02 Sep Responsibility of Stakeholders
Introduction: A key important matter for the operation of a company is the appointment of the individuals for its representation, (who will be members of the administration body or special attorneys in fact for specific matters). The appointment entails certain responsibilities and obligations inherent to each of those positions. The appointed individuals may be held accountable on behalf of the company in relation to their level of responsibility and liability.
Also, regarding partners and shareholders, although the general rule is the existence of the “corporate veil” to protect such shareholders and partners, there are specific cases where the corporate veil can be pierced, and the holders can be directly liable before third parties and government agencies.
This article is focused specially on Capital Stock Corporations (Sociedades Anónimas) and Limited Liability Companies (Sociedades de Responsabilidad Limitada), as they are the most common entities in Mexico. Depending on the specific case, some regulations hereby mentioned may be extensively applicable to other types of commercial or civil entities.
This article provides an executive summary of the most important provisions and scenarios under which, partners, shareholders, members of the administration body and representatives are accountable and can be held liable.
Corporate
A legal entity in Mexico can only act by the representation of either an attorney in fact or a member of the administration body (i.e. member of the board or sole director). The main difference between both is that the attorney in fact is specifically appointed with certain powers of attorney (general or special), while a member of the administration body have statutory authorities.
The general rule is that representatives act within the limitations of their authorities and the scope of their appointments, in accordance to the best interest of the Company by which they were authorized to act on its behalf, however, for corporate Mexican law, when attorneys in general do not act on the best interest of the company or act beyond the limits of their authorities, (ultra vires), commit frauds, act against the Mexican Laws or act in bad faith before creditors, such representatives are responsible for any damages or losses caused to the company. The shareholders of the company or members of the administration body can decide to initiate legal actions against them1. Even in some cases, the company can claim that a specific act carried out by the representative will not have legal effects or consequences against the company.2
For members of the administration body, the case is different. To proceed against a member of the board or the general sole director, the shareholders, or partners (in S.A. and S. de R.L., respectively) must approve it through a corporate resolution or general meeting. Art. 76, 157 and 158 of the General Act of Commercial Entities. 3
For all the situations above, the sanctions and legal consequences may be of civil nature (for example, demanding the reparation of the loss or damage caused to the company or third party), as well as criminal, (for example, in cases of a fraud or corruption). 4
Partners -
Article 2 of the General Act of Commercial Entities provides that every commercial entity registered before the Public Registry of Commerce has its own legal capacity and personality separated from the stakeholders’ capacity. This concept is usually known as “corporate veil”. For stakeholders, the general rule is that the corporate veil “protects” such stakeholders, who are liable only for the amount of their contribution in the capital stock.
Historically this figure has been misused by some shareholders or partners that have taken advantage of the protection provided by the corporate veil to commit frauds or acts, infringing different laws (tax obligations, environmental regulations…). Therefore, now this has been carefully regulated in Mexican Law, and different legal provisions of public order include exceptions under which the veil can be pierced and the stakeholders are jointly and/or directly liable with the company without any limitation.
Labor & Employment
For the case of stakeholders of the Mexican Entity, the general rule of the corporate veil prevails, as the shareholders or partners of the company may be only held responsible up to the amount of their equity contributed to the company.
On the other hand, regarding other representatives (members of the board, attorneys in fact, directors…), the general rule of ultra vires is applicable, and therefore, the company would be responsible for the acts committed by their representatives as long as they act within the scope of their authorities and the purpose of their individual appointments.5 Also if the representative acts outside of the scope of his/her authorities, the company may reject such act or transaction.
Social Security
The legal representative who is registered before the Mexican Institute of Social Security (“IMSS”) may be jointly and severally liable with the company’s responsibilities, (meaning that any responsibility which may be claimed by any creditor to the company could be also demanded to the legal representative that is registered before IMSS).
Also, according to article 5 of the Social Security Act, the individual considered a legal representative (under Article 26 of the Federal Tax Code) will be jointly and severally liable for social security contributions.
In any of these cases the liabilities may range from fines to criminal sanctions, depending on the particular situation.
Tax
For tax law, similarly to social security law, the legal representative that is registered before the Tax Authority (“SAT”) will be jointly and severally liable for the company’s responsibilities, meaning that any responsibility of the company could also be claimed to the registered legal representative.
Also, according to article 26 of the Federal Tax Code, the legal representatives (including members of the administration body), may be jointly and severally liable within the company’s responsibility in case of a tax assessment, (for the amount of said assessment), in case any of the scenarios of Section III.
Regarding partners or shareholders, Article 26 section X subsections a, b, c, d, e, f, g, h, and i6 , provide all the specific scenarios in which the corporate veil is pierced and the stakeholders are individually responsible.
Intellectual Property
There is no specific liability provided in the intellectual property regulations attributable to individuals for being a partner, shareholder, legal representative, attorney-in-fact, or member of the administration body. However, certain penalties for administrative infractions and criminal offenses are provided in the Federal Act for the Protection of Industrial Property, applicable to any individual who commits any of those infringements regardless of his/her capacity or position.
Foreign Trade and Customs
For customs matters, the actions of legal representatives may have a direct impact on the company that appoints them, as they are able to carry out certain procedures in which sanctions to the company are provided by law. The foregoing especially considering that their acts are directly related to a ground of suspension of the Importers and Exporters Registry, which is a major sanction to the company that loses it. However, the company may hold liable the legal representative by civil procedures foreseeing any sanction or responsibility.
Additionally, there is a legal figure known as "customs legal representative" who is a person of the company that, according with the Customs Act, is able to carry out the customs operation procedures before the Mexican authorities instead of an external customs broker. According to article 242 of the Customs Act, the customs legal representative is entitled to appoint other attorneys, for whose actions, the customs legal representative will be also responsible.
The company is entitled to hold the customs legal representative responsible for any misconduct committed through a civil or criminal procedure for each particular case and according to the sanctions provided by the Customs Act.
Contractual Matters (Civil and Commercial).
For contractual matters, most of the time the individual responsibilities will be agreed by the parties of the contract and the terms provided therein. Nonetheless, Mexican regulations for civil and commercial matters provide certain general rules for the representation in contractual matters.
According to articles 1800-1802 of the Federal Civil Act, if any person enters into an agreement in representation of another party without being authorized to do so, (i) the unauthorized individual is responsible for all the damages caused, and (ii) it is considered that he entered into the agreement personally and directly.
For commercial matters the Commerce Code makes a distinction between a general appointment for representation and a "mercantile commission”, which is a power of attorney for representation exclusively for commercial matters. The commission agent can reject the appointment, however, he or she must take the necessary steps to ensure the subsistence of the act for which he or she was appointed. In the event that the commission agent refuses, without legal cause to perform his duties, he or she may be held liable for damages caused to the principal. Also, the Commerce Code provides a series of particular cases by which the commission agent may be held accountable in case of not complying with said obligations.
Regulatory
Depending on the specific legal provisions and law matters (sanitary and health, environmental, permits and licenses, anti-corruption…), there may be cases where the corporate veil is pierced and/or where the representative (board member, director, or attorney-in-fact) will be jointly, directly and/or severally liable with the company; infringements that can lead to imprisonment or economic penalties.
Considering the above mentioned, the individual liability of a partner or shareholder goes beyond the corporate veil. Also, who the company chooses as its legal representative is of great importance giving his/her level of personal liability and exposure. As a firm, we recommend working closely with the client in the implementation of rules for corporate governance, and individual contracts (i) between the company and its shareholders, on one hand, and (ii) between the company and its representatives, on the other; this to regulate important legal matters such as penalties and civil indemnification.
Conclusion
Considering the above mentioned, the individual liability of a partner or shareholder goes beyond the corporate veil. Also, who the company chooses as its legal representative is of great importance giving his/her level of personal liability and exposure. As a firm, we recommend working closely with the client in the implementation of rules for corporate governance, and individual contracts (i) between the company and its shareholders, on one hand, and (ii) between the company and its representatives, on the other; to regulate important legal matters such as penalties and civil indemnification.
Please contact our firm for any question or comment you may have.
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1Article 2565 of the Federal Civil Act. The company is entitled to hold accountable the representative who acted in violation of the dispositions of the authorities granted or beyond those authorities in representation of the company. Alternatively, also, the company is entitled to ratify the actions of the attorney.
2For example, when the representative acted outside of the scope of the authorities granted to him. In this case, it is considered that the representative acted individually and not on behalf of the company.
3In Joint Venture companies, this is an important reason why control of quorums and seats in the board are a key factor for the operation of the company.
4For criminal actions, the authorization of the shareholders / partners is not required. Laws of public order will apply.
5In this case, the company could then, later on, have the election to file legal actions against that representative if he/she caused damages or losses to the company.
6[(i.e.) a) Do not apply for registration in the Federal Taxpayers Registry.
b) Changes its domicile without filing the corresponding notice under the terms of the Regulations of this Act (…).
c) Does not keep accounting records, hides them or destroys them.
d) It vacates the premises where it has its tax domicile, without presenting the notice of change of domicile in terms of the domicile under the terms of the Regulations of this Code. (…)]
Contact
Rafael Sánchez
rsanchez@cuestacampos.com
Jorge González
jgonzalez@cuestacampos.com