On 3 March 2013, Swiss voters approved the constitutional initiative against excessive compensation which requires, among other things, shareholder approval of board and executive management compensation (the “Minder Initiative”). Final implementation of the Minder Initiative requires legislative action by the Swiss Parliament; however, in the interim the Swiss Federal Council is required to issue an implementing ordinance. A preliminary draft of this ordinance was published on 14 June 2013.
CapLaw intends on dedicating a full issue to the Minder Initiative ordinance once it is finalized by the Swiss Federal Council and comes into full force and effect. In the meantime, the below summarises some initial considerations based on the preliminary draft ordinance published on 14 June 2013.
By CapLaw Editors (Reference: CapLaw-2013-14)
1) Introduction
On 14 June 2013, the Swiss Federal Council published the preliminary draft ordinance for the implementation of the constitutional amendments pursuant to the Minder Initiative referendum which occurred on 3 March 2013. The Swiss Federal Council has requested that comments and observations regarding the preliminary draft ordinance be submitted by 28 July 2013. It is anticipated that the Swiss Federal Council will finalize the ordinance by the end of November 2013, in which case, it is likely that the ordinance will come into effect on 1 January 2014.
Once implemented, the ordinance will apply to Swiss corporations whose shares are listed on a stock exchange in Switzerland or abroad.
While the ordinance is currently only in preliminary draft form, the general expectation is that the final ordinance will not deviate substantially from the one circulated by the Swiss Federal Council on 14 June 2013. In light of this, there are several aspects of the preliminary draft ordinance that are worth highlighting at this time as Swiss companies begin to anticipate and plan for the ordinance’s implementation.
2) Key Provisions coming into effect on 1 January 2014
a) Prohibited Types of Compensation
From 1 January 2014, the following types of compensation will be considered unlawful:
-
severance payments;
- advance compensation;
- incentive fees for the acquisition or transfer of companies or parts thereof; and
- certain other types of compensation and benefits not provided for by a company’s articles of association.
While it is important for Swiss corporations falling under the new regime to begin reviewing their compensation schemes and agreements (e.g., employment contracts with executive management) already now to ensure that they comply with the ordinance going forward, existing employment agreements in place prior to 1 January 2014 will need to be brought into compliance by 1 January 2015.
In addition, there has been some discussion on whether the prohibition of “advance compensation” also extends to sign-on bonuses (Antrittsprämien). The commentary by the Swiss Federal Council which accompanied the preliminary draft ordinance emphasizes that the decisive element distinguishing prohibited advance payments from certain types of sign-on bonuses is the point in time at which such payment is made. Consequently, sign-on bonuses compensating benefits and other entitlements that executives forfeit from their previous employers continue to be permissible.
b) Criminal Liability
Members of the board of directors, the executive management, and, if applicable, the advisory board can be held criminally liable for intentional violations of the prohibitions provided for under the ordinance. Importantly, criminal liability will extend not only to members of the board of directors, the executive management and, if applicable, the advisory board, but also potentially to outside advisors, such as lawyers, in cases of incitement (Anstiftung) and/or aiding and abetting (Gehilfenschaft).
Members of the board of directors, the executive management, and, if applicable, the advisory board found liable for intentional violations of the ordinance’s provisions face up to three years in prison and a fine of up to six times their annual salary. Indeed, the criminal liability provisions in the ordinance are quite broad and do not provide for any judicial discretion relative to the severity of the offense.
3) Key Considerations for the 2014 Annual General Meeting
a) Board Elections
At the 2014 Annual General Meeting, shareholders will need to elect, individually and annually, for only one-year terms each, the members of the board of directors, the chairman and, where applicable, the vice-chairman. The members of the compensation committee, who can only be selected among the board members, will also need to be elected individually and annually, for one-year terms each.
b) Compensation Report
For the 2014 Annual General Meeting, the board of directors will be required to prepare a compensation report which will replace the corresponding information previously included in the balance sheet notes. The duty to prepare such a report is nontransferable and will be subject to verification by the company’s auditors.
c) Independent Proxy
The preliminary draft ordinance prohibits the representation of shareholders by corporate proxies (i.e., officers or other company representatives) as well as by proxies of deposited shares. While shareholders will be required to elect the independent proxy moving forward, including for the 2015 Annual General Meeting (discussed in more detail below), for the 2014 Annual General Meeting, assuming that an independent proxy was not elected at the 2013 Annual General Meeting nor at an interim extraordinary general meeting, the board of directors will appoint the independent proxy. The board of directors shall ensure that shareholders are able to instruct the independent proxy on both (i) agenda items included in the invitation to the annual general meeting and (ii) new motions which were not disclosed in the invitation. The independent proxy is required to exercise the voting rights granted by shareholders only in accordance with shareholder instructions. Of particular significance, the independent proxy is required to abstain from voting where no specific voting instructions have been received.
d) Revision of Articles of Association?
Substantial compulsory and, if applicable, voluntary amendments to the articles of association and governing regulations (e.g., organisational regulations) will need to be made within two years following the ordinance’s implementation date, i.e., by 1 January 2016. However, in practice, it may be more cautious to adapt the articles of association to conform with the ordinance, including any additional voluntary provisions, already during the 2014 Annual General Meeting. This would ensure that any rejected or further required amendments could then be addressed during the 2015 Annual General Meeting ahead of the deadline on 1 January 2016.
4) Key Considerations for the 2015 Annual General Meeting
a) “Say-on-Pay”
Beginning at the 2015 Annual General Meeting, shareholders will need to separately approve the fixed and variable aggregate compensation of the board of directors, the executive management and, if applicable, the advisory board. This means from 2015 onwards, shareholders will be asked to vote on (i) the aggregate fixed compensation for the period until the next annual general meeting, i.e., a prospective vote, and (ii) the aggregate variable compensation, if applicable, awarded for the previous financial year, i.e., a retrospective vote.
In the event of a negative shareholder vote in connection with compensation, the preliminary draft ordinance permits the board of directors to submit a new proposal at the same annual general meeting. If the board of directors does not provide a new proposal at the same annual general meeting, or if the new proposal is also rejected, the board of directors is required to convene an extraordinary general meeting of shareholders within three months following the negative vote.
b) Independent Proxy and Electronic Voting
Shareholders will need to elect at the 2014 Annual General Meeting an independent proxy for the 2015 Annual General Meeting. In addition, by the 2015 Annual General Meeting at the latest, the board of directors must ensure that shareholders are able to grant proxies and provide instructions to the independent proxy electronically.
5) From Ordinance to Statute
The hearing period regarding the preliminary draft ordinance ended on 28 July 2013. While certain modifications to the preliminary draft ordinance are expected, one can reasonably anticipate that the final ordinance will not deviate substantially from the preliminary draft. Once finalised, the ordinance will remain in effect until the new legislation fully implementing the Minder Initiative, as enacted by the Swiss Parliament, enters into force.