A company admitted a new shareholder through a capital stock increase, received a promissory note as a guarantee for payment of the issued stock shares, and believed that with that it was in compliance. The Supreme Court of Mexico (the Court) confirmed that it was not.
A capital stock increase is not merely an administrative proceeding. The law requires specific formalities: a notice of meeting published through the system of the Ministry of Economy, the resolution published in the same system, and fifteen days for each shareholder to exercise their preemptive right, a term that, according to the Court decision, may not be shortened. Omitting any of these steps exposes the transaction to nullity, without the affected party being required to prove monetary damages.
Furthermore, a capital stock increase cannot be merely apparent but must be effectively paid. Even when the aforementioned publicity formalities are complied with, if payment is not made, the intended purposes of the capital stock increase may fail to materialize.
The General Business Company Law (LGSM) establishes that the term for payment must appear in the share certificates themselves or, failing that, the company must publish a notice through the system of the Ministry of Economy and wait thirty days before acting. However, the law goes further and provides that if within one month from the date on which payment should have been made no judicial claim has been initiated or the stock shares have not been sold at the agreed price, such stock shares shall be declared extinguished and the company’s share capital stock shall be reduced (Article 121 LGSM).
The Court analyzed the validity of the aforementioned Article 121 when reviewing a specific case: an entity joined another company through a capital stock increase of the latter, and consequently new stock shares were issued. The new shareholder executed a promissory note to guarantee payment for the issued stock shares; thereafter, it sold the promissory note to a third party without having fully paid its contribution to the share capital stock (Constitutional Trial in review 4334/2025)
Although the adverse effect in that case was the tax authority’s rejection of a declared loss, as well as the determination of a tax obligation for omitted contributions, what is relevant is the Court endorsement in confirming the validity of Article 121 of the LGSM.
This is because the share capital stock constitutes a guarantee of payment for the company’s creditors. The law seeks to ensure that it effectively corresponds to the contributions that the shareholders have undertaken.
The law grants rights to shareholders to the extent that they have paid their contributions. For example, the distribution of profits shall be made in proportion to the amount paid for the stock shares.
New stock shares may not be issued until the previously issued stock shares have been fully paid.
In a corporate spin-off, the stock shares of the company being spun off must be fully paid. The voting rights granted by stock shares to their holders may be compromised or limited if the stock shares have not been fully paid. This is in addition to the tax effects that an unpaid capital stock increase may generate for the company, as confirmed by the Court.
The foregoing are only some examples of the serious consequences that the non-payment of stock shares in a capital stock increase may generate for the shareholder who assumed the commitment to pay for them.
The Court confirmation of validity leaves two lessons:
a) For companies: once the payment term has expired, it is not optional to initiate within one month a judicial claim or to sell the stock shares at the price determined in the shareholders’ meeting. Otherwise, the company must cancel the unpaid stock shares and reduce its share capital stock.
b) For shareholders who subscribed to the capital stock increase (that is, who assumed the commitment to pay for the stock shares), they must make full payment within the terms indicated in the stock shares or within thirty days from the publication made by the company through the system of the Ministry of Economy.
Timely legal advice prior to carrying out a capital stock increase may help avoid a preventable dispute among shareholders or a tax-related conflict, as well as structure a transaction capable of withstanding review by the authorities.
Have you verified that the stock shares issued by your company have been fully paid? Did the shareholders’ meeting that approved the capital stock increase properly document the payment terms?
If you are not completely certain, it is important to review it to avoid legal issues arising from a shareholder, a creditor, or the authority itself.
