Navigating Legal Considerations for Non-Mexican Directors of Mexican Entities

July 6, 2023
Navigating Legal Considerations for Non-Mexican Directors of Mexican Entities

Among the laws that regulate the management of Mexican business entities, the General Law of Business Associations (LGSM) states that the bylaws of a Mexican entity will regulate how the entity will be managed. Some key items one should consider for the appointment of non-Mexican persons to serve as directors and managers of Mexican entities include the following:

•    The LGSM states that individuals who own an interest in the entity, or individual third parties, may be appointed to serve as directors. It also states that individuals who are banned from carrying out commercial acts may not be appointed as directors. In addition, the Mexican Commercial Code states that non-Mexican individuals referred to as foreigners may exercise commercial acts according to the treaties entered into by Mexico and the country where that individual resides and in accordance with the laws that regulate their rights and obligations.

•    Also, the LGSM states that directors may act as legal representatives of the entity, and that they may carry out any acts allowed under the corporate purposes stated in the bylaws of the entity (unless the laws or the bylaws themselves provide otherwise). A key item to keep in mind is that unlike other jurisdictions such as the U.S., in general, the representation authority in Mexico must be expressly granted. Therefore, such authority is neither implied nor automatically granted as a consequence of the appointment. As such, the express terms of the authority of a director must be set forth in either the bylaws or a specific appointment.

•    The appointment of a director is a personal designation. Therefore,  the role may not be carried out through a representative.

In general, directors have the following obligations:

•    To maintain confidentiality regarding the information received as a director (except if such is public or is required by a government authority).

•    Directors are jointly liable to the company for the following:

(i) The contributions to the corporate capital made by members or shareholders.

(ii) Compliance with the law and the bylaws regarding the payment of dividends.

(iii) The existence and maintenance of mandatory accounting, governance, records, archives, and information systems.

(iv) Compliance with the resolutions taken in shareholders’ meetings.

•    The LGSM also states that the directors will be jointly liable with the prior directors for any wrongdoing if, after being made aware of such, they do not report the wrongdoing to the statutory auditor of the company.

•    Any conflict of interest must be reported and the director shall refrain from carrying out any act in connection with such matter. If not reported, the director will be liable for any losses and damages caused to the company.

•    To create the reserve fund, which will be made and maintained from the net profits of the company equal to an amount  of one fifth of the corporate capital while having a full and joint obligation to deliver the same amount to the company in the event such fund is not increased after an increase in corporate capital.

Finally, it is advisable to consider the following items:

•    In general terms, the appointment of a Mexican business entity’s director does not create an employment relationship in Mexico with such entity; however, it is advisable to carefully review the role, responsibilities, and manner and place where the director’s activities will be performed so that proper documentation of the relationship is prepared and actions can be taken to mitigate any related risk.

•    To perform an analysis of the Mexican tax impact regarding such appointment and the director’s exercise of his or her role to determine what obligations could arise for the company and for the director. For example, if the appointment and related actions are to be exercised in Mexico, tax residency in Mexico for the director could be triggered.

•    To analyze relevant Mexican immigration laws and regulations to determine if the exercise of the responsibilities of the director, including visits and stays in Mexico, could generate any type of obligations for the company and/or for the director.

In any case, based on the above, it is advisable to consult a Mexican attorney to determine the considerations and actions to be taken on a case-by-case basis.

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