C reel Insights on COVID-19 for Mexico: Issuers- Corporate Governance

Creel, Garcia-Cuellar, Aiza y Enríquez, S.C.®

The directors of a Mexican publicly-traded company must maintain a very proactive involvement in the management of the COVID-19 crisis. In their supervisory role, under the Securities Market Law (Ley del Mercado de Valores, or LMV), they must ensure that the management team gives priority to the safety and well-being of its employees, and implements a plan for the continuity of the Company’s operations.

Considerations for Directors and Management Team

In the light of this crisis that can severely affect the operations of many companies, members of the board of directors must maintain strict compliance with their fiduciary duties of loyalty and diligence. Failure to do so could result in liability for directors, including payment of damages caused to the company, in accordance with the LMV.

The board members must avail themselves of relevant information to actively participate in board decisions and ensure adequate crisis management. To achieve the foregoing, it is important to receive information from independent experts in respect of updates, progress and development of the COVID-19 pandemic.

It should be noted, however, that board members should not undertake to assume the responsibilities of the management team, but rather to maintain their supervisory role and focus on the company’s strategic vision.

Specifically, some recommendations for directors, aligned with their duty of care, are:

(i) understand the effects and possible impacts of the emergency on the company (both internal and external), as identified by management, experts and their own investigation, including the determination in respect of the company’s operations as an essential activity, the ways in which to operate remotely, compliance with sanitary guidelines in case of continued operation, and if necessary, shut-down measures;

(ii) support the management team in designing a plan to contain the most critical problems affecting the company in the short and medium term; and

(iii) designate, together with the management team, a specific team to establish a critical path for solving immediate and identified problems that may arise.

To this end, among other issues, the board must analyze the company’s debt profile, including contractual obligations, short and medium-term liquidity requirements, as well as decrees or any other guidelines that may be issued by the federal, state, or municipal governments. In addition, the board should make sure it receives information from the management team regarding compliance of regulatory requirements, as well as decrees or any other guidelines that may be issued by the federal, state, or municipal governments.

In addition to the foregoing, management teams may assist board members in complying with their duties of care and loyalty by adopting measures such as:

(i) establishing secure and effective communications channels (such as password-protected portals) to provide directors with relevant information;

(ii) contact directors to understand their availability and set forth time commitments to participate in extraordinary meetings and committees;

(iii) review and update the agenda of matters to discuss at committee meetings and extraordinary sessions to give priority to matters that are required due to the pandemic; and

(iv) hire financial and health experts, as well as consultants and legal advisors to navigate decision making resulting from the COVID-19 pandemic.

Executive Compensation Considerations

It will be very important to review and, if appropriate, make adjustments to executive compensation in order to lessen the impact on the company’s cash flow during the crisis, but at the same time analyze methods to keep executives motivated and aligned with the future of the company.

The members of the committee in charge of determining executive compensation, whether the corporate practice committee or the compensation committee, should analyze the impact on the incentive programs that exist for 2020. Such analysis should consider whether existing compliance metrics should be modified, or new metrics based on the priorities redefined by the board for the current year must be added.

For this purpose, the form of payment of bonuses in favor of the executives, whether in cash or in company shares, the moment when the rights to be eligible for such bonuses or options vest, as well as the current and historical value of the company’s shares, must also be defined.

Actions around the review of executive compensation should seek a balance between keeping executives adequately incentivized and mitigating the impact that the COVID-19 pandemic may have on the profitability of the company’s business.

 

*This article or news brief does not constitute legal advice and is protected by copyright.