Federal Tribunal tightens grip on security brokers
In October 1990, the defendant telephoned the plaintiff, convincing him to invest in futures options. After the plaintiff had signed an investment contract, the defendant began to trade in put and call options for the plaintiff, charging $300 in commission for each transaction. This led to remarkably high commissions. As the plaintiff's two accounts began to depreciate steadily, he ordered the defendant to close them. Subsequently, he sued the defendant claiming all his money back.
The Federal Tribunal held that the defendant had failed in its duty to advise and disclose according to article 398 para. 2 of the Swiss Code of Obligations. In 1994 the court held that persons professionally involved in the investment business are subject to a special disclosure obligation when negotiating and performing asset management. The same applies to security brokers trading in future options, who in addition are subject to a duty to advise and warn their clients of the risks involved. The scope of the duties depends on the client's knowledge as well as the investments. The court held that this obligation is particularly comprehensive when highly speculative and therefore risky deals are at stake. In the view of the court the defendant did not meet its disclosure obligation. Although it had mentioned the risk of loss, it had also raised unrealistic profit expectations. The written information contained in the defendant's brochure was not sufficiently clear for a layman.
The defendant's general conditions decline responsibility for any losses from trading in future options and offers no guarantee for profits. The defendant also declines responsibility for its advice and exchange rate fluctuations. The court held that in this case the exclusion clause would not apply, because the defendant was grossly negligent and thus could not validly waive liability under Swiss law (Art. 100 of the Code of Obligations). Due to professional incompetence the defendant was not fit to fulfill the obligations undertaken, and thereby inflicted damage on the plaintiff. Despite the waiver clause in its general conditions the defendant had breached its obligations under the contract, and therefore the court ordered that the plaintiff be reimbursed for the entire investment including the commissions.
By its judgment the court imposes strict disclosure obligations on security brokers. The scope of these duties is determined by the respective client's knowledge and the type of investment at issue. The court's decision reflects a general tendency towards consumer protection. Time will tell whether the incisive obligations imposed by the court are reasonable and enforceable from a practical point of view.
New Swiss Merger Law
The draft comprises provisions on mergers, spin-offs and reorganizations of entities governed by public and private law. The existing legislation in this area is rather meagre. The draft intends to replace the provisions on mergers, presently incorporated in the Swiss Code of Obligations, and to create a new legal framework for spin-offs and reorganizations.
Mergers of corporations, limited liability companies, partnerships, cooperatives, foundations and membership associations are permissible. In general, mergers between entities with the same legal form are always admissible, with the exception of merging foundations which must pursue the same or a similar purpose to be able to merge. The draft also contains provisions governing the merger of entities with dissimilar legal forms and entities in liquidation. The management of the merging partners are obliged to enter into a written merger contract and to establish a report in which the merger is commented on and explained from a legal and economic point of view. The merger contract and report must be examined by a qualified auditor. The merger contract ought to be displayed for inspection at the registry of commerce 30 days before the shareholders' meeting approving the merger. The merger decision must be entered into the register of commerce. The shareholders of the entity that has been taken over are entitled to shares and membership rights of the entity performing the take-over. The draft also contains provisions on the protection of creditors.
Spin-offs are only permissible for corporations and cooperatives. The legal entity has several different spin-off possibilities:
- to transfer all its assets to one or several other legal entities. The shareholders receive shares or membership rights of the entity performing the take-over;
- to segregate parts of its assets and transfer them to one or several other legal entities. The shareholders receive shares or membership rights of the entity performing the take-over; and
- to transfer parts of its assets to one or several other legal entities and thereby the legal entity itself (not its shareholders) receives shares or a settlement.
The draft's provisions on spin-offs are similar to the provisions on mergers. A spin-off contract and report are necessary and must be examined by a specially-qualified auditor.
The legal form of any corporation can be altered into a different legal (corporation) form or into a cooperative. The following reorganizations are possible: partnerships can be transformed into corporations and cooperatives into corporations or membership associations. A reorganization requires a reorganization plan and a report to be in writing and examined by a qualified auditor. Members liable for the company's obligations, established before the reorganization, remain liable for a period of five years after the reorganization. The draft also contains provisions on reorganizations of public entities into entities governed by private law.
In general, the new legal provisions close a gap and provide the necessary legal basis which enables mergers of enterprises as well as a flexible transformation of the legal construction and the possibility of spinning off parts of an enterprise.
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