On 27 June 2017, the Swiss Supreme Court ruled in favour of a shareholder claiming that the shareholders’ agreement to which he was a party represented an excessive commitment. It is one of the few instances where the Supreme Court has ruled on shareholders’ agreements. It is rarer still for the Supreme Court to consider a shareholders’ agreement an excessive commitment.
In 1985, three founders of a Swiss corporation entered into a shareholders’ agreement for an indefinite period with no termination rights.
Among others provisions, the shareholders’ agreement included a right of first refusal, a right for the shareholders to be represented at board-level and a penalty clause in case of a breach of the shareholders’ agreement. In addition, the shareholders’ agreement contained a salary clause. If the salary of Shareholder A (a company officer) was higher than a certain amount, the company would pay Shareholder B (a minority shareholder) a percentage of that salary.
Shortly after the entering into the shareholders’ agreement, Shareholder B left his position as board member due to a disagreement among the shareholders. More than ten years later, Shareholder A terminated the shareholders’ agreement, left her position as board member of the company, and received a severance payment of approximately CHF 2 million. Concurrently, the two sons of Shareholder A were appointed as board members, one of them being put in charge of running the company.
Shareholder B initiated legal proceedings in 2013, almost 30 years after entering into the shareholders’ agreement, opposing the termination of the shareholders’ agreement by Shareholder A. He also demanded to be re-elected as board member, based on the provisions of the shareholders’ agreement, and the enforcement of the penalty clause as he was not re-elected as director despite asking for it in three previous shareholders’ meetings (in 2009, 2011 and 2012).
As for Shareholder A, she considered the shareholders’ agreement was validly terminated as it constituted an excessive commitment under Article 27 al. 2 of the Swiss Civil Code.
Termination of the shareholders’ agreement
The Supreme Court first examined whether the shareholders’ agreement was validly terminated by Shareholder A.
It reiterated that under Swiss law, a simple partnership – which is the legal form most shareholders’ agreements take – is formed for an indefinite period and can be terminated with a 6-month notice period (Article 546 al. 1 of the Swiss Code of Obligations). In the case at hand, the parties to the shareholders’ agreement specifically excluded this article which was allowed by the Supreme Court.
The Supreme Court mentioned another available option to terminate the shareholders’ agreement: the dissolution of the simple partnership by judgment. However, since this option was not claimed by Shareholder A, the only remaining possibility for a termination of the shareholders’ agreement was to consider it an excessive commitment under Art. 27 al. 2 of the Civil Code (which was the argument of Shareholder A).
Excessive commitment, defined under Art. 27 al. 2 of the Civil Code as a very intensive restriction of someone’s freedom, is forbidden under Swiss law. An agreement is considered an excessive commitment when it hinders, or significantly restricts, one of the parties’ economic freedom.
In its decision, the Supreme Court stressed that excessive commitment can be admitted only in specific instances. It stated that an excessive commitment shall be assessed at the time a party challenges such commitment and not when entering into an agreement. It also mentions that the long duration of an agreement – 30 years in the case at hand – is not a sufficient reason to consider the agreement is an excessive commitment.
In this case, the Supreme Court considered that the shareholders’ agreement, taken as a whole and not specific parts of it, was an excessive commitment. In particular, the Supreme Court mentioned the right of first refusal as well as the shareholders’ representation at board-level as being elements hindering the transfer of the business to the next generation. The fact that the shareholders’ agreement limited Shareholder A’s possibility to organise her estate and to transfer the business to her sons played a significant role in determining that the shareholders’ agreement was an excessive commitment for her. However, the Supreme Court did not explain to what extent the shareholders’ agreement removed the economic freedom of Shareholder A.
Relevant moment and manner to claim an excessive commitment
The Supreme Court, considering that the shareholders’ agreement was an excessive commitment, ruled that such agreement was no longer valid with non-retroactive effect (ex-nunc effect).
The Supreme Court further specified that a party subject to an excessive commitment could refuse to execute the agreement without having to actually terminate such agreement. It nonetheless ruled that the obligations under the shareholders’ agreement which arose before the moment the shareholders’ agreement became invalid had to be complied with by Shareholder A. Consequently, the payments under the penalty clause were due, too. As a result, due to these contradictory considerations in the same Supreme Court’s decision, it is unclear when an agreement ceases to be valid due to its excessive nature.
Supreme Court’s conclusions
To summarise, the Supreme Court ruled that the shareholders’ agreement was no longer in force because it was an excessive commitment for Shareholder A (Art. 27 al. 2 of the Civil Code). Accordingly, Shareholder A could not be forced to re-elect Shareholder B as director as the shareholders’ agreement was no longer in force at the time of the proceedings.
However, the Supreme Court ruled that the payments under the penalty clause of the shareholders’ agreement were due by Shareholder A as the breaches of the shareholders’ agreement (i.e. the non re-election of Shareholder B as director in 2009, 2011 and 2012) occurred prior to the moment the shareholders’ agreement became invalid due to its excessive nature.
The above-mentioned court decision is of significant importance as it is one of the few Supreme Court’s decisions related to shareholders agreements. It’s also a rare case of the Supreme Court considering a shareholders’ agreement as an excessive commitment.
From a technical standpoint, the Supreme Court’s decision is unclear from when the agreement ceased to be valid due to its excessive nature. It could therefore be advised to a party who wants to argue that an excessive commitment has occurred to do an explicit declaration of intent in order to clarify from when the agreement is no longer in force.
It’s also worth noting that the Supreme Court did not consider the long duration of 30 years to be excessive as such. This may give some comfort to parties to a long-standing shareholders’ agreement that such agreement would not be considered an excessive commitment simply due its long duration.
However, the Supreme Court’s taking into account a shareholder’s need to be able to organise his estate, his right of first refusal and his board-level representation when deciding on a case of excessive commitment is noteworthy. This creates some uncertainty for the parties involved, since these elements are very common in practice. It is recommended when drafting a shareholder’s agreement to carefully set forth detailed termination clauses, e.g. with deadlock resolution clauses, to ensure that the agreement cannot be considered as an excessive commitment. This is all the more important when a transfer of the company to the next generation is expected.