Loss of property rights to converted bearer shares - Action required until 31 October 2024

Background - Automatic conversion of bearer shares into registered shares

Since the Federal Act on Implementation of Recommendations of Global Forum on Transparency and Exchange of Information for Tax Purposes came into force on 1 November 2019, the issuance and continued existence of bearer shares in accordance with art. 622 para. 1^bis of the Swiss Code of Obligations (CO) has only been permitted if (i) the company in question has equity securities listed on a Swiss stock exchange or (ii) the bearer shares are structured as intermediated securities in accordance with the Federal Act on Intermediated Securities and are deposited with a custodian in Switzerland designated by the company or entered into the main register. Companies that continue to have bearer shares are obliged to have the applicable aforementioned exception registered in the commercial register.

Companies that did not fall under the above-mentioned exception regarding the continuation of bearer shares were obliged to convert all issued bearer shares into registered shares by 1 May 2021 at the latest and to amend the company's articles of association accordingly. Without action by the company, any bearer shares (as well as any bearer participation certificates) were automatically converted into registered shares by law as of 1 May 2021, with the competent commercial register making the changes resulting from the conversion ex officio (art. 4 para. 1 and 2 of the transitional provisions of the amendment of 21 June 2019; ÜBest). Companies whose (bearer) shares were converted by law are still obliged to amend their articles of association accordingly. As long as the corresponding amendment to the articles of association is not made by the company in question, the competent commercial register will reject any application for another amendment to the articles of association. However, other entries in the commercial register (e.g. changes within the board of directors) can still be made by such companies.

Provided one of the exceptions to art. 622 para. 1^bis CO was fulfilled (i.e. Swiss stock exchange listing or structuring as intermediated securities), the company had to notify the fact that the bearer shares were either listed on a Swiss stock exchange or structured as intermediated securities, together with the supporting documents, to the competent commercial register by 1 May 2021 at the latest (art. 43 para. 1 lit. i of Register of Commerce Ordinance). If such notification was not made within the applicable time period, the respective bearer shares were also automatically converted into registered shares after 1 May 2021.

Opportunities for former holders of bearer shares until 31 October 2024

In the event of an automatic conversion of bearer shares into registered shares as described above, the company was obliged from 1 May 2021 to include a note in the share register regarding those shares for which no notification of the former bearer shareholders pursuant to the former art. 697i CO had been received by the company by the aforementioned date. The membership rights of the former holders of bearer shares who had not complied with the notification obligation by then were suspended and the property rights were forfeited (art. 6 para. 2 ÜBest). This provision is in line with the sanction regime regarding non-compliance with the notification obligations of the beneficial owners pursuant to art. 697m CO.

Shareholders who have not yet complied with the notification requirement mentioned above still have the opportunity to apply to the competent court for the registration of their ownership until 31 October 2024, provided the company has given its prior approval. The company may only refuse its consent for reasonable grounds, i.e. if there are justified doubts about the shareholder status. Since the strict standard of proof only applies in the ensuing court proceedings, it should be sufficient for the purposes of the company's consent that the alleged shareholder demonstrates credible evidence of its shareholding status. Shareholders can, after the automatic conversion, thus no longer independently create a situation in which they are entitled to fully exercise their membership rights. Instead, they are dependent on the cooperation of the company and must prove their shareholder status in court proceedings. If the company unjustifiably refuses its consent, the company's board of directors can be held liable. 

If the company has agreed to the court proceedings, the shareholder must prove its shareholder status to the court by means of a complete chain of title.

Legal consequence of nullification as of 1 November 2024

In the event that no former holder of bearer shares applies to the courts to claim its shareholding status by 31 October 2024 or the court rejects the application for entry of the applicant in the company's share register, the former bearer shares will become null and void by law as of 1 November 2024 (art. 8 para. 1 ÜBest), i.e. the shareholders concerned will be formally expropriated. The nullified shares will be replaced by treasury shares of the company. Subsequently, the company's board of directors may freely dispose of the treasury shares and can distribute them to the other shareholders as a dividend in kind or sell or cancel them as part of a capital reduction (cf. art. 732 et seq. CO). The members of board of directors also have the option to purchase the shares themselves. In an extreme scenario, questionable constellations could arise in which a purchaser of treasury shares could potentially acquire the entire company at no cost. This would be the case, if all shares of the company were nullified and subsequently sold by the board of directors to a third-party purchaser. As a result of this sale, the company may receive distributable reserves in the amount of the purchase price, which the acquirer could then distribute in full again to himself in his capacity as sole shareholder by means of a dividend. Unfortunately, the legislator has failed to provide a regulation for this extreme scenario.

If the "acquisition" of treasury shares as part of the conversion leads to a situation in which the maximum permissible threshold of 10 per cent of the company's share capital pursuant to art. 659 para. 2 CO is exceeded, the board of directors is obliged to sell or cancel (by means of a capital reduction) the portion of treasury shares that exceeds the threshold in accordance with art. 659 para. 2 and 3 CO within two years.

Those shareholders whose shares have become null and void "without their fault" are entitled to claim a compensation from the company until 31 October 2034, provided that they can prove that they were shareholders at the time the shares became null and void. However, the company will only be liable to pay a compensation to the shareholder concerned if it has freely disposable equity in the corresponding amount at the time of the claim (art. 8 para. 2 ÜBest). A shareholder is not at fault if it has not intentionally or negligently disregarded the notification obligation. This is the case, for example, if the shareholder objectively had no opportunity to become aware of the new regulations (automatic conversion and the nullity as of 1 November 2024), as the shareholder was living abroad, or was unaware of its position as a shareholder of the company. The latter could well be the case if the shareholder inherited the shares and only learnt of the inheritance after the deadline of 31 Oktober 2024 had expired. The compensation claim corresponds to the actual value of the shares at the time of their conversion. However, it is unclear how this value is determined, as it will be difficult to determine it years after the conversion. If the actual value of the shares is lower at the time the claim is asserted, the company will only be liable for the lower value. Disputes between the company and the shareholder regarding the compensation to be paid by the company or regarding the fault of the shareholder may be clarified by the competent courts, namely upon application of the (former) shareholder.

Conclusion

Holders of converted bearer shares should urgently verify whether they complied with their notification obligation in accordance with the former art. 697i OR prior to 1 May 2021; in particular, whether they have informed the company of their first and last name respectively the company name and the address. If such a notification has not yet been filed, it is recommended that the relevant shareholders immediately obtain the consent from the company respectively the board of directors and apply no later than 31 October 2024 to the competent court for their shareholder status to be entered in the company's share register.

If the application is not submitted on or before 31 October 2024, the shareholder may claim compensation from the company for the "actual value" of the nullified shares from the company, provided that the shareholder itself is not at fault and the company has freely disposable equity in the corresponding amount. However, the shareholder's property rights to the respective shares (including the associated voting rights) will be permanently forfeited as of 31 October 2024.