The LGSM governance framework
Mexico’s LGSM is the primary statute governing corporate entities. For foreign investors, the two most common forms are the Sociedad Anónima de Capital Variable (S.A. de C.V.) and the Sociedad de Responsabilidad Limitada de Capital Variable (S. de R.L. de C.V.). Each has a distinct governance architecture.
The S.A. de C.V. requires either a board of directors or a sole manager. There is no minimum number of shareholders for the board, but the LGSM contemplates that larger companies will use a full board. The board is appointed by the shareholders’ meeting and is responsible for overseeing management, authorizing major transactions, and representing the company before third parties.
The S. de R.L. de C.V. uses managers rather than a board structure. This is simpler and works well for subsidiaries where the parent wants direct operational control without formal board meetings. The absence of a board does not eliminate governance obligations—the manager still owes duties to the partners.
Shareholders’ shareholder meeting powers
In both entity types, the shareholders’ (or partners’) shareholder meeting holds ultimate authority over fundamental decisions. Under the LGSM, the annual ordinary shareholder meeting must:
- Approve or reject the prior year’s financial statements and the report of the manager or board
- Appoint or remove directors and set their compensation
- Appoint the statutory auditor for S.A. de C.V.
- Declare dividends
Extraordinary shareholder meeting powers require a higher quorum and voting threshold. These include changes to the corporate purpose, capital increases or reductions, merger or dissolution, transformation of entity type, and amendment of the corporate bylaws. The LGSM sets default thresholds, but well-drafted bylaws specify exactly what vote is required for each category of decision.
Board powers vs. management authority
A common governance failure in Mexican subsidiaries is the failure to delineate clearly what the board decides versus what management (the Director General or CEO) can decide without board approval.
The board’s delegated authority should be documented in a formal notarial power of attorney. Mexican law requires notarized powers for many categories of acts—opening bank accounts, signing real estate contracts, filing with tax authorities, and representing the company in litigation. A director general operating without adequate power faces situations where counterparties refuse to contract or banks refuse instructions.
Conversely, a board that tries to micromanage every operational decision creates bottlenecks. Best practice is a reserved matters list: categories of decisions that require board approval regardless of amount, supplemented by a delegation matrix for management authority up to defined thresholds.
Voting requirements
The LGSM sets default voting rules. Most ordinary resolutions require a simple majority of shares or ownership interests (participaciones) present at a validly constituted shareholder meeting. Extraordinary resolutions generally require a supermajority—75% under the LGSM default for S.A. de C.V. extraordinary matters.
Subsidiaries controlled by a single parent with 100% ownership can technically pass all resolutions by written consent (resolution circulated and signed). This is common practice for administrative resolutions. However, if there are minority shareholders or local partners, voting mechanics become critical.
The corporate bylaws can increase thresholds beyond LGSM minimums but generally cannot decrease them below statutory floors. A shareholders’ agreement can add a contractual layer of supermajority requirements, reserved matters requiring unanimous consent, and veto rights—but these are enforceable between parties, not against third parties.
The statutory auditor: a frequently misunderstood role
Every S.A. de C.V. is required to have a statutory auditor (LGSM Art. 164). The statutory auditor is a corporate oversight officer—distinct from the external accountant—whose function is to supervise management actions on behalf of shareholders.
The statutory auditor must be an individual (not a company), cannot be a shareholder, manager, director, or employee of the company or its affiliates, and cannot be a spouse or family member of a director or manager.
The statutory auditor’s legal obligations include reviewing the annual financial statements and management report before the shareholder meeting, reporting to shareholders on whether the administration has complied with the LGSM and the bylaws, and calling extraordinary shareholder meetings when required.
Many foreign subsidiaries treat the statutory auditor as a formality and appoint someone without considering these restrictions. An improperly appointed statutory auditor (for example, a relative of the director) creates a technical defect in corporate governance that can be used to challenge shareholder meeting resolutions.
For S. de R.L. de C.V., a statutory auditor is not legally required unless the bylaws provide for one. This is one governance advantage of the S. de R.L. for simpler subsidiary structures.
Shareholders’ agreement governance provisions
The LGSM provides a floor, not a ceiling, for governance sophistication. Foreign investors should supplement LGSM defaults with a comprehensive shareholders’ agreement covering:
- Voting thresholds and reserved matters: Specify which decisions require more than a simple majority. Common reserved matters include related-party transactions, incurrence of debt above a threshold, capital expenditure above a threshold, hiring or terminating the CEO, and entering new lines of business.
- Information rights: The LGSM gives shareholders the right to inspect books and records, but the timing and format are often impractical. A shareholders’ agreement can require quarterly financial reporting, annual audited accounts prepared under IFRS or US GAAP (in addition to Mexican NIF standards), and prompt notice of material events.
- Board composition rights: If there are multiple shareholders, specify each party’s right to nominate directors proportional to their shareholding, including the right to nominate independent directors for governance committees.
Director fiduciary duties and liability
LGSM directors owe duties of loyalty and due care to the company and its shareholders. The duty of loyalty prohibits directors from acting in transactions where they have a conflict of interest without disclosure and authorization, exploiting corporate opportunities for personal benefit, and disclosing confidential corporate information.
Director liability under the LGSM is joint and several unless a director records their dissent in the minutes. This is an important practical point: a director who attends a meeting where a damaging resolution is passed but fails to vote against it or record their dissent becomes personally liable for the consequences.
Governance for regulated sectors
Financial services (CNBV-regulated entities), health care (COFEPRIS), telecommunications (IFT), and energy (CRE/CNH) each impose sector-specific governance requirements that supplement the LGSM. Foreign-owned entities in these sectors typically face fit-and-proper requirements for directors and senior management, enhanced information reporting obligations, and prior regulatory approval for corporate restructuring.
Frequently asked questions
Yes. Even with a single parent company shareholder, the LGSM requires annual shareholder meetings, a statutory auditor for S.A. de C.V., maintenance of corporate books, and filing of annual financial statements with shareholders. Failing to maintain proper governance creates personal liability risk for directors and can affect the subsidiary’s tax and regulatory standing.
No—the corporate bylaws control as a matter of corporate law, and the shareholders’ agreement is enforceable only as a contract between the parties. If there is a conflict, the bylaws prevail for corporate acts. Both documents must be aligned. When changing governance arrangements, amend both.
The sole manager is a single individual who holds all administrative powers of the company. A board (board of directors) distributes power among multiple members. For smaller or wholly owned subsidiaries, the sole manager structure is simpler and avoids the logistics of board meetings. For larger operations with multiple shareholders, a board provides better oversight and distributes liability.
Statutory minority protections under the LGSM are limited. The most effective protection is a well-drafted shareholders’ agreement with reserved matters requiring your consent, pre-emptive rights on new share issuances, a right of first refusal on share transfers, and a tag-along right if the majority sells. These contractual protections supplement but do not replace statutory rights.
Yes. The LGSM imposes no nationality requirement for directors or managers of Mexican companies. However, if the director will be signing documents in Mexico or appearing before Mexican authorities, they will need proper immigration status (work visa or applicable permit) and will need to be physically present for notarial acts.