The legally binding criminal conviction of a CEO for complicity to fraud and criminal mismanagement is a price-sensitive fact that the issuer must disclose pursuant to ad hoc publicity requirements. Although a CEO is entitled to privacy protection, for example under data protection or employment law, the issuer‘s interest in compliance with the ad hoc publicity requirement under the listing rules takes precedence over the CEO‘s interest in privacy protection under data protection or employment law.
1) Introduction
On 31 March 2023, the Sanctions Commission of the SIX Group (SaCo) found that Poenina Holding AG (Issuer) had intentionally violated the ad hoc publicity requirements under Art. 53 of the SIX Listing Rules (LR) and Art. 5 of the SIX Directive on Ad hoc Publicity (DAH) by not disclosing the criminal conviction of its chief executive officer (CEO) in an ad hoc announcement in a timely manner. A fine of CHF 150,000 was imposed on Burkhalter Holding AG (Burkhalter), as the legal successor of the Issuer. Subsequently, Burkhalter filed an appeal against the decision of the SaCo with the arbitral tribunal of the SIX Group (Arbitral Tribunal). In its arbitral award dated 26 August 2024, the Arbitral Tribunal dismissed the appeal and ordered Burkhalter to pay the fine of CHF 150,000. Due to Burkhalter‘s waiver of appeal, the arbitral award became legally binding (cf. Arbitral Tribunal decision dated 26 August 2024, rec. 127).
2) Background
In June 2021, a legally binding penalty order was issued against the CEO of the Issuer for complicity in commercial fraud and multiple acts of criminal mismanagement. However, the offenses, which led to the criminal investigation and the penalty order against the CEO, were committed twelve years ago at the previous employer of the CEO. When the chairman of the board of directors of the Issuer (Chairman) learned of the penalty order, he informed the company‘s internal media office for ad hoc announcements in order to determine a communication strategy. This strategy foresaw not publishing an ad hoc announcement in connection with the criminal proceedings. In addition, the media office was ordered to confirm, when asked by journalists, that a penalty order has been issued against the CEO, but that the offenses were committed more than 12 years ago and that the conviction was not connected to the Issuer. Fifty days later, the media office received an email from a journalist stating that the CEO‘s criminal conviction would soon be published in the media. In response to this request, the Chairman immediately convened an extraordinary meeting of the board. At this meeting, the entire board was informed about the CEO‘s criminal conviction. The board decided (i) to express its trust in the CEO, (ii) to inform the journalist accordingly and (iii) to ensure the publication of an ad hoc announcement should the criminal conviction be reported in the Sunday press. It was also emphasized that any trading in the Issuer‘s shares by insiders was strictly prohibited (cf. SaCo decision dated 31 March 2023, rec. 38-46).
The news of the criminal conviction was widely reported in the media. The Issuer‘s share price subsequently fell by more than 13% with a sharp increase in trading volume. In response to these developments, the board met again and decided to immediately release the CEO and accepted his immediate resignation as delegate of the board. Subsequently, a new CEO was appointed. The Chairman also announced his resignation at the next Annual General Meeting. Finally, an ad hoc announcement was published after the board‘s meeting and the resolutions were communicated to the public (cf. SaCo decision dated 31 March 2023, rec. 47-52).
3) Transfer of rights and obligations in accordance with the Swiss Merger Act
First, the parties disputed if Burkhalter was liable for the Issuer‘s violation of the listing rules due to the Issuer‘s merger by incorporation. According to Art. 22 para. 1 of the Swiss Merger Act, in the event of a merger „all assets and liabilities of the transferring company are transferred by law to the acquiring company.“ A grammatical interpretation of Art. 22 para. 1 Swiss Merger Act shows that the terms „assets and liabilities“ refer only to the existing assets and liabilities in the balance sheet of the company. The deferred fine, for which no provision was made because the relevant sanction decision by the SaCo was only made after the merger, is not an existing liability that would be covered by the wording of Art. 22 para. 1 Swiss Merger Act. However, the interpretation of the law is not limited to the wording alone; rather, the meaning and purpose must also be considered when interpreting it. In the legal materials leading to the Swiss Merger Act (Botschaft zum Fusionsgesetz), it is stated that Art. 22 para. 1 Swiss Merger Act should have a broad scope of application (cf. BBI 2000, p. 4421) (emphases added):
„The rights and obligations of the transferring company are transferred to the assets of the acquiring company, including unknown rights and obligations (such as liabilities arising from tortious acts).“
Regarding the interpretation of Art. 22 para. 1 Swiss Merger Act, the Arbitral Tribunal concluded that for a universal succession under merger law, all rights and obligations of the transferring legal entity pass to the acquiring legal entity, whereby potential or latent liabilities — such as a sanction or a fine — are also included (cf. Arbitral Tribunal decision dated 26 August 2024, rec. 72-73).
4) (No) event in the issuer‘s field of activity
Further, the parties disputed whether the CEO‘s criminal conviction constituted a fact that occurred in the Issuer‘s sphere of activity pursuant to Art. 53 para. 1 LR in conjunction with Art. 1 DAH (emphases added):
Art. 53 para. 1 LR
„The issuer must inform the market of any price-sensitive facts which have arisen in its sphere of activity. Price-sensitive facts are facts whose disclosure is capable of triggering a significant change in the market prices. A price change is significant if it is considerably greater than the usual price fluctuations.“
Art. 1 DAH
„This Directive details the information on the obligation of issuers to disclose price-sensitive facts (ad hoc publicity pursuant to Art. 53 LR). The purpose of ad hoc publicity is to ensure that issuers provide the public with true, clear and complete information on significant events arising in the course of their business activities.“
The Issuer argued that the criminal conviction of its CEO did not constitute a price-sensitive fact, because (i) the mentioned penalty order was not related to a fact arising from the Issuers own sphere of activity, i.e., the offenses were committed 12 years ago with another employer, and (ii) the relevant penalty order had no direct internal effect on the Issuer‘s business. However, in the opinion of the Arbitral Tribunal, the element „in the issuer‘s field of activity“ makes it clear that events at the Issuer or with an effect and relevance for the Issuer are subject to the ad hoc publicity. This includes a criminal conviction for complicity to fraud and criminal mismanagement by a member of the Issuer‘s executive management, even if the offenses were committed 12 years ago with another employer. Based on general experience, a criminal conviction for complicity to fraud and criminal mismanagement is capable of influencing and changing the perception and assessment of investors regarding respectability and trustworthiness, particularly regarding the management of the Issuer. The issuance of a penalty order against the CEO thus constitutes an event that triggered a disclosure requirement at the latest when this penalty order became legally binding (cf. Arbitral Tribunal decision dated 26 August 2024, rec. 84-91).
A criminal conviction of the CEO for complicity to fraud and criminal mismanagement is also relevant to the stock price, as it is likely to have a significant impact on stock market prices. This is because the trustworthiness of a company is very closely linked to the trustworthiness of its executive management (cf. Arbitral Tribunal decision dated 26 August 2024, rec. 92-97).
It should be noted that there are also events that clearly do not occur within the issuer‘s sphere of activity, but that nevertheless have an impact on the issuer. If an issuer learns, for example, of a planned merger between its largest competitors, this will certainly have a significant impact on the business activities or market position of the issuer. However, it is generally not up to the issuer to inform the public about the planned merger between the competing companies by means of an ad hoc announcement.
5) Confidentiality of the penalty order as a publication obstacle
Finally, it was disputed whether the Issuer in the case at hand could have refrained from disclosing the CEO‘s criminal conviction for reasons of data and privacy protection. Generally, a CEO is entitled to privacy protection based on data protection and employment law. However, this entitlement is not absolute but must be weighed against the Issuer‘s interest in fulfilling its ad hoc disclosure obligations under the Listing Rules. According to the Arbitral Tribunal, the public interest in compliance with the disclosure requirements under the Listing Rules carries considerable weight, as it is designed to prevent insider offenses from being committed and to help ensure that transparent and fair conditions prevail on the Swiss stock exchange. Thus, in the case at hand, the interest of the Issuer in fulfilling its duty of ad hoc publicity takes precedence over the data or employment law protection of the CEO‘s privacy (cf. Arbitral Tribunal decision dated 26 August 2024, rec. 98-101).
6) Conclusion
In summary, it should be noted that a criminal conviction of the CEO for complicity to fraud and criminal mismanagement is a price-sensitive fact in the Issuer‘s sphere of activity, because (i) the person concerned, a member of the executive management, plays a central role for the business activity and the reputation of the Issuer in the market, and because (ii) a criminal conviction for complicity to fraud and criminal mismanagement, irrespectively of whether the offenses were committed 12 years earlier with another employer, significantly undermines the trust of investors and market participants in the proper corporate governance and integrity of the person of the CEO, and, subsequently, it undermines the trust in the Issuer.
Pascal Hodel (pascal.hodel@nkf.ch)