Lens on Mexico

Grimaldi Alliance

Knowledge Management

Oct 24 2024

In Mercantile and Commercial Matters, the First Chamber of Mexico’s Supreme Court of Justice rules favourably of exceptionally lifting the “Corporate Veil” between partners and the Company, when it is being used with the purpose of defrauding third parties.

On September 13th of 2024, the First Chamber of Mexico’s Supreme Court of Justice resolved upon an “amparo” trial (a specific legal mechanism within Mexican legislation that seeks the protection of constitutional rights against governmental overreach and other judicially mandated violations), filed by a legal entity against the local judges order in interim injunctions, to freeze their bank accounts and suspend any payments they were due to receive. These actions on the local judges’ part, were taken in lieu of a financial institution’s request to have the legal separation between the company and its partners, including the one that filed for amparo, be disregarded, so that the same measures could be applied to them as well.

After the District Jury dismissed part of the appeal filed against the local judge’s decision, and denied constitutional protection to the other, the plaintiff filed for a revision of the resolution, a measure that was subsequently taken on by the Supreme Court for the case to be decided upon.

In its ruling, the Chamber reflected upon the notion of the “corporate veil”, given that one the fundamental principle of corporate law is the separation of assets that in turn infers the separation between a company’s assets and responsibilities regarding their partners. This separation becomes a sort of guarantee that the company / commercial entity provides to its members to assure them that they will not be responsible for paying the company´s dues with their own money. On the contrary, the very company will do so with its own goods and if it were unable to do so due to insolvency, that partners would only be responsible up until the amount of capital they had contributed.

Having considered the aforementioned, the Chamber conceded that, while denying the guarantee of the asset separation between partners and company was to dismiss the autonomous legal nature of the commercial entity, impacts the law and the States main tool to strengthen growth and development as fundamental pillars of an economy, it is possible, though exceptionally and upon the foundation of good faith, to lift said corporate veil upon abusive and fraudulent use in the eyes of the law. This in order to avoid exploitation of a commercial entity’s legal personhood to the end of eluding legal obligations, setting asset separation aside, in order to understand the company’s authentic corporate and economic identity and its objectives, whether general or particular.

The Court does clarify however, that, given that it is a restrictive measure that can jeopardise a guarantee set up to protect the entity, its partners and in some cases, other companies with whom it may form a corporate group, lifting the veil must be understood as an exceptional measure, one of restricted application and secondary use. That is to say, setting the corporate veil aside is a measure that must be applied with extreme discretion with enough justification to overrule the founding principles that rule over a company. Furthermore, the decision to lift the corporate veil must take subjective elements into account, specifically factual context that can give away if a company’s intention is to hide it´s defrauding of third parties behind the veil.

As such, the Court ruled that the general rule would stay as it was, the corporate veil cannot be lifted in a preliminary injunction proceeding, since this shall only be an exceptional measure there must be reliable evidence (including factual context) of the need to disregard fundamental principles safeguarding the legal personhood of the company.

Imminent Labor Reform in Mexico

At the beginning of the year, Mexican president Andrés Manuel López Obrador proposed a series of legislative reforms, just months away from the end of his six-year term as head of the executive branch of government in Mexico. In total, 20 initiatives were presented, while 18 are constitutional and 2 secondary, their nature has been widely debated both on the national, as well as international stage. While certain aspects of the reforms remain under heavy scrutiny, other elements of the change have passed relatively unnoticed by comparison. Such are the constitutional reforms pertaining to the rights of indigenous and Afro-Americans communities, welfare, universal health care, prohibition of toxic substances found in vapes and unauthorized synthetic drugs, amongst others.

One aspect of this package that has captured the people’s attention is undoubtedly the reforms relating to labor and workers’ rights. As such the reforms seek to modify articles of the Federal Labor Law (Ley Federal del Trabajo) as follows: a) Reduce hours within the working week, taking day shifts from 48 to 40 hours a week and likewise night shifts from 42 hours to 35 hours a week; b) increase bonuses to be calculated upon 30 days instead of 15; c) prohibit practices that force workers to stay on their feet throughout their entire shifts by implementing mandated resting periods; d) increase seniority bonus from 12 to 15 days of salary per year of employment and lower the minimum eligibility period for said bonus upon termination of the work relationship from 15 to 13 years; e) create a housing system for workers through the Worker’s Housing Institute (Infonavit) so that said body can directly build real estate and place it at the disposal of its beneficiaries; f) increase paternity leave from 5 to 20 days of paid working days for workers who have recently had or adopted a child.

There are multiple additions to the catalog of benefits available for Mexican workers with formal employment. These measures are aimed at all workers, both those who work in office or in person in general, as well as workers who operate through telecommuting. For example, when workers carry out around 40 percent of their work remotely then the company is required to grant a monthly payment to each employee in the “home-office” modality to cover their internet service expenses and the proportional part of the electricity consumption. Similarly, companies must guarantee that said workers enjoy the same rights as if they were working in an office, such as breaks for breastfeeding or the right to disconnect once they have finished their workday.

Legislation surrounding occupational diseases also saw significant changes, as 88 new afflictions were included. This catalog allows physicians to diagnose work-related ailments in order to extend incapacities. This reform marks the first time in five decades that the list is updated and stands out for recognizing for the first time mental disorders (such as stress, anxiety, depression and insomnia), incorporating women’s diseases such as endometriosis or infertility, increasing from four to 30 the types of cancer recognized as occupational risk, and increasing infectious and parasitic diseases, among which the inclusion of Covid-19 is noted.

As it stands, we are yet to see the full effects these reforms will have throughout the country. Nonetheless, the legal community remains steadfast in their endeavor to understand and shape the future of our constitutional framework as it develops and is actualized before our eyes.

The Importance of Corporate Governance for Business Longevity in Mexico

Recent data from Mexico’s National Institute of Statistics and Geography (INEGI) highlights that the country is home to 5.54 million businesses, with 98.7% classified as micro, small, and medium-sized enterprises (MSMEs). This represents a significant 28% growth since 2010 when 4.33 million businesses were recorded.

Despite this growth, challenges persist. INEGI reports that almost 52 out of every 100 businesses in Mexico shut down within their first two years of operation. In light of these figures, ensuring long-term viability is a major concern for most companies. Key to overcoming these obstacles is the implementation of effective Corporate Governance practices, particularly when it comes to managing internal relationships among stakeholders, family members, and employees.

A study by the CIFEM|BBVA Family Business Research Center at IPADE Business School, titled “Progress Levels of Family Businesses in Achieving Continuity and Harmony,” reveals that generational succession remains one of the toughest issues facing family-owned businesses. According to the research, half of these companies are at risk of instability because they lack clear succession plans. An additional 45% still have unresolved succession-related challenges, while only 5% of businesses surveyed in 2022 had an explicit strategy for transitioning leadership.

The introduction of Corporate Governance structures could help prevent companies from failing due to unclear responsibilities or succession processes. Setting well-defined rules and roles for everyone involved in the business is critical, especially for MSMEs aiming to thrive in the long run. Such governance strategies allow companies to separate family interests from business operations, which is essential for their continued success across generations.

Experts recommend several steps for implementing effective Corporate Governance. One of the top priorities is developing a robust succession plan that addresses future leadership transitions for second and third generations. This process should ideally be supported by external consultants who can help establish clear rules defining relationships between the company, its employees, and the family owners.

Establishing a Board of Directors and institutionalizing processes that align with governance principles—whether related to profitability, investment, diversification, or innovation—are also key strategies for strengthening Corporate Governance.

The benefits of such governance are wide-ranging. By creating structured decision-making bodies, companies can clearly define the roles and responsibilities of employees with measurable goals tailored to each individual’s performance. Furthermore, Corporate Governance promotes transparency, ensures better management of finances, and documents processes to create a well-defined organizational structure. Importantly, this approach fosters data-driven decision-making, reducing the influence of emotions on critical business choices.

Incorporating these measures will help prevent internal conflicts and encourage decisions that benefit the business as a whole rather than advancing individual interests.

Ultimately, implementing effective Corporate Governance plays a vital role in a company’s growth and continuity. It safeguards the interests of shareholders, ensures transparency in operations, and facilitates communication between family members, employees, and the company itself, making it an indispensable tool for long-term success.

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