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Switzerland: Corporate law overhaul

Rashid Bahar
The Federal Council opened on November 28 2014 a consultation on a major modernisation of Swiss corporate law. The draft bill aims, on the one hand, to implement on a statutory level the requirements of article 95 (3) of the federal constitution resulting from the so-called fat-cat initiative that was adopted. On the other, it aims to re-initiate a series of reforms that were launched in 2007, but that were put on hold shortly after to focus on the fat-cat initiative. As the consultation period closes, we consider the key proposals of the draft bill.

Overall, the draft bill on the modernisation of Swiss corporate law is a vast one, covering a diverse range of issues; some pundits have called it a mammoth bill.

The draft bill deals with the corporate governance of listed and non-listed companies, including compensation policy, and diversity requirements on the board and management. It proposes to step up the requirements set out in the Ordinance of the Federal Council against Abusive Compensation in Listed Companies, by requiring all companies to define in their articles of incorporation a maximum ratio of fixed compensation to variable compensation. It also requires a retrospective shareholder vote on executive compensation with a binding effect, to prevent companies from submitting executive compensation to a prospective vote on the budget followed by a consultative vote on the actual pay-out. Further, the draft bill proposes to set a statutory cap to the duration of non-compete arrangements and requires sign-on bonuses to be granted only in the compensation of a loss incurred by the incoming employee. This aims to prevent the avoidance of the blanket prohibition of golden parachutes and golden hellos (advance payments of executive compensation) both barred by the fat-cat initiative.

In parallel, the draft bill also seeks to encourage female representation in listed companies. It will require companies where the board of directors and executive management have less than 30% female members to explain why they were not able to reach this threshold and what measures they are taking to encourage the promotion of female executives more generally.

The draft bill also proposes the facilitation of the exercise of shareholder rights in the general meeting and shareholder actions. In particular, it proposes to lower the shareholding requirements to convene a general meeting or put an item to the ballot. It also contemplates a demand procedure. This would allow a group of shareholders representing three percent of the votes of a listed company or 10% of the votes of other companies to ask the general meeting to initiate a legal action on behalf of the company (for example, to initiate a director's liability suit). If the general meeting refuses to take action, the shareholder could ask the court to authorise it to initiate the law suit on behalf of the company with the company footing the bill.

More anecdotally, the draft bill also requires listed companies to create an electronic forum to allow shareholders to communicate prior to a general meeting.

The draft bill proposes reforms to the statutory regime applicable to legal capital as well as the issuance and cancellation of shares. It intends to allow companies to denominate the share capital in a foreign currency and to introduce a so-called share-capital margin, allowing the board of directors to increase or reduce the share capital at its discretion with the range described by the share-capital margin. Other notable changes include repealing the regime on substantial acquisitions in connection with capital increases, which subjected acquisitions of goods in connection with a capital increase to the same requirements as contributions in kind and the repealing of the cap on the issuance of participating certificates, a form of non-voting shares.

The bill drafts new rules on the restructuring of distressed companies. Under the proposed regime, the board of directors would be required, in addition, to following a pure balance-sheet test, to consider the liquidity of the company for a period of 12 months and have this liquidity planning reviewed by the statutory auditors. It seeks to increase the transparency of payments by companies involved in extractive industries, promoting the implementation in Swiss law of the Extractive Industries Transparency Standard.

At the end of the consultation period, it seems that the draft bill was given a mixed reception. Representatives of business interests invited the government to park this initiative and limit its efforts to codifying at statutory level the existing requirements of the Ordinance of the Federal Council against Abusive Compensation in Listed Companies and to assess the actual impact of the rules set out in the ordinance on compensation policy, instead of initiating prematurely new reforms.

Rashid Bahar

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