The Company Director Checklist Mexico

Transcription

1 The Company Director Checklist Mexico Contact: 1

2 1. Restrictions Conflicts of interest Information Disclosure Liabilities What is the position if the Company may be insolvent? What special responsibilities and liabilities are associated with a float? What special responsibilities and liabilities are associated with a takeover? Good corporate governance processes Indemnities Insurance Resignation Understand Meet get in contact with Review To whom are your duties owed? What is the duty of diligence or care? What is the duty of loyalty? How much can you delegate and rely on others? What is the business judgement rule? Before Appointment... 4 INTRODUCTION... 3 Ongoing Duties... 7 Self Defence

3 INTRODUCTION This Company Director Checklist has been designed as a practical guide to address the main obligations, requirements and procedures to which members of the board of directors ( Directors ) of a publicly traded Mexican company (Sociedades Anónimas Bursátiles) (the Company or SAB ) are subject to, under the Securities Market Law (Ley del Mercado de Valores SML ) and other regulations applicable to publicly traded companies. Please note that although these provisions may also be applicable to Mexican companies that go public by means of organizing as a SAPIB (Sociedad Anónima Promotora de Inversión Bursátil) which is a form of publicly traded company that initially does not meet all corporate governance requirements of a SAB and therefore, must adopt such requirements within a 3-year term following its initial public offering, this checklist is tailored as a general guide for a SAB or Company, and does not constitute a legal opinion and under no circumstance is intended to be a substitute for professional advice. This checklist was prepared as of May 31,

4 Before Appointment 1. Restrictions: a. Restrictions to be Director of a Company. As a general rule, persons acting as auditors of the Company or any entities that comprise the corporate group of the Company within the last 12 months may not be appointed as Directors (see Article 24 of the SML). b. Restrictions to be an Independent Director of a Company. The following will not be considered as Independent Directors of a Company (see Article 26 of the SML): i) officers or employees of the Company; ii) persons with relevant influence, power or decision-making in the Company; iii) shareholders who have control over the Company. For purposes of the SML it is deemed that a person has control over the Company if it is able to a) impose decisions, directly or indirectly at a shareholder s meetings; b) hold or is owner of at least 50% of the votes; and c) either directly or indirectly, manage the administration or strategy of the Company; iv) in the case of relevant clients, suppliers, debtors, partners, directors, or employees of important clients, suppliers, debtors or Pursuant to the SML, the Company s board of directors must be comprised of a maximum of 21 members from which at least 25% shall be independent. Independent directors are those who are not related or involved with the management team of the Company thus being able to be more objective, impartial, free of conflicts of interests and are not bound to personal nor economic interests and are elected due to their experience, abilities, and professional prestige ( Independent Director ). Independent Directors no longer meeting the requirements for such position must notify such event to the board of Directors no later than the next board meeting (see Article 26 of the SML). For such purposes SML deems that someone is a relevant client or supplier if its sales 4

5 creditors of the Company; and v) relatives up to fourth degree of consanguinity, affinity or civil relationship of any person mentioned in (i) to (iv) above. 2. Understand: a. Why you have been approached and what you are expected to contribute as a Director or Independent Director. b. Existing corporate governance procedures and charters, such as the Corporate Governance Code (Código de Mejores Prácticas Corporativas). c. That the board of Directors is in charge of the (i) approval of internal audit and control mechanisms; (ii) approval of compliance mechanisms to assure that the Company complies with applicable regulations; (iii) authorization for related parties transactions; (iv) management of the Company s on-going business, among other activities. For such purposes, the board of Directors may rely on the external auditor or one or more committees which may be formed. represent an income greater than 10% of the total income of the Company during the 12 months prior to the date in which it is appointed. A debtor or creditor is deemed to be important when its debt represents over 15% of the assets of the Company. The board of Directors may be assisted by (i) a corporate governance committee which in general terms, is responsible for monitoring the Company s activities to ensure compliance with its bylaws, internal policies and guidelines as well as all applicable laws, and (ii) an audit committee which is in charge of monitoring and reporting to the board of Directors the accounting practices implemented by the Company, among other activities (see Articles 42 and 43 of the SML for detailed functions of each committee). The committees assisting Directors should have well established authorities and goals as well as defined rules for their organization and operation. 3. Meet get in a. Chief Executive Officer of the Company, Chief Obtain a briefing on the history and strategy of 5

6 contact with: Financial Officer of the Company, managers and other relevant or key directors of the Company; b. other board members (including Independent Directors); c. recently retired Directors; d. auditors; e. Company s lawyers, among others. the Company. Understand major drivers of performance and key performance indicators. Get a background/resume on other Directors (including Independent Directors) and key members of the management team. Understand relationships and roles within management team and committees. Understand who are the key suppliers, customers, debtors and creditors. Understand status of relationships with employees and unions. Get auditor s input and perceptions on historical accounts and disclosure issues. Understand key legal relationships, any past or current litigation and compliance and regulatory issues. 4. Review: a. Historical financial statements of the Company for the last 5 years; b. Company s organizational documents (current bylaws, internal regulations, policies, agreements, etc); c. Board of Director s meetings minutes for the past 5 years; d. Shareholder s meetings for the past 5 years; e. Registries on the corporate books of the Have any abnormal losses or gains explained by the management, review accounts for trends, valuation of intangible assets. Review any corporate restrictions on your authority as a Director or any shareholder specific provisions (such as veto rights). 6

7 Company; f. Ratings of the Company s shares; and g. Publications of relevant events of the Company in the Emisnet or other means applicable or determined by the corresponding stock exchange or applicable listings of the Company for the last year. h. Review the Commercial Record (folio mercantil) of the Company. Ongoing Duties 5. To whom are your duties owed? a. Directors and officers must act in the Company's best interest at all times, and pursuant to the applicable laws and the company s bylaws. In this sense, while acting as a Director they shall: i. Create value for the benefit of the Company, without favouring a specific shareholder or group of shareholders. ii. iii. Take reasoned decisions in any aspect that may affect the Company. Establish general strategies for the corporate business and surveillance or performance by the Company (with the assistance of a corporate practice, an audit, and any other committees needed). b. As mentioned on Sections 6 and 7 below, Directors have two principal duties: (i) duty of loyalty (which forbids Directors and individuals The board of Directors is responsible for the surveillance of the execution of the resolutions adopted on the shareholder s meetings. You do not have a legal duty to act in the interest of employees or the community at large unless to do so is in the interest of the Company or they have another role (such as shareholders or creditors for wages); provided however that, at all times you must act in accordance with the duty of diligence and the duty of loyalty. Directors of SAB s are deemed to have access to privileged information and are subject to statutory restrictions (i) for the carrying of transactions or making recommendations regarding securities issued by the Company; and (ii) on handling and disclosing privileged 7

8 6. What is the duty of diligence or care? (SML Articles 30-33) with decision making authority from diverting to themselves or to other persons) and (ii) duty of diligence or care (consisting in the obligation to discharge their duties in good faith and to place the best interests of the company above their own personal interests). Directors must comply with these duties at all times. a. Directors have the general duty to perform their activities prudently and with the same level of carefulness they would ordinarily take in their personal affairs. b. It is the Directors duty to watch over the appropriate use of human and material resources. c. The law requires Directors to act bona fide and in the best interest of the Company (and its subsidiaries), entitling Directors to: i) Request reasonable information of the Company to make decisions; ii) request the presence at the board meetings of relevant officers and employees of the Company that may contribute or provide substantial elements in the decision making; iii) postpone board meetings for up to 3 days in case a Director was not properly summoned or called, or was not furnished with the complete information provided to the other Directors; and information regarding the Company. See Section 11 below for information regarding disclosure of information. a. Directors are deemed to breach their duty of diligence and may be held liable if their actions cause an economic damage to the Company or its subsidiaries by: i) Not attending to a board or committee meetings (unless such absence is justified) in the event such absence prevents instalment of the relevant meeting; or ii) failure to disclose relevant information to the board or a committee, that may be necessary for an adequate decision making (unless legally or contractually obliged to maintain confidentiality in such regards); or iii) failure to comply with any duties or obligations provided under applicable law or the Company s by-laws. See Section 12 for information regarding 8

9 iv) Deliberate and vote with the sole presence of the board members and the secretary of the board. liabilities of Directors. See Section 18 for insurance restrictions. 7. What is the duty of loyalty? (SML Articles 34-37) 8. How much can you delegate and rely on others? a. Directors must keep confidentiality of non-public information and refrain from participating in situations where they have a conflict of interests. b. Directors of SABs shall incur in disloyalty towards the Company (and as a result shall be liable for damages) in the event such Director, without reasonable cause and by means of its position, performs actions resulting in personal profit or vicarious profit on behalf of a certain shareholder or group of shareholders. How much you delegate and rely on others is a personal decision; however, take into account that you may be held responsible for the decisions taken by such delegates. See Article 36 of the SML for detailed scenarios of confidentiality and other restrictions regarding administration and disclosure of information of the Company. See Article 35 of the SML for detailed scenarios regarding breach of the duty of loyalty. See Section 12 for information regarding liabilities of Directors. The corporate governance committee shall be responsible for: (i) Requesting, if necessary, the opinion of independent experts; (ii) providing assistance with the board of Director s annual report; (iii) authorizing related parties transactions; (iv) approving important decisions concerning the Company. 9

10 9. What is the business judgement rule? 10. Conflicts of interest (SML Article 34) Decision making shall consider at all times the best interest of the Company, as well as the information received from the committees, external auditor and legal counsel. Directors must refrain from assisting to the deliberation and voting on matters on which they have an interest opposed to the interests of the Company. See Section 12 for detailed information regarding liabilities and exculpatory circumstances for Directors. The absence of Directors with a conflict of interest shall not affect the quorum required for the instalment of the board meeting. 11. Information Disclosure: There are distinct disclosure requirements depending on whether the Company is a registered issuer of debt or equity securities. Common requirements to both include filing and disclosure of: i) deeds evidencing the Company s incorporation and powers of attorney of its legal representatives; ii) corporate authorizations and certifications from the issuer regarding the implementation of the transaction; iii) audited financial statements (for the last 3 years or less, in the event of new incorporated businesses); iv) legal opinion; and v) reports on any information considered relevant to the public investors. a. Directors have the legal obligation to disclose financial and relevant information of the Company to the Mexican Stock Exchange and the National Banking and Securities Commission. b. Directors holding 10% or more of the Company s shares must notify the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) of any transactions regarding such securities. c. The board of directors is responsible for the approval of the guidelines for the Directors and other persons involved in the disclosure of information to the Mexican Securities Exchange and the National Banking and Securities Commission (see Article 47 of the Issuer s Circular Disposiciones de Carácter General Aplicables a las 10

11 12. Liabilities: Among others, Directors may incur in the following liabilities: a. Civil law: i. Directors are generally liable for damages and lost profits caused by breach of their duties. ii. Directors also face exposure to personal and several liability with respect to the Company, unless they express their objection on the matter of relevance at the time such matter is discussed and resolved. iii. The absence of a director from the board meeting would not suffice to release him or her from these liabilities. (Business Organization General Law Ley General de Emisoras de Valores y a otros Participantes del Mercado de Valores or the Circular Única de Emisoras ( Issuer s Circular ). d. The board of Directors is responsible for the disclosure of any relevant events regarding the Company (see Article 52 of the Issuer s Circular) and for impeding the execution of a transaction in case a relevant event has not been disclosed to the general public through the Emisnet or any other means so determined by the applicable stock exchange (see Article 59 of the Issuer s Circular). Actions for liabilities deriving from the breach of diligence and loyalty duties may be exercised by the Company or the shareholders holding 5% or more of the share capital. 11

12 b. Tax law: Sociedades Mercantiles Articles 158 and 159). i. Directors may be held liable if during the term they hold their position the Company fails to (a) register as a taxpayer, (b) advise the tax authorities of a change of its tax address or when it vacates the premises of its tax address, and (c) keep accounting records, as well as when the company hides or destroys such accounting records (see Article 37 of the SML). Defences include that you: i. Did not aid, abet, counsel or procure the Company s actions or omissions; ii. iii. Were not knowingly involved in, or party to, the Company s actions or omissions; Acted reasonably so as not to have known of the offence. c. Criminal law: i. Directors risk exposure to criminal liability by their position within the top management structure of the Company; however, such liability would only arise to the extent a director knowingly and personally participates in fraudulent or otherwise criminally sanctioned acts (see Articles of the SML). d. Environmental law i. Mexican Federal and local environmental laws and regulations generally provide liabilities for the Directors and the Officers who carry out, order or authorize: a) Activities deemed hazardous in Defences include that you were not in a position to influence the conduct of the company in relation to the contravention or that you used due diligence to prevent the contravention. 12

13 extreme causing damage to public health, natural resources, flora, wildlife or ecosystems. In this event, there may be 3 months to 6 years imprisonment and fines equivalent to 1,000 to 20,000 times the daily wage, provided, however, that in the event such activities are carried out within the boundaries of a population center, the term of imprisonment may be increased 3 more years; b) The use of hazardous substances and waste causing damage, or other emissions, ejections or spillages of pollutants or noise emissions, vibrations, thermal or luminous energy not in compliance with applicable legal provisions. In this event, there may be 3 months to 6 years imprisonment and fines equivalent to 1,000 to 20,000 times the daily wage; c) The dumping, spillage or filtration of residual waters, chemical or biochemical liquids, waste or pollutants unto the soil, sea, rivers, watersheds, vessels and any other deposits of water or waterways or the destruction, desiccation or landfill of damp soils, mangroves, lakes, estuaries or swamps. In this event, there may be 3 months to 6 years imprisonment and 13

14 fines for an amount equivalent to 1,000 to 20,000 times the daily wage; provided however if damage is caused to water supplying population centers, imprisonment may be increased 3 additional years; and, d) The pruning, felling or destruction of natural vegetation without applicable governmental authorization. In this event, there may be 3 months to 6 years imprisonment and fines for an amount equivalent to 1,000 to 20,000 times the daily wage. e. Labor law i. Mexican Labor laws and regulations generally provide for imprisonment and fines in connection with violations to it, ranging between 6 months to 4 years imprisonment and fines up to 315 times the daily wage. Such imprisonment terms and/or fines may be applicable to Directors. f. Antitrust law i. Mexican antitrust laws and regulations generally provide fines in connection with violations to them of up to 7,500 times the Daily Wage. Such penalties may be applicable to Directors and Officers. 14

15 g. Securities law i. Blind eye: Mexican securities laws provide that Directors are severally liable for any irregularities incurred by their predecessors in case such a Director is aware of such irregularity and fails to inform in written of such situation to the audit committee and the external auditor (see Article 34 of the SML). ii. Duty of Diligence: Directors involved in actions or omissions taken by the board of Directors or actions resulting in an incapacity of the board to meet shall be jointly liable for damages and lost profit; provided however the terms and conditions of such liability may be limited under the Company s by-laws or by resolution of the shareholders meeting in cases without wilful, bad faith or illegal actions (see Article 33 of the SML). iii. Duty of Loyalty: Directors involved in the breach of the duty loyalty shall be severally liable for damages or lost profit to the Company and shall be removed from their position (see Article 37 of the SML). iv. The CNBV may impose fines to Directors that fail to comply with reporting obligations and/or disclosure of information. Rule of Judgment: Directors shall not be personally or severally liable for damages or lost profit to the Company (or subsidiaries) in case, while acting bona fide, one of the following exculpatory circumstances is met (see Article 40 of the SML): i. Compliance with the requirements provided under the SML or the Company s by-laws for decision making. ii. Decision making or voting at the board meetings was based on documents or information provided by relevant officers, external auditor or independent experts. iii. According to their knowledge, the alternative chosen was the most appropriate or the negative effects were not predictable, based on the available information at the time such decision was made. iv. Compliance with the shareholders meeting s resolutions, provided such resolutions do not contravene applicable law. Statute of limitations for any liabilities provided under the SML shall expire after 5 years (see 15

16 13. What is the position if the Company may be insolvent? Mexican Insolvency laws provide that Directors and officers may be personally liable to restore the bankruptcy estate to the extent that due to negligence, wilful misconduct or legal violation of the applicable law, the corresponding bankruptcy is declared culpable or fraudulent. The Directors and the officers in this regard shall also be personally liable for the payment of damages and loss of profit expectancies, in addition to any civil liability incurred. Article 38 of the SML). If you suspect that the Company is insolvent, you should immediately engage legal counsel considering that to incur liability for insolvent trading all you need is a suspicion that the Company may be insolvent. There are defences to insolvent trading, including: i. You had reasonable grounds to expect and did expect the company was solvent and would remain solvent even if the debt or debts were incurred at that time; ii. You had reasonable grounds to believe and did believe a competent and reliable person was monitoring the financial position and informing you as to whether the company was solvent and was fulfilling this responsibility; iii. Through illness or for some other good reason you weren t involved in management of the company at that time; iv. You took all reasonable steps to prevent the company from incurring in debt. To obtain the defence you need an expectation that the company was solvent. 16

17 14. What special responsibilities and liabilities are associated with a float? (SML Article 104) 15. What special responsibilities and liabilities are associated with a takeover? (SML Article 101) Self Defence 16. Good corporate governance processes: Subscribe the preliminary prospectus (Article 2, I. m), 3. of the Issuer s Circular). Subscribe the annual report presented to the Commission, the Stock Exchange and the general public (Article 33, I. b), 1.1 of the Issuer s Circular). As mentioned before, Directors should refrain from disclosing any information that is false or that is misleading with respect to (i) the securities or (ii) the Company s financial, legal, administrative or economic information whether through a prospectus, reports or any other document that is distributed to the general public by means of the media. Directors shall refrain from any activities that may affect the offering. The board of Directors must issue, via the Mexican Stock Exchange, their opinion with respect to the price and any conflict of interest involving any of the Directors, no later than 10 business days after the beginning of the offering. This opinion must include the decision of the Directors regarding their respective shares in the Company. The risk of liability arising is reduced if you have good corporate governance processes in place. At a minimum: i. the structure and composition of the board and compulsory committees should be See Section 11 for information regarding responsibilities of disclosure of information. a. Structure and composition: consider issues such as the size of the board, its mix of skills, the proportion of executives and independents; and, committee structures (see Article 24 of the SML for 17

18 ii. iii. iv. appropriate; the functions and roles of the board and its members should be clear; the information systems should be adequate; and the processes and practises should be appropriate. composition of the board, and Article 25 of the SML for composition of compulsory committees). b. Functions and roles: the principle tasks of the board, the level of the board s involvement (as opposed to management involvement), appropriate time allocations for tasks, and the relationship with the management team should be clearly understood and responsibility for due diligence recorded. c. Processes and practices: meeting practices, decision-making mechanisms, reporting lines and processes for Directors performance evaluation should be clearly understood. d. Information systems: format for monthly reports and minutes, mechanisms for Directors access to information and key performance indicators should be clearly defined. 17. Indemnities: a. Duty of Diligence: Indemnification may be limited in the terms and conditions provided under the Company s by-laws or resolution of the shareholder s meeting; provided no fraudulent, wilful or illegal actions are involved (see Article 33 of the SML). b. Duty of Loyalty: Contrary to the liability arising from any breach in the duty of diligence, In addition, the negotiation of a golden parachute is advisable. See Section 18 for insurance information. 18

19 indemnification for breach of the duty of loyalty may not be limited in the Company s by-laws or by agreement of the shareholder s meeting (see Article 37 of the SML). 18. Insurance: a. Review the directors and officers liability insurance policy and make sure it covers you for all the positions you hold in the group and for liability after you have retired. Understand the exclusions and the level of coverage available. b. Duty of Diligence: SABs may acquire insurance or bond policies for Directors to cover any indemnification arising from a breach in the duty of diligence; provided no fraudulent, wilful or illegal actions are involved (see Article 33 of the SML). c. Duty of Loyalty: Contrary to provisions with respect to the duty of diligence, SABs may not acquire insurance or bond policies for Directors to cover any indemnification arising from a breach in the duty of loyalty (see Article 37 of the SML). 19. Resignation: Review the requirements in the bylaws; otherwise deliver your resignation in writing to the company. Generally, Directors are appointed for a 1 year term. SAB s may agree on indemnities and secure insurance or bonds in favour of the board members for the amount of the indemnity for the damages caused to the Company by their actions. Note however that Insurance cannot cover you where the conduct involves a wilful breach of duty, improper use of information and/or position, or for penalties. It is important to ensure that insurance remains in place after you have resigned taking into account the prescription terms established in the applicable regulations to commence proceedings against you based on your actions as Director. Nevertheless, Directors shall continue in office for up to 30 days after the term of their appointment has elapsed or in case of resignation, in case no substitute has been appointed or such substitute has not taken office (see Article 24 of the SML). 19