More than two years have gone by since the world confronted a new reality and a new way of living due to the Covid-19 pandemic. Social distancing policies necessitated adjustments to routines, family and work life, and economic stability as the impossibility of continuing with daily activities as usual came to the fore. All these changes have left society and public and private institutions in a state of uncertainty and with a constant search for alternatives to reactivate social and economic activities to conduct them in the most efficient and safe manner, and in compliance with the law and the continued changes in government policies regarding Covid-19 preventive measures.
In Mexico, these measures were implemented in March 2020 and since then social distancing has been encouraged through the suspension of activities that involve the physical concentration of people, such as meetings by the corporate governance of business corporations.
Considering the above, this article takes a brief look at the decision-making process of the corporate governance of Sociedad Anónima (SA) and Sociedad Anónima Promotora de Inversión (SAPI), stock corporation equivalents and the most common types of Mexican corporation, as well as the way in which such corporations faced the challenges caused by the social distancing in accordance to the law.
Corporate governance in Mexico
In Mexico, corporations are regulated by the General Law of Business Corporations (Ley General de Sociedades Mercantiles or LGSM), which provides the different types of corporations in the country, as well as the by-laws regarding their corresponding incorporation, operation and dissolution, including, among others, the rules of the decision-making process that shall be observed by corporate bodies. Additionally, SAPIs are regulated by the Securities Market Law (Ley de Mercado de Valores), which provides the particularities of such corporations regarding economic rights, shareholders agreements and minority rights, among others.
As mentioned before, the most common business corporations in Mexico are the SA and SAPI, whose corporate governance are comprised of the following bodies:
- the general meeting of shareholders, which is the supreme body and is empowered to approve and ratify all acts and operations of a corporation pursuant to the LGSM; and
- a sole administrator or a board of directors.
The general meeting of shareholders and the board of directors both perform as collective bodies that shall approve of decisions through votes in accordance with the attendance and voting quorums set forth in the LGSM or the by-laws of the particular company.
General meeting of shareholders
According to Article 179 of the LGSM, a general meeting of shareholders may be ordinary or extraordinary (depending on the matters to be addressed, as provided by the LGSM or by-laws), both of which must be held at the corporate domicile of the company, otherwise they will be null and void (except in the case of acts of God or force majeure). In Mexico, corporate domiciles are set forth by each company in its by-laws and often it is expressed as a city and not a particular address (ie, Monterrey, Nuevo León).
Pursuant to Articles 189 and 190 of the LGSM, in order for an ordinary general meeting of shareholders to be considered legally assembled, at least half of the shares representing the capital stock must be present, and resolutions shall be valid when approved by the a majority vote of those present. In order for an extraordinary meeting to be considered legally assembled, at least three quarters of the of the shares representing the capital stock must be present, and resolutions shall be valid when approved by the vote of majority of the shares of the capital stock.
Article 192 of the LGSM provides that shareholders may give powers of attorney or proxies to be represented in general meetings by third parties or even by another shareholder, except for members of the board of directors and of the vigilance body (comisarios).
Nevertheless, in terms Article 178 of the LGSM, the by-laws of a particular corporation may allow shareholders to approve resolutions outside of a general meeting, provided that such resolutions are passed by unanimous consent and confirmed in writing. Such unanimous resolutions have the same legal validity as those approved in a general meeting of shareholders.
Board of directors
Regarding the board of directors, the LGSM does not provide for a particular place where meetings shall take place, however, pursuant to Article 143, meetings shall be legally assembled only when at least half of the members are present, and resolutions shall be valid when approved by the vote of the majority of those present.
Contrary to shareholders, members of the board of directors are not allowed to be represented in meeting through means of a power of attorney or proxy. However, as for shareholders, in terms of Article 143 of the LGSM, the by-laws of a particular corporation may allow members of the board of directors to approve resolutions outside of a meeting, provided that such resolutions are passed by unanimous consent and confirmed in writing. Such unanimous resolutions shall have the same legal validity as those approved in a meeting of the board of directors.
Challenges caused by social distancing
In March 2020, the General Health Council published diverse executive orders in the Mexican Federal Official Gazette which, among others, declared a national health emergency due to force majeure as a result of the Covid-19 epidemic, ordered social distancing as a measure to prevent such epidemic, and suspended labour activities not considered to be ‘essential’ in terms of the executive orders.
Considering that the Covid-19 preventive measures implemented by the Mexican authorities hindered the physical reunion of shareholders and ability of members of the board of directors to hold meetings, corporate governance faced a material obstacle to comply with the rules set forth by the LGSM regarding the validity of resolutions.
In order to address this obstacle, a considerable number of shareholders and members of the board of directors in Mexico have turned to real-time videoconference meetings that allow collegial deliberation and voting.
Notwithstanding that the LGSM does not expressly allow videoconferences as a mean to hold meetings, pursuant to the Articles referenced herein:
- general meetings of shareholders may be held outside of the corporate domicile because of an act of God or force majeure;
- shareholders may be represented in general meetings by a third party or another shareholder, except for members of the board of directors and of the vigilance body, through means of a power of attorney or proxy;
- by-laws may provide that unanimous resolutions approved in writing shall have the same legal validity as those resolutions approved by the meeting of shareholders or meeting of members of the board of directors, and
- with respect to the board of directors, no requirement is set forth concerning the place where meetings shall be held.
Alternatives for shareholders meetings
Acts of God and force majeure
Even though the LGSM provides that an act of God or force majeure is the only exception for general meetings of shareholders to be held outside of the corporate domicile, Mexican law does not define, list or expressly illustrate what is considered as an act of God or force majeure.
However, in Mexican law doctrine, an act of God or force majeure case is regarded as an event or circumstance whose occurrence is beyond the control of human will, considering that it cannot be foreseen or, even if it is foreseen, it cannot be avoided, and that such event or circumstance prevents the compliance of a certain obligation (ie the social distancing measures imposed by the government to prevent a pandemic disease which obstructed shareholders to meet at the corporate domicile to approve resolutions as provided by the LGSM).
The executive orders published by the General Health Council served as a pillar and foundation to argue that Covid-19 is an act of force majeure and thus the exception set forth in Article 179 of the LGSM became valid, allowing shareholders to meet outside of the corporate domicile.
What is considered as ‘outside of the corporate domicile’ is not defined either on the LGSM, however, videoconference is not prohibited either so, pursuant to the principle that everything which is not forbidden is allowed in Mexican law, it became a tool for shareholders to held general meetings during social distancing measures.
It is important to note that even when a meeting is held through videoconference, all other requirements for the validity of such meeting as set forth by law and by-laws shall be met, including, among others, the attendance and voting quorums, the prior published notice and the written minute signed by the shareholders who were present, the president, the secretary, and, if applicable, the vigilance body. It is often recommended that a notary public attends the meeting in order to legally validate its attendance and votes, moreover when held under certain particular conditions.
Furthermore, by-laws of each company may provide additional requirements or particular formalities for the validity of a meeting of shareholders than those set forth by the LGSM, which shall also be considered and observed.
Setting aside the videoconference, attention shall also be paid to the aptitude of shareholders to be represented in general meetings. Considering social distancing measures (or even without them existing in an ‘ordinary’ life context), for example, all the shareholders may give a proxy to a particular person, stating their vote in each of the matters to be addressed, so that the meeting is validly held at the corporate domicile, for example, with the physical attendance of only three or four persons, even when the company is comprised by more than fifty shareholders, considering that each of them attended as a form of legal fiction.
Approvals outside meetings
In addition to videoconference and proxies, shareholders are also allowed to approve resolutions outside of a meeting, provided that such capacity is set forth in by-laws and that the resolutions are unanimous and confirmed in writing. In this case, even the prior published notice for a meeting is not required.
Alternatives for meetings of the board of directors
Considering that the LGSM does not provide a particular place for meetings of the board of directors to be held, members have greater flexibility regarding such matter. In fact, it is common for by-laws to provide that meetings of the board of directors may be held through telephone or videoconference as long as the attendance and voting quorums are valid and confirmed in writing.
Moreover, as mentioned before, members of the board of directors are also allowed to approve resolutions outside of a meeting, provided that such capacity is set forth in by-laws and that the resolutions are unanimous and confirmed in writing.
The future of corporate governance in Mexico
The impact of Covid-19 has generated changes and obstacles in the way companies operate their businesses, from labour to corporate governance, primarily because of social distancing. This has forced directors to look out for alternatives to face such unprecedented obstacles and for lawyers to analyse how these alternatives remain in compliance with the law, particularly in countries like Mexico, which are mainly regulated by statuary law.
Alternatives to physical meetings of corporate governance bodies in Mexico are set forth in the applicable law, which has provided with efficiency to the decision-making process even when social distancing measures are in order.
Furthermore, as mentioned above, some of these alternatives do not exclusively apply when an act of God or force majeure case such as Covid-19 occurs, being the proxies and the unanimous resolutions confirmed in writing, which certainly will be implemented more often due to its efficiency.
Now, the task is on legislators to amend the law, not only regarding corporate governance decision-making, but also in every other process or event whose legal validity was proven to be challenged by the unexpected events life has to offer.
It is important to remind that written law is subject to interpretation and, particularly in corporation matters, each companies’ by-laws shall always be considered and complied with prior to and when executing corporation acts.