Preliminary draft promises a more progressive outlook

Author: | Published: 12 Mar 2015
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Marco A Rizzi and Mark Montanari of Froriep break down the contents of the proposed reform to the Swiss Stock Corporation Law and warn that a slow legislative system will delay its effects

On Friday November 28 2014, the Swiss Federal Council presented the preliminary draft for a comprehensive reform of the Stock Corporation Law (Draft or dCO). The Draft resumes the general reform that had been initiated with the aim of modernising the Swiss Stock Corporation Law, but was interrupted in 2009, and completes it with topics that have become relevant in the last years. Additionally, it seeks to introduce comprehensive say-on-pay legislation for stock exchange listed companies, which will replace the initial, preliminary provisions that had been introduced in January 2014, following the famous popular vote of 2013, by way of the Ordinance on Excessive Compensation in Listed Stock Corporations (OAEC). The Draft also contemplates the introduction of gender quota for the board of directors and management of listed companies, and increased transparency for large and listed stock corporations in the commodities sector. The Federal Council opened the consultation on the Draft, which will last until March 15 2015.

Main contents of the Draft

Share capital and dividend entitlements

The Draft introduces a number of new provisions designed to increase corporate flexibility. The Draft introduces the possibility to have a share capital in a foreign currency, provided that it is the main currency of the company's business activities (article 621 dCO). Under the new accounting regulations (articles 957a and 958d CO) entered into force on 1 January 2013, it is already possible to use such functional currency.

The nominal value of a share may be below one cent (which is the current minimal value), but must be higher than zero, and the share capital must be fully paid-up (article 622 and 632 dCO).

"As a true novelty, the Draft proposes a benchmark for a balanced gender representation in boards of directors"

Acquisitions in kind will no longer be treated as qualified capital contributions. Acquisitions in kind will, therefore, be substantially simplified since statutory reports of the board, publicity in the articles of association or the commercial register and audit confirmation would no longer be necessary.

A new concept of a share capital band is introduced by the Draft (article 653s dCO). Such novel concept provides a flexible instrument for the Board of Directors (BoD) to increase or decrease the share capital within the range of a maximum and a minimum band, for a period of up to five years. Thereby, the current institution of the authorised capital increase (article 651, 651a CO) would be abolished. In addition, the call on creditors and the auditor's report for a share capital decrease may also become redundant. Companies that implement this will at least need to have their annual accounts reviewed by an auditor in a limited audit.

The articles of association may implement a dividend system which incentivises active shareholders participation with up to 20% higher dividend entitlements (article 661 dCO).

The Draft further introduces new rules regarding reserves and interim dividend payments (article 671ff dCO).

Dispo shares and use of electronic means

The Draft proposes a possible solution to the conflicts that might arise with a large percentage of dispo shares, as the voting rights of minority shareholders do have increased influence in the general meeting compared to the total issued share capital. Dispo shares are the registered shares of a listed company that are acquired over the stock exchange through an intermediary where the acquirer does not request entry in the shareholders register and therefore does not have the ability to exercise voting rights. The Draft introduces a new model, whereby the intermediary is entered in the shareholders register as a nominee with voting powers. The intermediary will exercise voting rights based on the individual or general instructions of the owner of the shares. The intermediary can invoice the costs for complying with such nominee-model to the company. As a consequence, such costs would indirectly be borne by all shareholders. In addition, article 11 of the OAEC prohibits the governing officer and the custodian as representative (Organ- und Depotstimmrechtsvertretung).

The Draft provides new provisions regarding the use of electronic means in connection with shareholders' meetings and requires companies listed on a stock exchange to implement an electronic forum for the discussions purposes among shareholders (article 701g dCO).

Excessive compensation in listed stock companies

By way of the Draft, the provisions of the OAEC, which entered into force on January 1 2014, will be replaced by proper statutory law and incorporated in the appropriate federal acts (namely the CO, and the Federal Law on Occupational Retirement, Surviving Dependents and Disability and the Swiss Penal Code).

The Draft provides for clarification of certain points in the area of say-on-pay for listed companies that had been left open by the OAEC.

First, criminal prosecution in case of infringement of certain say-on-pay provisions will apply ex officio, and not merely upon demand (proposed article 154 of the Swiss Penal Code).

Second, signup bonuses for members of the BoD and management would only be permissible if they compensate an actual, clearly verifiable financial disadvantage (article 735c dCO). Otherwise, such compensation would be illegal.

Third, the Draft sets out a number of limitations to competition bans and non-compete obligations, which must be viewed within the context of the illegality of severance payments under the OAEC and say-on-pay provisions. Under the OAEC, severance payments agreed by contract or foreseen in the articles of association qualify as inadmissible compensation and are subject to the OAEC's penal provisions. Many listed companies have so far included in their articles of association a non-competition clause (often with a duration of more than one year), combined with the possibility of paying compensation for such non-competition. Whilst the conclusion of a non-competition clause is in principle permitted by the CO (article 340 CO), criticism had been voiced that non-competition clauses of excessive duration may be seen as hidden, and therefore illegal, severance payment. By setting a maximum duration of one year to non-compete obligations, the Draft provides for clarification that: (i) compensation not at arm's length and based on a non-competition ban, or a compensation based on a competition ban which commercially is not justified, should qualify as inadmissible and therefore be prohibited; and (ii) non-compete obligations should not exceed a duration of 12 months.

Compared to the OAEC, the Draft proposes to tighten the scope of a prospective shareholders' vote on say-on-pay. Whilst the OAEC permits conducting a retrospective or prospective vote over fixed and variable compensation, the Draft would only permit a retrospective vote on variable compensation. Therefore, a prospective vote would only be permissible for fixed compensation (article 735 dCO).

As a true novelty, the Draft proposes a benchmark for a balanced gender representation in the BoDs and the management of large companies. Large companies are those exceeding two of the following thresholds in two successive financial years: a balance sheet total of SFr20 million ($21 million); turnover of SFr40 million; and, 250 fulltime positions on annual average). According to article 734e dCO, there should be at least a 30% representation of both genders in the board of directors and the management. If this threshold is not reached, the compensation report has to state the reasons for the shortfall and describe the measures to promote the representation of the less represented gender.

Corporate governance

The Draft proposes a further strengthening of shareholders' rights of both listed and private companies by reducing the thresholds of shareholding for: a request of special investigation (article 697e dCO); a convocation of a general meeting (article 699 dCO); the placement of an item on the agenda of the general meeting (article 699a dCO); the right to make requests during a general meeting (article 699a dCO); the right to request the dissolution of the company through lawsuit (article 736 dCO); and, requesting a lawsuit at the company's expense (article 697f dCO). In addition, the existing lawsuit regarding the return of benefits (article 678 dCO) will be strengthened.

For non-listed companies, the Draft proposes to require the BoD to disclose information regarding compensation to the members of the BoD and the management at the general meeting (article 697 dCO).

"The Draft proposes a further strengthening of shareholders’ rights of both listed and private companies"

Further, the Draft proposes an extension of the statute of limitation period for filing claims of shareholders if the company suffered damage. Such period will be extended from six to 12 months (article 758 dCO). On the other hand, the judge may decide to allocate or divide the procedural costs between the claimants and the company (article 107 dCPC) in order to mitigate the risk of high costs for the claimant, usually a shareholder.

The Draft provides for the possibility of holding 'cyber-general meetings' (shareholders meetings without a physical venue). Whilst the first draft reform of the stock corporation law of 2007 still excluded the applicability of such cyber meetings for resolutions to be publicly notarised, the Draft would allow a cyber-meeting also for such resolutions (article 701d dCO). In case of technical problems occurring on the side of the company, the BoD would in any event have to repeat the vote, without the possibility of providing evidence that the technical problems did not have an influence on the result of the respective vote (article 701f dCO)


The proposed articles regarding restructuring and measures focus on the company taking restructuring measures at an earlier stage and encouraging the BoD to make use of the new restructuring measures.

Where there is good cause for impending insolvency of the company, an up to date liquidity plan, including an assessment of the economic situation, must be drawn up by the BoD by partial inclusion of the auditors and the shareholders' meeting, so that the solvency of the company is ensured at all times (article 725 dCO).

Further, and if certain conditions are met, the court notification will be omitted during a tolerance period of 90 days, if there are good prospects of recovering of solvency (article 725b dCO).

Transparency of commodities sector

The Draft proposes improvement of transparency in the Swiss commodities sectors. The proposed provisions follow the requirements of the corresponding EU and US rules. Further, the new articles agree with the requirements and recommendations of the Commercial Accounting Rules.

Listed companies and companies engaged in the raw material mining sector (logging, timber, and mining of metals and minerals) must prepare and publish a written report regarding payments (minimum amount of SFr120,000) made to public authorities during a company's business year. The Federal Council may extend these obligations (article 964a dCO) to other companies in the Swiss commodities sectors.

Next steps

The consultation period on the Draft ends on March 15 2015. It is expected that the Federal Council will analyse the results of the consultation period until the end of 2015 and publish its message to Parliament at the end of 2016 or the first half of 2017. Considering the length and complexity of the Swiss legislative process, it will then take several years before an amended Swiss Stock Corporation Law will come into force.

About the authors

Marco A Rizzi
T: +41 44 386 60 00

Mark Montanari
T: +41 44 386 60 00