Switzerland Update: No tacit extension of the term of office of the Board of Directors

The members of the board of directors are elected for a term of three years, unless the articles of association stipulate a different term of between one and six years. This is provided for in the Swiss Code of Obligations, which also allows for re-election (Art. 710 CO).

In practice, it may happen that the re-election or by-election of the members of the board of directors is forgotten, especially if the term of office exceeds one year and therefore a re-election or by-election does not have to be carried out at every annual general meeting. Even if the term of office of the various members of the board of directors does not end at the same time as a result of a staggered election, a re-election or a by-election can quickly be forgotten. In rare cases, the re-election or by-election is deliberately not put on the agenda.
In such cases, the question arose as to whether a tacit extension of the term of office can or must be assumed. This issue was disputed in the doctrine.

Organisational defect

The Swiss Federal Supreme Court has now ruled for the first time that there is no tacit extension of the term of office of members of the board of directors (Federal Supreme Court ruling 4A_496/2021 of 3 December 2021; intended for official publication). Rather, the term of office of the board member ends with the expiry of the sixth month after the end of the relevant business year if no annual general meeting of shareholders has been held or if the election of the board of directors has (intentionally or unintentionally) not been put on the agenda. This is because the Swiss Code of Obligations stipulates that the ordinary general meeting of shareholders must take place annually within six months after the end of the business year (Art. 699 para. 2 CO). In addition, the shareholders’ right to vote would otherwise be impaired (Art. 698 para. 2 item 2 CO).

It is true that the last elected members of the board of directors, who continue to serve despite not being re-elected, qualify as de facto directors and are thus still subject to directors’ liability according to the Swiss Federal Supreme Court (Art. 754 CO). In principle, third parties may also rely on the entry in the commercial register, unless they are positively aware that the term of office of the registered board members has ended.

Instead of a tacit extension of the term of office, however, according to the Federal Supreme Court there is in principle an organisational defect after the expiry of the term. This must be remedied by making up for the missed election.

In the case in question, at the request of a shareholder an administrator was appointed, who had to convene the corresponding general meeting. The action was necessary because the previous board of directors (whose term of office had already expired) was not prepared to convene such a general meeting. According to the Swiss Federal Supreme Court, a direct convocation by the court is also possible as an alternative to the appointment of an administrator.

The Swiss Federal Supreme Court did not have to rule on whether resolutions of the board of directors adopted after the expiry of the term of office of its members are valid. The Swiss Federal Supreme Court at least did not hold that the board of directors, whose term of office has already expired, cannot validly convene a general meeting. It would be an exaggerated formalism if the (initially forgetful but willing) board of directors or a shareholder had to refer to the courts instead.

Incidentally, according to the Federal Supreme Court, the same rules apply with regard to the election of the auditors.

Recommendations

It should always be ensured that no election of the board of directors and the auditors is forgotten, but is carried out at the latest by the end of six months after the end of the business year (if a term of office actually ends). Particularly in group relationships, care must be taken to ensure that this deadline is met not only at the parent company level but also in the subsidiaries.

If the annual general meeting cannot be held in time because the annual financial statements and, if applicable, the auditor’s report are not yet available, it may be advisable to hold an extraordinary general meeting to elect the board of directors, especially if important board resolutions are pending.

In circumstances where such an election was not held or was not held in time, the election should be held immediately. If the board of directors refuses to convene the general meeting, the matter must be referred to the court.

Depending on the circumstances, it may also be appropriate to repeat or subsequently confirm resolutions of the board of directors adopted after the expiry of the term of office, as soon as the election of the board of directors has subsequently been completed.

By Thomas Steiner-Krizaj, Vischer, Switzerland, a Transatlantic Law International Affiliated Firm.

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

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