Legal Obligations of Mexican Companies - Or How to Avoid Common Pitfalls

Reprinted from North American Free Trade & Invesment Report, with permission of the publisher, WorldTrade Executive, Inc.

Corporate Obligations

Foreign investors may freely establish a Mexican company or acquire stock in an already established one. The most common corporate form chosen by investors is the "Sociedad Anónima" (S.A.) or "Sociedad Anónima de Capital Variable" (S.A. de C.V.) - Variable Stock Corporation. Other forms of corporations are the "Sociedad de Responsabilidad Limitada" (S. de R.L. or S. de R.L. de C.V.) - Limited-Liability Company, the "Sociedad de Nombre Colectivo" (S. en N.C.) - General Partnership or the "Sociedad en Comandita Simple" (S. en C.S.) - Limited Partnership. Because the S.A. and S.A. de C.V. are the most common corporate forms, this article will focus on obligations related to these corporations.

Incorporation of an S.A. or S.A. de C.V. Corporate structure

The capital stock of an S.A. or S.A. de C.V. is divided into shares and the shareholders are liable only to the extent of their contributions. This corporation may exist under any kind of name, followed by the words, "Sociedad Anónima (de Capital Variable)", or its abbreviation "S.A. (de C.V.)." The shareholder's obligation is limited by their amount held in stocks. At least two shareholders and a minimum capital of fifty thousand Mexican pesos are required to form the company. Each shareholder should purchase at least one share of stock. The charter for the entity ("Acta Constitutiva" or "Estatutos") is a combination of what in the U.S. is known as articles of incorporation and by-laws. This document will designate the initial shareholders, members of the board of directors or the sole administrator of the Mexican company, its principal officers and the statutory auditor ("Comisario"). The charter will also approve the issuance of powers of attorney to one or more key representatives of the Mexican company. The charter must contain a clause to the effect that foreign shareholders of the Mexican company waive any right to seek the protection of their own governments in the event of any dispute regarding the Mexican company ("Calvo Clause"). A public notary who will register the company with the Public Registry of Commerce ("Registro Público de Comercio") must ratify the charter.

The shares are divided in titles ("Títulos"), which are used to credit and transmit shareholder's rights. In general, shares have the same value and confer equal rights. Relative ownership of share value defines the distribution of profits and capital among the shareholders. Shareholders can be represented and need not take part in the shareholder meetings. However, company directors are not allowed to represent shareholders.

The main difference between the S.A. and the S.A. de C.V. is that the capital amount for an S.A. is fixed and specified in the articles of incorporation and by-laws. Any increase or decrease requires modification of the articles of incorporation and by-laws. In contrast, the capital of an S.A. de C.V. differentiates between minimum fixed capital and an unlimited variable capital. Increase and decrease of variable capital does not require a modification of the articles of incorporation and by-laws.

Either company is obliged to keep accounting books and corporate records such as (i) a Daily Book, (ii) a Ledger, (iii) a Book of Shareholder's Assembly Minutes, (iv) a Shareholder's Record and, in the case of an S.A. de C.V, (v) a Book of Increases and Decreases in Capital.

Powers of Attorney

Special care must be given to powers of attorney granted to local directors. Shareholders who want to retain control over the company should issue specialized powers of attorney to the members of the board of directors or the sole administrator. Powers of attorney, which include authority to grant sub-powers of attorney and to sell company assets, are usually too broad. In addition, with the exception of powers for labor and judicial issues, powers of attorney should be granted as joint powers only to company directors.

The most important powers of attorney necessary to operate a company are:

General power of attorney for acts of administration This power allows representation of the company in all extra-judicial actions that are necessary for the operation of the company such as hiring and firing employees.

General judicial power of attorney for cases and collections This power of attorney allows the bearer to represent the company before courts and litigate for the company.

General power of attorney for acts of ownership This power entitles to sell, buy, encumber, or impose ownership limitations on the assets that belong to the company.

General power of attorney to approve bonds and contracts of credit

This power of attorney grants representation of the company for the fulfillment or endorsement of payment of obligations as well as the signing of checks and contracts that can encumber the company.

Other Important Obligations

Companies should also be aware of the...