This year’s AGM season is marked by the recent entry into force of the Swiss Corporate Law Reform and the need for companies to adapt their articles of association and decide whether and how to make use of new concepts such as the capital band introduced by the new law. While it is too early for a definitive assessment of market trends and practices, the authors will share some initial observations. An in-depth review and analysis of the 2023 AGM season will follow in a later issue of Caplaw.
By Daniel Raun / Thomas U. Reutter (Reference: CapLaw-2023-03)
1) Introduction
After years in the making, the Swiss Corporate Law Reform (the Reform) has finally entered into force, amending the provisions of the Code of Obligations (CO) with effect from 1 January 2023. As a result, the focus of public companies, proxy advisors and other interest groups during this year’s annual general meeting (AGM) season lies on how companies implement the requisite changes and to what extent the additional possibilities provided by the revised law are adopted in practice.
The Reform has also prompted economiesuisse to revise the Swiss Code of Best Practice for Corporate Governance (SCBP). The updated SCBP was published on 6 February 2023. It marks the first revision of the SCBP since 2014, when the SCBP was amended in the wake of another major change of law – the entry into force of the Ordinance against Excessive Compensation in Listed Companies (OaEC) following the approval of the popular “Minder” initiative. For the most part, however, the 2023 version of the SCBP merely reflects the current status quo of the new corporate law.
2) Need for Action
For most if not all companies the Reform entails the most comprehensive overhaul of the articles of association in almost ten years, since the OaEC became effective. Incidentally, the provisions of the OaEC have been transposed to the CO as part of the Reform with some, albeit minor, changes, and the OaEC has been repealed.
The Reform provides for a two-year period until 31 December 2024 for companies to conform their articles of association and other constitutional documents such as the organizational regulations to the revised CO. Once this transition period ends, mandatory provisions of the CO will apply and will prevail in case of any discrepancies. This for example applies to the new thresholds for minority shareholders to have items included in the agenda of general meetings or to request an extraordinary general meeting, both of which have been lowered (to 0.5% and 5%, respectively, of the share capital or voting rights). The implementation of changes such as these is generally not very complex. However, companies may consider whether they want to simply implement the legal minimum or provide for more shareholder-friendly solutions, e.g., by further lowering the aforementioned thresholds in their articles of association.
Other changes, such as the new capital band (replacing the former authorized capital, but conferring on the board of directors the authority to not only increase but also decrease the share capital) and the possibility to provide for virtual general meetings in the articles of association are not as straight-forward to implement, either from a technical perspective and/or because of restrictions imposed by proxy advisors. Companies do not only have to decide whether to make use of the new possibilities provided by the revised law at all but will also have to determine the parameters, such as the amount and duration of the capital band; to this end, they will have to decide whether to impose any restrictions that go beyond the law to comply with proxy advisors’ guidelines. Finally, from a timing perspective, companies have to decide whether they want to adopt some or all of the changes at this year’s AGM or wait until 2024 when there is more visibility as to market practices and more guidance from stakeholders such as proxy advisors.
3) Initial Trends
Only a minority of Swiss public companies has held their AGM or published their AGM invitations at the time of writing of this article. Nevertheless, while it is too early to predict where market practice will be headed exactly, some trends can be observed already at this early stage.
a) Number of agenda items to implement Reform
There was quite some debate among scholars whether the changes to the articles of association needed or desired in the context of the Reform can be submitted in just one agenda item to shareholders or whether a more granular approach with several agenda items is warranted. Based on the invitations published so far, it seems that most companies opt for several agenda items. Often companies single out agenda items that need a higher majority (two thirds of the votes present or represented) such as the introduction of a capital band or that may be particularly controversial such as the possibility of conducting a virtual shareholder meeting.
b) Capital Band
As of the time of writing this article, approximately one third of the companies who have published their AGM invitations have proposed to their shareholders the introduction of a capital band. There are several reasons why this number is not higher. Many companies have existing authorized capital that will not expire until 2024. Although the authorized capital has been replaced by the capital band as part of the Reform, any provisions regarding authorized capital resolved before 1 January 2023 remain valid until the expiry thereof. Companies who introduced or renewed their authorized capital at the 2022 AGM therefore typically are in no urgent need of the capital band unless they have since issued shares from authorized capital and deem the remaining amount insufficient. Other companies have decided against proposing the introduction of the capital band despite their authorized capital expiring in 2023 because they do not expect that they will need it and/or because they intend to observe how market practice develops and potentially introduce a capital band at a later point in time.
Among the companies who did propose to their shareholders a capital band, it is noteworthy that only one opted to go for the maximum upper limit allowed by law (50% above the existing share capital). Typically, companies set the maximum increase at 10%, which reflects proxy advisors’ recommendations for non-preemptive share issuances, particularly under ISS’s proxy voting guidelines. The lower limit of the capital band has typically been set at -5% to -10%, although in two instances companies have proposed capital band provisions that do not allow for a capital reduction at all, making said provisions akin to authorized capital under the old law.
c) Virtual and Hybrid General Meetings and General Meetings Abroad
The new law provides for the possibility of virtual general meetings, i.e., general meetings held electronically without a venue. It also allows for general meetings to be held abroad. However, the articles of association need to explicitly provide for such possibilities.
The prospect of Swiss public companies holding virtual general meetings has caused mixed reactions. GlassLewis has welcomed the facilitation of virtual participation by shareholders, subject to there being clear procedures in case of virtual-only meetings. ISS is more reluctant and will consider proposals for virtual meetings on a case-by-case basis, taking into account whether an authorization is restricted in time, among other things. The SCBP also provides for a moderate stance whereby general meetings can be held purely virtually if it makes participation easier for shareholders and the orderly and safe conduct of the meeting is not jeopardized. Ethos Foundation, on the other hand, has been particularly vocal in its opposition of virtual-only general meetings, calling it a threat hanging over this year’s AGM season (see https://www.ethosfund.ch/en/news/ethos-opposes-the-possibility-of-holding-100-virtual-agm).
Despite Ethos’ disapproval and some reluctance on the part of other proxy advisors, many companies have proposed amendments to their articles of association that will authorize them to hold general meetings virtually. Novartis, traditionally one of the first companies and the first SMI member to hold its AGM, has limited the possibility to hold general meetings virtually to five years in an apparent attempt to address the concerns of proxy advisors. After the lapse of the five-year period shareholders can decide again whether to extend the authority.
By contrast to the high rate of adoption of virtual general meetings, only few companies have proposed amendments to their shareholders to authorize the holding of general meetings abroad.
d) Other Changes
It is noteworthy that almost all public companies have made proposals to their shareholders to at least partially adapt to the new law. Aside from the capital band and the possibility of virtual general meetings, however, these changes are for the most part uncontroversial and merely serve to align articles of association to mandatory provisions of the revised law, to align terminology or to update outdated references to statutory provisions.
4) Outlook
It remains to be seen whether these initial trends will continue throughout the 2023 AGM season and set standards for Swiss listed companies generally, especially those who have postponed the more far-reaching decisions to 2024. A future issue will provide a comprehensive review and analysis of the 2023 AGM season and how companies have adapted to the new law.
Daniel Raun (daniel.raun@advestra.ch)
Thomas U. Reutter (thomas.reutter@advestra.ch)