1. Introduction

On 3 March 2013, the Swiss electorate approved a people’s initiative with the suggestive name “against remuneration rip-off”, by a large majority of 67.99% of the votes cast and in the face of opposition from the Swiss government and industry leaders. The Swiss people’s vote attracted a lot of attention internationally, as innumerable press-headlines showed. The main argument of the promoters of the Swiss initiative was that excessive management compensation, which is beyond effective shareholder control, is damaging to companies and to the broader economy (for further background information please refer to our news alert of March 2013, available under http://www.froriep. com/uploads/tx _news/News _ Aler t _on _ Executive_ Compensation.pdf).

It is not exaggerated to say that the new Swiss Ordinance against Excessive Compensation in Listed Stock Companies (“OAEC”) does significantly alter the foundations of the Swiss stock corporation law in many ways. Centerpiece of the OAEC is obviously the shareholders’ annual and binding “say on pay”, whereby the general meeting votes separately on the aggregate compensation amount of the board of directors, the executive management and the advisory board.

Pending the final implementation through new laws, respectively amendments to existing laws to be duly passed by Parliament, the Swiss Federal Council passed the final version of the OAEC in November 2013. Most of its rules have been enacted with effect as of 1 January 2014, such as the annual elections of the board of directors and the compensation committee, whereas the transitional provisions of the OAEC allow the affected companies to adapt and implement the new rules over a certain period of time. Most of the listed Swiss stock companies implemented the new provisions of the OAEC in their respective articles of association already in the first half year of 2014, although the transitional provisions require the article of association to be amended at the latest by the second ordinary general meeting after the entry into force of the OAEC, hence in practice by the first half year of 2015.

Needless to say that the general meetings of listed Swiss stock companies that took place in the first six months of 2014 proved very interesting with a view to how the new rules of the OAEC are being implemented.

Below we outline some selected topics which were subject to controversial discussions and with which legal advisors were faced in the context of advising Swiss legal stock companies in relation to the implementation of the OAEC.

  1. Most selected Compensation Models

The OAEC provides for three types of compensation models applicable to compensation for the board members, the executive management and, where applicable, the advisory board. According to that, the compensation is to be approved either on a prospective basis, a retrospective basis or a combination of these two models. The model determined e.g. for the board members may differ from the one determined for the executive management. The articles of association of the respective company have to separately determine the compensation model applicable to each of the relevant group, i.e. the board members, the executive management and, where applicable, the advisory board.

2.1. Prospective Compensation Model favorised

Looking at the compensation models proposed to and approved by the general meetings of listed Swiss companies, it appears that most companies have opted for an exclusively prospective compensation model, i.e. for a model where the general meeting approves both the fixed and variable compensation elements for both the board members and the executive management in advance. A minority have opted for a combination of prospective and retroactive compensation models where fixed compensation is to be approved in advance but the variable compensation only retroactively. Purely retroactive approval however seems not to be an option.

2.2. Reasons – Legal Certainty and Planning Security

The main reasons for the preferred solution of a prospective shareholders “say on pay” model lie with legal certainty and planning security for the affected listed companies. Although a retrospective approval of the shareholders might be considered the most favorable model from a shareholders’ control point of view, the affected companies would always be faced with substantial uncertainty as to whether or not the compensation paid to the board of directors and the executive management will be approved by the shareholders.

It would become problematic if the shareholders’ vote on the compensation was negative, as there is a controversial discussion among scholars as to whether an employee member of the executive management should receive at least a customary wage in such case or whether he should have no claim against the company at all. On the other hand, the company – or rather its board of directors and executive management – is exposed to civil claims by shareholders if compensation so paid is not refunded. There would however be no criminal liability under the OAEC. The OAEC stipulates, inter alia, that any person, who, as a member of the board of directors, against better judgment prevents the general meeting from voting on compensation shall be punished with imprisonment of up to three years or a fine. So it is a criminal offence if the shareholders cannot vote on the compensation but not if the compensation paid does not correspond to the shareholders’ vote.

As a result of the above, a prospective compensation model is preferred by the affected companies and is also recommended by legal advisors and scholars. As a consequence, companies are forced to anticipate their budgeting process with respect to the prospective amounts required for payment of the compensation. Since the prospective calculation of the necessary amounts might create certain difficulties, it has also been seen that companies tend to determine rather large amounts in order to have sufficient room for manouevre.

  1. Scope of the OAEC

3.1. In general

The new rules of the OAEC apply to Swiss stock companies incorporated according to the provisions of the Swiss Code of Obligations with their registered office in Switzerland, having shares (i.e. equity securities) listed on a stock exchange in Switzerland or abroad.

Hence, the OAEC does not apply to Swiss stock companies having listed securities different from shares. Likewise, the OAEC does not apply to stock companies with registered office abroad even if their shares are listed on a Swiss stock exchange. Accordingly, few of the companies affected by the OAEC have considered or are contemplating to move their registered office away from Switzerland but to keep their shares listed on a Swiss stock exchange.

3.2. Groups of Companies in particular

In case of a group of companies with wholly owned subsidiaries, the OAEC only applies to Swiss stock companies with shares listed on a stock exchange. however, there are various provisions of the OAEC which require looking at the group of companies as a whole. In particular, the compensation report must disclose all compensation awarded by the company, directly or indirectly.

Even more important to mention are the provisions on the vote of the general meeting on compensation, since the general meeting has to vote on the compensation that the board of directors, the executive management and the advisory board receive from the company directly or indirectly. As a consequence, the OAEC stipulates that compensation to members of the board of directors, the executive management and the advisory board for activities in enterprises that are, directly or indirectly, controlled by the company is prohibited if the compensation, inter alia, has not been approved by the general meeting of the company. hence, the provisions regarding the vote of the general meeting on compensation also apply if the executive management of the listed Swiss stock company or rather the members of the executive management of the group are (also) employed by other group companies.

This might be the case if the management of a group of companies is formally employed in and remunerated by a separate subsidiary out of which the listed Swiss stock company (holding company) or the group of companies is actually managed, irrespective of whether such subsidiary is domiciled in Switzerland or abroad.

There is however a limitation to consider in this respect. The OAEC covers compensations to members of the board of directors, the executive management and the advisory board for activities in enterprises that are, directly or indirectly, controlled by the company. hence, if the members of the executive management are employed by a sister company, such sister company would not be controlled by the listed Swiss stock company, neither directly nor indirectly, so such compensation payments would not be subject to the general meeting’s approval.

  1. Number of Permitted Activities

One further topic under the OAEC which has triggered controversial discussions within the affected companies concerns the permitted number of external mandates and functions by board members, members of executive management and members of advisory boards. According to the OAEC, the articles of association must contain provisions concerning the number of permitted activities by the members of the board of directors, the executive management and the advisory board within other superior governing or administrative bodies of legal entities that are obliged to register themselves in the Swiss commercial registry or a corresponding foreign registry and that are not controlled by the company and do not control the company.

According to Swiss law, an association has to be registered in the commercial registry when operating a commercial business in pursuit of its objects. hence, a board member’s membership in the executive body of a local soccer club which is operating a club restaurant has a direct impact on that board member’s permitted activities under the OAEC.

Looking at some selected large Swiss public companies, the articles of association foresee a range of four to five permitted activities for members of the board of directors within other listed companies and of five to ten permitted activities in non-listed companies. For members of the executive management, the range is significantly tighter and lies between one and two in listed companies and between four and five in non-listed companies. As regards appointments in associations, non-profit foundations, family foundations and employee welfare foundations, the articles of association foresee that the restrictions on permitted activities do not apply. We consider this limitation as justified, as the reason for the respective provision in the OAEC is to ensure disclosure of activities outside the respective company that may potentially absorb the members of the board of directors and the executive management. It seems reasonable that activities in an association will not be as absorbing as activities in profit-oriented companies.

Nonetheless, the aforementioned numbers of permitted activities raised substantial resistance on the side of shareholders and institutional shareholder representatives recommended to oppose the proposed number of permitted activities.

  1. Severance Payments vs. Compensation for Competition Ban

Severance payments, i.e. payment of a lump sum without actual counter-performance, provided for either contractually or in the articles of association (but not if legally owed) are prohibited for members of the board of directors, the executive management and the advisory board. At the same time, according to the Swiss Code of Obligations, a competition ban may be agreed between the employer and the employee “where the employment relationship allowed the employee to have knowledge of the employer’s clientele or manufacturing and trade secrets and where the use of such knowledge might cause the employer substantial harm”. Even though it is not required by law that the competition ban is compensated, the payment of a compensation is taken into account when assessing the appropriateness of the competition ban in terms of time and geographical scope.

Hence, the question is whether such compensation qualifies as an unlawful severance payment under the OAEC, all the more so because the term “severance payment” under the OAEC is to be broadly understood. While a majority of scholars state that compensation for an agreed competition ban in the context of the provisions of the Swiss Code of Obligations is still permitted under OAEC (since there is actually a counter-performance by the respective employee, namely not to compete the employer), the initiators of the OAEC are clearly of another opinion and state that such compensation for a competition ban should be construed as circumvention of the prohibition on severance payments under the OAEC.

It remains open and to be seen if, and if so how, the criticism of the initiators of the OAEC and of certain shareholder representatives will be considered and reflected in the future Law on Excessive Compensation in Listed Stock Companies.