FCRO Practice Note 1/24: Important practical tips for capital increases

1. Capital band

Background

With the revised company law, the authorized share capital was replaced by the capital band. This allows the shareholders to authorize the board of directors to change the share and/or participation capital within a certain range, namely to increase or decrease it.

Company law stipulates that a capital band lapses if the shareholders resolve a capital increase, a capital reduction or a currency change during the term of the capital band.

Clarifications of the FCRO

The FCRO states that the authorization provision introduced to the articles of association by shareholder resolution must clearly state whether the board of directors is authorized to amend the share capital and/or the so-called participation capital (related to so-called "participation certificates", which are essentially non-voting shares).

The FCRO is generous with regard to the lapse of the capital band: the FCRO seems to favor, for example, that a capital band only affecting the participation capital does not lapse in case of an ordinary share capital increase (and vice versa). However, the FCRO also points out that the wording of the relevant statutory provision would suggest otherwise.

Furthermore, the FCRO recommends, in line with the prior provisions on authorized capital increases under the old company law (which referred to the information on ordinary capital increases), that the shareholders meeting must specify whether any shares or participation certificates issued from a capital band must be fully or only partially paid-in. However, capital bands introduced without such specification and capital increases from a such capital bands (for which the amount to be paid-in was determined by the board of directors) would still not be rejected due to the unclear legal situation.

Our assessment

The FCRO's clarification that the authorization provision must clearly state which capital may be changed by the board of directors is agreeable.

The FCRO's generous practice regarding the lapse of the capital band is also to be welcomed. However, in addition to the concerns already expressed by the FCRO, it should be noted that the revised company law opts for a joint consideration of share and participation capital in a different context (regarding the maximum range of the capital band). In our opinion, an existing capital band should therefore - contrary to the opinion of the FCRO - be expressly confirmed in the shareholder resolution also in the situations mentioned as a precautionary measure.

The FCRO's argument that (as under the old company law) the shareholders should be responsible for determining the amount to be paid-in seems anything but obvious: instead of referring to the ordinary capital increase, the revised company law now explicitly lists the elements to be determined by the shareholders as part of its authorization of the board of directors, whereby the amount to be paid-in is not mentioned. It was also stated in the Federal Council's report (Botschaft) on the revised company law that the capital band is intended to provide the board of directors with flexibility in amending the company's base capital and that there are, therefore, deliberate deviations from the provisions on ordinary capital increases. The FCRO does not elaborate on the basis of its conclusion that it "would hardly have been the intention of the legislator" to leave the decision on the amount to be paid-in to the board of directors. Against this background, it is to be welcomed that the FCRO does not wish to have registrations rejected if its conclusion is not followed. In practice, the possibility for the board of directors to determine the amount to be paid-in is often expressly mentioned in the shareholder resolution and the authorization provision in the articles of association.

2. Conditional share capital / Capital increase by set-off of claims against the company

Background

Until the revision of Swiss company law, only (limited) disclosure in the commercial register was provided for in the case of amounts paid-in by set-off; the stricter requirements (in particular additional disclosures in the articles of association) for contributions in kind or (intended) acquisitions in kind were not applicable.

In the wake of the revision of company law, the disclosure requirements for amounts paid-in by set-off were extended and brought in line with the other qualified types of contributions. As a result, a capital increase including the set-off of claims against the company must now be mentioned in the articles of association, whereby the subscriber must also be disclosed.

A discussion has subsequently arisen in legal doctrine as to whether these new requirements must also be complied with in the case of an increase from the conditional share capital.

Clarifications of the FCRO

The FCRO joins the more liberal interpretation in this regard: Since under the old law, no disclosures in the commercial register were made in the case of set-offs in the course of capital increases from the conditional share capital, and since there are no indications that restrictions were intended, the FCRO is of the view that such set-offs do not have to be disclosed in the articles of association now either.

Our assessment

The FCRO's reasoning is abbreviated and not entirely accurate. In particular, it is not correct that such disclosure makes no sense "as set-offs take place by definition in the case of a capital increase from conditional share capital". When issuing options (rather than conversion rights), the newly issued shares may well be paid up in cash and not by set-off. Nonetheless, the FCRO's assessment is, in our view, correct and to be welcomed.

However, it is important to note that - for example in the case of start-ups - conversion rights are often issued without being backed by conditional share capital, but are to be implemented on the basis of corresponding obligations of the (remaining) shareholders in the course of ordinary capital increases. In such cases, the provisions of the new company law (unfortunately) apply and the investor who pays up newly issued shares by set-off must be named in the articles of association. Investors who are interested in maintaining their investment confidential should therefore aim for their conversion rights to be backed by conditional capital.

3. Further explanations of the FRCO

In the practice note, the FCRO makes further comments on certain types of shareholder meetings. We highlight these in a separate publication.