Any investor ready to establish a presence in Mexico and that has selected to form a stock corporation (sociedad anónima) must fully understand, among other particularities of this type of legal entity, the scope of duties and liabilities of those who will be appointed as members of the board of directors.
This is particularly important considering that the investor may be a foreign company that wishes to designate one or more of its trusted officers as board members of its Mexican subsidiary.
In stock corporations, the shareholders’ meeting is the supreme governing body and as such may elect, re-elect and remove directors. Management of stock corporations is entrusted either to an individual (“sole administrator”) or to a board of directors, whose members may or may not be shareholders. Generally, any individual capable of engaging in commercial transactions may be appointed as director. While directors’ positions must be performed personally and therefore, directors may not be represented at board meetings, Mexican law does allow directors to have alternates in case of absence.
Duties of Directors
The board of directors may carry out all acts directly related to the business of the company, although the shareholders may limit such authority in the by-laws. Directors, however, are not in charge of the day-to-day management, but rather have a supervisory function, as the shareholders’ meeting or the board delegate such duties to officers and employees. In general terms, directors must follow and implement the instructions received from the shareholders’ meeting and comply with the duties imposed on them by law or the company’s by-laws.
General duty of diligence or care
Directors have the general duty to perform their activities prudently and with the same care they would ordinarily take in their personal affairs. This duty is generally satisfied by attending all board meetings and complying with their specific duties, and always acting in the best interest of the company and its shareholders.
Duty of loyalty; conflicts of interest
A director that in any given matter has a conflict of interest with the company, must disclose the nature and scope of such conflict to the other directors, and refrain from participating in any resolution or deliberation in connection therewith.
Liabilities for Breach of Duties
Directors shall have the liabilities inherent to their position and those derived from the obligations imposed on them by law and the company’s by-laws.
Civil law liability
Directors are generally liable for damages and lost profits caused by breach of their duties.
Directors also face exposure to joint and several liability with respect to the company, unless they express their objection on the matter of relevance at the time such matter is discussed and resolved: (i) for the actual existence of shareholders’ contributions; (ii) for the satisfaction of the requirements to distribute dividends; (iii) for the existence and maintenance of the company’s accounting, control, registry and information systems; (iv) for the strict compliance of the shareholders meetings’ resolutions; (v) for separating the amounts required for the statutory capital reserve (5 per cent per annum until it reaches 20 per cent of the total capital stock) from the net profits account; (vi) for damages caused to the company resulting from authorising the acquisition by the company of its own stock; and (vii) for any actions taken after the company has been dissolved, or after a cause for dissolution has occurred. The absence of a director from the board meeting would not suffice to release him or her from these liabilities.
Moreover, directors are generally liable, together with their predecessors, for the irregular conduct of their predecessors, if the current directors were aware of it and failed to so notify the company’s statutory auditor.
Actions against directors for breach of duty may be initiated by a resolution adopted at the shareholders’ meeting and also by shareholders representing 33 per cent of the capital stock, in this last case when (i) the claim includes the total amount of liabilities incurred by directors in favour of the company, and not only the amount corresponding to the plaintiffs’ personal interest; (ii) the plaintiffs voted against the shareholders’ meeting resolution whereby it was agreed to release directors from their liabilities; and (iii) the amounts received as a result of the claim accrue for the benefit of the company.
Note that annual shareholders’ meeting (which must be held within the first four months of each year) typically ratifies and approves the actions taken by the board and by individual directors during the preceding fiscal year, and releases them from any liabilities incurred during such period.
Tax law liability
Directors could be held joint and severally liable with the company for the payment of taxes or other charges owed by the company to the Mexican tax authorities,
if during the term they hold their position the company fails to (a) register as a taxpayer, (b) advise the tax authorities of a change of its tax address or when it vacates the premises of its tax address, and (c) keep accounting records; as well as when the company hides or destroys such accounting records.
Criminal law liability
Directors risk exposure to criminal liability by their mere position within the top management structure of a company; however, such liability would only arise to the extent a director knowingly and personally participates in fraudulent or otherwise criminally sanctioned acts.
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Mexican corporate law contains a robust set of rules that directors must observe to avoid exposure to civil liabilities, which must be considered together with particular provisions of other federal statutes applicable to the directors’ position and could result in additional exposure to liabilities. It therefore is material for investors in Mexican stock corporations to familiarise themselves with the duties and liabilities of directors, survey the board’s responsibility and assess the risks its members may face during their tenure.