Void general meetings if convened by a board or directors no longer in office

Facts and key considerations

The respondent B AG had three shareholders, namely A with 45% of the shares and votes, C with 45% and J with 10%. A was the claimant who asserted the invalidity of the resolutions of the general meeting of shareholders by which the directors were re-elected and derived from this an organizational defect pursuant to art. 731b Code of Obligations ("CO").

The opponents of claimant A were the shareholders C and J. C was the only member of the board of directors of B AG and J was C's daughter.

The articles of association of B AG contained the following provision regarding the term of office of the board of directors (informal translation):

The members of the board of directors are elected for a term of office of one year, whereby the period from one ordinary general meeting to the next is deemed to be one year.

B AG had a financial year that corresponded to the calendar year.

According to the interpretation of the provision of the articles of association by the lower court (Obergericht des Kantons Zug II, Z2 2023 26), which was confirmed by the Federal Supreme Court, the year of office is to be understood as the period between two ordinary general meetings. According to art. 699 para. 2 CO, the ordinary general meeting of shareholders must be held within six months after the end of the financial year. A year in office at B AG could therefore last up to a maximum of 18 months.

Since C was never confirmed in office or re-elected after her election on 18 September 2018, she was no longer a member of the board of directors at the time the ordinary general meeting at issue was convened on 30 April 2022 according to the Federal Supreme Court. B AG suffered from an organizational defect pursuant to art. 731b CO. This is in line with the BGE 148 III 69 already published on 3 December 2021.

However, the current decision BGer 4A_387/2023, 4A_429/2023 also states that directors no longer in office lack the authority to convene a general meeting. The view that a convocation is possible due to the position as a "de facto director" is therefore rejected. According to the Federal Supreme Court, the convening of a general meeting by a "de facto board of directors" leads to the nullity of the general meeting and the resolutions passed therein.

Further considerations

In addition to these main considerations, further considerations of the Federal Supreme Court are worth mentioning.

As a shareholder, claimant A immediately confirmed receipt of the invitation to the general meeting and questioned C's authority to convene the meeting. Based on this, the lower court and the Federal Supreme Court denied that initiating the organizational deficiency proceedings pursuant to art. 731b CO was an abuse of rights. Considering the detailed considerations on the question of abuse of rights, it is conceivable that the Federal Supreme Court would have ruled differently (i.e. presumed an abuse of rights), if A had not objected to the convening of the meeting by a person without authority. It therefore seems – rightly so – questionable whether shareholders can use the new decision to revisit past general meeting resolutions and invoke their nullity if they were convened by a board member who was not re-elected in time. This applies all the more because the Federal Supreme Court has also not expressly addressed the question of whether a causality requirement applies, i.e. whether a defective convocation only leads to the invalidity of the decision if the result of the vote would have been different if the meeting had been correctly convened. This question therefore still does not appear to have been decided by the Federal Supreme Court.

The Federal Supreme Court also confirmed that the temporary, renewed appointment of C as a member of the board of directors to convene a general meeting was an appropriate measure to remedy the organizational defect. The reason given was that C had already been a director since 2013 and would not require any training period. It is noteworthy that the Federal Supreme Court recognized the appointment of the former director, who was no longer in office since there was no lawful re-election, as an appropriate measure to remedy the organizational defect. As a result, according to the Federal Supreme Court, the organizational defect can be remedied by a general meeting convened in the same way respectively by the same person as the general meeting that was previously deemed null and void, provided that the person is appointed by the court. The practical implications of the decision were correspondingly small in the specific case.   

Furthermore, the Federal Supreme Court considered the auditors - despite the lack of a (lawful) re-election and the identical provision in the articles of association regarding the term of office - to still be in office, due to the explicit wording in art. 730a para. 1 CO. Art. 730a para. 1 CO states that the term of office of the auditors ends "with the approval of the last annual financial statements". Since no annual financial statements have been approved after the election of the auditors in the present case, the mandate of the auditors continued even without (lawful) re-election, according to the Federal Supreme Court.

Considerations concerning the decision

The decision once again emphasizes the relevance of holding the ordinary general meeting on time. Shareholders must be protected against directors extending their term of office at their discretion. The six-month deadline pursuant to Art. 699 para. 2 CO is therefore not simply a provision for the sake of good order, but non-compliance with it has consequences. However, the scope of the nullity of general meetings convened by a board of directors that is no longer in office stated by the Federal Supreme Court may be limited. 

The decision mainly affects companies with several shareholders. In such cases, the convening of a general meeting cannot be waived. If a board of directors that is no longer in office then convenes a general meeting and no plenary meeting can be held, the resolutions passed at the meeting are generally null and void according to the Federal Supreme Court. The Federal Supreme Court does not differentiate between individual agenda items but considers all resolutions of such general meeting to be null and void.

On the other hand, if the company has only one shareholder, plenary meetings are the rule. It is thus not necessary for the directors to convene a meeting. Accordingly, directors that are no longer in office due to the expiry of the six-month period can be re-elected at a plenary meeting and an (interim) organizational defect can thus be remedied.

The decision not only has an impact on the validity of resolutions passed by the general meeting. It also raises the question of whether a board of directors that is no longer in office can take on the non-transferable and irrevocable tasks of preparing the annual report and the General Meeting in accordance with Art. 716a para. 1 no. 6 CO. This question also arises in the run-up to plenary general meetings. As the de facto directors, according to the Federal Supreme Court, "must do everything to ensure that a general meeting can be held", these preparatory acts can possibly also be carried out by de facto directors that are no longer in office. According to a strict interpretation, however, all resolutions of a de facto directors are null and void.

Nonetheless, the company remains capable of acting externally, as the power of representation is secured with the entry of the directors in the commercial register. Whether the directors were re-elected in due time is in that regard not decisive.

Recommendations for action

In light of the new decision, we recommend in particular the following measures:

• Timely holding of the ordinary general meeting: 
  
  Ideally, a company should always ensure that it holds the ordinary general meeting within the statutory period of six months after the end of the financial year in accordance with art. 699 para. 2 CO.

If it is not possible to hold the ordinary general meeting on time, we recommend that the re-election of the members of the board of directors be carried out at an extraordinary general meeting convened within the six-month period or - if possible - by means of a written shareholder resolution or an (extraordinary) plenary general meeting within the six-month period. The lower court denied that in the case of a provision in the articles of association according to which the election of the board of directors must take place "until the next ordinary general meeting" a re-election at an extraordinary general meeting is possible. However, the Federal Supreme Court has not ruled on this, and it is undisputed that members of the board of directors can also be elected or dismissed at extraordinary general meetings.

If the six-month deadline has been missed and an extraordinary general meeting has not been held in good time, the board of directors should wait with passing resolutions to the extent possible. Secondly, a plenary general meeting should be held or, if this is not possible due to the number of shareholders, as a last resort, the competent court should be invoked to remedy the organizational defect in accordance with art. 731b CO. When doing so, it may be requested that the directors, which are no longer in office, should convene and hold the general meeting in order to remedy the organizational defect. 
 

• Review and possible adjustment of the statutory term of office: 
  
  If the articles of association provide for a one-year term of office, the term of office can be extended for unlisted companies by amending the articles of association. This minimizes the risk of directors losing their office if no ordinary general meeting is held within six months of the end of the financial year. Annual confirmations with a view to a "good corporate governance" are still possible.  
   
• Overview of the members of the board of directors: 
  
  For companies with several directors it is advisable to keep an overview of the election date and term of office of the individual directors, particularly in the case of multi-year terms of office that do not run concurrently for each director.