Switzerland Update: EHRA’s welcome clarifications on capital changes under the new stock corporation law

With its latest Practice Communication 2/23 dated 6 June 2023, the Federal Commercial Register Office (EHRA) has clarified further practically relevant questions in connection with capital changes under the revised stock corporation law.

1. Initial situation

The revised provisions of the Swiss Code of Obligations (OR) on stock corporation law and the updated implementing provisions of the Commercial Register Ordinance (HRegV), which came into force on 1 January 2023, relate in particular to the various types of capital changes (for the capital band. One of the declared objectives of the revision was to modernise these procedures in order to allow Swiss stock corporations to obtain more needs-based financing. In order to facilitate the practical implementation of these flexibilisations, the EHRA had already addressed transitional issues in the case of capital increases in its Practice Communication 3/22 of 19 December 2022 and in the meantime made further clarifications with Practice Communication 1/23 of 21 March 2023 and the latest Practice Communication 2/23 of 6 June 2023.

2. Capital band

As a successor to the authorized capital, the capital band was introduced. What is new about this instrument is not only the longer authorisation period of the Board of Directors of up to five years and the possibility for the General Meeting of Shareholders to authorise the Board of Directors to carry out capital reductions, but also its system. Whereas in the past a fixed nominal amount had to be entered in the Articles of Association, to the extent of which the Board of Directors was allowed to carry out approved capital increases, an upper and a lower limit must now be fixed according to the ideal-typical capital band, within which the Board of Directors can in principle freely make capital changes upwards and downwards during the authorization period.

Due to the new legal concept of the limits in terms of amount, some questions had arisen about the necessary and sensible content of the statutory provision on a capital band, the so-called enabling clause. The EHRA has to comply with the corresponding requirements, which are required in accordance with Art. 653t para. 1 CO in the Articles of Association, the following is stated:

Capital band limits: In principle, the upper and lower limits of the capital band must be included in the enabling clause in accordance with the wording of the law. However, in the case of an authorization, the lower limit can only be waived for a capital increase (in accordance with the old authorized capital), since there is no actual fixed lower limit here, but the lower limit corresponds to the current share capital. The EHRA did not explicitly address the question of whether, in the opposite case of an authorisation, the fixing of an upper limit can be waived only for the purpose of reducing capital. If both the lower and upper limits are specified, it can be assumed in principle that the General Meeting intends to authorize the Board of Directors to increase or decrease the capital, at least insofar as the authorization clause does not provide for an explicit restriction of the powers of the Board of Directors (Art. 653s para. 3 CO).
Number and nominal value: If the Annual General Meeting wishes to grant the comprehensive authority to increase or decrease the capital at will within a certain range, the indication of the number and nominal value of the shares to be issued is typically not useful and can lead to unclear formulations as well as follow-up questions in connection with the amendment of the enabling clause. According to the EHRA, the number and nominal value of the shares to be issued should therefore only be included in the authorisation clause if the board of directors is only allowed to issue a certain number of shares (based on the capital increase approved under the old law). Otherwise, despite the wording of Art. 653t para. 1 no. 4 CO, this information can be waived.
Included participation rights: It is possible to formulate the authorization clause in such a way that the board of directors can issue different participation rights (e.g. shares with different preferential rights or participation certificates) alternatively from each other, provided that the characteristics of these participation rights are precisely fixed in the authorization clause and that the limits of the capital band are always complied with in the context of the issuance of the participation rights or changes in nominal value stay.
EHRA also commented on the amendment of the enabling clause. In principle, this can only be changed by the General Assembly. This applies in particular to the lower and upper limits, subject to the special case provided for by law, if the Board of Directors is called upon to update the capital band limits following a capital increase from conditional capital outside the capital band (Art. 653g para. 2 CO). Following a change in capital within the capital band, the Board of Directors is generally only required to amend the provisions of the Articles of Association relating to the share capital. An exception exists if the authorization clause contains information on the number and nominal value of the shares to be issued (without the corresponding restrictive intention of the Annual General Meeting). In this case, according to the EHRA, the relevant information in the enabling clause can be updated or completely deleted by the Board of Directors for reasons of transparency and in line with the practice on authorized capital.

EHRA has also clarified some important details for the capital change procedure itself, which also apply to capital changes within the capital band. It was already specified in Practical Communication 3/22 that documents for a change in capital not mentioned in the Commercial Register Ordinance do not have to be submitted to the Commercial Register, even if they are enclosures to the public document. Thus, in the case of capital increases, the subscription certificates do not have to be submitted, among other things, and in the case of capital reductions, the annual or interim financial statements on which the audit confirmation to be obtained is based. Furthermore, it was confirmed in the practical communication 2/23 that a capital increase with a maximum amount would also be possible within the framework of a settlement payment and (theoretically) a payment by contribution in kind.

EHRA’s clarifications on the capital band are to be welcomed, as they are based on a purpose-oriented understanding and improve the functionality and legal certainty of the new institution. This is clearly demonstrated by the comments on the content and adjustments of the enabling clause. Where, for reasons of transparency and clarity, it is necessary to formally update the enabling clause following a change in capital within the capital band, this can be done by the Board of Directors. However, the idea of the capital band should be that the general meeting of shareholders integrates an authorization clause into the articles of association, which gives the board of directors the desired capital change powers without the need for adjustments to the capital band after each capital change in the capital band.

Further on this functional approach: Sandro Bernet, The Capital Band as an Instrument of Corporate Finance, Zurich 2023, N 108 et seq. (Annex 1 of the above-mentioned publication contains a model clause on a capital band, which corresponds to this understanding now confirmed by EHRA).

3. Conditional capital

The instrument of conditional capital was not fundamentally adjusted on the occasion of the revision of company law, but was only selectively revised. Accordingly, EHRA also emphasizes that an adjustment of an existing (old law) conditional capital can be regarded as a transfer to conditional capital under the new law, insofar as the requirements under Art. 653 et seq. CO. A formal cancellation and re-registration of the conditional capital under the new law is not required in these cases.

At the beginning of the year, the new species led to some uncertainties. 653i para. 2 CO, the wording of which could give the impression that any adjustments to the provisions of the Articles of Association on conditional capital would now require an audit confirmation. However, the EHRA has now correctly specified that Art. 653i CO serves to protect the conversion and option holders and thus only applies in the event of a complete or partial cancellation of a conditional capital. In the event of other changes to the provision of the Articles of Association on conditional capital, e.g. in the event of an increase in the amount of conditional capital, Art. 653i CO according to the EHRA, on the other hand, does not have to be observed and therefore no confirmation of an approved audit expert is required.

From our point of view, the assessment expressed in the literature that the new disclosure requirements for offsetting payment in the context of a capital increase from conditional capital will not be applied is also correct, as the retention of the previous regulatory concept for conditional capital was expressly emphasized in the materials on the new stock corporation law.

4. Coordination issues

In its latest Practice Communication 2/23, EHRA also addresses the interplay between capital band and conditional capital. This is a bit of a challenge in that it requires the coordination of two different concepts. On the one hand, the change in capital within a range in the capital band. On the other hand, the capital increase to the extent of a nominal amount fixed in the articles of association for conditional capital (the latter in accordance with the approach of the old authorized capital).

As a rule, however, the practitioner will not have to deal with the associated interpretation subtleties. If the articles of association do not contain any special rules, conditional capital that already existed at the time of the introduction of a capital band or is subsequently introduced is conditional capital outside the capital band. This means that the limits of the capital band must be added to the extent of the increase by the Board of Directors after each increase in the capital from conditional capital (outside the capital band) (Art. 653g para. 2 CO). The two institutes can thus coexist without complications.

Special provisions in the Articles of Association are only mandatory if the issue of shares from the capital band and from conditional capital (following the issuance of equity-linked financing instruments) is to be made dependent on each other, i.e. the use of one of these types of placement is intended to limit the scope of the Board of Directors under the other instrument. In this case, we speak of a conditional capital within the capital band. As the EHRA has now clarified, the information pursuant to Art. 653b of the Swiss Code of Obligations (CO) on conditional capital to be fixed by the General Meeting of Shareholders in the Articles of Association. The design of such a combination must be examined on a case-by-case basis. From our point of view, however, it would typically make sense to separate out conditional capital within the capital band from the outset in a separate articles of association clause in addition to the enabling clause, since the articles of association clause on conditional capital within the capital band must remain in force over the authorization period of the capital band in order to protect the option and conversion holders, as long as corresponding instruments are outstanding. For reasons of transparency, EHRA requires the following note in the commercial register in this constellation: “Capital band partly with conditional capital as described in more detail in the articles of association”.

EHRA had already stated in Practical Communication 1/23 that in the event of a resolution on an ordinary change in capital at the same Annual General Meeting on the introduction of conditional capital and/or a capital band, the determination of the amount limits can already be based on the capital figure as of the situation after the ordinary change in capital, provided that the corresponding resolutions are passed at the same time as the registration can be registered. It is to be welcomed that the EHRA has expressly confirmed the continued validity of this proven practice.

Further on these and similar coordination issues: Sandro Bernet, Das Kapitalband als Instrument der Unternehmensfinanzierung, Zurich 2023, N 256 et seq. (Annex 1 of the aforementioned publication contains proposals for a statute clause on conditional capital within the capital band).

5. Authorized capital (transitional rules)

Finally, in Practical Communication 2/23, the EHRA has made further clarifications on the transitional provisions on the old authorized capital. As is well known, these stipulate that provisions of the Articles of Association relating to authorized capital remain valid until their expiry date, applying the previous law, but can no longer be extended or amended. However, as already noted in Practical Communication 1/23, this prohibition of adaptation only applies to substantive changes. According to the EHRA, the following changes in particular are also permissible:

Adjustment of the available nominal value and the available number of shares by the Board of Directors following a (still permissible) partial utilisation of an authorized capital.
Necessary adjustments to the provisions of the Articles of Association on authorized capital as a result of a change in the nominal value or a change in the currency of the capital.
Editorial adjustments to the Articles of Association clause on authorized capital by the Annual General Meeting (e.g. correction of spelling errors).
With regard to the relationship between the old authorized capital and the capital band, EHRA had stated in Practice Communication 1/23 that the introduction of a capital band with the authorization (also) to increase the capital is only possible if the General Meeting of Shareholders at the same time repeals the provision on authorized capital.

In case of doubt, such transitional issues can typically be eliminated by the General Meeting of Shareholders transferring an existing capital under old law to a (new) capital band with materially equal scope of authorization for the Board of Directors.

By Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact switzerland@transatlanticlaw.com

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