Legal guide for company directors and CEOs in Switzerland

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Strategy

Company strategy in Switzerland is the inalienable responsibility of the board of directors (CO 716a para. 1 no. 1), as part of the overall management (“Oberleitung”). During a crisis, the board of directors must review the company strategy and adapt it as necessary. It is advisable to assess, together with the management, the risks of the company, and to rank them by their effect on the company and by their probability of occurring. The board of directors and the management together should then simulate multiple scenarios from best case to worst case and define responses to each scenario.

Close supervision of the management

The supervision of the management (CO 716a para. 1 no. 5) must be particularly close during any economic crisis of the company. Further, the board of directors must make sure it is being appropriately reported to in terms of the frequency of the reporting (at minimum once per week) and its scope (e.g. reporting covers the entire company). Such close supervision also requires much higher availability of the directors than usual.

Financial situation

The board of directors must further keep a close eye on the financial situation of the company, both with regard to the danger of being over-indebted and to liquidity. The management is responsible for planning and monitoring liquidity. The directors need to monitor the management in this respect and again need to ensure they receive sufficient and accurate reporting.

Meeting of the board

The prevailing opinion of legal scholars agrees that board meetings may be held by way of telephone or videoconference, at least temporarily. Such alternatives to physical board meetings should be used to preserve the board’s ability to act during the current COVID-19 crisis. Should the board’s rules of procedure prescribe physical board meetings, they should be amended accordingly. Board meetings in person, if any at all, must be held with the necessary precautions, i.e. social distancing, etc.

COVID-19 Regulations

The board of directors needs to be aware of the COVID-19 regulations that apply to the company, notably with respect to the protection of the health of customers and employees. As part of their supervisory duties (CO 716a para. 1 no. 5), the board of directors must make sure that such regulations are complied with.

2. What government relief measures have been made available to directors?

Most relief measures in Switzerland target the company rather than the directors. However, directors need to be well aware of, among others, the below relief measures available to the company in order to fulfil their duties:

  • COVID-19 government guarantees for credit facilities
  • short working time benefit scheme (“Kurzarbeit”)
  • interest-free deferral of certain taxes and of social security contributions, and
  • COVID-19 moratorium.

It is the management’s duty to make use of the available and necessary government relief (and all other available and necessary measures) to stabilize the company. Under its supervisory duties (CO 716a para. 1 no. 5), the board of directors must ensure that the management does so. More specific relief may be available depending on a company’s economic sector (e.g. tourism, sports, etc.) and situation (e.g. start-up), and the board of directors should actively seek advice regarding the government relief that the company is eligible for.

Other measures have a more direct impact on the work of the directors, namely:

  • eased obligation to file for insolvency (modified CO 725 para. 2)
  • directors may obligate shareholders to exercise their rights in the general meeting in writing or by electronic means (e.g. virtual general meeting of shareholders) or by proxy (“unabhängiger Stimmrechtsvertreter”)

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

Notably the obligation of the directors to file for insolvency if the company is over-indebted (CO 725 para. 2) has been modified. The board of directors may refrain from filing for insolvency if the company was not over-indebted on 31 December 2019 and there is a prospect that the current over-indebtedness can be resolved by 31 December 2020. The board of directors must document its decision and state the rationale behind it in writing. Further, the necessary interim statement for determining over-indebtedness does not need to audited.

Additionally, credit facilities guaranteed by the Swiss Government under the COVID-19 guarantee scheme are not regarded as debt for the purposes of determining over-indebtedness until 31 March 2022.

With respect to the duty to call a shareholders’ meeting and to propose adequate restructuring measures if the last annual balance sheet shows a capital loss (i.e. half of the share capital, and the legal reserves are no longer covered by the company’s net assets), COVID-19 guarantee scheme-secured loans are also not regarded as debt until 31 March 2022.

Directors duties and responsibilities

1. What form does the board of directors take?

In Switzerland, companies have a single board of directors (“Verwaltungsrat”). Many companies however use the flexibility offered by Swiss corporate law essentially to create a two-tier board system, with the Verwaltungsrat being the supervisory board above a management board.

2. What is the role of non-executive or supervisory directors?

The role of supervisory directors is the supervision of the management (CO 716a para. 1 no. 5), which may consist of board members (“Delegierte") and/or non-board members (“Direktoren”). However, there are certain competences which by law cannot be delegated (CO 716 para. 1). For example, deciding on the fundamental strategy of the company is the responsibility of the entire board, including non-executive/supervisory directors.

3. Who can be appointed as a director?

The only Swiss specific mandatory requirement prescribes that at least one person domiciled in Switzerland must be able to validly represent the company (i.e. have sufficient signatory power). Such a person can either be a board member or an officer. If such a person does not have sole signatory power, the requirement can also be met by two persons domiciled in Switzerland having joint signatory power (i.e. being able to validly represent the company jointly).

Further, the law provides that at least one board member (whether domiciled in Switzerland or abroad) must be in a position to validly represent the company (i.e. have sole or joint signatory power with another director).

Swiss company law no longer contains a shareholding requirement. Directors are, however, entitled to attend shareholders’ meetings and to propose resolutions.

Unlike in other jurisdictions, companies – whether or not incorporated in Switzerland – cannot be appointed as directors. Only the individuals who represent these companies can be appointed as such.

4. How is a director appointed?

Generally a director may only be appointed by resolution of the shareholders’ meeting. In the absence of particular quorum requirements in the articles of incorporation, the appointment must be approved by an absolute majority of the votes of shares represented at the meeting. The chairman is either appointed by the members of the board of directors or, if the company’s articles of incorporation so provide or if the company is listed, by the shareholders’ meeting. Further, the board of directors may establish a nomination committee setting out the governing rules for the selection of candidates and for their re-election.

The minimum number of directors is one (or such higher number as is prescribed by the corporation's articles of incorporation). However, if there are different classes of shares, the articles of incorporation must provide for at least one representative of each class to the board. There is no maximum number of directors unless so provided by the corporation's articles of incorporation.

Appointments are generally made for a fixed term of three years, unless otherwise provided in the articles of incorporation; a director's term of office must, however, not exceed six years. In listed companies, the maximum term of office is limited to one year. Reappointment at the end of the term is possible, both in listed and non-listed corporations.

5. How is a director removed from office?

A director may resign from the board at any time by notice to the corporation (although such resignation may constitute a breach of contract).

Further, a director may be removed by resolution of the shareholders’ meeting at any time and without cause by an absolute majority of the votes of shares represented at the meeting unless the articles of incorporation provide for a different quorum. Delegates (i.e. managing directors or officers) may on the other hand be removed from their position by the board of directors at any time. Such removal may, however, constitute a breach of contract (cf. question 8 “What contractual relationship does the director have with the company?” below) between the corporation and the respective director or delegate.

In any case, resignation or removal of a board member or delegate must be filed with the Commercial Register of the canton where the corporation is incorporated. Although the liability of a board member usually ends with removal from the board, such removal must be filed with the Commercial Register immediately. The resigning or removed board member may notify the Commercial Register itself if the company fails to do so.

6. What authority does a director have to represent the company?

As a general rule, each member of the board of directors has the authority to represent the corporation individually and can perform all legal acts that may arise within the corporation’s purpose. If a special delegation of powers of the board to a managing director, a committee of directors or to independent external officers has been validly made (cf. question 7 “How does the board operate in practice?” below), the delegates have the same authority to represent the corporation. Internally (i.e. between a director or delegate and the company), organisational or other regulations or the contract between the director (or any other representatives) and the company may limit such authority.

However, internal restrictions on the powers of directors to represent the company are not enforceable against third parties acting in good faith (so-called bona fide third parties) unless those restrictions were filed with and entered into the Commercial Register. They can relate to the fact that: (i) the company may only be validly represented collectively by several directors (usually two); or (ii) the authority of certain directors is limited to the representation of either the principal establishment or a given branch. Bona fide third parties are protected by the fact that courts usually interpret the corporate purpose – within which a director may validly represent the company – very broadly.

Moreover, a third party’s good faith is presumed unless the party knew or should have known that there was an internal limitation of authority.

Finally, notwithstanding the restrictions registered in the Commercial Register, bona fide third parties may also be protected under concepts of apparent and ostensible authority, respectively (e.g. in case of a delegate’s transgression of such restrictions which the board was aware of and tolerated; misleading statements of the board about the representative’s authority to represent the company).

7. How does the board operate in practice?

The Swiss share corporation normally has a one-tier board of directors which may take decisions on all matters which, by law or the articles of incorporation are, to the extent permissible, not allocated to the shareholders’ meeting. Except for the (few, but substantial) statutory non-transferable and inalienable duties of the board of directors (cf. question 10 “What other general duties does a director have?” below), the CO allows for a delegation of the company’s management to a managing director, to a committee of the board or to independent external officers, which may in fact lead to a two-tier management structure. Such (limited) delegation of the board’s powers is admissible provided that the articles of incorporation expressly authorise the board of directors to do so according to the company’s organisational regulations. These regulations regulate the management of the company’s business, stipulate the required bodies, define their duties and, in particular, regulate the company’s internal reporting. If these requirements are met, the delegates have the authority to act – within the matters defined in the organisational regulations – in the name and on behalf of the corporation without prior board approval. The liability of the delegating members of the board of directors is then limited (cf. question 14 “How can a director limit his or her liability?” below).

If the company’s articles of incorporation provide for the possibility of a delegation, the establishment of a second-tier management structure still falls within the competence of the board of directors which has to issue the respective organisational regulations (non-transferable and inalienable duty of the board of directors) provided that the appointment of any director will be approved by the shareholders’ meeting. Members of the board of directors as well as delegates of the board have to be registered in the Commercial Register of the canton where the corporation is incorporated.

The prevailing opinion of legal scholars agrees that board meetings may be held by way of telephone or videoconference, at least temporarily. Further, circular board resolutions are permissible.

8. What contractual relationship does the director have with the company?

The appointment of a director creates a basic legal relationship with the company containing both contractual and corporate aspects. Further, a director may have an additional contractual relationship with the company based on an employment agreement (in particular managing directors). In any case, according to Swiss case law as well as the prevailing opinion of legal scholars, a director is entitled to reasonable remuneration in exchange for his/her services. The rules regarding the determination of the remuneration depend on whether the company is listed or not.

In non-listed corporations, such remuneration is determined by the board in compliance with general principles of company law (e.g. duty of care and loyalty, reimbursement of unjustified benefits). The company may also set up a compensation committee which issues the rules governing directors’ and senior management’s remuneration.

Pursuant to the ordinance against excessive compensation, which is only applicable to listed companies, the shareholders’ meeting has to vote annually (binding vote) on the aggregate amount of the remuneration for each of the board of directors and executive management; the articles of association have to specify the mechanism of the say-on-pay vote (various mechanisms are possible). Further, disclosure requirements apply to listed companies regarding remuneration and loans granted to its directors and officers.

As regards termination of a directorship, different considerations apply for the corporate aspects (cf. question 5 “How is a director removed from office?” above) and the contractual aspects of such termination. A contractual termination will not automatically terminate the directorship (although the contract may require that the director resigns in such circumstances) and the (corporate) removal of the director will not automatically terminate the director’s contract. The termination of the directorship pursuant to corporate law may constitute a breach of the related contract.

9. What rules apply in respect of conflicts of interest?

Generally, a director must disclose to the board any conflict of interest and not participate in a decision-making process if there are conflicting interests. Equally, the other directors should ensure that he/she does not do so.

A director may not enter into a transaction with the company (self-dealing) except in cases where either: (i) the transaction has been approved by independent board members or by the shareholders’ meeting; or (ii) the transaction does not jeopardise the company’s interests, i.e. is carried out at arm’s length (market prices; fairness opinion). Whenever a director acts for himself/herself (or a third party) and for the company, the underlying transaction must be concluded in written form to be valid unless the value of the consideration given by the company in such transaction does not exceed CHF 1,000 and qualifies as an ordinary business transaction. These rules are relevant for both the authority and representation of the corporation as well as the director’s liability.

As a consequence of his fiduciary duty, a director must not take personal advantage of corporate opportunities in which the corporation itself may have an interest.

If the board member’s remuneration is determined by the board itself (in non-listed companies), conflicts of interest inevitably arise in relation to the board members’ remuneration.

10. What other general duties does a director have?

Directors have a general duty of loyalty towards the company and must safeguard its interests. In a group of companies, a director must generally safeguard the interests of the company where he/she is a director and not of the group as a whole (however, when determining the individual interests of a specific company, the fact that such company belongs to a group of companies may be considered).

Directors must perform their duties with due care, i.e. with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. Further, the shareholders must be treated equally in like circumstances.

A director’s general duty of care under Swiss law entails numerous specific duties, which cannot all be listed here.

The law defines some particularly important duties of the board which are non-transferable and inalienable. The decision-making process as regards these non-­transferable duties cannot be delegated to a committee of the board, to a managing director or to independent outside officers; however, the board of directors may “delegate” the preparation and implementation of its decisions. The following duties are non-transferable:

  • strategic management of the company and the issuing of necessary directives
  • establishment of the organisation of the company
  • organisation of the accounting, financial control and financial planning systems as required for the management of the company
  • appointment, supervision and removal of persons entrusted with managing functions
  • preparation of the annual report and the financial statements as well as – for listed companies – the compensation report
  • preparation of the shareholders’ meetings, and
  • notification of the courts in case of over­-indebtedness of the corporation.

With the exception of these non-transferable duties, the board of directors may fully delegate (including the delegation of the decision-making process) the management of all or part of the company’s business. If the board has validly delegated all or part of its transferable duties to a committee of the board, to a managing director or to an independent external officer, the standard of care to be observed by the respective delegates is determined by the specific scope of the delegation.

With regard to the company’s creditors, directors are under a legal duty to call a shareholders’ meeting and propose adequate restructuring measures if the last annual balance sheet shows a capital loss (i.e. half of the share capital, and the legal reserves are no longer covered by the company’s net assets). Moreover, in case of substantiated concern of over-indebtedness, an interim balance sheet must be prepared and submitted to the auditors for examination. If the interim balance sheet shows that the company’s liabilities are no longer covered (whether the assets are appraised on a going concern basis or at liquidation value), the board of directors is under a legal duty to notify the court unless certain company creditors subordinate their claims to those of all other company creditors in the amount of the over-indebtedness.

Upon receiving such notification, the court opens insolvency proceedings. Nevertheless, on application by the board of directors or by a creditor, the court may grant a stay of insolvency proceedings provided that there is a prospect of financial restructuring (i.e. prospect of sustainable financial reorganisation of the company and recovery of its profitability); in such case the court prescribes measures to preserve the company’s assets. Further duties of the directors concern the timely and duly payment of social security contributions for the company’s employees and the payment of certain taxes.

11. To whom does the director owe duties?

The directors of a Swiss limited company generally owe their duties to the company. However, the directors may also owe certain duties to the shareholders and to the creditors.

12. How do the director’s duties change if the company is in financial difficulties?

One cannot say that the director’s duties change. Rather, the same duties as usual apply, but they do intensify to some degree. For example, directors must have an ever-closer eye on the financials of the company and must have an interim balance sheet drawn up if they suspect the company to be over-indebted. Also the general supervision of the management needs to be closer during a crisis.

13. What potential liabilities can a director incur?

The members of the board of directors, any delegate of the board and any persons engaged in the management of the company (including shadow directors) are personally liable towards the company, its shareholders and creditors for any damage caused by intentional or negligent violation of their duties (cf. para. “Duties” above). The legal standing to claim such damages depends on: (i) whether such damage was suffered by the company (directly) or by a (/an individual) shareholder or creditor, respectively; and (ii) whether the company is insolvent or not.

The damage suffered by the company may not only be claimed by the corporation itself, but also by the shareholders and – upon opening of insolvency proceedings of the company – by creditors. If the company is not insolvent, the compensation claimed by the corporation or a shareholder, respectively, has to be paid to the company. Upon opening of bankruptcy proceedings, the right of shareholders and creditors to sue the liable persons is, however, suspended and the bankruptcy trustee is first entitled to recover damages in favour of the company or the bankruptcy estate, respectively. Where the bankruptcy trustee waives its right to bring such a claim, any shareholder or creditor is entitled to claim the damage suffered by the (insolvent) company.

Apart from liability towards the company, the relevant persons may become directly liable towards individual shareholders or creditors (in particular in case of misrepresentation and fraud).

In addition to civil liability, the Swiss Penal Code provides for criminal liability of directors in the event of (among others) false statements about the commercial business (i.e. statements made in a prospectus for a public offer of shares), filing false statements with the Commercial Register, the artificial reduction of assets to the prejudice of creditors, disclosing trade or commercial secrets, mismanagement, granting of preferences to certain creditors, appropriation of seized property, economic espionage, and the failure to comply with accounting regulations.

Criminal (and administrative) liability for insider trading and price manipulation is governed by the Stock Exchange Act.

A recent study of the University of St. Gallen (HSG) has shown that in Switzerland every year around 1500 directors are sued in court due to violation of their duties pertaining to an aggregate loss amount of CHF 140 million. The majority of the liability actions refer to (civil) liability of directors for failing to promptly notify the courts of the company’s over-indebtedness and for unpaid social security contributions in order to overcome liquidity shortage.

14. How can a director limit his/her liability?

Generally, directors cannot limit their responsibility by agreement or in the articles of association beyond the general possibility to limit the board’s liability by delegating certain duties, if admissible (cf. question 7 “How does the board operate in practice?” above). The responsibility of the directors for properly delegated tasks is limited to using due care in selecting, instructing and supervising the delegated persons.

The director’s liability to the company is also excluded if the shareholders have granted them a full and unqualified discharge (“Entlastung”). Such discharge, however, is only valid with regard to: (i) facts that have been duly disclosed to the shareholders; and (ii) claims of the company and of those shareholders who have consented to the discharge resolution. Shareholders who have not consented to given resolutions have 6 months to file their claim.

Further, the company may take out directors’ and officers’ liability insurance cover (“D&O”) in favour of the directors which de facto also “limits” the directors’ liability.

Stefan Brunnschweiler, LL.M.
Managing Partner
Zurich
Dr Daniel Jenny, LL.M.
Partner
Zurich
Blezinger_Ferdinand
Dr jur Ferdinand Blezinger, LL.M.
Zurich