On 12 December 2014, the Swiss Parliament adopted the Federal Act Implementing the Revised Financial Action Task Force (FATF) Recommendations of 2012. The Act provides new and revised provisions in the field of anti-money laundering and criminal law which were discussed in CapLaw No. 3/2015 (p. 6 et seqq.). The Act also introduced new reporting obligations of acquirers of bearer shares and in respect of beneficial owners of 25% or more of the share capital or voting rights of unlisted Swiss companies. These changes, which entered into effect on 1 July 2015 and affect shareholders and companies alike, are discussed in this article.

By Hans-Jakob Diem / Tino Gaberthüel (Reference: CapLaw-2015-55)

1) General Description of the New Rules

a) Reporting Duty of Acquirers of Bearer Shares of Unlisted Companies Limited by Shares

According to the new provision in article 697i of the Code of Obligations (CO), an acquirer of bearer shares, including bearer participation certificates, of a company limited by shares (Aktiengesellschaft), whose shares are not listed on a stock exchange, has to notify the company of the acquisition within one month, by reporting to the company his/her first name and name or its corporate name (in case of a corporate acquirer) and the address. This notification duty is not subject to a minimum threshold, which means that the acquisition of a single bearer share has to be reported (which also means that unlisted bearer shares are subject to stricter notification rules than listed shares for which a notification duty is only triggered if the threshold of 3% of the voting rights is reached or crossed). Any subsequent change in the reported information (e.g. name or address change) has to be notified to the company as well. The one-month notification period is triggered with the completion of the acquisition, i.e. the transfer of legal title. While not explicitly stated in the law, the creation of a usufruct on bearer shares will likely also trigger a reporting duty as the concerned shares are transferred to the usufructuary (article 746 of the Civil Code (CC)). A mere pledge of shares does, however, not trigger the reporting duty.

An acquirer of bearer share(s) will have to provide evidence to the company that it actually possesses the bearer share(s), and must identify itself by submitting the original or a copy of an official identification document containing a photograph (such as passport, identity card or driver’s license) or an up-to-date extract from the commercial register or an equivalent foreign document (in case of a corporate acquirer). To evidence possession of the bearer share(s) the submission of a copy of the share certificate(s) should in our view be sufficient. The law does not require that the notification be made in a specific form. However, the shareholder and the company will usually prefer a notification in writing, by e-mail or telefax.

The above-described notification duty does not apply where bearer shares have been issued as intermediated securities (Bucheffekten) and are deposited with, or registered in the main register of, a depositary (Verwahrungsstelle) in Switzerland.

b) Reporting Duty in Respect of Beneficial Owners of Shares of Companies Limited by Shares and Limited Liability Companies

In addition to the reporting obligation of holders of bearer shares, article 697j CO requires the acquirer of any shares, including bearer shares or registered shares of a company limited by shares and shares of a limited liability company (GmbH, LLC), who, acting alone or in concert with third parties, reaches or exceeds the threshold of 25% of the share capital or voting rights of the company, to report to the company within one month the first name, name and address of the beneficial owner of such shares. Any subsequent changes in such information (e.g. name or address change of the beneficial owner) have to be notified to the company as well. The law provides that the beneficial owner to be reported is the “individual person for whom the shareholder ultimately acts”. Accordingly, a legal entity may, at least in principle, not be reported as the beneficial owner. From the wording of article 697j CO it seems clear that intermediate companies do not have to be reported.

It is open whether a notification is required under article 697j CO under circumstances where the beneficial owner changes but no shares of the company transfer. The wording of article 697j CO seems to indicate that no notification is required under such circumstances. However, the purpose of the provision, which is to create transparency about the beneficial owners of significant interests in unlisted companies, suggests that a change of the beneficial owner has to be reported even absent a transfer of shares of the company, although, in practice, compliance with this notification duty may prove difficult since a shareholder may not know and may not have the means to ensure timely knowledge of all changes of the beneficial owner.

No reporting duty exists if the shares are in the form of intermediated securities deposited or registered with a depositary in Switzerland.

c) Duty of the Company to Keep a List of Bearer Shareholders and of Beneficial Owners; Retention Duty

Besides the reporting duties of acquirers of bearer shares and regarding beneficial owners of 25% or more of the share capital or voting rights of a company, the new law (article 697l CO) requires the company to keep a record of the bearer shareholders and beneficial owners reported to it. The list of bearer shareholders has to include for each individual person his/her first name, name, address, nationality and date of birth and for each corporate shareholder its corporate name, address and date of incorporation. The list of beneficial owners has to contain the first name, name and address of the individuals who have been reported to the company as beneficial owners.

These lists must be accessible at any time in Switzerland to at least one board member or officer domiciled in Switzerland. Any documents based on which a bearer shareholder or a beneficial owner has been registered on the list have to be retained for a period of ten years following the deletion of such shareholder or beneficial owner from the list. Following the dissolution and deletion of a company from the commercial register, the share register (Aktienbuch) as well as the list of bearer shareholders and of beneficial owners have to be retained for ten years and must be accessible in Switzerland during that period (article 747 para. 1 CO).

These obligations relating to the keeping of a list of beneficial owners and the retention of documents apply by analogy also to LLCs.

According to article 697k CO, in case of bearer shares, the general meeting of shareholders of a company may resolve that the reporting by holders of bearer shares shall not be made to the company itself but to a financial intermediary as defined by the Federal Act on Combating Money Laundering and Terrorist Financing (AMLA; such as banks, securities dealers, SIX SIS). If such resolution is passed, the board of directors of the company has to appoint the financial intermediary and inform the shareholders accordingly. The financial intermediary is responsible for keeping and updating the list of holders of, and beneficial owners in, bearer shares as well as retaining the corresponding documents.

d) Consequences in Case of a Breach of the Notification Duties

If an acquirer of bearer shares does not comply with its reporting duties or if a shareholder does not comply with its obligation to report the beneficial owner of 25% or more of the share capital or voting rights of a company, any membership rights attached to the shares (in particular voting rights) are suspended for as long as the shareholder has not made the required notifications. In addition to the suspension of the membership rights, any financial rights attached to the shares (in particular the right to receive dividends) may only be claimed by a shareholder if and when such shareholder has made the required notifications. The right to receive dividends will be forfeited if the shareholder does not comply with its notification duties within one month from the acquisition. If the shareholder subsequently makes the required notifications, the entitlement to future dividends will resurge as soon as, and for the period after, the notifications have been made. It is, however, unclear whether these severe consequences also apply if a shareholder does not notify changes in the name or address of the holder of bearer shares or of the beneficial owner. In our view, this should at least not be the case in respect of the forfeiture of financial rights, in particular considering that the law only provides for this consequence if a shareholder does not make the required notification within one month after the acquisition of the shares. The described consequences apply by analogy also to LLCs.

The new law also provides that the board of directors of a company (or the managers of an LLC) is responsible for ensuring that no shareholder exercises voting rights or receives any dividends if and for so long as such shareholder has not made the required notifications. The law does not set out whether the board of directors has any specific duties in relation to outstanding or incorrect notifications. It is recommended that the board of directors proactively informs any acquirer of shares of its notification duty and the potential consequences in case of non-compliance. However, the board of directors does in our view not have a duty to examine or verify the correctness and completeness of the notifications received from its shareholders, unless the board has a reasonable suspicion that a notification is incorrect or incomplete.

e) Further Amendments of the CO

To support the new transparency requirements, additional provisions of the CO have been amended with effect as of 1 July 2015:

• Share register. Any documents based on which a shareholder or usufructuary of registered shares has been registered in the share register have to be preserved for a period of ten years following the deletion of such shareholder or usufructuary from the share register. These documents must be accessible in Switzerland during that period.
• Conversion of bearer shares into registered shares. The possibility to convert bearer shares into registered shares is now explicitly provided for in the CO. The conversion of bearer into registered shares requires only the majority of votes cast (and not represented) in the general meeting of shareholders. The articles of incorporation may not provide for any higher quorum.
• Cooperatives (Genossenschaften). The revised law states that cooperatives have to keep a member register containing the first name, name (or corporate name) and address of each of their members. The member register must be accessible at any time in Switzerland to at least one board member or officer domiciled in Switzerland. Any documents based on which a member has been registered in the register have to be preserved for a period of ten years following the deletion of such member from the register.

f) Transitional Regime

The new rules have entered into force on, and have been applicable since, 1 July 2015. Holders of bearer shares who already owned bearer shares on 1 July 2015 have to comply with their reporting obligations by 31 December 2015; otherwise their financial rights accrued since 1 July 2015 will be forfeited. The question whether the same six-month transition period also applies in relation to membership rights (in particular voting rights) is unclear. Accordingly, it is recommended that holders of bearer shares who wish to exercise any membership rights by 31 December 2015 make a notification prior to such exercise. By contrast, the holders of registered shares of a company or shares of an LLC are not required to report the beneficial owner if the 25% threshold had already been reached or exceeded prior to 1 July 2015. The notification duty only arises if such shares are acquired and the threshold was reached or exceeded on or after 1 July 2015. Finally, the new law provides that any necessary amendments of the articles of incorproation or organizational regulations will have to be implemented within two years from the entry into force of the new rules, i.e. by 30 June 2017.

2) Two Practical Questions

a) Indirect Participations and Group Relations

Various questions arise in connection with indirect participations and companies with a wide shareholder base. For illustrative purposes, we assume a holding company (HoldCo) whose shares are held by numerous family members. Some family members hold their HoldCo shares directly, others through individual (family) holding companies. The family members may or may not be organized in a shareholders’ agreement. HoldCo plans to acquire a new subsidiary (TargetCo) which has issued bearer shares.

While the notification of HoldCo as the new bearer shareholder of TargetCo does not raise issues, the duty to report the beneficial owner is less straight forward where there is more than one shareholder in the acquirer. According to article 697j CO, the beneficial owner is the individual person for whom the acquirer ultimately acts. While unclear, this wording seems to imply that the beneficial owner somehow controls the acquirer. Further, article 697j CO (“den Vor- und den Nachnamen und die Adresse der natürlichen Person melden, für die er letztendlich handelt (wirtschaftlich berechtigte Person).”) seems to assume that only one individual (or a group of individuals acting in concert) is deemed the beneficial owner of the acquirer. Against this background, it can in our view be validly argued that the beneficial owner of HoldCo must be the individual (and only the individual) who ultimately controls HoldCo, either through the holding of more than 50% of the shares in HoldCo or by other means. The purpose of the new rules (prevention of money laundering and transparency), practicability considerations as well as legal certainty support this interpretation of the term “beneficial owner” in the CO as well. Thus, if each family member holds less than 50% of the HoldCo shares and does not otherwise control HoldCo, HoldCo does in our view not have a beneficial owner in the sense of article 697j CO. In such a case, no beneficial owner has to be reported. From the board of directors’ perspective it is recommended that a negative notification (in writing or even orally) be made, stating that there is no beneficial owner. If on the other hand 60% of the HoldCo shares were held by one family branch through a family holding company, such family holding would control HoldCo. However, whether or not a beneficial owner would have to be reported, would depend on whether any individual family member holds a controlling stake of more than 50% of the shares of the family holding.

The result of above analysis could be different if the Holdco shareholders (or a part thereof) are party to a shareholders’ agreement or similar arrangement. Whether such a shareholders’ or similar agreement will indeed alter the analysis will depend on the specific content of the agreement. Mutual rights of first refusal, purchase rights, drag-along and tag-along rights or typical minority rights should not change the analysis, i.e. the concerned individuals would not be deemed to jointly control HoldCo. The result may however be different if under the shareholders’ agreement an individual shareholder could require other shareholders to sell their shares if such individual decided to sell his HoldCo shares, or if a shareholder were able to exercise (or to direct the exercise of) the voting rights of other shareholders and thereby control HoldCo. The same would hold true if a shareholder is granted the contractual right to designate the majority of the members of the board of directors of HoldCo. A mere informal and one-time coordination of voting rights prior to a general meeting of shareholders does, however, not lead to joint control. In any event, an assessment of the specific facts and circumstances of the individual case will be necessary.

b) Group Companies Ultimately Held by a Listed Company

The new law explicitly states that the notification duties pursuant to articles 697i and 697j CO do not apply to the acquisition of shares in companies whose shares are listed on a stock exchange. The reason for this exemption is that transparency is ensured through different notification obligations that are applicable to listed companies (article 20 of the Federal Act on Stock Exchanges and Securities Trading (SESTA), article 663c CO). These exemptions must in our view apply regardless of whether all or only a portion of the shares are listed, because the notification obligations under SESTA apply to listed as well as non-listed shares.

While the wording of article 697j CO implies that the exemption only applies to the acquisition of shares in the listed company itself, it seems in our view justified to extend the exemption to the acquisition by the listed company (or an unlisted subsidiary of the listed company) of a controlling stake in another unlisted company, as the acquired company will fall into the scope of consolidation of the listed company. This interpretation is also covered by article 4 AMLA which provides that the financial intermediary does not have to determine the beneficial owner of a listed company or of a subsidiary that is majority-controlled by the listed company. If, however, a listed company acquires, directly or indirectly, a minority stake in another company, such purchase would not be exempted from the reporting duty pursuant to article 697j CO. The notification would in our view though not have to state the beneficial owner of the acquirer, but only the fact that the acquirer is a listed company or the subsidiary of a listed company.

Hans-Jakob Diem (hans-jakob.diem@lenzstaehelin.com)
Tino Gaberthüel (tino.gaberthuel@lenzstaehelin.com)