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Shareholders' Rights in Private and Public Companies in Mexico: Overview
Practical Law Country Q&A 8-614-7346 (Approx. 22 pages)
Shareholders' Rights in Private and Public Companies in Mexico: Overview
| Law stated as at 01 Feb 2023 • Mexico |
A Q&A guide to shareholders' rights in private and public companies law in Mexico.
The Q&A gives a high-level overview of types of limited companies and shares, general shareholders' rights, general meeting of shareholders (calling a general meeting; voting; shareholders' rights relating to general meetings), shareholders' rights against directors, shareholders' rights against the company's auditors, disclosure of information to shareholders, shareholders' agreements, dividends, financing and share interests, share transfers and exit, material transactions, insolvency and corporate groups.
Types of Companies with Share Ownership and Limited Liability
1. What are the main types of companies with limited liability protections and shareholders or members? Which is the most common? Which type do foreign investors most commonly use?
Under Mexican law, there are three kinds of companies with limited liability:
- Stock corporation (sociedad anónima) (S.A). This is the most popular structure for national and foreign business investors. At the moment of its incorporation, this is type of corporation is formed as a private company; however, it can be converted to a publicly traded corporation (sociedad anónima bursátil) at any time after incorporation. It operates under a company name and is formed exclusively by stockholders whose liability is limited to paying for their shares as capital contributions. There must be at least two shareholders. The selected corporate name is followed by the initials S.A, or the words Sociedad Anónima.
- Limited liability company (sociedad de responsabilidad limitada) (S. de R.L.). This is treated as a corporation in Mexico but is considered as a partnership in the US for tax purposes. This type of company is formed by members whose obligations are limited to the payment of their contributions to capital, but in which capital contributions are not represented by negotiable certificates (shares), but by equity interests. The S. de R.L., which is a private company, is the second most commonly used structure for national and foreign investors. It has fewer corporate formalities than an S.A (see above) and is widely used for small businesses in Mexico as well as joint ventures. It must be made of up at least two members and must not have more than 50 members. The commercial name of a S. de R.L. is followed by the phrase Sociedad de Responsabilidad Limitada, or its abbreviation, S. de R.L.
- Stock market promotion company (sociedad anónima promotora de inversión) (S.A.P.I.). This type of corporation can be incorporated as a S.A.P.I. or as an S.A which later adopts the quality of a S.A.P.I. and is not supervised by the National Banking of Securities Commission unless it subscribes bonds or securities in the National Registry of Securities, in which case it will become a listed company known as a corporation promoting stock investment (sociedades anónimas promotoras de inversión bursátil) (S.A.P.I.B.). Members in a S.A.P.I. are admitted as shareholders, either as individuals or companies. There is no limit on the number of shareholders within a S.A.P.I., and each shareholder's liability is limited to its respective capital contributions. Such companies are common among investors, particularly in view of the benefits they provide, their possible wider range of rights that can be granted to shareholders and their structural flexibility as compared to a regular S.A.
The incorporation process for all the above types of companies is not too complicated. However, it can be a time-consuming process due to the fact that it involves government authorities and requires client approval of the corporate bye-laws, and the signing and formalisation of various documents.
3. Briefly set out the main types of shares typically issued by a company and the main rights they provide. Set out the other main financial instruments (for example, bonds) and participation instruments that can be issued by a company.
The following are the kinds of shares that can be issued under Mexican law:
- Shares of common stock (common shares): typical shares issued by a Mexican company that grant the same rights and obligations to all shareholders.
- Preferential shares: a special type of share which is entitled to receive dividends ahead of common shares, according to a minimum percentage as provided in law or as set out in the bye-laws of the company, which may or may not have voting rights.
- Limited voting shares: this type of share can only vote at extraordinary shareholders' meetings, at which the following matters are discussed (among others):
- amendments to bye-laws;
- dissolution;
- change of corporate purpose;
- extension of the company's term;
- change of company nationality;
- mergers;
- corporate conversions.
- Unlimited voting shares: this type of share grants shareholders the right to exercise voting rights in any shareholders' meeting and regarding any matter.
- Non-assessable shares: shares fully paid by the subscribing shareholders or given to shareholders as a result of the capitalisation of stock premiums or other shareholder contributions. A class of stock in which the issuing company cannot impose further levies on its shareholders for additional funds for further investment.
- Assessable shares: shares which have not been paid in full by the subscribing shareholder(s). This is a class of stock in which the issuing company is allowed to impose levies on stockholders for more funds.
- Neutral shares: shares issued by publicly-held corporations to Mexican trust institutions and which are used by these institutions to issue, in turn, ordinary participation certificates (certificados de participación ordinaria) that represent monetary rights (as opposed to corporate rights) derived from such shares.
Under Mexican law there are certain instruments which are not properly shares, because they do not represent the capital stock, but which grant a shareholder rights, such as the following:
- Founders' shares: a type of security covering the incorporators' share in the annual profits of an S.A, payable after at least a 5% dividend is paid to the holders of common stock. These types of shares are not included as part of capital stock and they do not entitle the holders of them to participate in the management of the corporation.
- Performance stock: a special kind of stock issued in exchange for services rendered to the company and entitling the holder to dividends.
- Treasury stock: stock that has been authorised but not yet issued and is not outstanding.
- Dividend certificates: a special kind of stock issued in exchange for shares being redeemed by a company with the company's distributable profits, which is entitled to receive dividends second in line to non-redeemable shares, as set out in the bye-laws of the corporation, and which may or may not have voting rights.
In general, Mexican legislation requires a minimum of two shareholders. However, the type of corporation known as a simplified joint stock company (sociedad por acciones simplificada) only requires a minimum of one shareholder. This type of corporation is not as widely used as the S.A, S.A.P.I. and S. de R.L, and can only be used for businesses that have a turnover in each fiscal year of less than MXN5 million, which is why this type of corporation is not suitable for the vast majority of transnational companies and medium to large companies in Mexico.
General Shareholders' Rights
5. At the formation of a company, what level of government defines the rights and obligations of the company?
Corporations are governed under a federal Act called the General Corporations Law (Ley General de Sociedades Mercantiles) and their incorporation involves both federal and state/local government bodies, as follows:
- Federal: Ministry of Economy and the Federal Public Registry of Commerce.
- State/local: notaries public and local public registries of commerce.
6. What are the general rights of all shareholders? How can shareholders' rights be varied (for example, attaching additional rights or limitations to a class of shares, or waivers of shareholders' rights)? Are such variations generally provided in the company's bye-laws, shareholders' agreements or by statute?
There are general shareholders' rights that are applicable to all types of companies. However, depending on the specific type of corporation, the shareholders' rights that are granted can change between one type of company and another. The bye-laws of Mexican companies can also include special rights for shareholders (provided these do not contravene Mexican law), which are usually rights granted to shareholders in an S.A (such as tag-along, drag-along and preferential rights, and put and call rights). General shareholders' rights include the following:
- Property rights: these are economic rights and can include the right to:
- make capital contributions;
- transfer shares to another shareholder/third party;
- receive benefits (including the right to receive dividends);
- obtain a refund of capital contributions paid; and
- share in the distribution of capital on liquidation;
- hold provisional or definitive share certificates;
- exchange shares;
- be granted shares of enjoyment (which result after the redemption of common shares).
- Corporate rights: these refer to the management and surveillance of the company and include the following:
- right to call for a shareholders' meeting and participate in such;
- right to draft points of the agenda to be discussed at a shareholders' meeting;
- right to be represented at a shareholders' meeting;
- right to subscribe to new shares;
- right to postpone resolutions and suspend their execution, as well as challenge them;
- right of first refusal;
- right to vote;
- right to designate directors, approve their performance and determine their emoluments;
- right to designate statutory examiners and dismiss them (if required); and
- right to request an account from directors and approve it.
7. Briefly set out the rights of minority shareholders and the minimum shareholding required to exercise such rights.
The rights of minority shareholders in a Mexican corporation are granted either according to law or under to the company's bye-laws, which may give additional rights and/or can reduce the threshold required to exercise such rights. Among minority rights established under Mexican law, the following are the most relevant:
- At least 22% of the capital stock is required in order to appoint a member of the board of directors (or an examiner) when the company has three or more shareholders.
- 33% of those present at a shareholders' meeting have the right to request a postponement of the resolution of an issue for three days without it being necessary to formally call a new meeting.
- 33% of the capital stock can object to a resolution before a court, provided such shareholders voted against the resolution or did not attend the meeting. The claim to object to a resolution must be filed within the following 15 days as of the date of the closure of the meeting, and must establish which provision, law or bye-law(s) was violated.
- 33% of the capital stock can request the board of directors to call a shareholders' meeting if no meeting has been held for two consecutive years or if, in the meeting, the issues on the agenda of the annual meeting were not discussed.
With respect to a S.A.P.I. the Securities Market Law (Ley del Mercado de Valores) establishes the following minority rights:
- Shareholders with voting rights that individually or jointly represent 10% of the capital stock can appoint a member of the board of directors and/or an examiner.
- Shareholders with voting rights that individually or jointly represent 10% of the capital stock can request the examiner or president of the board of directors, at any time, to call a shareholders' meeting regarding issues related to their voting rights, and can also request to the postponement of a resolution concerning an issue raised in a meeting about which they feel uninformed.
- Shareholders with voting rights that individually or jointly represent 20% of the capital stock can object to a resolution related to their voting rights that is taken in a general meeting.
8. How effective are institutional investors and other shareholder groups in monitoring and influencing a company's actions (for example, corporate governance compliance)? List any such groups with significant influence in this area.
Under Mexican laws, institutional investors and shareholder groups usually have a greater shareholding than other shareholders, and such investors and shareholder groups can influence the resolutions of the board of directors and the individuals involved in the running of the company. Further, such institutional investors and shareholder groups can have influence on the creditors and new investors of the company through their voting procedures. In addition, institutional investors can play an important role in pushing for the adoption of compliance policies in Mexican companies, especially where such Mexican companies have foreign shareholders that adhere to similar compliance policies in their own countries.
Meetings of Shareholders
9. Does a company have to hold an annual shareholders' meeting? If so, when? What issues must be discussed and approved at a general meeting? Which decisions must be approved by the shareholders in a general meeting?
Mexican law requires each company to hold an annual shareholders' meeting (which is an ordinary meeting) within four months following the close of the company's fiscal year (that is, no later than 30 April of each year), since the fiscal year of every corporation runs from 1 January to 31 December. It is important to note that whilst all annual meetings are "ordinary" meetings, not all "ordinary" meetings are annual meetings. Companies are required to hold one annual shareholders' meeting each year, but can hold as many ordinary meetings throughout the year as they deem necessary (so effectively the annual shareholders' meeting is a sub-category of ordinary meeting).
The annual shareholders' meeting must approve the company's financial statements and the statutory auditor's report for the previous fiscal year, and must elect the directors, examiners, officers and the statutory auditor who will hold office during the new fiscal year (though for closely held corporations there is no penalty if the annual shareholders' meeting is held after the expiration of the above outlined term). This meeting must also approve any proposed fees/compensation that will be paid to the directors or the company's officers.
10. Can a company hold extraordinary or special meetings of shareholders? If so, when and how often? What issues can be discussed and approved by the shareholders in an extraordinary or special meeting?
Mexican law allows corporations to hold both ordinary and extraordinary shareholders' meetings (in addition to the annual shareholders' meeting that is required each year).
Ordinary and extraordinary meetings can be held at any time by specific categories of shareholders (such as holders of limited voting shares). The specific purpose of this type of meeting is to agree, accept or oppose any proposal that the ordinary shareholders' meeting is usually intended to resolve and that may prejudice their special class rights.
The matters discussed at special meetings are those related to the relevant specific class of shareholders, but not to the matters that are the responsibility of each individual shareholder (which must be addressed individually by each shareholder).
Extraordinary meetings can also be requested at any time by the company's governing body or by shareholders representing at least 33% of the capital stock. Extraordinary meetings can only deal with the following matters (any other matters must be resolved at the ordinary shareholders' meeting):
- An extension of the duration of the company.
- The anticipated dissolution of the company.
- An increase or reduction of the capital stock.
- A change of the company's purpose.
- A change of the company's nationality.
- Conversion of the company from one type to another.
- The company's merger with another company.
- The issuance of preferred shares.
- The redemption by the company of its own shares and the issuance of beneficial shares.
- The issuance of bonds.
- Any other modification of the articles of incorporation.
- Any other matter for which a special quorum is required by the articles of incorporation or by the law.
11. Can a general or special meeting be held by telecommunication means or written/electronic approval?
Under Mexican legislation, whilst both an ordinary shareholders' meeting and an extraordinary meeting can be carried out by means other than a physical meeting, for a meeting's resolutions to be effective, the bye-laws usually require that such resolutions be ratified in writing by the shareholders.
12. What are the notice, information and quorum requirements for holding general and special meetings and passing resolutions?
Under the General Corporation Law, the annual (ordinary) shareholders' meeting must be held within the first four months of the year. However, this law does not provide any consequences for not holding the annual meeting within the first four months of the year. In practice, companies sometimes hold their annual meetings later throughout the year due to different reasons (for example, the financial statements may have not yet been issued, or decisions concerning the company's administrative body have not yet been determined, and so on). Except as provided otherwise by the company's bye-laws, the corresponding shareholders' meeting must be held no sooner than 15 days from the date of the publication of the corresponding call for that meeting (so that shareholders are given at least 15 days' notice of the meeting).
Under Article 181 of the General Corporations Law, the annual (ordinary) shareholders' meeting must resolve on the following specific matters:
- Discuss, approve and/or modify the report on the company's annual performance, based on the statutory auditors' report and the financial statements (as applicable).
- Approve the designations, revocations and/or ratifications of the company's administrative body.
- Determine the emoluments of the company's administrative body and the statutory auditor.
In this regard, prior to or during the meeting, the shareholders must be provided with the corresponding financial information, together with the respective reports drafted by the company's administrative body and the statutory auditor, in order to able to make those determinations outlined above.
The General Corporations Law does not provide for any specific notice period in order to pass proposed resolutions, and all resolutions that are approved in accordance with the company's bye-laws are considered valid, even to those absent or dissident shareholders. However, shareholders have the right to suspend the execution of resolutions and challenge them, as well as to file claims for damages and losses where validly passed resolutions are not followed by other dissenting shareholders.
Under the General Corporations Law, in the case of limited liability stock companies, there are two types of meeting:
- Ordinary shareholders' meetings.
- Extraordinary shareholders' meetings.
Ordinary shareholders' meetings. For ordinary shareholders' meetings, a quorum will be established when at least 50% of the shares of the capital stock are represented at the meeting, and resolutions must be adopted by a simple majority of the shareholders that attend the meeting (that is, more than 50%). If a quorum is not present to duly convene an ordinary shareholders' meeting, a subsequent call can be given, and the meeting must then be held, whether or not at least 50% of the shares entitled to vote are present, and any resolutions must be adopted by the affirmative vote of a simple majority of the shareholders that attend the meeting.
Extraordinary shareholders' meetings. For extraordinary shareholders' meetings, a quorum will be established when at least 75% of the shares of the capital stock are represented at the meeting, and any resolutions must be adopted by the affirmative vote of the shareholders that represent at least a simple majority of the capital stock of the company (that is, more than 50%). If a quorum is not present to duly convene an extraordinary shareholders' meeting, a subsequent call can be given, and the meeting must then be held, whether or not at least 75% of the shares entitled to vote are present, and any resolutions must be adopted by the affirmative vote of a majority of the shareholders that represent the majority of the capital stock of the company (that is, more than 50%).
Voting
Mexican law does not regulate or otherwise impose restrictions regarding voting during ordinary or extraordinary meetings. Therefore, voting mechanisms are instead provided by the company's bye-laws. Due to a general absence of regulation, voting can be expressed by ballot, by roll call, as a show of hands or by any other mechanism provided by the company bye-laws. In our experience, companies will usually designate a vote inspector, who is in charge of verifying each shareholder's voting powers, quantifying votes and certifying voting outcomes. Likewise, the vote inspector must certificate that shares have voting rights, since it is very common for a company to issue shares either without voting rights or that limit their vote on specific matters.
Shareholders can, through proxy letters duly signed before two witnesses, delegate their corresponding voting rights to another person (their proxy). In this regard, the vote inspector will verify that the proxy letters have been duly executed and provided, and that they comply with Mexican legislation (General Corporations Law).
In our experience, the only way in which the shareholders can aggregate their shares to exercise their voting rights is by executing a shareholders' agreement (in which all the shareholders are obliged to exercise their rights regarding a specific issue in a certain way) or by transferring their shares into a trust in which the trust agent can exercise the voting rights in the manner established in the trust agreement.
14. Are specific shareholder approvals/resolutions required by statute or an applicable stock exchange for certain corporate actions? What voting requirements and majorities apply?
Meetings in Mexico are classified as ordinary meetings or extraordinary meetings and resolve on different matters, as follows:
- Extraordinary meetings. These are reserved for decisions that entail an amendment to the company's bye-laws, such as (among other things):
- a renovation of term;
- an increase or decrease in the capital stock;
- an amendment to the company's nationality;
- mergers; and
- the issuance of preferred shares.
Such a meeting is deemed duly convened under the law when at least 75% of the shares of the capital stock are present or represented by proxy, and any resolutions passed are valid if adopted by the affirmative vote of a simple majority (that is, more than 50% of all shares of the capital stock). If a quorum is not present, a subsequent call can be given and the meeting must then be held (whether or not at least 75% of the shares entitled to vote are present), and any resolutions are validly adopted by the affirmative vote of at a simple majority of the capital stock (unless otherwise agreed in the company's bye-laws). - Ordinary meetings. These are for matters not reserved for extraordinary meetings. For ordinary shareholders' meetings, a quorum is established when at least 50% of the shares of the capital stock are represented at the meeting. If a quorum is not present, so as to duly convene an ordinary shareholders' meeting, a subsequent call can be given and the meeting will then be held (whether or not at least 50% of the shares entitled to vote are present). Resolutions will then be validly adopted by the affirmative vote of a simple majority of the shareholders that attend the meeting (that is, more than 50%).
Shareholder Rights Relating to Meetings
15. Can a shareholder require a general or special meeting to be called? What level of shareholding is required to do this? Can a shareholder ask a court or government body to call or intervene in a general meeting?
Shareholders independently cannot call for an ordinary or extraordinary meeting in their own capacity, since under Mexican law these meetings can only be either:
- Called by the board of directors.
- Convened at the request of the court.
Mexican legislation does not allow for a single shareholder holding less than 33% of the capital stock to obtain assistance from the courts or from any government body to intervene in a meeting. However, Mexican legislation does allow for a meeting to be called by the courts at the request of a shareholder or several shareholders acting in concert, provided that the single shareholder, or the shareholders together acting in concert, hold at least 33% of the capital stock and have asked the board of directors or examiners to call a meeting, and this meeting has not been held within the 15 days following the date of the request. As an exception to this, the aforementioned request can be made by a single shareholder (even if that shareholder only hold a single share) in the following cases:
- When two years have passed, and no annual shareholders' meeting has been held.
- When an annual shareholders' meeting has been held but it has not resolved on the matters applicable to the annual shareholders' meeting.
16. Can a shareholder require an issue to be included and voted on at a general meeting? What level of shareholding is required to do this? Can a shareholder require information from the board about the meeting's agenda?
As a general rule, a shareholder can require an issue to be included and voted on in an ordinary or extraordinary meeting. It is not necessary for the rest of the shareholders to approve the inclusion of such an item on the agenda of the meeting. With respect to an S.A or a S. de R.L. (see Question 1), a shareholder (or shareholders) who hold at least 33% of the capital stock can postpone any type of meeting with respect to the resolution of a certain issue on the agenda, if the shareholder (or shareholders) considers that it does not have enough information to exercise its vote. For an S.A.P.I., only 10% of the capital stock is required to postpone the resolution of an issue being discussed in a meeting.
The board of directors have a legal obligation to make available to the shareholders all the information that is needed to approve the items on the agenda of any meeting at least 15 days before the date on which the meeting is scheduled to be held.
17. Do shareholders have a right to resolve in a general or special meeting on matters which are not on the agenda?
18. Can a shareholder challenge a resolution passed at a general meeting? Is a certain shareholding level required to do this? What is the time limit and procedure to challenge a general meeting resolution?
Under Mexican legislation a shareholder (or shareholders) can challenge a resolution passed at an ordinary or extraordinary meeting only if such shareholder (or shareholders) did not vote in favour of the resolution that is being challenged. Shareholders representing 25% of the company's capital stock can judicially oppose the resolutions of a shareholders' meeting, provided that the following requirements are met:
- The claim must be presented within 15 days following the closing date of the meeting.
- The claimants must have either:
- not attended the meeting;
- voted against the challenged resolution.
- The claim indicates the clause in the bye-laws, or the legal concept, that was violated by the resolution.
However, such judicial opposition cannot be filed against resolutions relating to the liability of the administrators or the statutory auditor.
Shareholders' Rights Against Directors
The appointment of directors and statutory examiners must be done at the incorporation of the company or through the requisite subsequent ordinary shareholders' meeting. In both cases, the appointment is by a simple majority vote unless otherwise agreed in the bye-laws. The replacement and/or revocation of such appointments can be carried out through an ordinary meeting in accordance with the requirements and conditions provided by the company's bye-laws. Under Mexican legislation, directors and statutory auditors can be re-elected indefinitely.
20. Can shareholders challenge a resolution of the board of directors? Is there a minimum shareholding required to do this?
Mexican law does not expressly allow shareholders to directly challenge a resolution of the board of directors. However, a shareholder (or shareholders) who holds at least 25% of the company's capital stock can directly bring a civil liability action against the company's directors provided that:
- The claim is brought on the company's behalf (rather than on the shareholder's/shareholders' behalf) and includes the total amount of the interests owed by the directors to the company (and not only the personal interests of the claimants).
- The claimants have not previously approved any resolution that was passed at an ordinary or extraordinary meeting which expressly provided that they are unable to proceed against the defendant director(s) (where applicable).
21. Briefly set out the main directors' duties to the company and its shareholders. What is the potential liability of directors to the shareholders? Can their liability be limited or excluded? On what grounds can shareholders bring legal action against the directors?
The main duties of the directors are to:
- Co-ordinate and report on the daily operations of the company.
- Issue an annual report containing the company's financial statements, its ongoing operations and the policies that the directors followed when making the report.
Directors enjoy confidentiality in all the transactions that they perform and under Mexican law are irrevocable attorneys in fact (Article 142, General Corporations Law (Ley General de Sociedades Mercantiles)). Directors of public companies must act loyally, confidentially and diligently in all their duties.
In general, though the directors are attorneys in fact during the performance of their duties, they are jointly and severally liable for the:
- Extent of the contributions made by the shareholders.
- Compliance with the legal and statutory requirements for paying dividends.
- Existence and maintenance of systems of accountability.
- Compliance with the resolutions made by the shareholders.
This liability cannot be waived or derogated from, and any agreement by the shareholders that aims to limit or exclude the liability of directors will be considered null and void under Mexican law. Further, it is a criminal offence (punishable by imprisonment in Mexico) if directors act fraudulently in company transactions: for example, if a director spends company funds for their own benefit or approves a transaction that is harmful to the company but indirectly benefits the director.
22. Are directors subject to specific rules when they have a conflict of interest relating to the company? Are there restrictions on particular transactions between a company and its directors? Do shareholders have specific rights to bring an action against directors if they breach these rules?
23. Does the board have to include a certain number of non-executive, supervisory or independent directors?
There is no legal requirement to include certain number of non-exclusive, supervisory or independent directors in regular limited liability companies. However, the board must include at least one resident director acting as sole administrator or a board of directors composed of at least two individuals.
There is also no legal requirement to include a certain quota of diverse directors based on gender or race unless otherwise stated in the company's bye-laws (in our experience, these types of requirements have not been applied within our jurisdiction).
For public companies, the Securities Market Law requires that at least 25% of the members of the company's board of directors must be independent directors.
24. Do directors' remuneration and service contracts have to be disclosed? Is shareholder approval of directors' remuneration required?
The obligation to disclose directors' remuneration and service contracts is only required for public companies. Private companies such as S.A, S.A.P.I and S. de R.L. (see Question 1) are not required to disclose this information.
Under the law, shareholders must approve the compensation/fees of the directors in the annual shareholders' meeting (see Question 8). This means that the shareholders have a right to refuse to agree to certain fee levels, and that this may need to be negotiated with the shareholders in order to obtain their necessary approval.
Shareholders' Rights Against a Company's Auditors
25. What is the procedure to appoint and remove the company's auditors? What restrictions and requirements apply to who can be the company's auditors?
Under Mexican law, there is no specific procedure for appointing auditors for an S.A or an S. de R.L., unless the bye-laws provide for such a procedure on incorporation.
Companies can appoint a statutory examiner, who is a third party that supervises the operations of the boards of directors of both S.A and S. de R.L. companies and represents the interests of the shareholders. However, there is currently no obligation to appoint or designate a statutory examiner and it is entirely up to the bye-laws and the will of the corporation whether or not such person is appointed. The appointment of a statutory examiner must be done on the incorporation of the company or through a subsequent ordinary meeting. The appointment is by majority vote unless otherwise agreed in the bye-laws. The replacement and/or revocation of such appointments can be carried out through an ordinary meeting in accordance with the requirements and conditions provided by the company's bye-laws.
Under the General Corporations Law, the following cannot be statutory auditors:
- Those who, under the law, have been disqualified from engaging in business.
- Certain employees of the company: employees of the company who are shareholders of the company in question and who hold more than 25% of the capital stock, or employees of the company who are shareholders of the company in question and who hold more than 50% of the company's shares.
- Persons related by blood to the directors of the company.
26. What is the potential liability of auditors to the company and its shareholders if the audited accounts are inaccurate? Can their liability be limited or excluded?
Under Mexican law, any shareholder can notify the statutory auditors in writing of any business management irregularities which must then be included by the auditors in their report to the annual shareholders' meeting, along with any suggestions for correcting such irregularities. Further, the statutory auditors are personally responsible to the company for carrying out their duties in compliance with the law and the bye-laws. They can be assisted and supported by the personnel under their control or by independent experts and professionals chosen by them. Any agreement to limit or exclude auditors' liability by the shareholders will be null and void under Mexican law.
Further, it is a common practice for companies to hire an independent and external auditor. In this case, the liability of that external auditor will be in accordance with the terms and conditions of the service agreement that the company concludes with the independent and external auditor. One of the objectives of independent and external auditors is to obtain reasonable assurance that the financial statements as a whole are free from material misstatements due to fraud or error, and to express an opinion on whether the financial statements are fairly presented in accordance with the relevant accounting principles.
Due to the inherent limitations of an audit, there is always a risk that deviations in the financial statements that lead to fraud or error may not be detected, even if the standards governing the auditor's performance have been followed. However, if the auditor's performance is not in accordance with the various standards that apply, that auditor may be professionally liable for any fraud or error. Professional liability is regulated by the rules of ethics and professional conduct that govern external auditors, and disciplinary proceedings are regularly carried out where auditors' services are not performed in accordance with those rules. In addition, under Mexican law external auditors can incur civil, fiscal or criminal liability for acting negligently, amateurly or fraudulently in the provision of their services.
With respect to public companies, the Stock Market Law establishes that external auditors are liable for any damages they cause to the company when:
- Due to inexcusable negligence, the report or opinion contains defects or omissions.
- Intentionally, they omit from the report relevant information of which they are aware, or include information which they understand to be false or misleading information, or they adjust the report so that it fails to reflect the real situation.
- They recommend the carrying out of an action (or actions) which harms the company or a certain group of shareholders.
- The suggest, accept, encourage or propose a certain registration transaction which may be contrary to the accounting regulations.
In this context, even when there are certain deviations from the financial statements that could lead to fraud or error, provided that the external auditor acts with diligence, under the different rules that regulate the professional conduct of external auditors, that auditor is unlikely to be found liable for causing harm to the company.
Disclosure of Information to Shareholders
27. What financial or other information about the company do the directors have to provide and disclose to its shareholders? What information and documents are shareholders entitled to receive?
The board of directors has a legal obligation to file an annual report each year at the annual shareholders' meeting which must include details of the:
- Company's general status with respect to its performance.
- Policies followed by the directors and the principal existing projects.
- Policies followed in order to prepare the financial information.
- Financial standing of the company.
- Status of the company's operations during the last fiscal year.
- Variations and updates with respect to the financial standing of the company and their respective notes on the same.
This report must be made available to shareholders, regardless of the number of shares they own, at least 15 days before the annual shareholders' meeting in which it will be discussed, and shareholders also have the right to receive a copy of it. Shareholders can request any information they need when the annual report from the directors is being approved, including a copy of the minutes of the board meeting concerning any relevant transaction pertaining to it (where that transaction is within the scope of matters managed or approved by the board of directors).
28. What information about the company do the directors have to disclose under securities laws (where applicable)?
Under the Securities Market Law the directors must never disclose any information that they have about the company to third parties, but they are obliged to disclose all the information that the shareholders require, such as corporate books and the accounting records of the company (including accounting transactions of the company and bank accounts).
Further, under the Single Issuance Circular (Circular Única de Emisoras), public companies must disclose the following:
- Annual report of the Auditors Committee.
- Annual report of the Best Corporate Practices Committee.
- Board of directors' opinion regarding the general director report.
- Report of the main accounting policies and principles.
- Report of the board of directors regarding the activities and operations of the company.
- Financial statements.
29. Is there a corporate governance code in your jurisdiction? Do directors have to explain to shareholders in the company's annual report if they have not complied with it (comply or explain approach)?
There is no mandatory governance code: however, there is a Best Corporate Practices Code (código de mejores prácticas corporativas) which gives guidance to companies on best corporate governance practice.
Under Mexican law, directors must issue an annual report every year that must be approved by the shareholders in the first four months of every fiscal year. If the directors do not comply with that provision, the shareholders can request any information that they need to be informed on the status of the company and can file a civil claim against the directors for breaching the obligation to issue the report.
30. What information can shareholders request from the board about the company? On what grounds can disclosure of company information be refused? Are shareholders entitled to inspect the company's books and similar company documents?
Shareholders can request any information from the board of directors that they require to be properly informed on the status of the company, including the annual report, a copy of the minutes of board meetings, a copy of the corporate books and information on any specific transaction (provided that such transaction is within the scope of the matters managed or approved by the board of directors).
Shareholders' Agreements
A typical shareholders' agreement remains in force for as long as the company is in existence and will usually include provisions concerning the following:
- New shareholders.
- Legal quorums.
- Amendments to the term of the company.
- Appointments to the board of directors.
- Attorneys-in-fact.
- Capitalisation rules.
- Constitution of the capital stock.
- Authority of the board of directors and of the shareholders' meeting.
- Company's business plan.
- Rights of first refusal.
- Deadlock.
- Drag-along and tag-along rights.
Such an agreement is only enforceable against the shareholders if the agreement complies with the provisions of the company's bye-laws and with the applicable Mexican laws.
32. Are there circumstances where the shareholders' agreement can be enforceable against third parties?
Dividends and Distributions
The most common form of distribution is the payment of dividends in favour of the shareholders pro rata to their participation in the share capital. There are other forms of distribution to shareholders, but they are related to different types of schemes concerning the company's cashflow (such as payments for a service).
35. How can dividends be paid to shareholders and what procedures and restrictions apply? Is it possible to exclude or limit the right of certain shareholders to dividends? Is the payment of interim or special dividends allowed?
Dividends can be distributed among shareholders once a balance sheet showing profits and the distribution of profits has been approved by the shareholders in the annual shareholders' meeting. Dividends are paid either proportionally to their shareholding, as established in law, or as otherwise provided for in the company's bye-laws. Dividends can only be paid from profits. This right can be limited, through the constitution of a series of shares which establish an order of precedence in the payment of dividends, but a shareholder cannot be excluded from the right to receive dividends. As an exception, a S.A.P.I. can limit or widen shareholders' rights for dividends.
Moreover, under Mexican law, a minimum of 5% of the company's profits must be set aside each year as a "reserve fund" until the fund reaches an amount equal to 20% of the capital of the company. The reserve cannot be distributed among shareholders and if for any reason it decreases, it must be reconstituted.
Mexican law does not provide for the possibility to pay advanced dividends, it only establishes the possibility to approve the payment of dividends until the corresponding financial statements which reflect a net profit have been approved.
Financing and Share Interests
36. Can shareholders pledge or grant security interests over their shares? If so, what effect does it have on the shareholders' right to vote or receive dividends?
The shareholders can grant security interests or create a pledge over their shares, as long as doing so does not contravene any provision stated in the bye-laws or any shareholders' agreement. Shareholders who grant security interests over their shares must state this in the shareholders' registry book. It is common practice for the securities over the shares to have the approval of the company through an ordinary meeting. Unless otherwise agreed, and provided that the obligation created by the security interest remains in effect without any default, the corporate and economic rights of the relevant shareholder (pledgor) remain in existence, and the pledgor (unless otherwise agreed) will be entitled to continue to receive and use the revenues generated by the pledged shares (for example, dividends) as well as exercise the corporate rights created by the shares.
Share Transfers, Issues of New Shares and Exit
38. Are there any restrictions on the transfer of shares by law? Can the transfer of shares be restricted? What are the rights of shareholders in the case of an issue of new shares (pre-emption rights)?
Generally, shares are freely transferable unless otherwise agreed in the bye-laws or in another agreement (shareholders' agreement, pledge, and so on). The company's bye-laws can provide that a transfer of shares can only be carried out with the board's prior authorisation. If a shareholder transfers their shares without complying with, or acting contrary to, the provisions of the bye-laws, or without the requisite authorisation of the board of directors (where applicable), the transfer will be considered null and void.
In S. de R.L. limited liability companies, the prior authorisation of a transfer of an equity interest, and an issuance of new equity interests, must be agreed in a general partners' meeting.
40. When are shareholders required to notify changes to their shareholding to a regulatory authority?
Shareholders have an obligation to notify or provide information on changes to their shareholdings to the Mexican authorities, specifically to the:
- Tax Administration Service (Sistema de Administración Tributario).
- Ministry of Economy (Secretaría de Economía).
- National Foreign Investments Registry (Registro Nacional de Inversiones Extranjeras) (for foreign investments).
Such notifications/provisions of information are made by means of the Electronic Publications System for Corporations (Sistema Electrónico de Publicaciones de Sociedades Mercantiles).
S.As and S de R.L.s cannot buy back their own stock, except for an acquisition that is derived from a court decision with respect to the company's loan payments. However, under the Securities Market Law, a S.A.P.I. is allowed to buy back its own stock with prior agreement from the board of directors.
42. What are the main ways for a shareholder to exit from the company? Can shareholders require their shares to be repurchased by the company? Can shareholders be required to exit the company in certain circumstances? How are the shares valued in this case?
In certain cases, shareholders have the right to withdraw from the company, except when as a consequence of such withdrawal the capital stock would be reduced to less than the minimum provided for in the bye-laws. Mexican law provides the right of shareholders to withdraw from the company when:
- Shareholders vote against resolutions regarding certain matters.
- Shareholders vote against the liquidation of the company.
- Against a shareholder's vote, a director is appointed who is a third party to the company.
The right can be exercised in accordance with the company's bye-laws if the bye-laws were amended without a unanimous vote and this results in either an increase in the shareholders' obligations or a restriction on their rights. In such cases, shareholders have the right to obtain a refund of their shares, in proportion to the company's assets, according to the last approved balance sheet.
Share Capital
Share cancellations are provided for in Mexican law and can be triggered by various types of capital reductions, including:
- Through the reimbursement of contributions by resolution of an extraordinary meeting (unanimous).
- Release granted to the shareholders of contributions pending (since the company will no longer receive the promised contributions and consequently the capital must be reduced by the relevant amount and the shares must be cancelled.
- As a result of the voluntary separation of a shareholder derived from a resolution adopted by an extraordinary meeting (concerning a change of nationality, object, or a merger/spinoff of the company) with which the separating shareholder does not agree. In this case, the separating shareholder is entitled to receive a reimbursement for the cancelled shares.
- Derived from the exclusion of a shareholder.
- Derived from the acquisition of a shareholder of its own shares (in which case, the capital stock must be reduced).
Material Transactions
44. What rights do shareholders have in the case of material transactions, such as a sale of all or substantially all of the company's assets, and a company reorganisation such as a merger or demerger?
There are generally no legal provisions regarding a shareholder's/shareholders' objection to a sale of the company's assets provided that this is carried out by the holder of a power of attorney for acts of ownership. However, depending on how the sale of assets is carried out, shareholders may be able to exercise certain rights and object to the sale if the sale is not conducted in accordance with the company bye-laws. If the shareholders who own the majority of the company's capital are against the sale, then the sale will usually not take place, but in the event that a sale does take place against the majority shareholders' wishes, they will have the right to file a claim against the board of directors (or whoever was in charge of the sale transaction).
Where amendments are made to the bye-laws as a result of a merger, shareholders have the right to withdraw from the company. Further, mergers must be approved by the shareholders in an extraordinary meeting, and if some shareholders do not approve of a merger which has been approved by the majority shareholders, those dissenting shareholders can withdraw from the company.
Insolvency
Shareholders can agree to the dissolution and liquidation of the company through an extraordinary meeting. If the company has debts that have been outstanding for more than three months' duration, and such debts represent at least 23% of the total debts of the company and the company has no current assets to cover such debts, the shareholders can initiate a bankruptcy procedure.
Under the General Corporations Law, two different liquidation procedures exist: the ordinary procedure and the summary procedure.
Ordinary procedure. Shareholders can agree to the dissolution and liquidation of the company through an extraordinary meeting approving the liquidation. In the meeting, the shareholders must appoint a liquidator, who will generally be an accountant. After the meeting, a final balance sheet which reflects the capital stock of the company is presented to the shareholders for their approval. The same balance sheet, as well as the relevant documents and corporate books, are made available to shareholders, who then have the right to present their claims to the liquidator within 15 days. Once the final balance sheet is approved, shareholders have the right to receive the relevant payment of their respective interests in the capital of the company. Shareholders can both appoint and revoke the appointment of the liquidator who will be in charge of the company's liquidation.
Summary procedure. The shareholders of a company can agree to dissolve and liquidate a company using the summary procedure only where all of the following applies:
- The company only has individuals (not companies) that are its shareholders.
- The company does not have an illicit purpose.
- The company has published (in the Ministry of Economy's Electronic Publications System for Corporations) its notice of registration, including the current capital stock structure, at least 15 working days before the date of the meeting in which the dissolution will be approved.
- The company has not carried out any commercial transactions or issued electronic invoices during the last two years.
- The company has complied with its tax, labour and social security obligations.
If the company complies with all the above, the shareholders can agree to the dissolution and liquidation of the company through a meeting approving the liquidation. In that meeting, the shareholders must (among other things) appoint a liquidator and prove that they are in compliance with the above-mentioned conditions. The meeting minutes will then be published in the Electronic Publications System for Corporations by the liquidator and the Ministry of Economy will verify all the information and record the shareholders' meeting minutes in the Public Registry of Commerce. Subsequently, shareholders have the right to receive the relevant payment of their respective interests in the capital of the company.
Corporate Groups
49. Does a controlling company have any duties and liability to the shareholders of the company it controls? What are the rights of company shareholders if the controlling company carries out actions that are prejudicial to the shareholders?
There are generally no specific obligations on the holding company in relation to the controlled company's shareholders. However, indirectly, the shareholders, by means of the company in which they own capital stock, can, under the procedures provided for in the bye-laws of the controlled company and in the General Corporations Law (such as by way of ordinary and/or extraordinary meetings or board of directors' resolutions), exercise any minority's right established in the General Corporations Law, provided that they have the requisite legal percentages for each right (for example, they can determine that the controlled company votes in a certain way on matters related to the holding company).
A shareholder or group of shareholders owning at least 25% of the capital stock of the company can legally oppose any prejudicial action or transaction, provided that such action/transaction is derived from a previous ordinary and/or extraordinary meeting (Article 201, General Corporations Law).
Contributor Profiles
Amilcar Garcia Cortes, Partner
Basham Ringe y Correa, S.C.
T +(52) (55) 52610533
F +(52) (55) 52610411
E [email protected]
W www.basham.com.mx
Professional and Academic Qualifications. Mexico, Lawyer; Graduate of Law School of the National University of Mexico; Master's Degree in Corporate practice, Universidad Anahuac
Areas of Practice. Mergers and acquisitions; foreign investment; international transactions; real estate; associations; cross border investments.
Recent Transactions
- Advised River Associates L.P. in the sale of shares of Double E Acquisition Holdings, Inc, including its Mexican subsidiary Double E International S. de R.L. de C.V. to Industrial Growth Partners, as purchasers.
- Advised CSG Systems, Inc to purchase 100% of the shares of Keydok LLC and indirectly 100% of the shares of Keydok Mexico, S.A. de C.V. which is a Mexican entity engaged in software development and digital solutions for the digitalisation of payments, contracts, and any sort of document-based transaction.
- Advised BlackHawk Industrial de Mexico and BlackHawk and BlackHawk Foreign Company LLC to purchase 100% of the shares of Distribuidora Argo Del Valle, a Mexican entity engaged in the sale and commercialisation of industrial equipment and machinery.
- Advised Insight Management Equity Company LLC in the acquisition of Mexico's exporting maquiladora industry "Easy Way Manufacturing, S. de R.L. de C.V." and "Easy Way Manufacturing II, S. de R.L. de C.V."
- Advised Jellyfish Digital Group Limited (Jellyfish) in the acquisition of Mexico's digital marketing agency "San Pancho Lab, S.A. de C.V." (San Pancho): our role was to assist Jellyfish in the legal due diligence of San Pancho and in the review and negotiation of the SPA and local closing documents.
- Advised Ricoh Mexicana and Ricoh LA in the acquisition of 100% of the shares of RICOH IT (formerly Capa Cuatro, S.A. de C.V.) and IXCAAN, S.A. de C.V.; both Mexican entities engaged in the provision of IT services.
- Advised Kathrein Mobile in the sale of all its tangible fixed assets within its Tlaxcala Plant (in particular, production assets, machinery and test chambers) as well as any tools belonging to its business in favour of Ericsson.
- Assistance and legal advice to AON Corporation and its Mexican subsidiary known as AON Mexico Business Support, S.A. de C.V. in the sale of assets.
- Assistance and legal advice to the DAS Group of Companies, a division of Omnicom Group, Inc and MarketStar Corporation, and its Mexican subsidiary (known as All Channel Sale Solutions, S. de R.L. de C.V.), whose main activities consist of sales, marketing and business process outsourcing, in the sale of all of its assets, rights and properties related to Wasatch Property Management, Inc.
Antón Elorriaga Rincón-Gallardo, Associate
Basham Ringe y Correa, S.C.
T +(52) (55) 52610697
F +(52) (55) 52610411
E [email protected]
W www.basham.com.mx
Professional and Academic Qualifications. Mexico, Lawyer; Graduate of Universidad Iberoamericana
Areas of Practice. Mergers and acquisitions; foreign investment; international transactions; real estate; associations; banking; cross-border investments.
Recent Transactions.
- Acquisition by HBP of a Mexican company acting as vehicle to develop the design, engineering and construction of a USD319 million gas plant to be located in Lerdo, Durango, that will generate electricity in favour of the Federal Electric Power Commission.
- Development of a USD144 million corn grits production plant in Mexico by Milenio Capital.
- Acquisition by Crecent Cove of Kingsley Gate Group.