Shareholders' Rights & Shareholder Activism 2019

Last Updated July 23, 2019

Switzerland

Law and Practice

Author



Walder Wyss Ltd has more than 200 lawyers and is one of the fastest growing Swiss full-service commercial law firms, with offices in Zurich, Geneva, Basel, Berne, Lausanne and Lugano. Walder Wyss offers services in the following areas: transactional services (corporate, M&A, equity and debt capital markets, banking and finance, regulatory law), tax, intellectual property and information technology, as well as dispute resolution (litigation and arbitration). The client base is comprised of domestic and multinational corporations of all sizes, including financial services providers. Walder Wyss has been appointed as a panel firm for several listed companies.

In Switzerland, the most common form for companies is the stock corporation. An overwhelming share of all companies takes this form. According to the Swiss Federal Office of Statistics, there were approximately 118,500 stock corporations as of 31 December 2017.

Swiss laws and regulations do not, with few exceptions, distinguish between large or small stock corporations. Generally, all stock corporations are subject to the same legal regime. It does not matter whether they are closely-held corporations or listed on one of Switzerland’s stock exchanges, in particular the SIX Swiss Exchange (SIX) and the BX Swiss (BX). The basics are contained in Article 620 and following of the Swiss Code of Obligations (the CO). The respective provisions deal among others with the following topics:

  • incorporation;
  • capital structure;
  • changes to the capital structure;
  • corporate governance;
  • shareholders’ rights;
  • annual reporting; and
  • liquidation.

Nevertheless, in the past decades Switzerland has adopted specific rules applicable to listed companies only. These rules are very often related to shareholders’ rights or the result of shareholder activism. We would like to mention two sets of rules applicable to listed companies:

  • rules relating to the disclosure of significant shareholdings (Article 120 and following of the Swiss Federal Financial Infrastructure Act, FMIA) and takeover offers (Article 125 and following, FMIA); and
  • rules on the excessive compensation in listed companies.

Both sets of rules apply to listed companies only. As a general rule, the rules set out in the FMIA (disclosure of significant shareholdings, takeover offers) apply to Swiss corporations and to foreign corporations with a primary listing in Switzerland. The rules contained in the Ordinance on the Excessive Compensation in Listed Companies apply to Swiss corporations listed on any (domestic or foreign) stock exchange.

Listed companies are subject to the listing rules of the exchange on which the securities are listed, with SIX Swiss Exchange being the most important exchange in Switzerland. Its listing rules foresee a number of additional obligations which are relevant for the exercise of shareholder rights, including:

  • annual and semi-annual reporting;
  • ad hoc disclosure of potentially price-sensitive information;
  • disclosure of management transactions;
  • preparation of annual corporate governance report.

All of the above disclosure requirements aim at ensuring full transparency for shareholders. The information allows shareholders to form an informed judgement about the business and the prospects of any corporation. The information contained in the corporate governance report is often the basis for activist shareholders to form their strategy in relation to a particular target corporation. The basis for potential action or areas to increase shareholder value is determined from the financial reporting and the compensation report.

Given that Switzerland is not a member state of the European Union or the European Economic Area, respectively, the Directive (EU) 2017/828 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (Shareholder Rights Directive II) has not been transposed into Swiss law.

As a general rule, Swiss law does not restrict foreign persons from investing into Swiss companies. Again, there are a few exceptions to this rule. Most notably, corporations may foresee transfer restrictions in their articles of incorporation. While the transfer restrictions in case of publicly listed companies are very limited, closely held companies enjoy a broader freedom when it comes to defining reasons why not recording a shareholder in the share register as a shareholder with voting rights. Typically, companies that invest in residential real estate foresee investment restrictions for foreigners, as the acquisition of residential real estate by foreigners is subject to detailed regulations in Switzerland. Generally, non-Swiss and EEA nationals are not allowed to acquire residential real estate at all (so-called Lex Koller). Accordingly, even listed real estate companies will endeavour to exclude foreigners from becoming a shareholder in the respective corporation.

Currently, there are various ways to define the capital structure of a corporation and the shareholder structure. The first and most important distinction is the distinction between registered shares (with or without transfer restrictions) and bearer shares. It is expected that the latter will be abolished from 1 January 2020, with a transitory period of 18 months.

Swiss shares represent part of the share capital. They must have a nominal value (expressed in Swiss Francs or a fraction thereof, with the minimum nominal value per share being CHF0.01). Also, Swiss law allows for the possibility to create voting shares. The legislator has enacted some restrictions applicable to voting shares with the aim of protecting the ordinary shareholders. These restrictions can be summarised as follows:

  • The nominal value of the voting shares must not be less than one tenth of the nominal value of the ordinary shares (Article 693, paragraph 2 CO).
  • The fundamental resolutions of the shareholders’ meeting require not only the approval of a majority of two thirds of the votes represented at a shareholders’ meeting but in addition the approval of more than 50% of the nominal values represented at such shareholders’ meeting. For a list of resolutions, see 1.8 Shareholder Approval.

Finally, Article 654 and following CO allow for the creation of preference shares, ie, shares with preferred dividend or liquidation rights or preferred subscription rights.

Shareholders rights are governed in the following primary sources of law and regulation:

  • Swiss Code of Obligations (Article 620 and following);
  • Swiss Financial Infrastructure Act (Article 120 and following);
  • Ordinance on the Excessive Compensation in Listed Companies; and
  • Listing Rules (promulgated by the SIX and the BX) and implementing ordinances (eg, rules on ad hoc disclosure or the reporting of management transactions).

Shareholders have economic rights and participation rights. All shareholders have these rights, even though they can be modified by the articles of incorporation.

Economic rights (Vermögensrechte), which typically depend on the capital contribution of the respective shareholder (or more generally, the respective share class), include:

  • right to receive a dividend;
  • preferential subscription rights (capital increases, issuance of convertible or option bonds); and
  • right to participate in the liquidation proceeds.

Participation rights (Mitgliedschaftsrechte) include:

  • right to participate in the shareholders’ meeting;
  • right to call an (extraordinary) shareholders’ meeting;
  • right to request a particular agenda item being put up for vote at a shareholders’ meeting; and
  • right to be informed about the business and the affairs of the corporation (Article 697, CO), including the right to instigate a special audit (Article 697a and following CO).

From a shareholder activism perspective, the participation rights are very important. Shareholders’ rights may be varied by the corporation's articles of incorporation. The articles are adopted by the shareholders' meeting and recorded with the register of commerce. They are publicly available.

Not all of the above participation rights are equally available to all shareholders, but they may depend on reaching a certain threshold (see 1.6 Rights Dependent Upon Percentage of Shares).

Alternatively, it is possible that shareholders enter into agreements among themselves (eg, members of a family holding a controlling stake in a listed corporation). Even though very common in Switzerland, these shareholders' agreements are typically not available to the general public. They may lead to an acting in concert, which may trigger disclosure obligations in accordance with Article 120 and following, FMIA, or even trigger a (mandatory) takeover offer pursuant to Article 125 and following, FMIA (see also 1.5 Shareholders' Agreements / Joint Venture Agreements).

Shareholders’ agreements and joint venture agreements are enforceable in Switzerland. It is common to enter into shareholders' agreements and, very often, joint ventures are set up through the creation of a common corporation. Even though the corporation itself can become a party to shareholders’ agreements, such agreements are not binding upon the corporation's executive bodies, in particular the board of directors and the executive board. Ultimately, they have to make their decisions in accordance with applicable law and the company’s articles and regulations, otherwise they run the risk to become personally liable. Having said this, shareholders agreements are binding among the shareholders who enter into such an agreement or who accede such an agreement.

Shareholders holding shares with a nominal value of CHF1 million, or 10% of the share capital, may request that the corporations board of directors calls an (extraordinary) shareholders’ meeting. They can request a particular agenda item, eg, the election of new members of the board of directors, and make specific motions to the shareholders’ meeting.

Furthermore, shareholders holding shares with a nominal value of CHF1 million or (according to the Swiss Federal Supreme Court) 10% of the share capital may request that a particular agenda item be put on the agenda and make specific motions to the shareholders’ meeting.

Shareholder access to a company’s documents and information is limited in Swiss law. This is the result of the fact that anybody (even a competitor) can become a shareholder in a corporation.

In listed companies, corporate disclosure is very comprehensive. It encompasses the following:

  • annual report;
  • semi-annual report;
  • annual compensation report;
  • annual corporate governance report; and
  • ad hoc publications.

The corporate governance report describes in detail the rights and obligations of the shareholders as well as the functioning of the corporation’s executive bodies, including the decision-making processes. Therefore, the corporate governance report is the primary source of information for any activist shareholder. This particularly holds true with regard to the obligation to submit a mandatory bid following the acquisition of more than 33.3% of the voting rights in a corporation. Likewise, the corporate governance report contains information as to any (preventive) defence measures adopted by the board of directors.

All items requiring shareholders’ approval (the shareholders’ meeting is the supreme governing body of any corporation) are set out in Article 698 CO. The shareholders’ meeting has the following inalienable powers:

  • to determine and amend the articles of incorporation;
  • to elect the members of the board of directors and the external auditors;
  • to approve the management report and the consolidated accounts;
  • to approve the annual accounts and resolutions on the allocation of the disposable profit, and in particular to set the dividend and the shares of profits paid to board members;
  • to grant discharge to the members of the board of directors; and
  • to generally pass resolutions concerning the matters reserved to the general meeting by law or the articles of association.

As a general rule, and unless otherwise provided by law or the articles of incorporation of a corporation, the shareholders’ meeting passes resolutions and conducts elections by an absolute majority of the voting rights represented (Article 703 CO).

There are specific resolutions requiring a supermajority of 66.6% of the votes present and more than 50% of the nominal values represented at a shareholders' meeting (Article 704, paragraph 2 CO):

  • any amendment of the company's objects;
  • the introduction of shares with preferential voting rights (voting shares);
  • any restriction on the transferability of registered shares;
  • an authorised or contingent capital increase or the creation of reserve capital in accordance with the Swiss Federal Banking Act;
  • a capital increase funded by equity capital, against contributions in kind or to fund acquisitions in kind and the granting of special privileges;
  • any restriction or cancellation of the shareholders' subscription right;
  • a relocation of the corporation’s domicile; and
  • the dissolution of the corporation.

As outlined above (see 1.6 Rights Dependent Upon Percentage of Shares), shareholders holding shares with a nominal value of CHF1 million or 10% of the share capital may request that the corporation's board of directors calls an (extraordinary) shareholders’ meeting. Likewise, shareholders holding shares with a nominal value of CHF1 million or 10% of the share capital may request that particular item be put on the agenda. In both cases, they can (and must) make specific motions to the shareholders’ meeting.

See1.8 Shareholder Approval and 1.9 Calling Shareholders' Meetings.

Generally, shareholders have the right to elect the corporation's supreme corporate body, the board of directors (Article 698, paragraph 2 section 2 CO). Various share classes (ordinary shares, voting shares, preference shares; see 1.2 Type or Class of Shares) have the right to be represented on the board of directors (Article 709 CO). Other than that, there are no rights for shareholders to participate in the management of the company. In case of listed companies, there are certain other shareholders' rights:

  • shareholders elect the chairman of the board of directors;
  • shareholders elect the members of the compensation committee; and
  • shareholders elect the independent proxy.

Note that individual shareholders do not have a right to be represented on the board. Board members are proposed by the existing board of directors. As outlined above (see 1.6 Rights Dependent Upon Percentage of Shares and 1.9 Calling Shareholders' Meetings) shareholders may have the right to call for an extraordinary shareholders' meeting or to make proposals to the agenda. In this instance, they can propose a specific person for election to the board of directors, however, there is no guarantee that the proposed individual will be elected.

Shareholders have no right to elect members of the executive management. The executive management is appointed by the board of directors.

Additionally, shareholders decide upon the compensation of the members of the board of directors and the members of the executive board, as well as any advisory board, if any (as set out in the Ordinance on the Excessive Compensation in Listed Companies).

As detailed in 1.11 Shareholder Participation in Company Management, shareholders have limited scope to request the election of a specific individual to the board of directors. Whether or not such person is elected is for the shareholders present at the shareholders' meeting to decide. The election requires the absolute majority of the votes present at the respective shareholders' meeting. Shareholders have no right to elect members of the executive management. The shareholders' meeting is entitled to dismiss members of the board of directors, external auditors and any registered attorneys or commercial agents appointed by them (Article 705, paragraph 1 CO). Again, subject the limitations set out above (see 1.6 Rights Dependent Upon Percentage of Shares and 1.9 Calling Shareholders' Meetings), individual shareholders can request that a specific member of the board of directors be dismissed by the shareholders.

Shareholder decisions can be challenged in accordance with Article 706 CO. The board of directors and every shareholder may challenge resolutions of the shareholders' meeting which violate the law or the articles of association by bringing action against the corporation before the court. The following types of shareholders' resolutions may be challenged:

  • decisions that remove or restrict the rights of shareholders in breach of the law or the articles of association;
  • decisions that remove or restrict the rights of shareholders in an improper manner;
  • decisions that give rise to the unequal treatment or disadvantaging of the shareholders in a manner not justified by the company's objects;
  • decisions that transform the company into a non-profit organisation without the consent of all the shareholders.

Based on the above it will, in most instances, be very difficult to challenge an election made in a shareholders' meeting. It would not suffice to challenge an election based on the argument that a certain candidate is not able to exercise its office.

Based on Article 698, paragraph 2, section 2 CO, the shareholders' meeting elects the external auditors. Likewise, the shareholders' meeting is entitled to dismiss the external auditors (Article 705, paragraph 1 CO). Such dismissal must occur in a shareholders' meeting. To be valid, it is required that the dismissal is requested in the agenda with a proper motion.

There are several provisions dealing with the disclosure of shareholders’ interests in their company.

Article 120, paragraph 1, FMIA, requires notification to the company, and to the stock exchange on which the equity and securities are listed, of anyone who directly, indirectly or acting in concert with third parties acquires or disposes of shares, or acquisition or sale rights relating to shares, of a company with its registered office in Switzerland whose equity securities are listed in whole, or in part, in Switzerland, or of a company with its registered office abroad whose equity securities are mainly listed in whole, or in part, in Switzerland, and thereby reaches, falls below or exceeds the thresholds of 3%, 5%, 10%, 15%, 20%, 25%, 33.3%, 50% or 66.6% of the voting rights, whether exercisable or not.

It is worth noting that the disclosure obligations are very comprehensive in Switzerland. In particular, the disclosure of acquisition or sale rights requires the disclosure of all types of derivative instruments (without set-off of any acquisition or sale rights), irrespective of whether they are settled physically or in cash.

There are special reporting obligations for members of the corporate bodies when acquiring or disposing of shares (reporting of management transactions according to Article 56 of the SIX Swiss Exchange’s listing rules). Any corporation whose equity securities have their primary listing on SIX Swiss Exchange must ensure that the members of its board of directors and its executive committee report transactions in the issuers equity securities, or in related financial instruments, to the corporation no later than the second trading day after the reportable transaction has been concluded. Transactions undertaken on a stock exchange must be reported to the issuer no later than the second trading day after they are executed. The respective information is periodically disclosed in aggregated form by the corporations.

The information on significant shareholdings and management transactions is available through the websites of the relevant stock exchange.

Furthermore, any corporation must list its significant shareholders in the annual report (corporate governance report; Article 663c CO).

The sale of shares is possible, particularly if a corporation’s shares are listed on a stock exchange such as SIX Swiss Exchange or BX Swiss. Certain banks maintain trading venues or facilities for shares not listed on a stock exchange. In case of listed securities, there are various options, including on-exchange and off-exchange sales. Large blocks of shares are sold through block trades or by way of an accelerated bookbuilding. Shares in closely held companies are sold by private sale (share purchase agreement), followed by a transfer of possession in the (endorsed) share certificate(s) or, in the case of un-certificated shares, by an assignment, in order to consummate the transaction.

In case of closely held corporations, the transfer can be restricted by the articles of incorporation. In addition, shareholders' agreements can (and typically do) contain transfer restrictions. However, in such case, the respective transfer restrictions are only binding upon the parties to the specific shareholders' agreement.

As a general rule, shareholders are entitled to grant security interests over their shares. Depending on the type of security, this may lead to disclosure obligations in accordance with Article 120 FMIA. Likewise, it could trigger reporting obligations under the management transaction rules. Accordingly, security over shares in Swiss corporations usually takes the form of a share pledge, where ownership remains with the pledger, but possession is transferred to the pledgee, thereby avoiding any disclosure in accordance with Article 120 FMIA.

In the case of an insolvency of a corporation, shareholders have very limited rights. In the distribution of the liquidation proceeds, they rank lowest in priority. Nevertheless, shareholders can bring forward claims against the members of the corporate bodies in case of breaches of legal obligations by the respective individuals, which is fairly common following the insolvency of a corporation.

Shareholder activism, and the defence against it, is subject to a number of rules and regulations. The most relevant regulations are the following:

  • disclosure of significant shareholdings (Article 120 and following FMIA), which prevents activist shareholders from building up hidden stakes in a potential target company. As outlined in 1.14 Disclosure of Shareholders' Interests in the Company, there is no netting of acquisitions and sales positions. Furthermore, derivatives transactions providing for a cash settlement (as opposed to a physical settlement) must be reported.
  • takeover offer rules (Article 125 and following FMIA) regulate the process for submitting a takeover offer. In particular, there is a duty to publish an offer prospectus (Article 127, paragraph 1 FMIA). The offeror must treat all holders of equity securities of the same class equally (Article 127, paragraph 2 FMIA). The offeror, prior to publication, has to submit the offer to the review body (ie, a licensed audit firm or a securities dealer, respectively) for review. The offer prospectus is reviewed by the Swiss Takeover Board. The Swiss Takeover Board has issued an ordinance on takeover offers (Verordnung der Übernahmekommission über öffentliche Kaufangebote), which sets forth detailed rules on takeover offers, including rules on permissible conditions precedent. Among others, the offeror has to demonstrate that the financing of the offer is secured (and reviewed by the audit firm or the securities dealer ).
  • mandatory takeover offer rules, which require a shareholder or a group of shareholders acting in concert, to submit a mandatory takeover offer if they cross a specific threshold. Article 135, paragraph 1 FMIA, requires anyone who directly, indirectly or acting in concert with third parties acquires equity securities which, added to the equity securities already owned, exceed the threshold of 33.3% of the voting rights of a target company, whether exercisable or not, must make an offer to acquire all listed equity securities of the respective company. Corporations may raise this threshold to 49% of voting rights in their articles of incorporation. The price offered to the shareholders must at least match the higher of the following two amounts, either the stock exchange price or the highest price the offeror has paid for equity securities of the target company in the preceding twelve months. There is a detailed regime governing mandatory takeover offers.
  • Article 132 FMIA sets forth the duties of target companies. In particular, the board of directors of the target company shall publish a report to the holders of equity securities setting out its position in relation to the offer. More importantly, from the moment the offer is published until the result is announced, the board of directors of the target company shall not enter into any legal transactions which would have the effect of significantly altering the assets or liabilities of the company (prohibition of poison pills). Decisions taken by the general meeting of shareholders are not subject to this restriction and may be implemented irrespective of whether they were adopted before or after publication of the offer.
  • obviously, the rights to call for a shareholders’ meeting, as well as the right put forward a proposal on the agenda, are important in this context (see 1.6 Rights Dependent Upon Percentage of Shares and 1.9 Calling Shareholders' Meetings).

These rules, which were, in part, a reaction to tactics employed by activist shareholders, have significantly altered the activities and strategies of activist shareholders over the last four decades (see 2.2 Level of Shareholder Activism).

Switzerland experienced a first wave of shareholder activism in the 1980s (Werner K. Rey’s takeover of Bally). At that time, taking over corporate control was the primary goal. Takeovers were not regulated and poison pills were still common (as was the case in the defence of Holvis Ltd, a Swiss paper group, against an unfriendly takeover by International Paper in 1995). A second wave of takeovers occurred in the 2000s (for example, the takeovers of Unaxis Holding Ltd and Sulzer Ltd), where again the fight for corporate control was the driver behind the transactions. Some of the corporate 'raiders' were building up stakes in the targets by circumventing the rules relating to significant shareholdings. This round of takeovers shaped Swiss disclosure and takeover laws with respect to:

  • comprehensive disclosure of significant positions in accordance with Article 135 FMIA, including all types of derivatives transactions, irrespective of whether they are settled physically or in cash; and
  • reinforcing mandatory takeover rules, including the decision of the Takeover Board on the circumvention of mandatory bid rules through the use of derivative instruments in the takeover of Saurer Holding Ltd.

More recently, the focus shifted towards optimising shareholder value, even though the battle for corporate control remains on the agenda. Prominent recent examples demonstrating the diverse goals of activist investors include:

  • Nestlé: in 2018, Daniel Loeb’s Third Point fund bought a substantial stake in Nestlé, the Swiss-based food and drink processing conglomerate. He then reached out to management, requesting the spin-off of non-core assets and a simplification of the management structure to create additional shareholder value.
  • Sika: a controlling stake in Sika, the Swiss construction chemicals manufacturer, was sold to the French Saint Gobain group in 2015. Given that the transaction was structured as an indirect change of control, there was no public takeover offer for the remaining shareholders. A group of minority shareholders, with the management, opposed the sale and, eventually, they were able to procure that the sellers, the buyer and the target re-negotiated the terms of the transaction.
  • Clariant: Swiss specialty chemicals producer Clariant and US group Huntsman abandoned their USD20 billion merger deal in the autumn of 2017 following the intervention of activist investors (White Tale, the investment vehicle of hedge fund manager Keith Meister and New York City-based fund 40 North) who fought against the deal for months. In essence, they argued that it would destroy shareholder value. During the fight, the activist investors had increased their stake in Clariant to more than 20%. This stake, coupled with the support of other Clariant shareholders who were against the deal, made the company doubt whether it would obtain the necessary quorums to push the deal through. Finally, Clariant decided to abort the transaction and White Tale sold its stake to SABIC.
  • Aryzta: in the case of Aryzta, a minority shareholder aligned with a financing provider and argued that the financial restructuring proposed by the board of directors destroyed shareholder value and led to an unnecessary dilution of existing shareholders. In this case, the activist shareholder was not successful, however, this is another example of the shift towards a maximisation of shareholder value vs the battle for corporate control.
  • Panalpina: in April 2019, the shareholders of Panalpina accepted an offer from Danish competitor DSV, ending a takeover battle, after the Ernst Goehner Foundation, which held 46% of Panalpina, had surrendered to pressure from 12.3% shareholder Cevian Capital and 9.9% shareholder Artisan Partners to sell the company to DSV.

Recent examples of corporations with activist shareholders include UBS, Credit Suisse and ABB. Generally speaking, there may be less activist shareholder activity in Switzerland compared to the US as a result of a significant number of listed corporations still under the control of a stable majority shareholder (even though the example of Panalpina demonstrates that this must not necessarily be the case).

Typically, activist shareholders build a stake in the target, an extreme case being Clairant, where the activist shareholders controlled approximately 20% of the shares. They then  reach out to the target’s management with their suggestions for additional shareholder value creation. Examples for this strategy include the activities of activist shareholder Third Point, managed by Daniel Loeb, in Nestlé in 2018.

While initial contacts would typically be in a non-public manner, recently, activist shareholders have addressed the general public more often, particularly in cases where management ignored their requests (Clariant, Nestlé or Aryzta being examples of this strategy). In these cases, activist investors stepped-up pressure on target corporations by disseminating their requests to the general public. This was Third Point's tactic, publicly requesting 'sharper', 'bolder' and 'faster' steps from Nestlé regarding spinning off businesses and adjusting its overly complex management structure.

As can be seen from the above examples (see 2.3 Shareholder Activist Strategies), there are no particular industries or sectors that have been targeted by activist shareholders. Likewise, size does not prevent a corporation from becoming the target of activist shareholders.

In recent years, hedge funds and large private investors (often acting through their fund-like investment vehicles) have been more active in the Swiss market. See 2.2 Level of Shareholder Activism and 2.3 Shareholder Activist Strategies for recent examples.

There is no statistical information available. However, boards of directors have responded to investments by activist shareholders (see 2.7 Company Response to Activist Shareholders). The example of Clariant, which abandoned the USD20 billion merger deal with Huntsman, shows that activist investors’ can successfully torpedo corporations' plans.

Target corporations have reacted in several ways to demands of activist shareholders:

  • changes in corporate and competitive strategy (including, for example, the sale of non-core assets and the concentration of core business units and core competencies);
  • changes to corporate governance (including changes in the senior leadership team);
  • changes in the earnings distribution and cash management (announcement of a more shareholder-friendly distribution policy);
  • implementation of share buy-back programs (as part of a more shareholder-friendly earnings distribution policy); and
  • implementation of changes to compensation of the members of the board of directors and the executive board.

Advanced preparation is of essence. The best repellent against activist shareholders is a high share price, therefore, the board of directors and the executive management should take the following series of measures in order to prevent shareholder activism:

  • They should identify issues that may attract activist shareholders' attention. For example, companies with large excess cash have come into the spotlight of activist investors recently (eg, Nestlé). The same applies to corporate conglomerates, particularly in cases with limited synergies between the various divisions and differences in performance of these divisions (eg, ABB). Therefore, boards of directors and executive boards are advised to regularly question corporate performance and corporate cash flows. They should continuously evaluate strategic and transaction alternatives.
  • Boards of directors and executive boards need to respond to the shareholders' need for transparency and information. Basis is a clear corporate and competitive strategy, which can be communicated to investors (with key performance indicators which can be measured). In addition, this strategy and the corporation’s value proposition must be regularly communicated to the investor community.
  • Last but not least, the board of directors and the executive board need to monitor the composition of the shareholder base.

In addition, there are a number of legal remedies that can be taken:

  • transfer restrictions relating to registered shares;
  • voting restrictions (percentage limitation applicable to individual shareholders or persons acting in concert as well as to nominees); and
  • qualified majorities for certain shareholders' resolutions, such as the deletion of transfer or voting restrictions.

While voting restrictions are still common, the other legal remedies are considered to be contrary to good corporate governance. As a result, they are less frequently employed than they used to be. It is noteworthy that it is not possible anymore in listed companies to have a staggered board of directors, as the members of the board of directors are elected for a term of one year up to the next shareholders' meeting.

It is also worth noting that the board of directors has only limited defence measures available. It is, for example, prohibited to grant extraordinary compensation to the members of the board of directors and the executive board (no 'golden parachutes'). There are even more restrictions once a public tender offer has been launched. Specifically, it is prohibited to:

  • buy or sell material assets (sale of the so-called 'crown jewels');
  • sell assets specifically mentioned in the takeover offer (irrespective of the materiality of the assets);
  • issue new shares in the corporation; or
  • buy or sell treasury shares.

Swiss law recognises the separate legal personality of a corporation as distinct from its shareholders. Likewise, the members of the board of directors and/or the executive board may become personally liable.

The main legal remedy available to shareholders under Swiss law is the ability to challenge shareholders’ resolutions. Pursuant to Article 706, paragraph 1 CO, the members of the board of directors and every shareholder may challenge resolutions of the shareholders’ meeting which violate the law or the articles of association by bringing action against the company before the court. It is generally not possible for shareholders to challenge resolutions of the board of directors.

Challenging shareholders’ resolutions is only possible for other shareholders and members of the board of directors. The plaintiff must be able to demonstrate and substantiate that the shareholders’ resolutions violate the corporation’s articles of association, provisions of Swiss corporate law or general principles of Swiss corporate law. The challenged shareholders’ resolutions must negatively affect the plaintiff’s legal position. The plaintiff must not have approved the resolutions (otherwise, there is no legitimate reason to bring forward the claim). Any respective actions are directed against the corporation itself and have to be filed within two months of the adoption of the resolution. If not filed within this deadline, the respective claims will be forfeited.

Minority shareholders have the right to challenge resolutions of the shareholders’ meeting.

Under Swiss law, it is not possible for shareholders to challenge board resolutions (see 3.7 Strategic Factors in Shareholder Litigation for the exceptions to this rule in connection with transactions subject to the Swiss Federal Act on Mergers, Demergers or Conversions of Legal Form (the MA)). Shareholders could only claim that a particular resolution of the board of directors be null and void, however, in such case, courts and authorities would have to disregard the resolutions irrespective of whether a shareholder had claimed that the resolution be null and void.

The main legal remedy available to shareholders under Swiss law is the ability to file claims against the corporation’s directors and officers. These are personal claims against the respective individuals in their capacity as members of the board of directors and/or the executive board. Article 754, paragraph 1 CO, provides that the members of the board of directors and all persons engaged in the business management or liquidation of the corporation are liable both to the corporation and to the individual shareholders and creditors for any losses or damage arising from any intentional or negligent breach of their duties.

Liability claims against directors and/or officers require the plaintiff to show that the defendant intentionally or negligently breached a legal duty under Swiss corporate law. In addition, such breach must have caused a damage (loss) to the corporation or to the plaintiff itself. Any claim will only be successful if the plaintiff can demonstrate that there is an adequate causal link between the breach of duty and the damage (loss). It is controversial whether the plaintiff is required to establish fault or whether fault is presumed (in the latter case, the defendant still has the ability to prove that there was no fault).

If the corporation suffers a loss, the corporation itself or individual shareholders may file liability claims. There are two options available to shareholders:

  • they can sue either on behalf of the corporation (derivative action, see 3.6 Derivative Actions); or
  • they can sue in their own right and if they decide to do so, they can only claim damages directly suffered by them.

Minority shareholders have the right to file claims against the corporation’s directors and officers.

There are no legal remedies against other shareholders available to shareholders. There is no contractual basis for such claims. Outside any contractual claims, shareholders could try to claim damages based on general principles of tort law. However, as the damage is usually of a financial nature (as opposed to a physical damage), such claims will only be admitted if there has been a breach of a protective norm specifically safeguarding the financial interests of the plaintiff.

Article 755 CO, states that all persons engaged in auditing the annual and consolidated accounts, the company's establishment, a capital increase or a capital reduction are liable both to the company and to the individual shareholders and creditors for the losses arising from any intentional or negligent breach of their duties.

Accordingly, shareholders may file claims against the company’s auditors. The conditions for a successful claim are substantially equivalent to claims against directors and officers (see 3.3 Legal Remedies Against the Company's Directors). The claim can be directed against an audit firm.

Minority shareholders have the right file claims against the corporation’s auditors.

Shareholders can bring derivative actions on behalf of the corporation (see section 3.3 Legal Remedies Against the Company's Directors). In such case, the plaintiffs (shareholders) will claim the damage (loss) suffered by the corporation itself. Any derivative action is brought in the name of the individual shareholder(s) as plaintiff(s) and not in the name of the corporation. However, the plaintiff(s) may only request payment of damages to the corporation (but not to the plaintiff(s)). As a result, the corporation is compensated for the damages (losses) suffered, and shareholders are indirectly compensated.

If a plaintiff is able to demonstrate with prima facie evidence suggesting that a right of the plaintiff(s) has been violated or is about to be violated, Swiss courts may order injunctive or interim relief in summary proceedings. In this case, the court will assess whether such violation will cause the plaintiff irreparable harm and whether there is an urgent need to protect the plaintiff’s rights. The court will further consider whether the relief requested by the plaintiff is reasonable and proportionate.

In a case of utmost urgency (which must not be caused by the plaintiff’s delay in applying for injunctive or interim relief), the court may also grant ex parte relief without allowing the defendant to comment on the claim for injunctive or interim relief. In this case, the measures ordered by the court are confirmed (or rejected) in inter partes proceedings. Any injunctive or interim relief granted by a court must be pursued by the plaintiff in ordinary proceedings in order to have a court confirm the right of the plaintiff and the violation  any rights.

Shareholders may further consider filing an objection with the commercial register and request that the commercial register be blocked. As a consequence, applications filed by the company are not entered into the register anymore for a term of ten days. The shareholder(s) filing the objection must file an application for injunctive relief with the competent court within this ten-day term. If no application for injunctive relief is filed or if the application is dismissed, the commercial register will process the corporation’s registrations.

Apart from the actions shareholders’ resolutions and claims against directors, officers and auditors set out above (see 3.2 Legal Remedies Against the Company onwards), there may be other actions available in case of transactions pursuant to the Swiss Federal Act on Mergers, Demergers or Conversions of Legal Form (the MA). In this case, shareholders’ resolutions and board resolutions may be challenged, and shareholders can file liability claims in the case of mergers, demergers, conversions of legal form or transfers of assets. In addition, in the case of mergers, demergers or conversions of legal form, shareholders can file claims for review and determination of adequate compensation by the competent court.

Transactions prompted as a response to activist shareholders may include capital markets transactions. In this case, prospectus liability may become an issue. The liability for an issue prospectus is governed in Article 752 CO. Even though Article 752 CO primarily refers to equity prospectuses, it also applies to bond prospectus by reference (Article 1156 CO). Article 752 CO reads as follows: Where information that is inaccurate, misleading or in breach of statutory requirements is given in issue prospectuses or similar statements disseminated when the company is established or on the issue of shares, bonds or other securities, any person involved whether wilfully or through negligence is liable to the acquirers of such securities for the resultant losses.

Article 752 CO only applies if the following two requirements are met:

  • First, there must be an actual issuance of shares, bonds or other securities by a corporation (eg, through a capital increase or through the issuance of any debt instruments including convertible or option bonds). Additionally, initial public offerings (IPOs) with an actual capital increase (primary offerings) are subject to prospectus liability (as opposed to secondary offerings, where only existing shareholders sell shares or simple listings).
  • Second, the corporation must have prepared an issue prospectus or must have failed to do so despite the duty to publish such prospectus.

Prospectus liability does not only cover actual prospectuses but also prospectus-like offering documents and, according to certain scholars, even verbal statements made in the context of a capital markets transaction.

The prospectus liability regime is currently subject to a reform and will be transferred from the CO to the Swiss Financial Services Act (the FinSA). As such, it will be adjusted to European prospectus standards. Therefore, prospectus liability will, in the future, also cover secondary offerings and mere listings.

Generally, shareholder litigation, at least as of today, has not played an important role in Switzerland. This is attributable to several factors, including:

  • the standards of proof of a claim are generally high and the burden of proof is on the plaintiff; and
  • the cost associated with civil proceedings are high and entail additional litigation risks for the plaintiff, as it will not only bear its own cost but will also have to compensate the defendant for its cost in case of loss of the legal proceedings.
Walder Wyss Ltd

Seefeldstrasse 123
PO Box
Zürich
Zurich
Switzerland
8034

+41 58 658 58 58

+41 58 658 59 59

reception@walderwyss.com www.walderwyss.com
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Trends and Developments


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Lenz & Staehelin is one of the largest law firms in Switzerland, with over 200 lawyers and offices in Zürich, Geneva and Lausanne. The firm handles all aspects of international and Swiss law. In addition to advising on corporate law, the strong corporate and M&A practice group is involved in domestic and cross-border private and public M&A transactions and has been party to many of Switzerland’s most important corporate deals. Significant recent M&A transactions include Sunrise Communications Group AG in its acquisition of UPC Switzerland GmbH, CMA CGM in its public tender offer for CEVA Logistics AG, SABIC's purchase of 24% stake in SIX-listed Clariant from White Tale and subsequent business combination and governance agreement and Salt Mobile in its restructuring and subsequent sale of its passive mobile infrastructure to Cellnex. The firm serves as principal outside counsel for a number of SMI and other SIX-listed corporate clients on stock exchange and securities law and corporate governance matters.

Switzerland is in the middle of a significant revision of the section of the Swiss Code of Obligations governing the most common form of corporate entity, the corporation limited by shares (Société Anonyme/Aktiengesellschaft). This revision process, which was initiated more than thirteen years ago and which will, hopefully, be concluded before the end of the year 2019, was meant to bring the Swiss corporation limited by shares into the 21st century (the last revision dates back to 1991). The aim of the Swiss Federal council for this revision was to reinforce corporate governance and shareholders' rights and to give Swiss corporations limited by shares greater flexibility in the structure of their share capital and in the organisation of the shareholders' meetings and the passing of shareholders' resolutions. The revision has been reviewed and debated by both chambers of the Swiss parliament and while there are still a number of substantial divergences between the two chambers, it is unlikely that the ongoing process of eliminating these divergences will yield any surprise.

While the revision is clearly an improvement over the current situation in a number of aspects, such as the proposed simplification of the incorporation process or the increased flexibility of the stated capital, in terms of governance and shareholders' rights, the revision contains no real innovation and only modest improvements, mostly limited to publicly listed companies.

One example of limited improvement can be found on the topic of shareholders' rights and, in particular, regarding the ability of minority shareholders to request that an item be added to the agenda of a shareholders meeting, that a shareholders' meeting be summoned or to actively participate to the meeting.

Under the current law, a shareholder or group of shareholders must have at least 10% of the stated capital of the company or shares aggregating CHF1 million in par value to be able to request that an item be put on the agenda of a shareholders' meeting. These represented very high thresholds to satisfy when dealing with listed companies. In the revision, the threshold for listed companies will be reduced to 1% or 3% (the two legislative chambers are still to agree on the figure) of the share capital or voting rights and in non-listed companies the threshold will be set at 5% of the voting rights or share capital. The threshold of shares aggregating CHF1 million in par value has been completely eliminated in the revision.

While reducing the threshold from 10% to 1% (or 3%) looks like a significant improvement across the board, this is only true with respect to listed companies which have a stated capital not exceeding CHF100 million. For the largest listed companies, with stated capitals exceeding by far CHF100 million, the revision will make it harder to put an item on the agenda of their shareholders' meeting as gathering shares aggregating CHF1 million in par value is a lower hurdle than gathering 1% of the voting rights. With respect to non-listed companies, the revision represents an improvement for minority shareholders only with respect to companies with a stated capital not exceeding CHF20 million.

It should be noted though that, in practice, a number of large listed companies (such as Nestlé or ABB) have already introduced thresholds in their articles of association which are well below the 1% threshold contemplated by the revision and consequently it is not expected that the contemplated revision will significantly impact the level of shareholder activism such companies face, which has increased considerably in Switzerland over the past few years.

Recent activist campaigns include Cevian Capital’s campaign against Panalpina and its chair, who as a result had to resign from office. The campaign was also instrumental for the subsequent public tender offer by Danish DSV A/S for the shares in Panalpina. Cevian Capital also played an important role in the sale of a majority stake of ABB’s power grids division to Hitachi, which was the largest Swiss M&A transaction in 2018. A further recurring name on the list of activist shareholders is Daniel Loeb, who, through his investment company Third Point, repeatedly raised demands to Nestlé, including the desire to sell Nestlé’s stake in L’Oréal. Another noteworthy situation was Cobas Asset Management's opposition against SIX-listed Aryzta's highly dilutive capital increase.

Regarding the ability of minority shareholders to request a shareholders meeting, the current law provides that a shareholder or group of shareholders must have at least 10% of the stated capital or shares aggregating CHF1 million in par value to be able to request the summon of a shareholders' meeting. In the revision, the threshold for listed companies has been reduced to 5% of the voting rights and the threshold of shares aggregating CHF1 million in par value has been completely eliminated. The reduction in the voting rights threshold represent an improvement only with respect to listed companies, which have a stated capital not exceeding CHF20 million. In other words, for most large and mid-cap listed companies, the revision would make it harder, not easier, for minority shareholders to request the summon of a shareholder's meeting (unless a lower threshold is introduced in the articles of association). For non-listed companies, the elimination of the threshold of shares aggregating CHF1 million in par value without a reduction in the stated capital or voting right threshold actually degrades the rights of minority shareholders in any non-listed company with a stated capital exceeding CHF10 million.

Another example of limited improvement is the governance issue of the representation of women within the board of directors and at the level of senior management of Swiss companies. Since 1981, Switzerland has enshrined in its constitution the principle of the equality of men and women with Article 8 providing that Swiss law shall ensure not only equal legal rights for men and women but also actual equality (de facto), notably in the fields of family law, education and labor. Almost forty years after the introduction of this constitutional article, the representation of women on the board of directors and at the level of senior management of Swiss companies has not reached parity. Within the 100 largest Swiss companies, women represent less than 10% at the level of senior management and less than 20% at the level of the board of directors.

The topic of the representation of women on the board of directors and at the level of senior management of Swiss companies has been heavily debated, both when the draft of the revision was first placed in consultation by the Federal Council and when the two legislative chambers reviewed the project but such debates did not yield any ground-breaking innovation. In its current state, the revision does not provide for any mandatory level of representation for women (so called quota) or any mandatory steps, objectives or organisational measures to improve the representation of women on the board of directors and at the level of senior management of Swiss companies.

The only measure which will be implemented is limited to listed companies and provides that if the representation of women on the board of directors and at the level of the senior management is below 30% or 20% respectively, the company is required to explain, in its annual report to the shareholders on the compensation of board members and senior management, why these minimum thresholds have not been satisfied and which measures are being taken to improve the representation of women in the future. Non-compliance with these minimum thresholds does not carry any legal consequence. It remains to be seen whether this 'comply or explain' method, inspired the Swiss Code for Best Practice of Corporate Governance (a set guideline issued by economiesuisse, a trade association), will trigger a substantial increase in the representation of women in Swiss listed companies.

Another relatively hot governance topic currently debated in Switzerland is the issue of the responsibility of Swiss companies for violation of human rights and environmental abuse committed outside of Switzerland, either directly or through entities belonging to or controlled by any Swiss companies. This debate has been ushered by a recent constitutional initiative on which Swiss citizens will probably be required to vote within the next two years, unless the Swiss parliament decides to legislate on this matter to an extent which would prompt a withdrawal of the constitutional initiative. One of the two chambers of the Swiss parliament has prepared a draft legislation to address the concern of the constitutional initiative, while restricting its initially contemplated scope.

While the constitutional initiative provided that all Swiss companies (with a limited exception for small or mid-sized companies) liable for violation of human rights and environmental abuse committed outside of Switzerland, either directly or through entities belonging or controlled by Swiss companies, the draft legislation proposed by the parliament would only apply to companies with more than 500 employees and with a turnover greater than CHF80 million. The draft legislation also limits the liability of Swiss companies to situations resulting in loss of life, physical harm or property damages and provides that such companies would not be held liable in such situations if they can prove that they were in compliance with applicable legislation or they were not in a position to direct the actions of the controlled entity responsible for the violation of the relevant legislation. The draft legislation also explicitly excludes the liability of employees or directors of Swiss companies: in case of breach, only the relevant Swiss corporate entity would be held liable.

The Swiss Government recently came up with its own counter-proposal to this constitutional initiative, a project which is significantly more favourable to Swiss business since it completely eliminates any specific liability provision, preferring an approach where Swiss companies of a certain size would be required to publish annual reports on their compliance with human rights and environmental legislation in the foreign countries where they operate. The fact that two counter-proposals were prepared in response to this constitutional initiative is a sure sign that the issue of the social and environmental responsibility of Swiss multinational companies is gaining more traction and it can be expected to result in more stringent governance requirements in the near future as well as more shareholders' activism in these areas.

Lenz & Staehelin

Brandschenkestrasse 24
Zürich
Zurich
Switzerland
CH-8024

+41 58 450 8000

+41 58 450 8001

zurich@lenzstaehelin.com www.lenzstaehelin.com
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Law and Practice

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Walder Wyss Ltd has more than 200 lawyers and is one of the fastest growing Swiss full-service commercial law firms, with offices in Zurich, Geneva, Basel, Berne, Lausanne and Lugano. Walder Wyss offers services in the following areas: transactional services (corporate, M&A, equity and debt capital markets, banking and finance, regulatory law), tax, intellectual property and information technology, as well as dispute resolution (litigation and arbitration). The client base is comprised of domestic and multinational corporations of all sizes, including financial services providers. Walder Wyss has been appointed as a panel firm for several listed companies.

Trends and Development

Authors



Lenz & Staehelin is one of the largest law firms in Switzerland, with over 200 lawyers and offices in Zürich, Geneva and Lausanne. The firm handles all aspects of international and Swiss law. In addition to advising on corporate law, the strong corporate and M&A practice group is involved in domestic and cross-border private and public M&A transactions and has been party to many of Switzerland’s most important corporate deals. Significant recent M&A transactions include Sunrise Communications Group AG in its acquisition of UPC Switzerland GmbH, CMA CGM in its public tender offer for CEVA Logistics AG, SABIC's purchase of 24% stake in SIX-listed Clariant from White Tale and subsequent business combination and governance agreement and Salt Mobile in its restructuring and subsequent sale of its passive mobile infrastructure to Cellnex. The firm serves as principal outside counsel for a number of SMI and other SIX-listed corporate clients on stock exchange and securities law and corporate governance matters.

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