One of the main objectives of the corporate law reform was to strengthen shareholders’ rights. And indeed, the reform will, albeit to a limited extent, strengthen the rights of shareholders, and those of minority shareholders’ in particular, in a number of ways. Most notably, certain threshold requirements for the exercise of minority rights are lowered, while in turn a two-thirds majority vote requirement will be introduced for certain important resolutions. Perhaps most notably, information and participation rights for minority shareholders in both listed and non-listed companies are made more accessible and to some extent likely more effective.

By Remo Decurtins / Jonas Hertner (Reference: CapLaw-2020-54)

This article outlines the upcoming changes to Swiss corporate law with respect to the protection of the rights of shareholders generally and minority shareholders more specifically.

1) Changes to Information and Participation Rights

a) New Threshold Requirements

Several threshold requirements for the exercise of minority rights will be lowered as a result of the reform. Unlike the threshold requirements in the current law, which is based on capital alone, the new threshold requirements are calculated based on capital or voting rights. A distinction is generally made between listed and non-listed companies:

– The right to convene a General Meeting will require 5% of capital or voting rights in listed companies and 10% in non-listed companies. Current law requires 10% of capital for all companies.

– The right to demand that an item be placed on the agenda of a General Meeting will require 0.5% of capital or voting rights or participation capital. Current law requires a stake with a nominal value of at least CHF 1 million or 10% of capital for all companies.

– The right to ask a court to order a Special Audit (Special Investigation) will require 5% of capital or voting rights in listed companies and 10% in non-listed companies. Current law requires 10% of capital for all companies.

In turn, the right to inspect the company ledgers and business correspondence will require 5% of capital or voting rights. No threshold requirements for the exercise of this right exists in current law but inspection is made subject to approval by the General Meeting or the Board of Directors. Under the new law it will be for the Board of Directors alone to grant the exercise of this right.

Finally, the threshold requirement for the right to apply to a court to request the dissolution of the company will remain at 10% of capital or voting rights (article 736 (1) nCO; whereas currently law requires 10% of capital). The same is true for the existing right to request that an ordinary audit be conducted (article 727 (2) CO).

b) Changes to Information Rights

The reform will introduce several changes to rights to receive information from the Board of Directors. In non-listed companies, shareholders (or a group of shareholders) with at least 10% of capital or voting rights may request that the Board of Directors provide information in writing within four months of the request. If the Board of Directors denies the request it must give reasons for doing so in writing (the right can be exercised during a General Meeting but also throughout the year; article 697 (2) nCO). This change, allowing shareholders to request information from the company at any time, is likely to affect the strategies of shareholder claimants with interests opposed to the those of the Board of Directors.

As in current law, the right to information will remain subject to overriding interests of the company (article 697 (4) nCO). The legislative message (“Botschaft”) noted in particular that shareholders shall be entitled to receive additional information on the compensation of members of the Board of Directors and of the management to the extent such information is required for the exercise of shareholders’ rights.

A four-months’ deadline also applies with respect to the right to inspect the company ledgers and business correspondence. If the Board of Directors denies a request for inspection, shareholders may apply to a court to enforce the right. Such action must be brought within 30 days of the denial of the right (article 697b nCO).

c) Changes to Participation Rights

Under the current regime, one or more shareholders representing together at least 10% of capital can request that a General Meeting be convened. If the Board of Directors fails to grant such a request within “reasonable time“, defined as a maximum of 60 days, the shareholder or group of shareholders can ask a court to order that a General Meeting be convened (article 699 (3) and (5) nCO). 

d) Changes to the Special Audit

The reform will rename the “Special Audit” in “Special Investigation“. Along with this, seemingly irrelevant, change in name come two changes in substance, which may well alter the way the Special Investigation is going to be used by shareholders.

First, a new article 697d (2) will specify and thus attempt to clarify the scope of a Special Investigation: the request that a Special Investigation be ordered by a court, in the event that the General Meeting rejected such request, may cover all questions, which were the subject of a prior request for information or inspection or which were addressed in the General Meeting in the course of the deliberations on the request for the Special Investigation, to the extent the response to these questions is necessary for the exercise of shareholders’ rights.

Second, and more importantly, the reform will do away with the requirement under current law that the shareholder requesting a Special Audit must credibly establish that the company or the shareholders have incurred damage. Instead, a new Article 697d (3) nCO will require merely that the requesting shareholder credibly demonstrates that a violation of the Articles of Association or of statutes is capable of causing damage to the company or to shareholders. It will therefore be possible for a shareholder to request a Special Investigation as a preventive measure, before a potential damage materialised.

The remainder of the provisions currently governing the Special Audit will only undergo minor changes primarily to reflect changes in the wording in related provisions.

e) Removal of the Auditor for Good Cause

Under the current law, the General Meeting was explicitly allowed to remove the auditor at any time with immediate effect (article 730a (4) CO). The reform will restrict the General Meeting’s freedom to do so, only allowing a removal of the auditor for good cause. The change will mean that article 404 CO no longer applies to the legal relationship between the company and the auditor. The auditor in turn will still be allowed to resign at any point.

In the event of a removal of the auditor for good cause, the respective reasons will have to be disclosed in the notes to the accounts (article 959c (2) (14) CO).

This change is rooted in the legislator’s aim to increase Corporate Governance requirements by fortifying the position of the auditor in situations where a majority of shareholders may have an incentive to remove the auditor against the interests of a minority, creditors and other third parties who may rely on the auditor.

In light of a growing focus on the work of auditors it will be interesting to observe how this change is going affect the relationship between company and auditor in practice and how case law will develop with respect to such good cause required for dismissal and to the liability of the auditor generally.

2) Other Relevant Changes

In addition to the changes to information and participation rights, the reform will introduce a number of further changes that will or may also affect the position of minority shareholders.

a) Liability Actions

The reform will significantly alter certain material and procedural aspects of liability actions. Most notably:

– Subordinated claims against the company will not be taken into consideration for the calculation of damage in a liability action (article 757 (4) nCO). This change is intended to correct the jurisprudence of the Federal Tribunal requiring that subordinated claims constituted damage to the company, which sometimes complicated the taking of certain restructuring measures. This provision is likely to be the subject of litigation given that subordinated claims against a company do result in actual damage to the company.

– Shareholders who opposed a resolution to grant discharge will be able to file a liability action within twelve months (previously six months). This deadline will be interrupted if a court is asked to order a Special Investigation, pending the court proceeding and, if ordered, the Special Investigation (article 758 (2) nCO). This change is unlikely to change the current practice of potential claimants taking steps to interrupt the running of the prescription period if necessary.

– The relative prescription period (ie the period starting on the date on which the person suffering damage learned of the damage and of the person liable for it) will be shortened from five years under the current law to three years (article 760 (1) nCO), while the absolute prescription period remains ten years. As is the case under the current law, the absolute prescription period starts on the date on which the harmful conduct took place or ceased. Both relative and absolute prescription periods are interrupted if a court is asked to order a Special Investigation, pending the court proceeding and, if ordered, the Special Investigation. This change, too, is unlikely to change the current practice of interrupting the prescription period if necessary.

– The General Meeting will be able to compel the company to initiate a liability action (article 756 (2) nCO). When doing so the General Meeting may entrust the Board of Directors or an agent with conducting the litigation. This provision in particular is likely to raise various questions in practice, such as when the agent’s assessment of the merits of the contemplated lawsuit differs from the assessment that led the General Meeting to compel an action.

b) Action for the Return of Benefits

The reform will expand in a number of ways the existing obligation to return benefits that were unduly received (article 678 et seq. CO):

– The scope of the obligation will be expanded to include not only shareholders and members of the Board of Directors but also any actual and de facto governing officer (article 678 (1) nCO).

– No consideration will be given to the financial state of the company. Thus, an obligation to return unduly received benefits may also arise in companies that are in good or very good financial shape. This change stresses the importance of the duties of care and loyalty of members of the Board of Directors towards the company. The test under the new law will ask whether there was a clear discrepancy between performance and consideration with respect to a benefit paid out.

– In a further change to the provisions governing the return of benefits a general reference to article 64 CO regarding the obligations of an unjustly enriched party is made. As a result, the enriched party may argue that there is no obligation to return benefits if the recipient can establish that he or she is no longer enriched at the time the claim for restitution is brought, unless he or she alienated the benefits in bad faith or in the certain knowledge that he or she would be bound to return them.

c) Cost Allocation in Court Proceedings regarding liability or
restitution claims

Pursuant to a new article 107(1bis) Code of Civil Procedure, which will enter into force on 1 January 2021, a court will have discretion to allocate costs of the procedure (court costs and legal fees) in the event of a rejection of an action based on corporate law, which seeks damages on behalf of the company, to the company and the claimant. This provision will therefore allow the court to deviate from the loser pays principle set out in article 106 (1) Code of Civil Procedure and distribute such costs between the company and the claimant, somewhat reducing the cost risk for the claimant.

d) Changes affecting the powers, organization and execution of
General Meetings

In its attempt to improve the Corporate Governance of both listed and non-listed companies, the reform will introduce a set of changes affecting the powers, organization and execution of General Meetings. Some of these changes will directly or indirectly strengthen the position of the individual shareholder:

– The resolution to delist a company will require a two-thirds majority in the General Meeting (article 698 (2) (8) and 704 (1) (12) nCO). Under the current law the delisting decision is for the Board of Directors to take. The change will give shareholders an opportunity to challenge the respective resolution by the General Meeting.

– The Board of Directors will need to grant shareholders a period of at least ten days between the distribution of the annual report before closing the agenda and convening the General Meeting (article 699a nCO). This change is intended to give shareholders time to assess whether to request additional agenda items on the basis of the annual report. The annual report and related materials may be made available electronically.

– The Board of Directors will have to comply with increased requirements regarding proposals submitted to the General Meeting. Most notably, reasons and background information must be provided together with the proposals (see article 699b (3), 700 (2) and (3) nCO).

Further changes include the confidentiality of votes submitted through an independent representative of voting rights towards the listed company up until 3 working days before the respective General Meeting (article 689c (5) nCO) (the independent voting rights representative must give account to the General Meeting about his communication with the company), and the right of shareholders to access the minutes of a General Meeting within 15 days in listed companies and within 30 days in non-listed companies (article 702 (4) and (5) nCO)¹. 

e) Conclusion

The corporate law reform emphasizes the importance of the General Meeting within the system of checks and balances of a company. One of the main objectives of the reform was the strengthening of the rights of shareholders and good Corporate Governance more generally. Indeed, probably most of the changes in one way or another are aimed at protecting the shareholders’ interests.  

In several ways, the reform is specifically aimed at strengthening the rights of minority shareholders, the guiding principle being the realisation of “shareholders’ democracy“. A functioning democracy on the one hand requires that everyone, no matter the size of the stake, has a say but on the other hand it also requires that majority decisions are accepted and implemented. Similarly, in determining the “right” level of minority rights in a company, a balancing must be struck between what rights should be granted to an individual shareholder and where such rights should be limited, for the sake of operational efficiency of a company (which, in turn, should benefit all shareholders). Thus, numerical thresholds for the exercise of shareholders’ rights must not be prohibitively high but must not be too low either. 

Against this background, it is understandable and probably a good thing that in terms of protecting minority rights the reform is not a revolution. Rather, it is the result of a balancing act of the function of certain shareholders’ rights and the corresponding threshold requirements. Still, as a general statement, one can note that the new corporate law will be more shareholder and, specifically, minority shareholder friendly than the current one. As described in some detail in this article, several thresholds for information and participation rights were lowered, certain features such as a “special audit” or an action for reimbursement according to article 678 CO are facilitated in order to make it more practical and accessible, and some of the hurdles for shareholder lawsuit are lowered. It remains to be seen whether in practice this reform will have a noticeable effect, and in particular, whether it will, as some groups seem to expect, lead to more shareholder activism and shareholder lawsuits. 

Remo Decurtins (remodecurtins@quinnemanuel.swiss)
Jonas Hertner (jonashertner@quinnemanuel.swiss)

¹ For further information on changes affecting the General Meeting please refer to our colleagues’ contributions in this issue.