Corporate Law Reform

On 28 November 2014 the Federal Council presented a preliminary draft (Vorentwurf) of the corporate law reform and started the consultation procedure which runs until 15 March 2015. The main proposals are:

  • Implementation of the Ordinance against Excessive Compensation in Public Companies into the Code of Obligations (with tighter rules on certain points, e.g. a prohibition of prospective say-on-pay votes and of compensation for non-compete covenants over 12 months).
  • A target gender quota of 30% for the board of directors and the executive committee of listed companies based on a comply or explain approach.
  • A duty for major companies in the exploitation of natural resources to disclose payments to public authorities.
  • Numerous changes in traditional corporate law, such as the permissibility of a share capital in foreign currency, a minimum par value below one cent, a capital band allowing more fl exibility to increase and reduce the share capital, clarification of the requirements for distributions from capital reserves and interim dividends, and the enhancement of shareholders’ rights and remedies.

by Matthias Wolf (Reference: CapLaw-2015-4)

After the Federal Council had issued a draft bill for a reform of corporate and accounting law already in 2007, the accounting law part of the bill was carved out and entered into force in 2013. The discussion of the corporate law part, in contrast, was delayed, and with the adoption of the popular initiative against excessive compensation (Minder Initiative) on 3 March 2013 the issue of executive compensation became the focus of the legislative process. The Ordinance against Excessive Compensation in Public Companies (Excessive Compensation Ordinance), which was adopted to implement the Minder Initiative and has been in force since 1 January 2014, must now be transformed into a formal law. This is the background of the submitted preliminary draft (Vorentwurf) for a reform of corporate law (Draft). The Draft was submitted together with an explanatory report.

The Draft covers three broad topics: first, compensation rules, i.e. the implementation of the Excessive Compensation Ordinance into the Code of Obligations (and other laws); second, new proposals for a gender quota and disclosure obligations for companies in the natural resources sector (which are not really part of corporate law, but nonetheless included in the Draft); and third, changes in traditional corporate law, which in part had already been included in the draft of 2007 and which primarily relate to the areas of capital and legal reserves, corporate governance and corporate restructurings.

1) Say on pay and other compensation rules

The Draft is to replace the Excessive Compensation Ordinance, which was enacted as an interim solution. In substance, the provisions of the Excessive Compensation Ordinance have by and large remained the same. However, the Draft provides for some stricter rules. The main differences are the following:

  • Prospective shareholder say-on-pay votes (so-called budget votes) on variable  compensation are no longer permissible. Shareholders are to vote on variable  compensation only after the annual accounts have become available. Whether  or not an additional advisory vote on the compensation report is held is irrelevant.  Should this proposal become law, the many companies that have introduced a prospective  model of say-on-pay approval votes would have to amend their approval  procedures and articles of incorporation.
  • The articles of incorporation must include a maximum ratio of variable to total compensation for the members of the board and the executive committee.
  • Sign-on bonuses are only permissible if they are to compensate clearly demonstrated financial disadvantages incurred in connection with a change of employment.
  • Compensation for non-compete covenants may only be paid if the non-compete obligation is commercially justified and the consideration is in line with market standards. Non-compete covenants exceeding 12 months are not considered to be commercially justified and may not be compensated.
  • As regards the maximum number of external mandates permitted to be held by  members of the board and the executive committee, all mandates in comparable  functions in enterprises with commercial objectives must be covered in the future.  This means that also external management functions (which are currently not subject to the maximum under the Excessive Compensation Ordinance) are covered.  With respect to mandates in foundations and associations, the determinant factor  will likely be whether these qualify as enterprises with a commercial objective, which  would typically not be the case. External mandates must be disclosed in the compensation report.
  •  The compensation report must individually specify the compensation received by  each member of the board and the executive committee (the Excessive Compensation Ordinance requires for the executive committee only the disclosure of the aggregate  amount and the highest amount paid to an individual member).

2) Gender quotas and disclosure obligations for companies exploiting natural resources

The Draft provides for a target quota of 30% for the representation of each gender in the board and in the executive committee of major public companies. It is applicable to public companies exceeding the thresholds relevant for an ordinary audit (which is almost always the case for public companies). If they do not achieve the target quota of a 30% representation of each gender after a transition period of five years, they must explain in the compensation report the reasons for the underrepresentation and the actions undertaken to promote gender diversity. Thus, the Draft goes beyond the revised Swiss Code of Best Practice for Corporate Governance, which recommends a representation of both genders in the board but does not require a specific quota.

In accordance with the EU Directives 2013/34 and 2013/50, which also provide for transparency obligations for companies exploiting natural resources, the Draft requires companies active in such business and being subject to an ordinary audit to disclose payments exceeding CHF 120,000 to public authorities. Companies solely active in commodity trading are not subject to this requirement yet, but the Federal Council may broaden its scope to also encompass commodity traders in the event of concerted international efforts.

3) True corporate law changes

The changes proposed in the area of traditional corporate law primarily relate to the capital structure, measures for the improvement of corporate governance, including the strengthening of shareholder rights and remedies and shareholders’ meetings, and to corporate restructurings and insolvency.

a) Capital, capital changes, legal reserves, and distributions
The proposed changes include in particular:

  • The share capital may also be denominated in foreign currency, which resolves a number of inconsistencies between the accounting rules, which already now allow accounting in (convertible) foreign currency, and corporate law.
  • The minimum par value of one cent is abolished; shares may have any lower par value above zero. This would facilitate share splits. Shares that are only paid-up in  part are no longer permissible.
  • The rules regarding (intended) acquisitions of assets, which currently necessitate a somewhat cumbersome qualified procedure for incorporations and capital increases with a number of potential legal pitfalls, are to be abolished.
  • Introduction of a capital band, i.e. an authorization of the board for a maximum of five years to increase and reduce the share capital within an upper and lower limit (+/- 50%). This would allow more flexible and faster capital changes.
  • The rules on legal reserves are aligned with the respective accounting rules, and the creation and dissolution of legal reserves is clarified. Specifically, the distribution of capital reserves (i.e. paid-in capital surplus and other contributions in excess of the par value) is to be permissible within certain limits and if an audit report is obtained.
  • Interim dividends are to become permissible for audited companies provided that the articles of incorporation permit them and audited interim financial statements
    are available.
  • Companies may provide for an up to 20% higher dividend for shareholders who exercise their voting rights in the shareholders’ meetings. This rule aims at mitigating
    the problem of shares which are not registered in the company’s share register (so-called dispo shares) and incentivizing active participation in shareholder meetings.
    A nominee model as a possible solution to the problem of dispo shares is not proposed.
  • The treatment of treasury shares is aligned with the accounting rules (deduction from equity of an amount corresponding to the acquisition price).

b) Shareholder rights and remedies

According to the Draft shareholder rights and remedies are to be strengthened, which  includes the following proposed changes:

  • Shareholders in private (unlisted) companies are to have the right to ask questions outside shareholders’ meetings; the board is required to respond to questions  of the shareholders twice a year and to report at the annual shareholders’ meeting  on board and management compensation.
  • The requirements for the right to request a special investigation are to be relaxed  in that the necessary threshold of shares is reduced to 3% in public companies and  the circumstances for which prima facie evidence is to be furnished are somewhat  eased.
  • Certain shareholder (derivative) lawsuits for the benefit of the company may,  upon request of the plaintiff, be litigated at the expense of the company provided  that the claiming shareholder(s) have an existing participation of at least 3% (in public companies) or 10% (in unlisted companies) and can provide prima facie evidence  of the elements of the claim.
  • The requirements for actions against shareholders, directors and managers for  repayment of unduly received benefits are to be relaxed. In the future, claims  may also be brought against related persons of shareholders and members of corporate  bodies, and the financial situation of the company is irrelevant for the outcome.
  • The articles of incorporation may include binding arbitration clauses for disputes relating to corporate law matters.

c) Shareholders’ meetings

The Draft provides for more fl exibility in the organization of shareholders’ meetings, reduces the hurdles for shareholder rights, and attempts to foster participation in the  shareholder democracy process:

  • Shareholders’ meetings held (exclusively) by electronic means and shareholders’ meetings taking place abroad or in several locations at the same time are expressly
    to be allowed.
  • Reduction of the threshold for shareholders in public companies to request the convening of a shareholders’ meeting to 3% and reduction of the threshold to
    propose agenda items and motions to 0.25% (10% and 2.5%, respectively, in private companies).
  • Public companies are to set up an online platform for discussions before shareholders’ meeting.

d) Corporate restructuring and insolvency

With regard to the early warning systems in case of impending insolvency, the Draft shifts the focus to the aspect of illiquidity and provides more specific rules for the  board’s duty to take action:

  • If there is well-founded concern about impending illiquidity in the next 12 months, a liquidity plan and an assessment of the company’s economic situation must be prepared. If the board concludes based thereon that there is no threat of imminent illiquidity, the liquidity plan must be submitted to an auditor to ascertain its plausibility. If, however, the board finds that there is a threat of imminent illiquidity, or if the auditor does not confirm its plausibility, a shareholders’ meeting must be convened and restructuring measures proposed.
  • The same duties apply for additional warning indicators, e.g. if net assets cover less than one third of the sum of the share capital and the legal reserves (capital loss), in case of a rapid decrease of equity, and if there has been a loss in three consecutive  years.
  • If there is well-founded concern about over-indebtedness, the board generally  still has a duty to notify the insolvency court; such notification can be deferred by  obtaining a subordination by creditors of their claims and, which is new, in case of a  reasonable prospect of restructuring within 90 days.

4) Outlook

Following the consultation period running until 15 March 2015 a draft of the revised law will be prepared and submitted to the Parliament. In view of the significant scope of the Draft and the number of issues that will likely give rise to discussions, the new law is not expected to enter into force before 2017.

Matthias Wolf (