The scope of authority vested in an individual by virtue of his or her position in a US company can be as confusing and unfamiliar to a person from Mexico as the use of powers of attorney in Mexico is to someone from the US. A US person about to form a Mexican company will be asked at the outset to whom powers of attorney will be issued, and the nature of those powers. More often than not US clients will be baffled when these questions are first posed as they will not understand why powers of attorney are required at all, nor will they be familiar with the different forms of power of attorney. Conversely, a Mexican client about to form a US corporation will be just as perplexed when told by her attorney that no powers need be granted and that the officers and directors can perform all required functions by virtue of the authority inherent in their positions.
The confusion arises from the fact that Mexican law requires that companies expressly grant authority to its representatives to perform their duties as opposed to the US legal system that recognizes the "Doctrine of Apparent Authority " whereby an officer, director or manager is presumed to have certain authority by virtue of his/her position that third parties can rely upon it. Further, while in the United States it is not common to enumerate the explicit powers of a corporate representative, Mexico requires such enumeration. This article will summarize and contrast how corporate representatives are granted authority to represent a company under both legal systems.
Under Mexican law in order to act on behalf of a company a person must be granted the proper authority by the way of a power of attorney issued by the company through resolutions adopted at a Shareholders’ Meeting or Board of Director’s Meeting (according to the specific rules included in the company’s bylaws).
The authority that may be granted through a power of attorney are:
- Lawsuits and Collections ("Pleitos y Cobranzas"): This power of attorney is required to initiate or defend any type of litigation proceedings, whether judicial or administrative, and also to collect debts on behalf of the company. It is common for a company to grant to its legal counsel this type of authority to represent it in any type of litigation proceedings.
- Acts of Administration ("Actos de Administración"): This power of attorney authorizes the attorney-in-fact to carry out the day to day management of the company, including, but not limited to, signing contracts, purchase orders and similar documents with third parties.
- Acts of Ownership ("Actos de Dominio"): This power of attorney is required to acquire, dispose of or encumber the assets of the company, including real and personal property in transactions that are not in the Company’s ordinary course of business.
- Negotiable Instruments and Credit Transactions ("Títulos y Operaciones de Crédito"): This power of attorney is required to open and close bank accounts, sign on those accounts, issue notes and other similar transactions including negotiable instruments.
- Substitution Authority ("Sustitución o Delegación de Facultades"): This power grants the initially authorized individual the right to delegate the power of attorney in favor of other persons.
The aforementioned powers of attorney may be general (effective for an undetermined number of acts until they are cancelled or revoked) or special (effective only for a determined and limited number of transactions). In addition, the powers may be given with or without limitations. For instance, a power to sign negotiable instruments can include restrictions on monetary amounts, joint signature requirements for amounts above a limit, or other form of restrictions on the attorney in fact’s authority.
Powers of attorney must be granted in writing, drafted in a formal public deed (escritura pública), formalized before a Notary Public and recorded in the Public Registry of Commerce corresponding to the corporate domicile of the company if: (i) they are general powers (as explained above), (ii) the amount of the transaction is higher to the equivalent of one thousand times the minimum wage for the Federal District in effect at the time it was granted, (approximately US$4,597 dollars); or (iii) whenever it is desired that the attorney-in-fact be able to execute documents that under Mexican law must be formalized in a public deed.
As the reader will have concluded by now, when forming a Mexican company the US client will have to issue several powers of attorney, possibly to different persons. By contrast, a Mexican businessman about to incorporate a Delaware corporation will not be asked to grant any powers to any person. Instead he will be asked who should be the initial officers and directors of the corporation. When the Mexican client next asks what are the powers and limitations of officers and directors the US attorney will not have as straightforward an answer as her Mexican counterpart could give.
The key departure point is Section 141 of the Delaware General Corporations Law ("GDL") which provides as follows:
"The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation."
Section 142 of the GDL, which deals with officers and their duties is likewise very general. The GDL itself provides minimal framework upon which each corporation can appoint officers and delegate authority to meet its own needs, virtually without restriction. There are no requirements with respect to numbers, titles or duties, except that there must be a sufficient number to enable the corporation to fulfill the signature requirements with respect to stock certificates (that is, that there must be, at a minimum, two officers, one of who must perform the duties generally associated with a president and the other those of secretary). One person can fill both offices, although he must sign certificates in each capacity. Another statutory duty imposed upon a corporate officer is a requirement in Section 142(a) with regards to the maintenance of corporate minutes. Aside from those two statutory requirements, Section 142(a) relegates the assignment of duties and responsibilities to officers to the corporation’s Bylaws and to resolutions of the board of directors not inconsistent with the Bylaws.
There is a wide body of case law and it too does not provide narrow limitations on the generic authority of directors and officers. To the contrary, the general thrust of the precedents is to vest in officers and the board of directors control over management of a corporation except as otherwise provided in a corporation’s Articles of Incorporation or Bylaws.
In California the broad scope of authority of officers of directors is exemplified by Section 313 of the California Corporations Code :
"Subject to the provisions of subdivision (a) of Section 208, any note, mortgage, evidence of indebtedness, contract, share certificate, initial transaction statement or written statement, conveyance, or other instrument in writing, and any assignment or endorsement thereof, executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assistant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same."
On the other hand, Section 208(a) provides that no limitation upon the powers of the shareholders, officers or directors shall be asserted except in a proceeding:
"(1) by a shareholder or the state to enjoin the doing or continuation of unauthorized business by the corporation or its officers, or both, in cases where third parties have not acquired rights thereby, or (2) to dissolve the corporation or (3) by the corporation or by a shareholder suing in a representative suit against the officers or directors of the corporation for violation of their authority."
In summary, directors and officers are agents of the corporation with broad authority to bind a corporation in transactions conducted in the ordinary course of business.
Notwithstanding the broad grant of apparent authority, officers and directors do not of course have absolute carte blanche to do as they please. Counterparts to any significant transaction (whether a purchase or sale, lease or financing transaction) are likely to require that the officers executing documents on behalf of a corporation deliver copies of resolutions of the Board of Directors (and sometimes of the Shareholders as well) evidencing the approval of the transaction and the authority of the officer to bind the corporation (just as in Mexico counterparts will request a copy of the required powers of attorney). In addition to the limitations noted above and general limitations imposed by the fiduciary duties imposed by general corporate law on officers and directors, shareholders can limit the powers of their officers and director by way of (i) shareholders’ agreements that require the approval of the shareholders or a supermajority of the directors for certain listed transactions; (ii) bylaws that require a supermajority of the directors or shareholder approval for certain transactions; and (iii) corporate resolutions that specifically limit the authority of individual officers. The key point to keep in mind, however, is that unlike the situation with a Mexican power where the powers must be explicitly listed, in the case of a US corporation the limitations must be explicitly listed.
If the amount of the transaction its lower to such amount but higher to the equivalent of fifty times the minimum wage for the Federal District (currently approximately US$230 dollars), a written private document signed before two witnesses will suffice.