Reshaping Fiduciary Duties in Mexico (2005)

Reshaping Fiduciary Duties Reshaping Fiduciary Duties

in Mexicoin Mexico

Pablo Jiménez-ZorrillaPablo Jiménez-ZorrillaApril 21, 2005April 21, 2005

Fiduciary DutiesFiduciary Duties

Legal response to Legal response to agency problemsagency problems NegligenceNegligence Self-dealing (unfair)Self-dealing (unfair)

Traditional nomenclatureTraditional nomenclature Duty of CareDuty of Care Duty of LoyaltyDuty of Loyalty

SectionsSections

OverviewOverview PurposePurpose AnalysisAnalysis ConclusionsConclusions

OverviewOverview

Limited articulation of Fiduciary Duties in Limited articulation of Fiduciary Duties in MexicoMexico

Statutory provisions – Obsolete & InadequateStatutory provisions – Obsolete & Inadequate

Case law – Non-existentCase law – Non-existent

Reform is required, in the opinion ofReform is required, in the opinion of International organizations International organizations (World Bank, IMF, OECD)(World Bank, IMF, OECD)

Mexican lawyersMexican lawyers

Mexican financial authorities & public officersMexican financial authorities & public officers

OverviewOverview

On the 2001 amendments to the On the 2001 amendments to the SML:SML:

““The provisions regarding corporate The provisions regarding corporate governance are ‘junk’ if the core governance are ‘junk’ if the core remains intact. … any efforts are remains intact. … any efforts are comparable to ‘building a train comparable to ‘building a train without the railways to run it’. In this without the railways to run it’. In this case, our ‘railways’ are the fiduciary case, our ‘railways’ are the fiduciary duties of directors and managers.”duties of directors and managers.”

……OverviewOverview

Proposal for a new Securities Market Proposal for a new Securities Market LawLaw

Presented to Congress on March 30, Presented to Congress on March 30, 20052005

Creation = Authorities + Interest groupsCreation = Authorities + Interest groups

Dual nature = Corporate + SecuritiesDual nature = Corporate + Securities

New set of New set of Fiduciary DutiesFiduciary Duties

SectionsSections


PurposePurpose

Are the proposed fiduciary duties Are the proposed fiduciary duties potentially potentially functional functional ? ?

functionalfunctional – serviceable for directors, managers, – serviceable for directors, managers, shareholders, and enforcersshareholders, and enforcers

< Effort Use = > Functional< Effort Use = > Functional

> Effort Use = < Functional> Effort Use = < Functional

……PurposePurpose

Two ways to increase Two ways to increase functionalityfunctionality

Reasonable Certainty (clear Reasonable Certainty (clear rules)rules)

Access to EnforcementAccess to Enforcement

SectionsSections


AnalysisAnalysis

I.I. Reasonable Certainty Reasonable Certainty a)a) Abstract – Theoretical assessment Abstract – Theoretical assessment

b)b) Concrete – Case-study Concrete – Case-study

II.II. Access to Enforcement Access to Enforcement a)a) Preliminary considerations Preliminary considerations

b)b) Questions for further research Questions for further research

……Analysis / Analysis / I. Reasonable CertaintyI. Reasonable Certainty

a)a) Theoretical assessment Theoretical assessment Importance of “good laws” in Importance of “good laws” in

emerging jurisdictionsemerging jurisdictions

Rules vs. StandardsRules vs. Standards Clarity and simplified utilizationClarity and simplified utilization

Clarity and optimal complianceClarity and optimal compliance

Standards and long-term valueStandards and long-term value

……Analysis / Analysis / I. Reasonable CertaintyI. Reasonable Certainty

b)b) Case-study Case-study ((Codisco-UnefonCodisco-Unefon))

Examination of factsExamination of facts Existing provisions vs. ProposalExisting provisions vs. Proposal

Reasonable Certainty – whether it facilitates:Reasonable Certainty – whether it facilitates: Identify potential violationsIdentify potential violations

Recognize remediesRecognize remedies

Access to enforcement – short referenceAccess to enforcement – short reference

……Analysis / Analysis / II. Access to II. Access to EnforcementEnforcement

a)a) Preliminary considerations Preliminary considerations Virtually no litigationVirtually no litigation

Existing provisions vs. Proposal Existing provisions vs. Proposal Lower requirements to file lawsuitsLower requirements to file lawsuits

Explicit intention to increase enforcementExplicit intention to increase enforcement

b)b) Questions for further Questions for further researchresearch

SectionsSections


Conclusions / Conclusions / I. Reasonable I. Reasonable CertaintyCertainty

a)a) Theoretical assessment Theoretical assessment

““Reshaped” fiduciary duties are potentially Reshaped” fiduciary duties are potentially functional functional

(might(might facilitate interaction w/rules)facilitate interaction w/rules)

……Conclusions / Conclusions / I. Reasonable I. Reasonable CertaintyCertainty

Corporate fiduciaries Corporate fiduciaries Rearticulation will “raise the bar”Rearticulation will “raise the bar”

Should not cause overcompliance or Should not cause overcompliance or risk-aversion risk-aversion

Honest Honest and and moderately diligent moderately diligent individuals bear little riskindividuals bear little risk

Greater certainty, regarding:Greater certainty, regarding:


1. Who are corporate fiduciaries?1. Who are corporate fiduciaries? DirectorsDirectors Senior officersSenior officers Persons with power over the company Persons with power over the company

(e.g. controlling shareholders)(e.g. controlling shareholders)

2. Catalog of actions causing liability (Clear-cut)2. Catalog of actions causing liability (Clear-cut) Duty of Care Duty of Care Duty of LoyaltyDuty of Loyalty Duty of CandorDuty of Candor Duty of ConfidentialityDuty of Confidentiality


3. Safe-harbor rules = 3. Safe-harbor rules = Good faithGood faith plus plus Procedural stepsProcedural steps Reasonable relianceReasonable reliance Business judgment protectionBusiness judgment protection Compliance with shareholders resolutionsCompliance with shareholders resolutions

4. Possibility to limit or cover potential liability4. Possibility to limit or cover potential liability Only on duty of careOnly on duty of care


ShareholdersShareholders – – Better definition ofBetter definition of Entitlement (legal protection)Entitlement (legal protection) Available remediesAvailable remedies

EnforcersEnforcers – Easier to identify– Easier to identify Nature of the violationNature of the violation Possibility to limit or cover liabilityPossibility to limit or cover liability Safe-harborsSafe-harbors Other consequences (e.g. removal)Other consequences (e.g. removal)


b)b) Case-study Case-study Proposal facilitates identification ofProposal facilitates identification of

Responsible partiesResponsible parties Nature of the violationsNature of the violations ConsequencesConsequences

Liability - non limitable or coverableLiability - non limitable or coverable Removal directors and officersRemoval directors and officers

……ConclusionsConclusions

Reasonable certaintyReasonable certainty diagnosis: diagnosis:

potentially potentially functionalfunctional

But…not so fast!But…not so fast!

Access to enforcementAccess to enforcement diagnosis: diagnosis:

yet to be carried outyet to be carried out

Conclusions / Conclusions / II. Access to EnforcementII. Access to Enforcement

a)a) Preliminary Considerations Preliminary Considerations Is the Proposal likely to increase access Is the Proposal likely to increase access

to enforcement?to enforcement? Reducing % for derivative actions might Reducing % for derivative actions might

not be sufficient (15% - 5%), two not be sufficient (15% - 5%), two reasonsreasons

Low average floatLow average float Cost-inefficiency for plaintiffCost-inefficiency for plaintiff

Low average float Low average float 12% -15% 12% -15% (Source: OECD 2002)(Source: OECD 2002) Mexican companies listed in the NYSEMexican companies listed in the NYSE

Ownership Concentration (2002)

Country Sample % of largest % of 3 largest % of 5 largest

shareholder shareholders shareholders

Argentina 15 61% 82% 90%

Brazil 459 51% 65% 67%

Chile 260 55% 74% 80%

Colombia 74 44% 65% 73%

Mexico 27 52% 73% 81%

Peru 175 57% 78% 82%

Average 168.3 53% 73% 79%


Cost-inefficiency for plaintiffCost-inefficiency for plaintiff No clear rule on reimbursement of No clear rule on reimbursement of

plaintiff’s expenses (if successful)plaintiff’s expenses (if successful) Diluted benefits from award (private Diluted benefits from award (private

benefits of control)benefits of control)

Potential implications…Potential implications… No rational investor would “volunteer” No rational investor would “volunteer”

to be plaintiff to be plaintiff Incentive to defect and free-rideIncentive to defect and free-ride


b)b) Questions for further research Questions for further research If Proposal does not increase access If Proposal does not increase access

to enforcement, other alternatives to to enforcement, other alternatives to exploreexplore

Reduce requirements even more? How much Reduce requirements even more? How much more?more?

Premium or bonus to plaintiff?Premium or bonus to plaintiff? Class-action?Class-action? Securities market prosecutor for civil lawsuits?Securities market prosecutor for civil lawsuits? Stock exchange or NPO’s as plaintiffs?Stock exchange or NPO’s as plaintiffs?


Questions & Comments…Questions & Comments…

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Reshaping Fiduciary Duties in Mexico (2005)

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