Conflicts between shareholders and term of office of a director of a Swiss listed company limited by shares

Conflicts between shareholders and the term of office of a director of a listed company limited by shares

Conflicts between shareholders have unfortunately become relatively common in Switzerland. Incomplete articles of association, flawed shareholders agreements or simply major changes to shareholding, are regularly the cause of lasting and devastating disputes between shareholders, not only for the company but also for the persons or entities who control it.

For example, consider a listed company limited by shares which has recently been subject to a successful IPO. In such case, without going into details, it occurs regularly that the new majority shareholders express their wish to bring significant changes to the policy of the newly acquired company. In such event, it is not unusual to note the frustration of the previous majority shareholders who have become minority shareholders following the IPO. A conflict between previous majority shareholders and the new majority shareholders may then start.

Once a conflict of shareholders arises, a prime obstacle to the plans of the new acquirer will be often encountered when the previous majority shareholding is mainly represented in the Board of Directors of the company, following the IPO, serving in particular as chairman-director.
In fact, the previous majority shareholding, which mostly sits at the Board of Directors, can make it harder for the new majority shareholder to take control of the management of the company.

In particular, this article describes a situation in which a shareholder’s conflict encourages the previous majority shareholder to take all possible steps in order to oppose sustainably to the election of a new Board of Directors and prevent therefore the new buyer from appointing its own management.
In practice, in order for the new majority shareholding to dictate its own policy, it should be able elect its representatives in the Board of Directors. The election of the members of the Board of Directors is an inalienable prerogative of the general meeting of shareholders, (art. 698 para. 2 ch. 2 of the Code of Obligations (« CO »). As a result, such election requires the convening of an ordinary or an extraordinary general meeting (art. 699 CO).

However, the general meeting must be imperatively convened by the Board of Directors [1]. More precisely, the board of directors must first decide to convene such meeting and then request its convening.

Therefore, a decision of the Board of Directors («Board Resolution ») is first required in order to convene a general meeting so that a member of the board may actually request its convening.

For a board resolution to be adopted, a simple majority of the votes is required. The chairman has a casting vote which may tilt the balance unless otherwise provided by the Articles of Association (art. 713 CO)[2]. A tie vote (equality of votes in favor and votes against) is not sufficient.

It is worth recalling that the board of directors has the power to convene the general meetings, in particular:

  • Ordinary general meetings, every year within six months of the end of the financial year; (art. 699 al. 2 CO) ;
  • Extraordinary general meetings,
    • when deemed necessary (art. 725 para. 1 CO or 726 para . 2 CO) ;
    • when convened by one or more shareholders together representing at least 10 % of the share capital. (art. 699 para. 2 CO) in the form provided by the law (art. 700 para. 3 CO) ;
    • when convened by the external auditors (art. 699 para. 1 CO) when necessary;
    • when ordered by a judge (art. 699 para. 4 CO), often following the request of shareholders whose request to convene the assembly within a reasonable time, has been denied (art. 699 para. 4 CO).

Nonetheless, the law does not provide for any immediate sanctions if the board of administration refuses to convene an ordinary or extraordinary general meeting, regardless of the requests of the shareholders in this respect. The members of the Board of Directors are nevertheless held liable under the conditions prescribed by the law. The shareholders who wish to take legal action against one or several directors have to demonstrate in particular that a damage was caused to the company [decrease of assets or increase of liabilities] (art. 754 CO), an evidence which is usually difficult to bring.

In addition, de lege lata, reckless members of the board of directors, who have decided to delay the ordinary general meeting so that they can defer their revocation, could ignore without any valid reason the requests of the shareholders together representing at least 10 % of the share capital to convene a general meeting.
In this kind of situation, the risk of sanction for the directors who refuse to respond favourably to the requests of convening is a tenuous one to say the least.

In other words, following an IPO, the board of directors composed mainly of the representatives of the previous majority shareholder, can decide by a majority to refuse the convening of a general meeting in order to defer the revocation of the members of such board, which is a way of perpetuating the policy conducted before the IPO.

In case of a tie vote, only the Chairman of the board of directors in favor of the convening of a general meeting can make use of his casting vote, in order to tilt the balance, unless such privilege has been denied to him by the Articles of Association.

If there is a difference of opinion between many groups of shareholders, a stalemate situation may probably occur (called « pat ») which results from a tie vote (equality of votes in favor in one hand, and against the resolution on the other hand) [3].

Confronted with the refusal of the board of directors to convene a general meeting, the new majority shareholders have the possibility to request a judge to order the convening of a general meeting (art. 699 para. 4 CO). According to the case law of the Federal Court, in case of an imminent danger, the Court may decide itself on the convening of the general meeting, without going through the board of directors or a third neutral person[4].

Nonetheless, the convening of a general meeting by a judge may take several months, even though a summary procedure is applicable, especially if the board of administrators invokes grounds for refusal.

In a recent case, the first instance Court of Geneva did not render any decision of convening for more than six months obviously puzzled at the arguments of a board of administrators refusing to convene in the light of an alleged doubt regarding the representation of a majority shareholder [6]. In this case, the court did not have to decide given that a general meeting was finally convened by the board of administrators.

When an ordinary or extraordinary meeting is not convened during many months or even years, what about the term of office of members of the board of directors of a listed company limited by shares?

In accordance with article 3 of the Ordinance against excessive remuneration in listed Companies limited by shares (ERCO), the term of office of a member of the board of directors commences on the date in which he was elected by an ordinary or extraordinary general meeting and expires at the end of the following ordinary annual meeting[7].

Therefore, the article 3 of ERCO requires the election or reelection of the members of the board of directors every year. The article 3 of ERCO is of mandatory nature and as a result, the articles of association of the company may not derogate from it.

According to the article 699 para.2, 1st phrase of the Code of Obligations, the ordinary general meeting takes place every year within six months of the end of the financial year. This provision if of a semi-mandatory nature, meaning that such deadline may be shortened but not extended [10].

On this subject, BÖCKLI considers that « the rule according to which the term of office of directors expires at the end of the following ordinary general meeting means that (….) if no ordinary general meeting takes place, the term of office expires on the last day of the sixth month following the beginning of the financial year »[11].

Likewise, TRAUTMANN and VON DER CRONE consider that in absence of a general meeting, the term of office of the directors expires at the end of the sixth month following the end of the financial year [12]. In fact, for each of these authors, the expression of the will of the general meeting is irreplaceable, which means that an implicit renewal of the term of office of the directors would be inadmissible [13].

These authors share the view of the federal Court [14], who issued a judgment on the validity of a statutory clause regarding the implicit reelection of members of the board of directors and considered that an automatic renewal of their term of office as inadmissible, the election of the members of the board of directors being an inalienable right of the general meeting.

According to BÖCKLI, TRAUTMANN and VON DER CRONE, when a director continues to act as such, despite the expiry of its term of office, he becomes a « de facto organ » [15]. As such, he may incur his liability. However, the board resolutions are voidable only on grounds of nullity (art. 714 cum 706b CO). The entry in the commercial register protects bona fide third parties but does not extend the term of office of members of the board of directors [16].
Of a contrary opinion MÜLLER, LIPP and PLÜSS consider that despite the fact that an annual general meeting has not been convened at the expiry of the term of office, a director’s term does not expire but continues until the next general meeting and the election or the reelection of the member of the board of directors is included in the agenda of such meeting [17].

According to KNOBLOCH, a director’s term expires at the next ordinary general meeting, should it take place before or after the sixth month following the end of the financial year, since the time limit prescribed in art. 699 para. 2 is simply indicative [18]. According to KNOBLOCH the law requires an annual election of the members of the board of directors of the listed companies. An annual election becomes impossible when two years have elapsed following the last election As a result, the term of office expires at the latest two years after last election [19].

In view of these differing opinions and the case law of the federal Court, it appears that in any event is excluded the possibility of an implicit renewal of the term of office of members of the board of directors if an annual general meeting has not been held.
Admitting the contrary would go against the inalienable right of the general meeting to elect the members of the board of directors (art. 698 para. 2 ch. 2).

In the light of the above, the term of office of a director of a listed company limited by shares, remains unclear in the absence of an ordinary general (or extraordinary) meeting held within 6 months following the end of the financial year.

Does the term of office of the members of the board of administration expire on the last day of the sixth month following the end of the financial year, if an ordinary general meeting has not been convened before the expiry of such time limit (BÖCKLI; TRAUTMANN/VON DER CRONE)?

Or, as argued by KNOBLOCH, does it expire at the next ordinary general meeting, whether or not it takes place before or after the time limit of six months, or 2 years after the last election at the latest?

In our opinion, the view held by BÖCKLI is more convincing given that the possibility to renew the term of office of the members of the board of directors constitutes an infringement of the legislator’s intent to have the directors elected or reelected every year. This being said, it is the fate of the company, who would then be deprived of elected organs that should enter into consideration.

In conclusion, it should be noted that the convening of a general meeting requires certain patience when the board of administrators is hostile to it. Furthermore, the case law is virtually nonexistent considering the grounds for refusal given by the board of administrators when a request to convene is made by shareholders representing less than 10% of the share capital.

It is also clear that the Swiss law does not provide to this day, a satisfactory answer with regard to the term of office of the directors when an ordinary general meeting has not been convened within 6 months (or an extraordinary general meeting requested by the shareholders whose intent is to elect or reelect the members of the board of directors).

For the time being, taking control of a company by a new majority shareholding following an IPO is filled with challenges. Therefore, the potential acquirers of a listed company limited by shares should assess the situation and anticipate eventual problems before the IPO.

In the absence of an abundant case law on the subject and due to the uncertainties resulting from it, the legal certainty of Swiss law would no doubt benefit from a revision of the provisions related to the elements studied here above (ERCO and art. 699 CO, in particular), in order to allow the majority shareholder to (re)take control of a listed company limited by shares.

In particular, specific sanctions can be imposed on the board of administrators when it refuses to convene a general meeting on the sole purpose of delaying as long as possible the expiry of their term of office.

Samuel HALFF Lena-Marie CLODONG
Attorney Paralegal
BRH PARTNERS LLC
sh@brhpartners.ch

[1] Art. 699 para. 1 CO ; Henry Peter/Francesca Cavadini, , Commentaire Romand CO II, Ed. 2008, Helbing Lichtenhahn, art. 699 N 4).

[2] Henry Peter/Francesca Cavadini, Commentaire Romand- CO II, Ed. 2008, Helbing Lichtenhahn, art. 699 N 5; ZK-Tanner, N 30; BaK-Dubs/Truffer, N 2; Forstmoser/Meier-Hayoz/Nobel, §23 N 19.

[3] On this subject see case law related to art. 731b CO, regarding « pat », or « Patt » in german or « deadlock » in english.

[4] ATF 132 III 555, c.3.4.3

[5] Nonetheless, art. 699 CO does not provide for any grounds of refusal and the federal Court has not to this day issued a judgement on the possibility for the board of administrators to refuse the convening on any grounds.

[6] In casu, the board of administrators argued an existing dispute related to the election of the representatives of the majority shareholder of the company, claiming that a general meeting could not be convened in absence of certainties regarding the representation of the majority shareholder.

[7] DAENIKER Daniel, Anlegerschutz bei Obligationenanleihen, Ed. 1992, Schulthess, p. 53 ; VON DER CRONE Hans Caspar, Aktienrecht, Ed. 2014, Stämpfli, 5.16.

[8] VON DER CRONE Hans Caspar, Aktienrecht, Ed. 2014, Stämpfli, 4.46 ; VON BUREN Roland/STOFFEL Walter A./WEBER Rolf H., Grundriss des Aktienrechts, Ed. 2011, Schulthess, art. 529a.

[9] VON DER CRONE Hans Caspar, Aktienrecht, Ed. 2014, Stämpfli, 4.46.

[10] PETER Henry/CAVADINI Francesca, Commentaire Romand- CO II, Ed. 2008, Helbing Lichtenhahn, CO 699 N 19.

[11] BÖCKLI Peter, Schweizer Aktienrecht, 4ème éd., Schulthess 2009, 13 N 58

[12] TRAUTMANN Matthias/VON DER CRONE Hans Casper, Organisationsmängel und Pattsituationen in der Aktiengesellschaft, in Revue suisse de droit des affaires et du marché financier (Schulthess), SZW 2012 461, p. 465

[13] BÖCKLI Peter, Schweizer Aktienrecht, 4ème éd., Schulthess 2009, 13 N 58 TRAUTMANN Matthias/VON DER CRONE Hans Casper, Organisationsmängel und Pattsituationen in der Aktiengesellschaft, in Revue suisse de droit des affaires et du marché financier (Schulthess), SZW 2012 461, p. 465; contra MÜLLER Roland/LIPP Lorenz/PLÜSS Adrian, Der Verwaltungsrat Ein Handbuch für Theorie und Praxis, 4ème éd. (Schulthess), 2014, p. 49)

[14] Federal Court judgment , cause 4A_235/2013

[15] BÖCKLI Peter, Schweizer Aktienrecht, 4ème éd., Schulthess 2009, 13 N 58; TRAUTMANN Matthias/VON DER CRONE Hans Casper, Organisationsmängel und Pattsituationen in der Aktiengesellschaft, in Revue suisse de droit des affaires et du marché financier (Schulthess), SZW 2012 461, p. 466.

[16] Ibid.

[17] MÜLLER Roland/LIPP Lorenz/PLÜSS Adrian, Der Verwaltungsrat Ein Handbuch für Theorie und Praxis, 4ème éd. (Schulthess), 2014, p. 49.

[18] KNOBLOCH Stefan, Basler Kommentar, VegüV – art. 3 N 3; PETER Henry/CAVADINI Francesca, Commentaire Romand- CO II, Ed. 2008, Helbing Lichtenhahn, art. 699 N 19.

[19] KNOBLOCH Stefan, Basler Kommentar, VegüV – art. 3 N 3

21 February 2016