of directors, it is a country that understands there are principles that have to be followed in the world of corporate governance. A clear example are fiduciary duties. These duties are born from a relationship of trust between directors and the company itself (shareholders) and often include the duties of loyalty, good faith and due diligence.

It is important to point out that, although fiduciary duties are not regulated in the General Law for Business Corporations, the Mexican Securities Law includes the Code of Principles and Best Practices for Corporate Governance (Código de Principios y Mejores Prácticas de Gobierno Corporativo). This code is issued by the Business Coordinating Council (Consejo Coordinador Empresarial) and, together, both the Mexican Securities Law and the Code of Principles and Best Practices for Corporate Governance are the pillars of corporate governance in Mexico.

It is of utmost importance that it is understand that the fragments, provisions and corporate practices set out in the Code of Principles and Best Practices for Corporate Governance are merely recommendations issued by the Business Coordinating Council and, therefore, must return to the idea that the imputation of responsibility to a director of a company for violating fiduciary duties that are not contained in the General Law of Business Corporations would be difficult. This is why companies that do not take these recommendations and apply them to their bylaws may have trouble holding a director accountable.

Corporate Governance Principals

After a large investigation, it was found that Mexico does have some principles in law regarding corporate governance, including good faith, loyalty, competence, confidentiality, absence of conflict of interest and fiduciary duties.

Good faith for example, is a principle defined as a person's belief that they are acting in accordance with the law; it constitutes a general principle of law, consisting of an imperative of honest, diligent and correct conduct, which requires loyal and honest people that exclude any malicious intention. Although this principle is not found in the General Law of Business Corporations, the Federal Civil Code and the Mexican Securities Law, in its Article 30, do contemplate it.

Loyalty is a principle that means acting in good faith, being faithful and loyal to the company, and acting in its best interest. This principle can be found in Articles 34-37 of the Mexican Securities Law.

Competence is another very important principle for directors because of how they carry out their job while ensuring that the performance of their duties is always within the sphere of their competence and can be found in Article 157 of the General Law of Business Corporations.

Confidentiality is a principle that prohibits directors from disclosing confidential information; in other words, they have the duty to maintain confidentiality over the privileged information they possess because of their position. Details regarding this duty or principle are in Article 157 of the General Law of Business Corporations and in Article 31 of the Mexican Securities Law.

Absence of conflict of interest is another very important principle for directors. A director who has no conflict of interest does not appear on both sides of the transaction nor do they expect to obtain any personal financial benefit, other than the benefit that is advantageous to the company. This principle regulated in Article 156 of the General Law of Business Corporations, and Articles 34 and 35 of the Mexican Securities Law.

Finally, the concept of fiduciary duties, as has been discussed, is stated in the Code of Principles and Best Practices for Corporate Governance and in Articles 30 and 32 of the Mexican Securities Law.

Colombian Regulation

Colombia regulates this topic in three different laws. Colombians have the Commercial Corporations Law (Ley de Sociedades Comerciales), the 222 Law of 1995 (Ley 222 de 1995) and the Code of Commerce (Código de Comercio). It is important to state that these three laws have to be seen as one because the purpose of creation of the first two laws mentioned in this paragraph was to complement the Code of Commerce. Therefore, each precept or principle found in any of these laws is obligatory for companies in Colombia.

The problem is that someone who is not well versed in Colombian corporate governance will have to review not one but three different laws that regulate director’s liability and their performance in the company in order to understand the topic and it is this that creates legal uncertainty. The difference between Mexico and Colombia is that, although spread different laws, Colombia has clear, mandatory regulations. In Colombian laws, we find the following principles: duty of loyalty, duty of diligence, absence of conflict of interest, competence, good faith and confidentiality.

The USA

Finally, a look at the USA, especially at the regulation of the State of Delaware. Delaware is a useful example because, according to Fortune 500, 66% of the companies that appear in this list chose Delaware as their legal domicile. It must be clarified that the companies that appear in this list have profits of hundreds of millions of dollars every year. If 66% of these companies chose Delaware as their legal domicile, there must be some interesting benefits for companies both in the state and in relevant regulation.

Regulation in Delaware regarding director’s liability and the way they operate a company is guided by the Business Judgment Rule, this rule is “a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company” (Aronson v Lewis, 473 A.2D 805, 812 Delaware, 1984). However, this rule works as a double-edged sword because if the requirements of the rule are complied with, the rule would protect the director who makes a bad decision, otherwise, if the violation of one of these requirements is verified in court, the director would be liable and have to pay a compensation for damages.

The Business Judgment Rule is interesting, and those who try to refute it (shareholders) must prove that one or more requirements of its application were breached. The requirements of application are the principles and guidelines a director has to comply with. The principles found in the Business Judgment Rule are business decision, competence, absence of conflict of interest, good faith and loyalty, duty of diligence and care, fiduciary duties and informed basis.

Conclusion

In conclusion, it is important to state that regulation of this matter tends to help directors of the company to comply with the basic principles of good corporate governance so that there is no doubt that the head of the company is acting as straight, as diligent and as honest as possible. The truth is that success in business decisions nowadays cannot be taken for granted, but the process in which the decisions are taken can be regulated so that directors can assure shareholders that they made the best decision for the company.

It can be concluded that by grouping the principles here analysed, a director should act in this way: in good faith and with loyalty towards the company, without exceeding its competence (laws or bylaws), treating the information they possess with confidentiality and always being exempt from any conflict of interest. In addition, their actions will be considered valid business decisions when they go according to the company's purpose and when an informed base backs them in order to comply with the duty of diligence and fiduciary duties.

As long as these general principles are followed, directors should be exempt from liability towards the company in Mexico, Colombia and the USA.

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
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Law and Practice

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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.

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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.

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