Ten duties that directors of Mexican companies should know so as to avoid incurring civil liability.

Directors of commercial corporations are regarded as their agents and legal representatives according to articles 10 and 142 of the Mexican General Corporations and Partnerships Law (“GCPL”), and have the authority necessary to perform all those activities listed on the company’s corporate purpose unless otherwise stated in the law or in the bylaws of a company.

Directors are individuals -whether Mexicans or foreigners who are allowed to conduct business- appointed by the shareholders at the moment of the company’s incorporation or afterward by a general shareholders’ meeting and can be revoked at any time by the same shareholders’ meeting. Directors can be shareholders or individuals who are not members of a given company.

Directors’ Duties

Directors have not only the duty to manage correctly a company’s assets and liabilities, but also they must comply with certain legal obligations in order to prevent -or at least mitigate the risk of- incurring liability.

The general shareholders’ meeting and the company’s bylaws may require the directors a guaranty to face any potential liability, but it may happen that such a guaranty is insufficient to deal with severe cases of civil liability, consisting of the directors’ obligation to pay damages caused to (i) the company itself, (ii) the company’s creditors or, (iii) the company’s shareholders.

This is why, directors should be aware of some of the main duties they undertake upon accepting their positions.

Below are some of the main directors’ duties set forth in the GCPL. By failing to comply with the following obligations, directors may incur civil liability (in some cases joint liability):

I. Directors shall keep as confidential the information to which they have access, unless such information is public or rsolicited by judicial or administrative authorities (article 157).

II. An administrator who has an interest contrary to the interests of the company must inform so to the rest of the administrators and refrain from voting any point discussed in a directors’ meeting (article 156).

III. Directors must ensure that the shareholders’ capital contributions are real (article 158 I).

IV. Directors must ensure that when the company distributes dividends to shareholders, all the requirements established in the company’s bylaws and the law are duly fulfilled (article 158 II).

V. They will verify that the accounting records of the company are duly handled and maintained (article 158 III).

VI. They will ensure that the resolutions taken by the shareholders’ meeting are duly implemented into practice (article 158 IV).

VII. Directors must state their disagreement with the points discussed in a given meeting where certain resolutions were to be taken against the company’s interests (article 159).

VIII. Directors must inform the statutory auditors of the company on former Directors’ malpractices, when becoming aware of (article 160).

IX. Directors must ensure that from the company’s annual net profits, at least, 5% of such profits is separated until constituting (or reconstituting) the so-called “reserve fund” equivalent to one fifth of the entity’s capital stock (article 20).

X. They must draft and submit to the general shareholders’ meeting a report on the status of the entity during the relevant fiscal year as well as the policies followed by the directors and the main existing projects. This report should contain, among other aspects, all related financial information of the company during the fiscal year in question (article 172).

The above is not an exhaustive list with all the legal directors’ duties. Many obligations to be fulfilled by directors of Mexican business corporations can be established in the company’s bylaws or entrusted to by the general shareholders’ meeting. Other general duties are contemplated in the Federal Civil Code which is a supplementary law of the GCPL as well as in the Mexican tax and administrative laws.

This is why, items relating to directors’ liability must be analyzed carefully on a case by case basis, depending upon, among other aspects, the (i) corporate type of a company, and (ii) the content ands scope of its bylaws.

However, the above list could serve as guidelines for directors of commercial corporations (and more particularly of stock corporations -sociedades anónimas-) for the correct performance of their duties as agents and legal representatives of the companies that appointed them.

Ultimately, directors must always perform their tasks within the frame of the company’s corporate purpose; and if in doubt, they should seek directions from the supreme corporate body, that is, the general shareholders’ meeting.

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