Corporate Law Reform: Delisting

On 19 June 2020 the Swiss parliament approved a bill introducing a new Swiss corporate law (Aktienrecht). The new Swiss corporate law is expected to come into force in 2023.

As part of the reform the decision to delist the shares of a listed company will be made subject to a mandatory vote of the (meeting of) shareholders. The following article will discuss what the consequences of this change are and what other laws and rules are of relevance in connection with the delisting of a Swiss company from a Swiss exchange. 

By Lukas Roesler (Reference: CapLaw-2021-58)

1) Introduction

a) Background

The main purpose of the rules governing a delisting is the protection of (i) the rights and interests of minority shareholders versus the interests of the majority shareholders and (ii) the protection of the interests of the shareholders in general versus the interests of the board of directors and management of the company.

So far, Swiss corporate law did not know specific provisions addressing a delisting and the rules to govern a delisting were based on general governance and competency principles of Swiss corporate law. Specific provisions could only be found in the self-regulatory Listing Rules (LR) of the Swiss stock exchanges SIX Swiss Exchange and BX Swiss (this article will focus on the rules of the preeminent exchange in Switzerland, SIX Swiss Exchange) (see section 3 of this article). Further, given that a delisting is often preceded by a takeover of control by a shareholder or a group of shareholders, the takeover law provisions of the Swiss Financial Markets Infrastructure Act (FMIA) and its ordinances were and remain relevant in connection with a going private (see section 4 of this article).

Lack of specific corporate law provisions and on the basis of the general competency of the board of directors to take all decisions which are not expressly allocated either by law or its articles of association to the (meeting of) shareholders of a Swiss company, the decision to delist a Swiss company used to be (and currently still is) one of the board of directors to take. 

The potentially far-reaching economic consequences of a delisting on the shares of the (minority) shareholders and the German ‘Macrotron’ decision of 2002 sparked a discussion among Swiss legal scholars whether it is adequate that such decision is put into the competency of the board of directors. It was discussed whether such decisions should rather be brought forward to a (voluntary or mandatory) vote of the shareholders, how such vote by the shareholders should be taken and what other protective measures, such as e.g. a duty to make a public offer for the shares of the minority shareholders, may have to be applied. 

While the German courts overturned the ‘Macrotron’ decision by the ‘Frosta’ decision in 2013 and the German legislator amended the German stock exchange law (Änderung des deutschen Börsengesetzes vom 20. November 2015, BGBI, I (2015), 2029) with a duty to buy out the minority shareholders in case of a delisting, no specific actions were taken by the legislator in Switzerland to make changes in relation to the rules governing a delisting of a Swiss company. Only rather late during the discussion of the reform of the Swiss corporate law, namely in the draft of November 2016, it was proposed to put the competency to decide on a delisting into the hands of the shareholders.

b) Reasons for delisting

A delisting may be sought for several reasons: A listing comes with material costs which can be saved for the company if there is no adequate benefit of a continued listing. Costs include direct costs for listing fees, investor relations work and information of analysts, preparation and disbursement of reports (which have to follow more sophisticated and, therefore, costlier accounting standards) and the organization of the annual general meeting of shareholders, but also indirect costs as a consequence of regulation that only applies to listed companies (such as e.g. the rules governing management compensation and publicity rules). 

Further, management or shareholders may be of the view that the value of the company is not adequately mirrored in the share price paid over the exchange and, therefore, seeks for ways to better mirror such price or to protect against takeover attempts at a price that is considered too low.

Costs become particularly relevant if the benefits of a listing are small for the company, e.g. if there is not much interest and trading in the shares and a low free float and/or liquidity in the market for the shares. In such circumstances, the price building for the shares is not efficient and, therefore, the price of the shares may not be a good reflection of their value. 

If a delisting in connection with a going private is initiated by a majority shareholder, its reasons may additionally include a simplification of the structure of the company, a restructuring and refinancing (the benefits of which it does not wish to share with other shareholders), the intention to improve its options for a sale of the company, less publicity in general and also more leverage to deal with the rights of the minority shareholders.

c) Adverse effects of a delisting

From the point of view of the company, a delisting has the disadvantage that it loses access to the capital markets to raise funds by way of a share offer and to use its shares as a currency for acquisitions. Further, the structuring of employee participation programs may become more complex.

From the point of view of the (minority) shareholders a delisting has the adverse effect that their exit by way of a sale of their shares may become more difficult because a sale outside an exchange requires more efforts and is more difficult due to less (price-relevant) information available to the parties and generally less liquidity of the private markets. Further, certain rights granted by Swiss corporate law to (minority) shareholders of listed companies do not apply anymore if the company is delisted. All of these aspects may result in a lower price obtainable for the shares of an unlisted company (unless the price of the shares is already very low due to a lack of interest of the market in the listed shares).

2) Delisting under the new Swiss corporate law

a) Vote of a qualified majority of shareholders

The new corporate law provides that the proposal to delist is not made by the board of directors anymore, but is being put forward to a meeting of shareholders which has to decide in favor of the delisting with a qualified majority of 66 2/3 percent of the votes and nominal amount of the shares cast (article 704 new CO). 

No new right of the minority shareholders to be bought out by the majority or the company in case of a delisting is introduced.

In the case of a company with a broad shareholder base, experience shows that it is rather difficult to reach an approving vote of a qualified majority of shareholders as newly required for a delisting decision. Compelling arguments must be presented to the shareholders in order to get sufficient votes.

However, in the case of a company with majority shareholder controlling 66 2/3 percent of the votes and nominal amounts of its shares, the majority shareholder has the power to decide a delisting on its own and against the will of the minority shareholders unless the law provides protective rights of the minority in such a situation (as e.g. an approving vote of the “majority of the minority” or the right to challenge the decision in court, see section 2b) and 2c) of this article).

b) No vote of a majority of the minority

Although discussed in the aftermath of the German “Macrotron” decision as one option to protect the interests of the minority shareholders, no requirement of an approving delisting vote of a “majority of the minority” of the shareholders was introduced. In general, Swiss corporate law does not know the exclusion of shareholders from participating in a vote in case of conflicts of interests. Such an exclusion is specifically only provided by art. 695 para. 1 CO for the vote to grant discharge from liability to the members of the board of directors. Further, a vote of the “majority of the minority” is required by the Swiss takeover law of the FMIA in relation to the introduction of an “opting out” (see section 4b) of this article). During the legislative process there was no discussion about the introduction of a vote of the “majority of the minority” in relation to a delisting and no respective provision found its way into the new corporate law. 

c) Challenges of shareholders’ resolutions

One consequence of the change of competency to take the delisting decision from the board of directors to the shareholders is that the shareholders may now directly challenge the shareholders’ decision in court. A delisting decision of the board of directors under the current law could not be directly challenged in court by shareholders (unless it was void), and shareholders could only file liability law suits against the members of the board of directors (which are difficult to win).

Decisions by the meeting of shareholders can be challenged directly by the shareholders for violation of applicable laws or the company’s articles of association. Further, the execution of the decisions of the meeting of shareholders may potentially be blocked by a preliminary injunction until a decision by the competent court is served. 

In the case of a delisting, art. 706 para. 2 cif. 2 or cif. 3 CO may provide the basis for a challenge. According to cif. 2 of this article, resolutions are contestable which improperly deprive or restrict the rights of shareholders in the individual case even if the resolution a such is permissible in principle. A shareholders’ resolution is also contestable if it is not in compliance with the principles of ‘cautious exercise of rights’ (schonende Rechtsausübung) or ‘proportionality’ (Verhältnismässigkeit), or if it is in fact inappropriate (zweckwidrig), i.e. promotes only the goals of individual shareholders but not those of the company. 

However, the hurdles for a successful challenge of a shareholders’ resolution based on art. 706 CO are high. If the company succeeds in presenting its legitimate interests in a reasonably credible manner, the courts will generally give preference to these interests. A challenge on this basis can therefore only be successful if the resolution in question causes substantial damages to the plaintiff without these damages being counterbalanced by any recognizable benefit to the company. 

As mentioned earlier, a delisting is often made because the costs of the listing are not reasonably offset by the benefits of the listing to the company anymore. If that is the case, it will not be difficult for the company to present its interest in the delisting in a reasonably credible manner. Further, it may be difficult for the plaintiff to argue looming damage if the shares – due to lack of investor interest and low liquidity – already trade at a low price. Furthermore, the company may address the principle of ‘cautious exercise of rights’ by setting a sufficiently long period between the delisting decision and the last day of trading of the shares. Therefore, in such rather typical circumstances of a delisting, a successful challenge based on art. 706 CO will be difficult to achieve.

3) Listing rules

The self-regulatory listing rules of the Swiss stock exchanges base on a delegation by the legislator to stock exchanges (on the basis of the FMIA). Swiss stock exchanges and their governance in turn are licensed and supervised by the Swiss financial markets regulatory authority FINMA.

According to art. 58 of the listing rules of SIX Swiss Exchange (LR), a voluntary delisting requires a written application by the listed company to the regulatory board of SIX Swiss Exchange (the “Regulatory Board”). The Regulatory Board, for its decision, will take into account the interests of stock exchange trading, investors and issuers. In particular, it may require timely announcement and sufficient time until delisting. In any case, proof must be provided by the issuer that the competent bodies of the issuer are in agreement with the delisting. 

SIX Swiss Exchange has further specified Art. 58 LR in the Directive on the Delisting of Equity Securities, Derivatives and Exchange Traded Products of 7 December 2018 (Directive on Delisting, DD). Therein, SIX Swiss Exchange clearly holds that it shall not be the decision of the Regulatory Board whether a delisting actually occurs or not (Art. 3 para. 1 DD: “In principle, the issuer itself decides on the delisting of securities it has issued.“). The decision to delist shall be one of the issuer and its competent bodies. 

While the Regulatory Board checks whether the decision to delist has been duly taken by the company, its decision will primarily focus on establishing an adequate delisting process, in particular that an appropriate transition period between the announcement of the delisting and the last trading day is granted. In other words, it is not the practice of the Regulatory Board to prevent a delisting, but rather to delay it. 

As a rule, the period between the delisting announcement and the last day of trading may be no less than three and no more than 12 months. When setting this time period, the Regulatory Board will particularly take into consideration the free float, liquidity and trading volume of the shares (art. 4 paras 1 and 2 DD). In its recent decision in relation to Rapid Nutrition plc, for example, which held a double-listing on SIX Swiss Exchange and in the US, it decided that a period of seven months between the announcement of delisting and the last trading day was appropriate (Decision of SIX Exchange Regulation AG of 21 December 2020 regarding the delisting of all registered shares of Rapid Nutrition plc, London).

According to art. 62 para. 3 LR shareholders may appeal to the appeals board of SIX against decisions on applications for delisting within 20 trading days of the publication of that decision on the SIX Exchange Regulation website. In this procedure, shareholders may challenge the delisting decision only in respect of the period between the delisting announcement and the last day of trading. Thereafter, only a challenge in the civil courts is possible.

4) Takeover law 

a) Relevance in relation to a delisting

The new corporate law requirement that a delisting decision must be taken by a vote of a qualified majority of 66 2/3 percent of the votes and nominal amount of the shares cast in a shareholders’ meeting is a rather high hurdle to reach if the company has a broad shareholder base. This is not the case if the company is controlled by a majority shareholder (or a group of shareholders acting in concert) holding 66 2/3 or more of the votes that can take a delisting decision on its own. 

This may pose a risk for shareholders that are invested in a listed Swiss company that is already controlled by a majority shareholder or is subject to an “opting-out”. If that is not the case, minority shareholders enjoy the protection of the Swiss takeover law of the FMIA (as further specified in the FMI ordinance, the FMI ordinance FINMA and the Takeover Ordinance) that require a shareholder (or a new group of shareholders acting in concert) gaining control over more than a certain percentage of the voting rights in a Swiss company to make a public tender offer for all shares in the company.

b) Protection provided by takeover law

The Swiss takeover law provides for disclosure obligations of shareholders which – when (alone or acting in concert) buying or selling shares (or rights or obligations for the purchase or sale of shares) – exceed or fall below (directly or indirectly) certain thresholds in relation to the company’s voting rights (3, 5, 10, 15 etc. percent). Further – provided that the articles of the relevant company do not contain an ‘opting-up’ or ‘opting-out’ – it requires shareholders which (alone or acting in concert) acquire control over more than 33 1/3 percent of the voting rights in a company (whether exercisable or not) to make a public tender offer for the shares of all other shareholders which gives the minority shareholders the opportunity to exit their investment in such event.

Companies may, by vote of their shareholders, exclude the obligation to make an offer by including a respective provision into their articles of association (“opting-out”). They can also include an “opting-up”-provision by which the percentage of shares to be controlled that requires an offer to be made may be increased up to 49%. However, once the company is listed, the implementation of an opting-up/opting-out clause must meet the (higher) standards of art. 125(4) FMIA according to which it must not prejudice the interests of the shareholders in the meaning of art. 706 of the Swiss Code of Obligations (CO). According to the current practice of the takeover board (TOB) this is presumed if (i) the shareholders are informed transparently about the introduction of the opting out/-up and its consequences, (ii) the majority of the votes represented at the shareholders’ meeting and (iii) the majority of the minority of shareholders agree to the opting out/up. In such case, the TOB will only challenge this presumption and examine art. 706 CO in substance if there are special and exceptional circumstances.

Further, it is the practice of the TOB to apply the takeover law also in relation to a delisting that is made before a takeover in an attempt to circumvent the takeover law.

c) Squeeze-Out

In case of a successful public tender offer, the bidder is most often interested in gaining 100% control over the target company. This may be achieved by a squeeze out of the minority (and may, for example, help save time and money that challenges by minority shareholders against a planned delisting can cost). Once the bidder controls more than 90% of the shares of the Swiss target company, it may force the minority shareholders to sell their shares by way of a squeeze-out merger in accordance with art. 8 para. 2 of the Merger Act (whereby the shareholders have an appraisal right and may file a claim for appropriate compensation in accordance with art. 105 of the Merger Act). If the bidder controls more than 98% of the shares, it may also instigate a squeeze-out action in accordance with art. 137 FMIA filed within three months after the expiration of the offer period against payment of the offer price of the previous tender offer. 

Lukas Roesler (