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Law Reform on Company Law – Aspects of Corporate Governance

Law Reform on Company Law – Aspects of Corporate Governance

Law Reform on Company Law – Aspects of Corporate Governance

On January 1st 2023, the new provisions on limited company law came into force. These changes have been awaited for many years, in particular in order to offer companies greater flexibility and to bring the law into conformity with the practice that has developed over the years.

I. Introduction

In light of some of the innovations introduced by the revision, the duties of the board of directors have been increased in return, particularly with regard to the holding of general meetings and the monitoring of the solvency of companies. Members of the board of directors and the executive management must also promptly disclose conflicts of interest, against which the board of directors must take measures. If they fail to comply with these new obligations, members of the board of directors will be held liable. The revision of the law also strengthens the rights of shareholders, particularly in terms of information, which increases the reporting obligations of the board of directors. Furthermore, the law is more precise in terms of delegation of management, so that companies are required to update and complete their organisational regulations, if necessary. Finally, the law provides for a number of new features that require adaptation of the articles of association in order to be implemented.

II. The Holding of General Meetings

A. Corporation (AG, SA), Limited Liability Company (GmbH, Sàrl), Cooperatives

The holding of general meetings has been modernised. The new Article 701a of the Swiss Code of Obligations (CO) stipulates that the board of directors shall decide on the venue of the general meeting, taking into account that the exercise of rights should not be unduly complicated for any shareholder. In addition to the traditional face-to-face general meetings, several other options are now available in this respect:

  • General meeting at several locations simultaneously and live broadcasting of speeches by audiovisual means at all meeting locations (Art. 701a III CO)
  • General meeting held abroad (Art. 701b CO)
    • This possibility must be provided for in the articles of association, involving a public notary deed of the general meeting and a change in the articles of association in the Commercial Register.
    • An independent representative should be appointed by the board of directors in the notice convening the general meeting, unless all shareholders of an unlisted company waive this appointment.
    • It should be noted that the board of directors will have to consider the possible tax implications of holding a general meeting abroad.
  • Partially or fully virtual general meeting (Art. 701d CO)
    • The possibility of holding a fully virtual general meeting must be provided for in the articles of association, involving a notarised general meeting decision and a change of the articles of association in the Commercial Register.
    • For the fully virtual general meeting, an independent representative must be appointed by the board of directors in the notice convening the general meeting, except for non-listed companies if the articles of association provide for the possibility to waive this appointment.
  • Universal general meeting (Art. 701 CO)
    • The universal general meeting was already regulated under the old law, whereby a general meeting can be held without observing the convening requirements if the owners or representatives of all shares consent and participate. This universal general meeting can now be held in one of the new forms mentioned above, if the specific requirements in this respect are met.
  • General meeting in writing by circular (Art. 701 III CO and Art. 701c CO)
    • The new law now provides for the possibility of holding a general meeting in written form on paper or in electronic form, without observing the requirements for convening a general meeting, unless a discussion is requested by a shareholder or a representative.
    • This new feature facilitates decision-making, especially when the shareholding structure is simple, and should be provided for in the articles of association.
    • Although the old law already allowed the board of directors to take circular resolutions, the new law now allows such decisions to be taken in electronic form without the need for a signature, unless the board of directors decides otherwise in writing (Art. 713 II para. 3 CO). It should be noted that, in our view, electronic form refers to approval or rejection for example by e-mail, and that the new law still seems to preclude a signature in electronic form, such as Docusign, subject to a qualified electronic signature (with a qualified electronic time stamp within the meaning of the Federal Act on Electronic Signatures).

These new provisions imply an increased duty for the board of directors to ensure that meetings are properly conducted. Indeed, when the method of holding the general meeting involves the use of audiovisual means, the board of directors must ensure that (i) the identity of the participants is established, (ii) the speeches at the general meeting are broadcast live, (iii) any participant may make proposals and take part in the debates, and (iv) the result of the vote cannot be falsified (Art. 701e CO).

In addition, if technical problems occur which prevent the general meeting from running smoothly, it must be reconvened (Art. 701f CO). However, decisions taken before the occurrence of such technical problems remain valid. In any event, these technical problems must be mentioned in the minutes of the general meeting. However, shareholders remain responsible for their own hardware and software.

B. Applicability to Associations and Foundations?

Unfortunately, the application of these new possibilities to associations and foundations is not yet provided, although this is the case for limited liability companies for which the provisions of the corporation concerning the place and use of electronic media for the preparation and holding of the general meeting apply by analogy.

Nevertheless, the Federal Supervisory Authority for Foundations seems to be flexible in the light of the COVID-19 situation and currently allows foundation boards to hold their meetings by telephone, video conference or in writing even if the articles of association do not provide for this possibility. However, all board members must agree to do so and participate in the meeting. The minutes must indicate the form in which the foundation board held its meeting. It should be noted that in this case, a decision is only considered validly taken if all members approve it and it is recorded in writing. On the recommendation of the Federal Supervisory Authority for Foundations, these forms of meeting should be incorporated into the articles of association in a future amendment.

In any event, it is to be hoped that the practice of the new law in this respect will have an impact on associations and foundations for which an unrestricted analogous application of the above rules would be welcome.

III. New Obligation to Monitor and Manage Solvency

With regard to the monitoring and management of the financial situation, the new law on corporations (Art. 725, 725a-c CO) is structured according to the following three critical thresholds (or “warning indicators”): risk of insolvency (A.), loss of capital (B.) and over-indebtedness (C.). These provisions also apply to limited liability companies (Art. 820 CO) and cooperative companies (Art. 903 CO).

A. Insolvency Risk

One of the innovations of the new law is the introduction of an early warning system, which now requires the board of directors to closely monitor the solvency of the company and, if necessary, to take measures to ensure the solvency of the company when there is a risk or threat of insolvency. In this respect, the law states that the board of directors must act promptly. If it fails to do so, it is liable.

In order to understand the concept of “insolvency”, reference can be made to the Federal Council’s Message which defines it as the situation where the company has neither the liquidity to pay its debts as they are due nor the credit necessary to obtain such liquidity. As regards the risk” of insolvency, this should be understood as any indication that the company will not be or will no longer be able to meet its payment obligations within the next six months (e.g. due to particular events, late payments, lawsuits, etc.) for a company subject to or having waived its limited audit, or twelve months for a company subject to ordinary audit. A temporary lack of liquidity should therefore, in principle, not necessarily constitute a threat of insolvency within the meaning of Article 725 CO. In this respect, it should be noted that the Federal Supreme Court has ruled that a first inability to pay in due time does not necessarily constitute “true insolvency”.

In case of risk or threat of insolvency, the board of directors must take measures, such as sale of assets, suspension/subscription or subordination of claims, or even additional measures to reorganise the company, such as redundancies, reorganisation of production or distribution, etc. It can even propose measures to the general meeting, provided they fall within the competence of the latter, for example to increase or reduce the capital. Finally, the board of directors must apply for a debt-restructuring moratorium, if necessary, even if the company is not in a situation of over-indebtedness or loss of capital (Art. 725 III CO).

B. Loss of Capital

The new Article 725a CO deals with the loss of capital and its consequences. It first defines loss of capital and requires the board of directors to convene a general meeting under certain conditions (paragraph 1), and then – not insignificantly – imposes a limited audit by a licensed auditor on companies that have opted out (paragraphs 2 and 3).

This obligation to audit the annual accounts ends when an application for a debt-restructuring moratorium is filed. However, according to the interpretation of the new law at this stage, even in the case of subordination of claims by creditors, this obligation remains. It should be noted that if this obligation is not respected, the decision of the general meeting approving the accounts is considered as null and void.

The law clarifies the notion of loss of capital by defining it as the case where the assets, after deduction of debts, no longer cover half of the share capital, the legal reserve derived from the capital and the legal reserve derived from the profit which are not refundable to the shareholders (in this respect cf. new Articles 671 and 672 CO).

In this situation, the board of directors must first take measures to stop the loss of capital and then, if necessary, take further remedial action.

The distinction between “measures to halt the loss of capital” and “other reorganisation measures” is not clear, as these concepts overlap. The following proposal may help to answer this question: “measures to halt the loss of capital” are measures which, in the short term, remedy the deficiency in accounting and/or financial terms. This means that they serve to restore the balance sheet (e.g. capital increase, non-repayable contributions, conversion of borrowed funds into equity, revaluation of real estate or participations (Art. 725c CO), release of hidden reserves, etc.). On the other hand, “other reorganisation measures” are strategic measures aimed at restructuring the company at the operational level, but without immediate accounting effect (analysis of product lines, redundancies, destocking, change of management, disposal of assets not essential to the realisation of the company’s purpose, etc.).

C. Over-indebtedness

The situation of over-indebtedness arises when there are serious reasons to assume that the company’s debts are no longer covered by its assets (Art. 725b CO). The board of directors must then immediately draw up an interim balance sheet at the operational and liquidation values. The interim balance sheet at liquidation value is not required if continued operation is envisaged and the interim balance sheet at the operational value does not show any over-indebtedness. As under the old law, the interim balance sheet must be audited by the auditors.

If the two interim balance sheets, i.e. the balance sheet at the operational value and the balance sheet at liquidation value, show that the company is over-indebted, the board of directors must notify the court. This notification can now be made in the form of an application for a provisional debt-restructuring moratorium or the opening of bankruptcy proceedings.

The law now expressly provides that the board of directors is not required to notify the judge in the following alternative cases:

  • certain creditors of the company subordinate their claims to those of all other creditors of the company up to the amount of the capital deficit, as under the old law. This subordination should also include all interest due throughout the period of over-indebtedness, or
  • there is good reason to believe that the over-indebtedness can be eliminated in due course, but no later than 90 days after the interim balance sheets have been drawn up, and this does not further jeopardise the enforcement of claims. With regard to the latter, this must mean that the losses have stabilised regardless of the success of the reorganisation measures. This new condition is a codification of case law. The 90-day period must be examined ex ante and if the resolution of the company’s over-indebtedness within this period does not seem possible, the board of directors will probably have to inform the court.

It should be noted that under the new law, if the company is bankrupt and a case of liability within the meaning of Articles 753 to 755 CO arises, the subordinated claims are no longer taken into account in the calculation of the company’s loss. This is a major innovation, as until 31 December 2022 the liability of the board of directors (and the auditors) was the same as it would have been if the board of directors had not reacted to the over-indebtedness at all and had not obtained such subordinated claims. This new feature takes some of the burden off the shoulders of the members of the board of directors.

It should also be noted that Article 725c CO of the new law specifies the possibility, in the event of a loss of capital or over-indebtedness, of revaluing in the balance sheet the real value of a company’s real estate or holdings which now exceeds the acquisition price or cost price, up to a maximum of this value.

IV. Other Novelties for the Board of Directores

Art. 710 CO provides that the term of the mandate for members of the board of directors of a company whose shares are listed on the stock exchange ends at the end of the next ordinary general meeting, whereas the mandate for members of the board of directors of a company whose shares are not listed is three years, unless the articles of association provide otherwise. The articles of association may also provide that the members of the board of directors of a company with unlisted shares are elected in corpore, and not individually. For companies with listed shares, the chairman must also be elected by the general meeting, while for companies with unlisted shares, the board of directors elects a chairman from among its members, unless the articles of association provide otherwise (Art. 712 CO).

The law now expressly provides that members of the board of directors and the executive management must inform the board of directors immediately and in full of any conflicts of interest in which they find themselves (Art. 717a CO). Conflicts of interest can be manifold. The Federal Council’s Message mentions, for example, close private or business relationships with a third-party customer or supplier or a simple lack of time to devote to the company’s business if the activity of a member of the board of directors for another company in the group or outside is too absorbing. The new legal provision specifies that the board of directors shall take appropriate measures to safeguard the interests of the company. In this respect, situations of conflict of interest should, if necessary, be defined in the company’s organisational regulations and clear procedures should be established. For example, it could be foreseen to have a double vote, once with all members and a second time without the members subject to a conflict of interest, the decision being valid only if it is confirmed by the second vote. It should be noted that if the persons concerned harm the company by mishandling a conflict of interest, they are liable for it in accordance with Article 754 CO.

The existing organisational regulations may be reviewed and revised in the light of the legal requirements now detailed in Article 716b III CO. Article 716b I CO provides that unless otherwise provided for in the articles of association, the board of directors may delegate all or part of the management to one or more of its members or to third parties on the basis of organisational regulations. These organisational regulations must set out the terms of the management, determine the necessary positions, define the responsibilities and regulate the reporting obligations within the board of directors or between the management and the board of directors (Art. 716b III CO).

The new law also places increased obligations on the board of directors in view of the strengthened right to information and consultation of the shareholders contained in Articles 697 et seq. CO.

In general, it can be said that in view of various ongoing legal developments, the reporting obligations are likely to become a greater administrative burden for the board of directors. For example, the companies (which are submitted to such new rules) will also have to publish their first reports (for the financial year 2023) on the new provisions for better protection of people and the environment (Art. 964 a et seq. CO) in the first semester of 2024.

Finally, the organisational regulations may, if necessary, also provide for the implementation of a fluctuation margin decided by the general meeting, a new feature provided for in articles 653s et seq. CO, which consists of granting the board of directors the right to increase and/or reduce the share capital within the authorised limits defined by the provisions of the articles of association over a maximum period of five years.

V. Conclusion

The changes introduced by the revision of law offer companies greater flexibility, in particular by allowing them to hold general meetings in different forms. Nevertheless, these changes imply an increase in the obligations of the board of directors, which must in particular ensure that these general meetings are held properly with regard to the proper functioning of audiovisual means. The board of directors furthermore has increased duties with regard to monitoring and managing the solvency of the company. It has to disclose any conflicts of interest without delay and must take steps to prevent them. The board of directors is also subject to more extensive reporting obligations. The new provisions also provide for innovations, such as the possibility of a share capital fluctuation margin, which must be subject of an amendment to the articles of association in order to be introduced. In addition to a revision of the articles of association, it may be appropriate, or even necessary, for many companies to provide for appropriate organisational regulations in the detailed manner now provided for by the law, or to revise and amend the organisational regulations currently in place, in order to implement the new legal provisions.