The shareholders of a Mexican company approved a capital stock increase and dividend distribution at a meeting. They signed the minutes. They endorsed promissory notes. The Federal Administrative Court (TFJA) held that those transactions had no legal effect.
A company approved an increase in its capital stock to be paid through the endorsement of a promissory note by a shareholder. It then approved the distribution of dividends also through the endorsement of promissory notes, considering that the payment of profits was made in kind.
The TFJA determined¹, unanimously by ten votes, that the capital stock increase and the dividend distribution had not been effectively paid.
A promissory note does not constitute payment but a promise to pay. If that negotiable instrument is transferred, the only effect is a change in the creditor entitled to payment, but not that the instrument has been effectively settled. Until the instrument is paid, the contribution made as a capital stock increase only constitutes a subscription, but not a payment of capital stock.
The General Business Company Law and the Income Tax Law require that the contribution be effectively paid in order to produce the intended effects: increasing the shareholder’s participation in the company’s share capital.
With respect to dividend payments, the Income Tax Law establishes, in a strict manner, two options: by non-negotiable check or by funds transfer regulated by the Bank of Mexico. Any other alternative, such as the endorsement of a promissory note, is not acceptable.
From a practical standpoint, it may seem easier to endorse a promissory note both to document a capital stock contribution and to pay dividends. This avoids moving cash and simplifies the transaction.
However, the nature of these negotiable instruments is that the debtor undertakes an unconditional obligation to pay a sum of money, but until that amount is actually paid, their transfer only results in a change of creditor. It does not constitute fulfillment of the payment obligation for either the capital stock increase or the dividend distribution.
Even if there are shareholders’ meeting minutes that apparently comply with all formal requirements, and even if there was good faith in documenting the capital increase and dividend payment through means not authorized by law, these TFJA precedents confirm that such decisions will not produce the intended legal effects. These matters must be planned before the meeting is held, not after they are identified in an audit or challenged by a shareholder.
Were your company’s recent capital increases actually paid or merely subscribed? Were your dividends paid through the only two options allowed by law?
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[1] Thesis IX-P-SS-509 and IX-P-SS-510, Jurisdictional Plenary of the Superior Chamber of the TFJA.
