Overhaul of Swiss Corporate Governance Regime for Listed Swiss Companies Following Approval of the Minder Initiative

On 3 March 2013 a constitutional amendment was approved by the Swiss voters as proposed by the Minder say-on-pay initiative. By the end of May 2013, the Federal Office of Justice is expected to publish a draft implementing ordinance, which will be enacted on 1 January 2014. The implementing ordinance will overhaul the Swiss corporate governance regime for listed Swiss companies pending the enactment of a revised statute of law.

By Ralph Malacrida (Reference: CapLaw-2013-10)

1) Implementing Ordinance to Become Effective on 1 January 2014

On 3 March 2013, in a nation-wide vote the Swiss decided to amend the Constitution as proposed by the Minder constitutional initiative (Initiative). Pending the enactment of the revised law, the new constitutional principles will be implemented by a governmental ordinance, which must come into effect no later than 3 March 2014.

Based on comments of the Minister of Justice, the expected timetable for the issuance of the implementing ordinance is as follows:

  • End of May 2013: the Federal Office of Justice will publish a first draft of the implementing ordinance.
  • June—August 2013: public hearings on the draft implementing ordinance.
  • September—November 2013: the Federal Office of Justice will review any comments made in the public hearings in detail and produce a final form of the implementing ordinance.
  • 1 January 2014: the implementing ordinance will enter into force.

The key features of the new constitutional regime to be implemented by the Government’s ordinance in a first step, and by the legislator through a bill of law in a second step, are set out below.

2) Say on Pay

a) Shareholders’ Vote on Compensation

The aggregate compensation (cash and value of compensation in kind) of the board of directors, the senior management and the advisory board will be subject to approval by the general meeting of shareholders. The shareholders will have to vote on the total compensation of each of the board and the senior management as a group. No approval will be required for the compensation packages of individual directors or senior executives.

The Initiative is silent on the shareholders’ approval conditions. In particular, the Initiative does not specify whether the approval shall be given in advance or whether it implies a ratification of payments earned in the past. In this regard, the implementing ordinance is expected to contain more detailed rules. In addition, the Initiative does not expressly state that the shareholders’ vote shall be binding. This has prompted the question whether advisory votes should be permissible. At present, the majority view of legal writers is that advisory votes would not be in line with how the Initiative was presented when it was put to the national vote. However, proposals were made by legal commentators which in effect delegate the rule making power to the shareholders that would have to define the relevant rules in the articles of association.

b) Amendments to Articles of Association

The Initiative requires that the articles of association contain rules for directors and senior managers on the amount of credits, loans, and retirement benefits. In addition, the articles must specify any incentive and participation plans, the numbers of positions of directors or senior managers outside the group as well as the duration of the senior managers’ employment contracts.

Legal writers pointed out that the incorporation of retirement, incentive and participation plans in the articles of association would not be feasible because such plans are laid down in lengthy documents setting out detailed rules. If these rules were to be taken up in the articles of association, each change of a plan would require a notarized resolution of the general meeting of shareholders. Therefore, the implementing ordinance is expected to provide that the articles shall contain the basic parameters only.

3) Elections of Board Members

According to the Initiative the general meeting of shareholders shall elect the chairman of the board of directors, and individually each member of the board and the board’s compensation committee, as well as the independent proxy.

4) Contracts with Members of the Board and Senior Management

The Initiative prohibits severance payments (golden handshakes) or similar payments, advance payments, special bonuses or awards for buying or selling companies, and any additional employment or consulting agreements involving another company in the group. In addition, the management of a company may not be delegated to a legal entity.

The Initiative does not define “severance payments”, “similar payments” or “advance payments”. The implementing ordinance is expected to clarify whether indirect severance payments taking the form of extended notice periods or payments as consideration for non-compete obligations will be permissible if they are based on valid grounds. As far as prohibited “advance payments” are concerned, the common view is that this involves payments under an employment contract that are made in advance as opposed to signing bonuses, which usually compensate the employee for losses suffered when leaving his former employer.

The scope of the new requirement that there be no additional employment or service agreements between a director or senior manager and any group company (other than the listed Swiss company) remains undefined. The purpose of this restriction is to prevent agreements between directors or senior managers and non-listed companies within the group to circumvent the shareholders’ approval requirement, which only applies to listed Swiss companies. This purpose could be met by submitting compensation packages for approval to the shareholders on a consolidated basis, in which case a prohibition of multiple contracts would seem unnecessary. This point needs clarification by the governmental ordinance as well.

The Initiative does not elaborate on the effects the implementing law will have on existing agreements, including those containing contractual rights of senior management to receive golden handshakes, severance payments, etc. Some views are that existing contracts should not be affected because the Initiative does not enter into force retroactively, whereas others point out that the new law will apply to all existing agreements as of the time it becomes effective with the result that contractual provisions contravening the new law will be invalid.

5) Preparation and Conduct of General Meeting of Shareholders

a) Electronic Voting

The Initiative further prescribes that shareholders may vote electronically from a remote location. Legal commentators have pointed out that the introduction of electronic voting as envisaged by the Initiative should be optional because setting up the required voting systems could result in considerable costs so that the shareholders of each listed Swiss corporation should be able to weigh these costs against the possible upside of remote access to voting. Whether or not the shareholders should have a say on this will have to be addressed in the implementing ordinance.

b) Abolition of Corporate Proxies

The Initiative prohibits corporate proxies and representation of the shareholders by depositary banks. In consequence, proxies will have to be voted by the independent proxy who will have to be elected by the shareholders. Proxy cards, proxy statements and AGM notices will have to be amended accordingly.

c) New Agenda Items

Upon the entry into force of the new law, the (non-recurring) item to be put on the agenda involves a general revision of the articles of association to include rules on the amount of credits, loans and retirement benefits, incentive and participation plans for directors and senior managers, the number of positions directors or senior managers outside the group, as well as the duration of the senior managers’ employment contracts.

Further, annual elections as a new standard item on the agenda of an AGM will involve the election of the chairman of the board of directors, and individually each member of the board and of the board’s compensation committee as well as the independent proxy. The articles will have to be amended to that effect as well.

Finally, the approval of the total compensation for the board of directors, the senior management and the advisory board (if any) will have to be included as a standard item on the agenda of each AGM.

d) Pension Funds

The Initiative states that pension funds must vote in the interests of their members and disclose how they voted. The current view is that only pension funds regulated by Switzerland’s social security laws will fall within the scope of this requirement. It remains to be seen how the Government works out the details of how such pension funds must ensure that shares held by them are voted at a shareholders’ meeting without imposing undue administrative burden.

e) Criminal Sanctions

Contraventions of any requirements introduced by the Initiative as implemented by law shall be punishable by imprisonment for a term of up to three years and a fine of an amount up to the equivalent of six annual salaries. There is some controversy amongst legal scholars whether or not criminal sanctions may be introduced through the issuance of an ordinance by Government as opposed to a statute of law passed by the legislator.

f) Next Steps

The Initiative’s language is vague in many respects and requires implementing legislation. Therefore, the short term consequences of the Initiative remain uncertain pending publication of the draft implementing ordinance by the Federal Government at the end of May 2013. The definitive (long-term) consequences will become clear only after a bill of law will be drafted and adopted in Parliament. The new law will then be subject to a possible referendum, which may lead to a nation-wide vote again if this is requested by 50,000 Swiss citizens.