On 28 November 2014, the Swiss Federal Council issued a new preliminary draft aimed at a comprehensive reform of Swiss corporate law (the Draft).The consultation period ended on 15 March 2015. Daniel Daeniker and Daniel Hasler of Homburger AG provide an overview and a critical assessment of the proposed key changes.
The publication of the Draft marks the end point of a longer revision phase. Almost 15 years ago, work on the corporate law reform started. In 2007, the Federal Council published a draft bill for a new Swiss corporate and accounting law. In 2009, the parliament split the draft bill into an accounting part, which was generally uncontested, and a corporate part. The amendment of the accounting law was adopted and entered into force on 1 January 2013. The discussion on the corporate law reform was delayed, in particular due to the heavily disputed popular initiative against “excessive compensation” (Minder Initiative), which was adopted by a thin majority of the votes on 3 March 2013. To implement the Minder Initiative, the Federal Council issued the ordinance against excessive compensation in public companies (the Compensation Ordinance), which came into force on 1 January 2014. Against this background, the Federal Council published the Draft, aimed at a comprehensive reform of the Swiss corporate law.
Compared with existing law and previous drafts, the Draft contains a number of improvements. In a nutshell, these include:
• the denomination of shares and accounting in currencies other than Swiss francs;
• the capital band, a new way of flexibly increasing and decreasing the share capital;
• the confirmation of the permissibility of distributions of capital reserves;
• a cyber-shareholders’ meeting;
• a liquidity test in connection with potential insolvency; and
• the possibility for companies to submit disputes on corporate matters to arbitration.
However, the Draft is also full of new and unnecessary micro-management rules. Should the Draft become law in the proposed form, it would mainly be a burden for corporations and cause costs without achieving a legitimate goal or maintaining the rule of proportionality.
The Draft provides for approximately 140 articles that should be newly inserted or substantially amended. The purpose of this article is not to comment on all of those proposals, but rather to present those which are deemed to be relevant and controversial, in the view of the authors.
Share capital in foreign currency
Pursuant to the Draft, share capital denomination as well as accounting and financial reporting shall be possible in a foreign currency. The company’s resolutions regarding dividend payments and on the reserves may be taken exclusively in foreign currency in the future. However, there are two restrictions to that liberalisation: first, only currencies which are freely convertible; and second, only the currency which is relevant in view of the business activities of the company may be chosen (so-called functional currency). The downside of this liberalisation is that, as the assessment of the company’s capital loss or over-indebtedness will also be undertaken in foreign currency, the creditors’ protection is weakened in case of a devaluation of the foreign currency. Nevertheless, the proposal aligns corporate law with the revised accounting law and thereby implements the foreign currency approach also in the corporate law.
No minimum nominal value – abolishment of partial payment of share capital
The minimum nominal value of 0.01 Swiss franc per share shall be abolished. Corporations (and LLCs) may reduce the nominal value of their shares indefinitely, provided that it exceeds zero Swiss francs. This would facilitate share splits. On the other hand, the issuance of only partially paid-up shares would no longer be possible. This amendment, together with the maintained minimal share capital of 100,000 Swiss francs unnecessarily enhances the entry barrier for start-up companies. Thus, in our view, either the partial payment of the share capital should be maintained, taking into consideration the numerous existing companies which have only partially paid-up shares outstanding; or else the minimum share capital should be decreased to 50,000 Swiss francs.
Abolishment of rules on acquisitions in kind
The regulations of the – intended – acquisitions in kind shall be abolished. The legal pitfalls related to the acquisitions in kind have caused some headaches in corporate lawyers’ daily life and practice, and the qualified incorporation procedures related therewith have been cumbersome and costly. The existing measures protecting the capital, which are strengthened by the Draft, are sufficient. Therefore, the abolishment of the rules on the – intended – acquisitions in kind is one of the major achievements in the Draft.
Changes in share capital
Some of the more burdensome requirements for capital increases and reductions shall be relaxed. Companies may introduce a so-called capital band of +50 per cent or -50 per cent, within which the board of directors (the board) may increase or reduce the share capital for a period of up to five years. Though this amendment offers a big step forward towards a more flexible capital regime, we see room for improvement. We propose to introduce the capital band as authorised additional capital within the framework of the capital structure. As such, it would also be recognised by foreign investors and the implementation in the law would be easier. If the capital band is a structural element, and not only part of a change in the share capital, the limitation to 50 per cent changes becomes obsolete. This limitation might be justified in the current set-up with the authorised capital, which may change the shares capital in only one – upward – direction, whereas with a capital band structure, the share capital may be changed in both directions. To avoid Swiss singularity in the terminology, the term “capital band” should be replaced by “authorised capital”.
Unlimited participation capital
The aggregate participation capital (non-voting shares) of listed companies would no longer be limited to twice the issued (voting) share capital as is currently the case. Whereas this flexibility is positive, a capital structure with a participation capital exceeding 10 times the share capital would take the concept of the corporation from its hinges. We believe that the analogy with the preferred voting shares, where the maximum ratio of 1:10 shall be maintained, should be considered, and the same ratio should be prescribed in the case of participation certificates.
Reserves: repayment of capital reserves
The Draft clarifies the rules regarding the creation and dissolution of legal reserves and provides for an alignment with the accounting rules. Since the introduction of the capital contribution principle through the corporate tax reform II in 2011, the repayment of capital reserves (ie, paid-in capital surplus and other shareholder contributions made in excess of the par value) to the shareholders has become attractive from a tax point of view, and has been actively used by many Swiss companies in recent years. The Draft provides for a rule that explicitly allows for such distribution. However, the repayment of paid-in capital surplus to shareholders would be subject to certain creditor protection rules, eg, an audit report would be required which confirms that after the repayment neither creditors’ claims are endangered nor is there any concern that the company may become insolvent in the next 12 months. We do not see a need for this additional protective measure as the current regime that applies on dividend payments, ie, the obligation to prepare an audited balance sheet as well as the review of the dividend proposal by the auditors, is sufficient. This is one of the many examples in the Draft where a generally good idea is implemented in an overly bureaucratic manner.
Purchase of own shares
The Draft facilitates the acquisition of own shares by taking up a long-standing practice and expressly allowing companies to originally purchase their newly issued shares. The Draft supplements the already effective new accounting regime for own shares: repurchased shares held by the company will be recorded as a deduction from equity (rather than by booking a reserve), shares held by group companies will lead to a deduction from the participation value in the books of the parent company. While the proposed wording does not explicitly allow or restrict repurchases for capital reductions using the full range of the capital band, the possibility of such repurchases seems a logical conclusion.
Dividends and dispo-shares
The Draft proposes to enable companies to provide in their articles of incorporation (articles) that shareholders who exercise their voting rights in shareholders meetings get up to 20 per cent higher dividends (or, alternatively, a reduction of up to 20 per cent on the dividend for those shareholders who do not vote). This proposal aims at mitigating the problem of shares which are passively held and never registered in the company’s share register (the so-called “dispo-shares”). In contrast, the Draft does not provide for a comprehensive approach to address the issue of dispo-shares. Alternative solutions, such as the nominee model, have been dismissed as ineffective. We believe that this bonus/malus system on dividends will not work for listed companies in practice, as shares with different dividend claims would circulate. Moreover, such system will benefit controlling as well as professional shareholders. It will be to the detriment of the minority and retail shareholders for whom the voting process is too cumbersome and costly. This proposal also punishes the abstention from voting, which has nothing to do with the problem of the dispo-shares and jeopardises the free decision-making.
The Draft confirms that shareholders may resolve interim dividends based on audited interim financial statements, provided that the articles allow for the payment of such interim dividends. Whereas the confirmation of the current practice is positive, the additional requirements (audited financials/basis in articles) put additional burden on the companies, are unnecessary and should therefore be deleted.
The Draft proposes to relax some of the organisational requirements for shareholders’ meetings. In particular, shareholders’ meetings may be held as purely “virtual” online meetings (so-called cyber-meetings) and shareholders’ meetings may be held outside of Switzerland or simultaneously at several locations. On the other hand, the notice period for invitations to ordinary shareholders’ meetings shall be extended from 20 to 30 days for private companies. Whereas such extension might be justified for listed companies, it is not for private companies.
Shareholders’ requests and online fora
The Draft proposes to strengthen rights of rather small minorities with respect to shareholders’ meetings of listed companies. The threshold for a shareholder or shareholders’ group to request that an extraordinary shareholders’ meeting be convened is proposed to be lowered from currently 10 per cent to 3 per cent of the share capital or voting rights. The threshold to list an agenda item is proposed to be reduced to 0.25 per cent of the share capital or voting rights (from currently 10 per cent of the share capital or an aggregate nominal value of 1 million Swiss francs). These proposals should be reconsidered in light of the increasing power of shareholder activists with small shareholdings. We propose to increase the thresholds to 5 per cent for both the request for a shareholders’ meeting as well as for an agenda item.
The Draft further attempts to allow a discussion prior to shareholders’ meetings of listed companies by proposing a blog-like online forum, in which shareholders can discuss agenda items among themselves and with the board. The shareholder forum would be open from the date of the invitation until two days prior to the meeting. While we acknowledge that decision making today indeed largely takes place prior to the shareholders’ meeting, the proposal may risk leaving the floor to those shareholders with the highest inclination and resources to dominate the blog, rather than permitting a structured and equal discussion.
Shareholder rights and remedies
Shareholders in private companies may submit questions to the company outside of the shareholders’ meetings. The board is required to answer those questions twice a year. Whereas this proposal strengthens the corporate governance, it also puts an additional administrative burden on the companies.
Some actions for the benefit of the company (in particular, claims for repayment of undue payments or benefits, certain D&O liability claims and claims for special investigations) may be brought at the company’s expense if the shareholders’ meeting so resolves or upon court petition of shareholders holding at least 3 per cent (in public companies; 10 per cent in private companies) of the share capital or voting rights if they can demonstrate a prima facie case. These rules will have a particular impact on the small and medium-sized public companies where the 10 per cent threshold is more likely to be reached. The important question here is: is a judge better suited to decide what is in the best interest of the company than the majority of the shareholders? We have our doubts. Further, the claims against members of the board, executive management and related parties for the repayment of unduly received payments or benefits shall no longer be tied to the economic situation of the company. Rather, any benefits that are manifestly not at arm’s length shall be reclaimable.
The articles may, with binding effect on the company, its directors and officers and all shareholders, provide that disputes on corporate law matters shall be submitted to arbitration. Whereas we deem this provision to be innovative, the rule that such arbitration clause shall also be binding with regard to shareholders and directors joining the company after the adoption of the respective rule is problematic from a rule of law point of view.
Compensation of members of the board and executive management
While the Draft by and large reflects the Compensation Ordinance as currently in force, it proposes certain deviations that are stricter than the ordinance. Companies shall be required to set a maximum ratio of fixed compensation to total compensation in their Articles. Such a rule is neither required by the Minder Initiative nor the Compensation Ordinance. The compensation of members of executive management is to be disclosed individually, rather than on an aggregate basis as it is the case under the Compensation Ordinance (with disclosure of the highest individual compensation). The prospective approval of variable compensation (budget votes) is to be prohibited and a binding retrospective vote required. This proposal lacks justification and is particularly harmful as many companies which have introduced a prospective model of compensation approval votes would have to amend their articles and approval procedures. Sign-on bonuses are to be restricted to cases where they compensate a financial disadvantage suffered by the relevant executive (eg, by losing benefits granted by the former employer). And finally, payment of non-compete covenants would have to be justified by business reasons and may not exceed one year. Again, companies whose articles provide for non-compete covenants with a longer term would have to amend them.
Restructuring and insolvency
The Draft proposes to reflect the fact that most companies do not fall because liabilities exceed assets (over-indebtedness), but rather due to illiquidity. If there is well-founded concern about impending
illiquidity in the next 12 months, the board must prepare a liquidity plan. If such plan does not confirm impending illiquidity, the plan has to be submitted to an auditor to ascertain its plausibility. If the plausibility check fails or if the plan confirms impending illiquidity, a shareholders’ meeting needs to be convened to resolve on restructuring measures. The same procedures shall apply if losses occur in three consecutive years or if the net assets cover less than one-third of the share capital and the legal reserves (capital loss).
The Draft proposal aims to encourage gender diversity in larger listed companies. After a five-year transition period, each company is expected to have both genders represented by at least 30 per cent in its board and in its executive management. If a company fails to reach these targets, it shall explain the reasons for the underrepresentation and the efforts it takes to further promote gender diversity (“comply or explain”).
Transparency of government payments
The Draft proposes to include a transparency requirement in line with the relevant EU Directives. Companies active in the exploitation of natural resources must disclose all payments to public authorities exceeding 120,000 Swiss francs per year. The Swiss Federal Council may, if treaties so require, submit commodity trading companies to similar requirements.
Overall, the Draft aims at modernising the capital structure and corporate governance and seeks to increase legal certainty. Moreover, the Draft includes new “test the water” proposals which will need to be tested against the criteria of practicability and public acceptance. Considering the reactions of influential political parties and business associations on the Draft after the 15 March 2015, deadline, many of the proposals will not survive those tests. This holds particularly true for the proposals that are either politically driven or that unnecessarily amend established procedures.