Switzerland revises transparency obligations
On 21 June 2019, the Swiss parliament passed a law that implemented the recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
The Swiss parliament's resolution was a final step in the legislative process initiated by the consultation (Vernehmlassung) on the pre-draft of this legislation (Pre-Draft), which the Swiss Federal Council launched in January 2018 (see our newsletter of 7 March 2018). The legislation passed on 21 June 2019 was based on the results of this consultation and was considered by lawmakers with the draft legislation going back and forth between the parliamentary chambers for a couple of days.
According to the Swiss Federal Council, the legislation must enter into force by October 2019 to be considered in the Global Forum's Swiss assessment, although the council has yet to set a date. The legislation is subject to an optional referendum (fakultatives Referendum), which could be undertaken by the Swiss people before 10 October 2019.
The law that the Swiss parliament passed consists of amendments to the Swiss Code of Obligations (revCO), the Swiss Criminal Code and other statutes (including tax laws). In part one of our analysis, we discussed the abolishment of bearer shares in Swiss corporate law and its impact on Swiss entities and their shareholders. In this part two of our analysis, we focus on other corporate law aspects of the revCO and address the related criminal sanctions introduced in the Swiss Criminal Code.
Criminal fines introduced
The legislation passed by the Swiss Parliament introduces criminal fines for intentional infringements of both the shareholder obligation to notify the company of the beneficial owners (and any applicable changes) and the obligation of each company to correctly maintain its share register and the register of beneficial owners.
Regarding the maintenance of the respective registers, an infringement will be attributed to the individuals acting on behalf of the company. Specifically, a fine of up to CHF 10,000 would be imposed on the members of the board of directors or any responsible person who failed to meet this obligation.
Who is the beneficial owner?
Pursuant to art. 697j CO, any person who alone or acting in concert with third parties acquires shares in a company, whose shares are not listed on a stock exchange, and thus reaches or exceeds the threshold of 25% of the share capital or votes shall notify the beneficial owner to the company.
In our first newsletter on the consultation of the Pre-Draft, we criticised that the introduction of criminal fines seems problematic in view of the 'certainty principle' in criminal law (nulla poena sine lege certa). In conflict with this principle, the wrongdoing is not clearly defined since the answer to the question "Who is the beneficial owner?" is anything but clear if the shares in a Swiss company are acquired by a legal entity and the (ultimate) beneficial owner needs to be identified in a multilevel structure of intermediary legal entities.
The revCO, however, seeks to clarify this question. Art. 697j para. 2 revCO states that if the acquiring shareholder is a legal entity or a partnership, the beneficial owner is the one who "controls" the acquiring shareholder in case of an analogous application of art. 963 para 2 CO (art. 963 CO sets forth the obligation of a legal entity that controls one or more companies to prepare the group financial statements in addition to the entity's annual accounts). Hence, the beneficial owner in relation to the legal entity that acquires shares in a Swiss company is the individual who directly or indirectly has the majority of votes in the acquirer's shareholder meeting; directly or indirectly has the right to nominate the majority of directors of the acquirer; or otherwise exercises controlling influence on the acquirer.
It is certainly a positive development that the revCO confirms that not every individual directly or indirectly holding one or a few shares in the acquirer must be identified as beneficial owner. The actual value of the reference to art. 963 CO, however, seems limited if the shares in a Swiss company are acquired by a legal entity whose shareholders are again legal entities. In this case, the reference to art. 963 para 2 CO does not conclusively answer the question: which individual "indirectly" has the majority of votes in the acquirer's shareholder meeting? In our view, "control" in the sense of art. 963 CO is required in a multilevel structure of intermediary legal entities with the shareholder of the acquirer, the shareholder of such shareholder and so on (i.e. on each level). In light of this, we would argue that, subject to "other controlling influences", a 50% threshold of either votes or board representatives is applicable for the legal entities that are shareholders of the acquirer and those legal entities that are shareholders of the shareholders of the acquirer and so on. In our first newsletter, we supported the view that this approach is already applicable under the current version of the Swiss Code of Obligations based on art. 2a para 3 of the Anti-Money Laundering Act and the commentary to the Agreement on the Swiss Banks' Code of Conduct, bearing in mind that the rationale behind the shareholder obligation to disclose the beneficial owner is to support transparency measures required by the laws combatting money laundering.
Furthermore, the revCO offers additional clarification on other related questions, which have been disputed so far, such as the obligation of a shareholder to notify a company of the fact that there is no beneficial owner or if the acquirer is an affiliate of a listed entity and no beneficial owner need be identified (i.e. a so-called negative declaration).
Despite the above clarifications, the revCO does not resolve all issues around the identification of the beneficial owner and its related questions. For example, there is no clarification regarding the controversial question of what exactly constitutes an "acquisition in concert" triggering the notification obligation if the acquiring shareholders in aggregate reach the relevant threshold. Against this background and the unresolved controversies around the identification of the beneficial owner, it remains questionable whether any wrongdoing is sufficiently defined to be subject to criminal sanctions.
Recommendations for companies and shareholders
The threat of criminal sanctions highlights the importance of due diligence by Swiss companies and their shareholders vis-à-vis compliance with statutory transparency obligations. We strongly advise seeking legal advice concerning these complex issues. In practice, if a company has inquired about the measures to be taken and has obtained "incorrect" information from a qualified expert, a justifiable mistake about the unlawfulness of the act may be assumed, provided that the shareholders or companies were not able to identify the incorrectness of the information. Hence, even if a criminal offence were to be committed, the respective shareholder or company might possibly excuse itself based on the poor advice it received from a qualified expert.
Other proposals for ensuring compliance with transparency obligations
According to the revCO, a company's failure to duly maintain the required registers (share register and register of beneficial owners) shall constitute a defect in the company's organization. In such cases, the shareholders and the creditors will have the right to request the court to order appropriate measures, i.e. to request the company to duly maintain the registers under the threat of the company's dissolution. As mentioned in our first newsletter, we consider it questionable whether this proposal is appropriate. First, the circle of potential claimants is too far-reaching since the creditors do not have access to those registers and, therefore, are in general not in a position to substantiate their claims (the revCO further lists the commercial registrar as a potential claimant; however, with regard to the commercial registrar, a further revision of the Swiss Code of Obligations introducing a revised concept of competences relating to organizational defects is currently pending). Second, shareholders might misuse the right to request appropriate measures to enforce other objectives.
Further controversial elements of the Pre-Draft have not been upheld which is good news: Contrary to the Pre-Draft, the revCO does not require Swiss companies, Swiss branches of foreign companies and certain sole proprietorships (Einzelunternehmen) and partnerships (Personengesellschaften) to open an account with a Swiss bank anymore nor does it give banks and other financial intermediaries the right to access the company's share register and register of beneficial owners. However, the Swiss Federal Council considers giving the Swiss Federal Tax Administration the right to verify the existence of these registers in the course of withholding tax audits. Furthermore, the Swiss Federal Council has already alluded to future assessments by the Global Forum and FATF, and the need to consider further legislation.
It should be noted that a minority of Swiss lawmakers proposed more extensive transparency measures, which exist in other countries, but would constitute fundamental changes in the Swiss legal system. These measures include the introduction of a centralised transparency register, the obligation to file annual financial statements, and registering beneficial owners in the publicly accessible commercial register.