Switzerland Update: New Stock Corporation Law: Capital Increase and Capital Reduction (No. 6)

The new stock corporation law, which comes into force on 1 January 2023, brings many innovations. In our current blog series, we present these in detail.

In addition to the possibility of introducing a so-called capital band in the articles of association of the stock corporation – a number of other practice-relevant capital provisions in the Swiss Code of Obligations will be amended in the course of the revision of stock corporation law from 2023, in particular with regard to the conditional capital increase, the capital reduction, and the so-called harmonica. These changes will be examined in more detail below.

Adjustments to the conditional capital increase

Under current law, the General Meeting (“AGM“) may resolve on a conditional capital increase by granting in the Articles of Association the creditors of new bond or similar bonds vis-à-vis the Company or its Group companies as well as employees rights to subscribe for new shares (conversion or option rights).

Shareholders, members of the Board of Directors (“Board of Directors”) and third parties are now also recognised as possible addressees of the conditional capital. This corresponds to the liberal practice already in force today, for example when shareholder options (warrants) are issued in the event of a capital increase or members of the Board of Directors receive stock options as a component of remuneration, each of which is backed by conditional capital.

The prerequisite for the issuance of such instruments is that the subscription or advance subscription right of the (other) shareholders has been validly limited or withdrawn, for which an “important reason” is generally required. In the case of public companies, it will now be possible to restrict or revoke the right to subscribe in advance even without the existence of important reasons if and because shareholders have the opportunity to acquire the corresponding securities on the stock exchange on reasonable terms, thereby safeguarding their interests.

The exercise of the conversion or option rights underpinned by conditional capital (or the waiver of these) has so far required the written form, which is sometimes not complied with in practice (for example, if unrecognised electronic signatures are used in Switzerland). The possibility is now opened up that the statutes can also provide electronic means for the exercise of these rights (or the waiver thereof).

Adjustments to the ordinary capital reduction

Analogous to the capital increase, it will also be possible in the future to specify a maximum amount in the resolution of the AGM on the reduction of the share capital. In practice, this procedure is already considered partly permissible under current law, for example in the case of share buyback programs, in which the final extent to which shares are repurchased over a longer period of time and then destroyed is initially unclear.

Only linguistically and for reasons of coherence is it clarified that the AGM resolution must specify the manner of the capital reduction, i.e. the reduction of the nominal value and/or the destruction of shares.

The AGM resolution on the capital reduction must now also contain information on the use of the reduction amount. Consideration includes, for example, payment in cash and cash equivalents, offsetting (e.g. with an outstanding obligation to pay up) or conversion into reserves or debt.

Another new feature is that not only the AGM, but also the Board of Directors will have to participate in the capital reduction in the future. It prepares the reduction and carries it out by amending the articles of association in a public document – analogous to the two-stage procedure for the capital increase – and passing the declaratory resolution.

From a procedural point of view, the period within which the Board of Directors must register the capital reduction for registration with the Commercial Registry Office is also extended from three to six months, as is the case with the ordinary capital increase.

The debt call is also simplified; instead of three publications in the Swiss Official Gazette of Commerce (SOGC) with a reaction period of two months for creditors, a publication will be sufficient in the future, according to which the creditors must report to the company within 30 days with the request for freezing.

Adjustments to the capital reduction in the event of a genuine under-balance sheet

If the share capital is reduced to an extent not exceeding this in order to partially or completely eliminate an openly disclosed so-called genuine under-balance sheet resulting from losses (so-called declaratory or nominal capital reduction), the applicable law already allows for certain simplifications in the capital reduction procedure. The regulation applicable from 2023 specifies that the provisions on ordinary capital reduction, which concern the securing of claims, the interim financial statements, the audit confirmation and the findings of the FR, are not applicable. The content of the required audit report is now explicitly defined, on the basis of which the AGM decides on the declaratory capital reduction by amending the Articles of Association.

Facilitation of the “harmonica”

A relevant change arises in the possibility of the so-called capital cut (also called “harmonica”) already existing under the applicable law. For restructuring purposes, the share capital can be reduced for a logical second below the minimum capital under stock corporation law of CHF 100,000 (often even to zero) if it is increased again immediately afterwards at least to the same extent by fresh capital to be paid in full. This important restructuring instrument is now regulated in a separate provision, the content of which largely corresponds to previous practice. However, there is a decisive innovation with regard to the degree of liberation: unlike today, the new capital is no longer necessarily to be fully paid; it is sufficient if the amount of the contribution paid is not reduced, i.e. the previous level of payment is not reduced.

This also justifies not applying the provisions on ordinary capital reduction, which concern the securing of claims, the interim financial statements, the audit confirmation and the findings of the FR; the provisions on ordinary capital increases remain applicable. An adjustment to the Articles of Association is also dispensable if the share capital, the contributions made on it (degree of payment) and the share denomination remain unchanged.

If, on the other hand, the share capital is increased to a lower amount than the previous one (which is also possible under current law) – except for the elimination of a genuine under-balance sheet (see above), all provisions on the ordinary capital reduction and capital increase apply.

The same simplified rules that apply to the reduction and simultaneous increase of the share capital now apply explicitly to the reverse, comparable constellation (increase and simultaneous reduction of the share capital to the original amount).

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In addition to the newly introduced legal institution of the capital band, the revision of stock corporation law brings further, partly only linguistically editorial clarifications, but partly also substantive changes to capital provisions under stock corporation law, with which practical needs are taken up. In particular, the capital reduction in the case of a genuine under-balance sheet and the “harmonica” for restructuring purposes are in practice important (although not always sufficient) measures available to the Board of Directors that it can take to eliminate a loss of capital or over-indebtedness. Especially the facilitation of the “harmonica” (merely maintaining the degree of liberation) is to be welcomed in principle, as it increases the scope of action of the VR in a situation that may be critical for society.

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

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

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