Is the Swiss companies limited by shares law revision a revolution?

Introduction

After years of groundwork and discussions, on 19 June 2020 the Swiss parliament at last adopted the new text of the law governing companies limited by shares. This eagerly awaited revision was rejected when it was first presented in 2013. In 2016, the Federal Council brought the issue back to the table with a new version which was finally accepted four years later, not without difficulty given the need for the National Council and the Council of States to agree.

The changes to the legislation will modernise the Swiss company limited by shares to make it a better fit for today’s economic, social and technological environment. This legislation has of course been amended several times in the past – we recall for example the new accounting law, the introduction of special audits and the register of beneficial owners, and more recently the abolition of bearer shares.

But is this latest revision really a revolution? Or is all the media hype actually much ado about nothing?

Here, our lawyers will present the most important aspects of this four-part reform. The first part deals with executive pay for listed companies, following the Minder initiative. The second concentrates on gender equality, and introduces quotas for large companies. The third establishes transparency obligations for businesses in the raw materials sector. And the final part makes a series of technical modifications to the “ordinary” law governing Swiss companies limited by shares. We will focus mainly on this last section, as the other topics relate primarily to multinational corporations.

Excessive pay

The revision to the Swiss law on companies limited by shares repeals the Ordinance of 20 November 2013 against excessive remuneration in listed companies limited by shares (ORAb; RS 221.331) and transfers the majority of its provisions to the Swiss Code of Obligations. The aim of this was to set in law the requirements of the initiative against excessive pay approved by the Swiss people in a referendum in 2013 (the Minder initiative), although the final text does not go as far as the original proposal. Differences compared to the ORAb are:

• Payments to former or current members of a company’s governing bodies (board of directors, management and advisory board) or their relatives and close associates are forbidden if they are the result of:

□ a non-compete clause whose value exceeds average pay for the last three financial years or a clause which is not justified under standard business practice,

□ a signing bonus not designed to compensate for a financial disadvantage compared to a previous post,

□ a bonus relating to a previous activity carried out within a company body that is not in line with market practices.

• It is still possible to offer variable bonuses prospectively to members of the board of directors, management team or advisory board, but a remuneration report must be presented at the general meeting for a consultative vote at a later date.

• It will also be possible to set in advance additional pay for new management team members.

• The company’s articles of association must state the maximum number of external appointments to similar roles in for-profit businesses that may be held by members of the board of directors, management team and advisory board. The remuneration report must mention external appointments.

Gender representation quotas

The reform of the law governing Swiss companies limited by shares introduces a gender representation quota of 30% for the board of directors and 20% for the management team for listed companies subject to ordinary audits. If these quotas are not achieved within the transition period of five years for the board of directors and ten years for the management team, the remuneration report must explain why and detail the efforts made to promote the under-represented gender. This measure will affect around 250 Swiss companies.

“Technical” modifications to the Swiss companies limited by shares

Share capital and distributions

• The one-centime minimum par value for shares will be scrapped. Any par value above zero will now be acceptable. This aims to improve share liquidity, especially when splits are carried out. This solution mainly relates to listed companies.
• It will be possible to quote share capital in foreign currency rather than solely in Swiss francs, so long as the value in foreign currency complies with the CHF 100,000 minimum. The Swiss Federal Council will publish a list of authorised currencies, but the currency chosen must be that in which the company does the majority of its business (functional currency). For existing companies, the share capital currency may be changed via a resolution at the general meeting, recorded by and bearing the stamp of a notary. 
• Introduction of “capital bandwidth”. At the general meeting, the board of directors may be authorised, for a period of five years, to increase or reduce the share capital within a set bandwidth. The bottom of the bandwidth is set at half of the registered share capital (subject to a minimum of CHF 100,000), and the top is set at one and a half times the registered share capital. The articles of association must be amended each time the share capital is modified.
• Option to pay an interim dividend so long as interim accounts are published. No revision to this dividend will be required so long as the company has opted out of limited audits for its accounts, or the shareholders have unanimously agreed and the interests of the company’s creditors are not compromised. There will be no mandatory amendment to the articles of association.
• Harmonisation of certain provisions with accounting law, in particular as regards reserves and treasury stock. The repayment of reserves from capital contributions, in particular the paid-in surplus (agio), is authorised.
• When a company is created or share capital is increased, (intended) acquisition in kind is no longer a qualified process.

General meetings

• It is now possible for general meetings to be held virtually, i.e. electronically. Provision must be made for this in the articles of association, and the board of directors must appoint an independent representative, except in the case of unlisted companies where the latter condition will not be mandatory if the shareholders unanimously agree to waive it. The board of directors is responsible for ensuring that all participants are identified reliably, that contributions can be heard in real time, that all those concerned can contribute to the debate and make suggestions and that votes cannot be rigged. In the event of technical issues, a new general meeting must be called but decisions made before the issues occurred will stand.
• Universal general meetings can be held in writing or in electronic form so long as no shareholder has requested a discussion.
• General meetings may also be held abroad so long as this is provided for in the articles of association, it does not cause undue complications for shareholders in exercising their rights and the board of directors appoints an independent representative (except if the company is unquoted and the shareholders unanimously agree to waive this last requirement).
• Lastly, a general meeting may take place simultaneously in several locations, once again so long as this does not cause undue complications for shareholders in exercising their rights. Contributions simply need to be broadcast live to all meeting sites.
• The delisting of company’s shares will now require approval by qualified majority at the general meeting, whereas this decision previously fell within the remit of the board of directors.
• Listed company shareholders representing more than 5% of the voting rights or share capital may require the directors to call a general meeting. The threshold of 10% of votes for private companies remains unchanged, but a new threshold of 10% of share capital will replace the current CHF 1m. The board of directors will be required to act on the request within a reasonable period of sixty days.
• To propose a resolution during a meeting or add an item to the agenda, the threshold will be 5% of share capital for unlisted companies and 0.5% for listed companies (replacing the current threshold of CHF 1m). A brief statement in support of the item may be provided to be published in the notice of the meeting. 
• Boards of directors of listed companies must provide brief justification for their proposals in the notice of the meeting.
• In listed companies, it will no longer be possible for the only representation option available to shareholders to be another shareholder. Again in listed companies, it will remain forbidden for a member of a company’s governing body, or an agent, to represent shareholders. A private company can decide that its shareholders may be represented only by other shareholders, but in this case a shareholder has the right to insist on representation by an independent party or a company body. Representation by a member of a governing body will remain possible in unlisted companies.
• To limit proxy fights, independent representatives in listed companies are required to keep the instructions of the shareholders they represent confidential. They may only provide the board of directors with a general indication of the instructions they have received, at the earliest three days before the general meeting is held. 

Rights of (minority) shareholders in Swiss companies limited by shares

• In unlisted companies, outside of the general meeting, shareholders who together represent at least 10% of the share capital or voting rights may, where this is necessary for them to exercise their shareholders’ rights and does not compromise trade secrets or other company interests worthy of protection, request written information from the board of directors regarding the affairs of a Swiss limited company. The board of directors is required to reply within four months.
• Shareholders who together hold at least 5% of the share capital or voting rights can view company registers and files, as far as this is necessary for them to exercise their shareholders’ rights and so long as it does not compromise trade secrets or other company interests worthy of protection. The right to view the material must again be granted within four months.
• The shareholder in receipt of the information can then propose a resolution at the general meeting to introduce a special inspection (formerly “special audit”). If the resolution is passed, the shareholder or the company must request the appointment of a legal expert within 30 days. If the resolution is not passed, shareholders representing 10% of voting rights or share capital (5% for listed companies) must apply to the court for a special inspection within three months.
• There are plans to reduce the conditions for taking legal action for recovery of payments (dividends, remuneration, etc.) received without justification by shareholders, board members, members of the management team (new) or optional advisory board (new), and their relatives and close associates. Obvious inconsistency with the business’s financial situation will no longer be a criterion.
• The articles of association may contain an arbitration clause. Unless otherwise stated in the articles, the company, its governing bodies, members of these governing bodies and shareholders will be bound by this clause, which will state that disputes under company law will be decided by a court of arbitration located in Switzerland.

Financial reorganisation and insolvency

• The concept of insolvency (or more precisely illiquidity) has finally made its entry into the Swiss Code of Obligations. A business is of course insolvent when it no longer has sufficient liquidities to meet its due debts. The board of directors is now required to monitor the company’s solvency and take measures if there is a risk to liquidity. (It is not however legally required to put in place a cash-flow plan.) The board will then take additional steps to reorganise the company’s finances, or propose such steps at the general meeting, if this is part of its remit. If necessary, the board must file an application for a composition agreement. In all cases, it must act promptly.
• The new legislation provides further details on the concept of capital loss, stating that the company is considered to be in such a situation when its assets, after deduction of losses, no longer cover half of its share capital, statutory reserves from capital contributions and statutory retained earnings not refundable to shareholders. The board of directors must take measures to halt the capital loss. It must also, as required, propose other measures at the general meeting and submit the accounts for limited audit before they are laid before the general meeting for approval. If the company has opted out, it will also be necessary to appoint an accredited auditor. Like the board of directors, the appointed auditor must act promptly.
• If the company is in excessive debt (i.e. its assets no longer cover its debts), the board of directors will still be required, as is already the case, to produce interim accounts establishing the company’s liquidation and going-concern values. These must be audited, and if the results confirm that the company is indeed in excessive debt, it must notify the judge. The judge will either declare the Swiss company limited by shares bankrupt, or make a composition agreement. Stays of bankruptcy will no longer be possible. There will be two exceptions to the obligation to notify the judge: firstly, deferral of a debt obligation (subordination of claims by creditors), and secondly, if there are genuine reasons to assume that it will be possible to exit the excessive debt situation (prospect of restructuring) within a maximum of 90 days of producing the interim accounts, without further compromising the servicing of debts during this period.
• Capital protection provisions will not be applicable if a share capital reduction is immediately followed by an increase (known as an “accordion deal”).
• Lastly, it will be possible to pay up share capital by offsetting it against a claim against a Swiss company limited by shares if the claim is no longer covered by the assets.

Fighting corruption in the raw materials industry

In line with current trends and in particular European directives (2013/34 and 2013/50), the revision to Swiss law governing companies limited by shares stipulates that any business subject to ordinary audits that is directly or indirectly involved in producing ores, oil, natural gas or wood from old-growth forests must publish an annual report on payments in excess of CHF 100,000 (whether single or cumulative) made to governments. This report must be available to the public for ten years. The Federal Council will also have the right to extend this obligation to raw materials trading companies.

Observations on the reform of the law governing Swiss companies limited by shares

The date on which this reform will enter into force has yet to be set, but it is expected to be in 2022, or even 2021 if no referendum is held. As a general rule, companies will be required to adapt their articles of association and by-laws within two years. Businesses working in the raw materials industry will be bound by the new transparency obligation from the first accounting year to begin one year after the reform comes into force.

In essence, the reform will provide welcome modernisation to Swiss company law. That said, it is an evolution rather than a revolution. Lawmakers have sought to make companies limited by shares more flexible and bring them into line with current technology and economic imperatives. Virtual general meetings and the facility to pay up share capital in foreign currency are examples of this. Above all, the reform brings a large number of incremental positive changes, and removes certain pointless restrictions (the ban on interim dividends, for example). However, although the devil is in the detail, legislators have not fundamentally changed Swiss law on companies limited by shares. In our opinion, they have not made sufficient provision for the diversity of the Swiss economic landscape. They could have created different legal statuses for different businesses, and made a genuine distinction between listed companies, start-ups and SMEs. So, for example, no provision has been made for a company to be formed, dissolved or liquidated without the use of a notary in very simple cases. Similarly, they have refused to introduce the concept of loyalty shares to reward investors who hold shares for more than two years with higher dividends or other preferential rights. Consequently, the company limited by shares remains at the present time the only real legal structure available to a Swiss business when capital is required, because although the limited liability company (Sàrl) status is widely used, it is unfortunately far too similar to its big sister.

The revision also deals with certain specific topics reflecting current trends. So, the protection of minority shareholders (reduction of thresholds for requiring a general meeting to be called or adding items to the agenda) and governance (via insolvency rules, for example) have been reinforced. This is a good thing, although it remains to be seen how these standards will be implemented in practice and whether there will be fierce battles between shareholders within companies.

We also applaud Parliament’s initiative to make it easier for women to access the highest echelons of management within listed companies, although we would have liked to have seen enforcement mechanisms. Lawmakers have also taken a step towards greater transparency in the fight against corruption in raw materials extraction corporations, which frequently make the headlines. As regards excessive pay, we regret that there is no requirement to state the level of pay set for each management team member individually in the remuneration report (only a collective figure is reported).

In any case, there will undoubtedly be further amendments to the law governing Swiss companies limited by shares over the coming years. We are likely, for example, to see the advent of legal requirements for ESG (environmental, social and governance) criteria, which are highly topical at the moment and have been the subject of various pieces of draft legislation at European level. 

The contents of this newsletter are not to be construed as a legal or tax opinion or advice. Should you require more information, please either email us or get in touch with your usual contact at CROCE & Associés SA.