Switzerland Update: New Corporate Law: Representation of the shareholders in the new company law

The new company law, which comes into force on 1 January 2023.

Introduction

The right to vote is one of the fundamental rights associated with being a shareholder of a corporation. Among the new provisions coming into force on January 1, 2023, Art. 689 et seq. of the Swiss Code of Obligations (nCO) concern the rights of any shareholder to participate in the general meeting, more specifically its representation in case of absence.

New law on shareholder representation

In the context of a general meeting, the shareholder may choose to participate personally or to be represented by a third party of his choice (Art. 689 para. 1 CO and 689b para. 1 nCO). This principle remains unchanged.

The current system of shareholder representation at the general meeting was not considered satisfactory, as it did not reflect the real will of the shareholders. Indeed, in the absence of instructions, which was often the case in practice, the proxy followed the recommendations of the board of directors.

The new law specifies the manner of appointment as well as the categories of eligible proxies. There are five categories of proxies: an independent, a depositary, a member of a corporate body of the company, another shareholder or a third party. The law also provides for the appointment of a joint proxy in the case of joint ownership of the shares, as well as for representation by the usufructuary (cf. Art. 690 CO). As the latter two forms of representation have not been modified by the new law, they are not covered by this blog. Among the categories of proxiees, the independent proxy is the focus of the new provisions.

The new law also makes a distinction between companies whose shares are listed on the stock exchange and those whose shares are not listed.

Part of the novelties have already been implemented through the ordinances and the COVID-19 law, which have opened the use of the independent proxy to all companies, whereas the concept was previously detailed in the Ordinance on abusive remuneration for listed companies (ORAb). However, one should be careful not to confuse the rules put in place during the pandemic with the new provisions of company law, as there are many differences.

Finally, we remind you that, under the new law, it will be possible to provide in the articles of association for the possibility of holding a virtual general meeting and/or to vote electronically (Art. 701c nCO and 701d nCO; see our blog: “General meeting under the new company law – what is changing?” of March 7, 2022).

The proxy in general

As regards shareholder representation, a more explicit distinction will be made in the Code of Obligations between unlisted and listed companies.

While Art. 689b nCO deals with the modalities that will be applicable, in principle, to all companies, the subsequent provisions make a distinction between companies whose shares are listed on the stock exchange and those whose shares are not listed.

With respect to the independent representative, certain new principles have been taken over from the ORAb. In particular, the new law specifies that the independence of the representative is to be assessed according to the same criteria as the independence of the auditors for the ordinary audit (cf. Art. 728 CO, applicable by analogy via Art. 689b para. 4 nCO): his independence must not be restricted either in fact or in appearance.

The independent representative can be a natural person, a legal person or a partnership (Art. 689b para. 5 nCO). He will have to exercise the shareholder’s corporate rights according to the instructions he has received (cf. provisions of mandate agreement, Art. 398 CO et seq.). In the absence of instructions, and contrary to the current system, he will have to abstain from voting (Art. 689b para. 3 nCO; see below “implementation”).

The board of directors, which is responsible for the convening and conduct of the general meeting, will be responsible for drawing up the forms for the granting of powers and instructions to the independent representative (Art. 689b para. 3 nCO; see below “implementation”).

The shareholders must have the possibility to give individual instructions on the proposed items on the agenda and general instructions on any new item (Art. 689c para. 4 nCO).

The possibility for a shareholder to be represented by a member of a corporate body of the company as well as by the depository representative remains open for unlisted companies (Art. 689b para. 2 nCO). For listed companies, this form of representation remains prohibited, as was already the case under Art. 11 ORAb.

The representative in unlisted companies

Among the permissible statutory restrictions, the new law maintains the possibility for unlisted companies to provide in their articles of association that a shareholder may only be represented by another shareholder of the company (Art. 689d para. 1 nCO).

However, where such a restriction is provided for in the articles of association, the board of directors will be obliged to appoint an independent representative where a shareholder so requires (Art. 689d para. 2 nCO). The objective is to guarantee shareholders the possibility of being represented by a neutral person, which is particularly important in companies with few shareholders, where possible conflicts and tensions could lead to delicate situations.

The board of directors must inform all other shareholders of the name and address of the independent proxy at least 10 days before the general meeting (Art. 689d para. 3 nCO). In principle, this information should be included in the invitation to the meeting (Art. 700 para. 2 no. 5 nCO). If the board of directors violates this obligation, the shareholder may be represented at the general meeting by a third party of his choice.

The articles of association may provide for a time limit within which a shareholder may request the appointment of an independent proxy (e.g. within two months after the end of the financial year) or even for other characteristics of the proxy or modalities of his appointment (Art. 689d para. 3 in fine nCO). If the possibility for a shareholder to make such a request is restricted or made impossible, it will be possible to appeal against the decisions of the general meeting.

Representation by a member of a corporate body has finally been maintained for unlisted companies, despite the initial draft of the Federal Council, which prohibited it for all companies (Art. 689b para. 2 nCO). A representative who is a member of a corporate body is also obliged to follow the shareholder’s instructions and to abstain from voting if he has not received them (Art. 689b para. 3 nCO).

Representation by a depository representative is also maintained (Art. 689b para. 2 and 689e nCO). For the purposes of the law, a depository representative is defined as a bank in accordance with the Banking Act and a financial institution in accordance with the Financial Institutions Act (Art. 689e para. 3 nCO).

In order to exercise the voting rights attached to the deposited shares, the depositary representative must request voting instructions from the depositing shareholder before each general meeting (Art. 689e para. 1 nCO). If the instructions are not given in time, the depositary representative shall exercise the voting right in accordance with the general instructions of the depositor, which may be set out in the general terms and conditions. In the absence of general instructions, he shall abstain from voting (Art. 689e para. 1 nCO).

Finally, if the company makes use of the possibility offered by the new law to hold the general meeting abroad or virtually, provided that this is provided for in the articles of association (Art. 701b para. 1 and 701b para. 1 nCO), the board of directors is obliged to appoint an independent representative in the convocation. The appointment of an independent proxy can be waived in this case if all shareholders of an unlisted company have waived the appointment of an independent proxy (Art. 701b para. 2 and 701d para. 2 nOC). The waiver of the appointment of an independent voting representative is considered to be an important decision which requires at least two thirds of the votes allocated to the shares represented and a majority of the nominal values represented (Art. 704 para. 1 no. 15 nCO).

For the rest, the general principles of Art. 689b nCO explained above apply.

The representative in listed companies

Art. 689c nCO deals with the independent representative in listed companies and takes up the principles of Arts. 8 and 9 ORAb.

The independent representative is the prescribed form of representation for this type of company, as representation by a member of a body or a custodian is prohibited.

It is also an implementation of Art. 95 para. 3 let. a of the Swiss Federal Constitution, which provides that the general meeting of listed companies shall appoint the independent representative each year. This is one of the principles applying to companies listed on the stock exchange in Switzerland or abroad which, according to the Federal Constitution, aims to protect the economy, private property and shareholders as well as to ensure sustainable corporate management (Art. 95 Cst).

The election of the independent representative is a non-transferable competence of the general assembly (Art. 698 para. 3 no. 3 nCO). The independent proxy is elected by the general meeting until the next meeting with the possibility of re-election (Art. 689c para. 1 nCO). A revocation of the independent representative will only be possible for the end of a general meeting. Thus, even if the dismissal of the independent representative is on the agenda, the independent representative will be able to exercise his powers in compliance with his duty of care and in accordance with the instructions received, even if his dismissal is approved at that meeting. The purpose is to avoid practical problems and to safeguard the rights of shareholders who would be represented at this meeting and who would have given instructions to the independent proxy.

If, for any reason, such as the resignation, death or loss of independence of the representative, the company no longer has an independent representative, the board of directors must exceptionally appoint one for the next general meeting. The articles of association may provide for another solution, such as the election of a substitute representative by the general meeting (Art. 689c para. 3 nCO).

Finally, we recall that the Criminal Code also provides for sanctions in case of violation of certain principles of company law. This is the case of Art. 154 of the Swiss Criminal Code, which deals with the punishability of members of the board of directors and the management of companies whose shares are listed on the stock exchange. According to Art. 154 para. 2 no. 3 of the Swiss Criminal Code, anyone who, as a member of the board of directors of a company whose shares are listed on the stock exchange, prevents the general meeting of shareholders from electing the independent representative annually and individually, is punishable by a custodial sentence of up to three years or a fine.

For instructions, see “Implementation” below.

For the rest, the general principles of Art. 689b nCO explained above apply.

Implementation of representation – powers of attorney and communications

In principle, in order to justify his powers, a representative must present a written power of attorney, general or specific, from the principal.

According to the new Art. 689a paragraph 4 nCO, the board of directors may authorize other forms of legitimization with respect to the company, unless otherwise provided for in the articles of association. This may include, for example, a power of attorney with an electronic signature (qualified or not).

The board of directors must take measures to ensure that no unauthorized persons can participate in general meetings and decision-making. Failure to do so may result in a decision of such a general meeting being considered null and void due to a breach of the board of directors’ duty of care.

Independent proxies, proxies who are members of a corporate body of the company and depositary proxies must notify the company of the number, type, nominal value and class of the shares they represent (Art. 689f para. 1 nCO). If these notifications are not made, the decisions of the general meeting can be annulled under the same conditions as in the case of unauthorized participation in the general meeting in accordance with Art. 691 CO.

The chairman shall communicate this information to the general meeting in its entirety for each form of representation. If, despite a shareholder’s request, he fails to do so, any shareholder may challenge the decisions of the general meeting by taking legal action against the company (Art. 689f para. 2 nCO).

Finally, the minutes of the general meeting must indicate the number, type, nominal value and class of shares represented, specifying those represented by the independent proxy, those represented by a member of a corporate body and those represented by the depositary representative (Art. 702 para. 2 no. 2 nCO).

The implementation of the representation – the representative’s instructions

According to the new Art. 689b paragraph 3 nCO, if the company provides for the institution of an independent proxy, the latter is obliged to exercise the voting rights in accordance with the shareholder’s instructions. If he has not received instructions, he must abstain from voting.

As it will be possible to vote electronically (Art. 701c nCO, which is an implementation of Art. 95 para. 3 let. a Cst), shareholders will have the possibility to grant powers of attorney and give instructions electronically (Art. 689c para. 6 nCO).

If the proxy is not authorized, Art. 691 CO on participation without right in the general meeting applies.

Art. 689c nCO also specifies that the board of directors must draw up forms to be used for the allocation of powers and the giving of instructions. According to the Message of the Federal Council, this rule, which is in line with the duty of the board of directors to organize the general meeting, settles a question that was partly controversial in practice. The content of the forms will be dictated in particular by the provisions of the Swiss Code of Obligations (Art. 689b para. 3 and 689c para. 4 nCO).

According to Art. 689c para. 4 nCO, the board of directors shall ensure that the shareholders have the possibility to give the independent proxy (i) instructions on any proposal mentioned in the notice of general meeting and relating to the items on the agenda, as well as (ii) general instructions on any unannounced proposal relating to the items on the agenda and on any new item within the meaning of the new Art. 704b nCO, i.e. on proposals to convene an extraordinary general meeting, the institution of a special examination and the appointment of an auditor.

For items on the agenda, and based on a practice that has already been considered compatible with the ORAb, it will be possible to provide in the form that the shareholders vote in accordance with the recommendations of the board of directors when the form is returned signed but without specific or general instructions.

For objects not on the agenda, with the exception of the objects mentioned in Art. 704b nCO, a simple option “approval of the proposal of the board of directors” or “abstention” is forbidden. For these objects, no decision of the general meeting can be taken.

The above principles apply to both listed and unlisted companies with regard to the independent proxy and to the proxy who is a member of a corporate body in unlisted companies (Art. 689c para. 4 and 689d para. 4 nCO).

In order to reduce the administrative burden on unlisted companies in particular, the shareholders of such companies will be able to issue standing proxies and instructions. In contrast, the powers and instructions of the independent proxy in listed companies may only be granted for the upcoming general meeting (Art. 689c para. 6 nCO).

The independent proxy will be obliged to treat the instructions of each shareholder confidentially until the general meeting, subject to the possibility to provide general information to the company three working days before the date of the general meeting and to indicate at the general meeting which information he has provided to the company in advance (Art. 689c para. 5 nCO).

Finally, it should be noted that the provisions of the mandate agreement apply to the relationship between the proxy and the shareholder (cf. Art. 394 et seq. CO). The proxy is therefore obliged to request and follow the instructions of the shareholder (Art. 397 et seq. CO). In the event of a breach of this obligation, the proxy is liable for the damage he causes to the principal (Art. 397 para. 2 and 398 para. 2 OR).

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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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