Switzerland says good-bye to bearer shares
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 is one of the final steps of 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 of 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 over a couple of days.
According to the Swiss Federal Council, the proposed 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 can 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 this, part one of our analysis, we discuss the abolishment of bearer shares in Swiss corporate law and the consequences for Swiss entities and shareholders. In part two (to be published shortly), we will highlight other aspects of the revCO and briefly address the related criminal sanctions introduced in the Swiss Criminal Code.
Elimination of bearer shares
According to the revCO, bearer shares will only be permitted if either the company has listed at least one part of its shares on a stock exchange or the bearer shares are issued in the form of intermediated securities and deposited with a depository (or registered in a central register) in Switzerland, and this fact is registered with the commercial register. The Swiss Federal Council and Swiss parliament expect that the required transparency will then be ensured by the Swiss Financial Market Infrastructure Act or the Swiss Federal Act on Intermediated Securities.
During parliamentary deliberations, an alternative grandfathering concept was discussed where there would not have been any change of the regime applicable to bearer shares already existing at the time the draft legislation enters into force. This concept was overturned, however, due to significant concerns that it would not be sufficient to meet the Global Forum's standards.
To the extent that bearer shares will no longer be permitted, the revCO foresees a complex "transition period" for the conversion of existing bearer shares into registered shares and a grace period before shareholders lose title to their shares.
Conversion of bearer shares into registered shares
Pursuant to the revCO, bearer shares can exist 18 months following the entry into force of the legislation (in contrast to the Pre-Draft, which saw bearer shares converted by operation of law upon the law's entry into force). During this period, entities with bearer shares may convert such bearer shares into registered shares voluntarily, or register the fact that such bearer shares are either listed or issued in the form of intermediated securities in the commercial register. If neither is given, the respective entities can seek to establish this fact, and have the shares listed or transformed into intermediated securities.
Failing to implement either action within the 18-month period (i.e. if bearer shares still exist and the respective entity has not registered either of the two actions with the commercial register), the bearer shares will be automatically converted into registered shares by operation of law. The revCO provides that the new registered shares will be equivalent to the previous bearer shares in nominal value, paid-in capital, voting and monetary rights and that their transferability is not restricted.
Upon the automatic conversion of bearer shares into registered shares, the commercial register ex officio will register this conversion and the fact that the articles of association and other corporate documents are out of date in this respect. Afterwards, the commercial register will not register any amendments to the articles of association until the conversion of bearer shares into registered shares has been reflected therein.
Loss of title for failing to identify oneself
At the time of the conversion of bearer shares into registered shares, shareholders who have complied with their obligation to identify themselves as shareholders can be entered into the share register by the company. Shareholders who fail to comply with this obligation, however, must observe the following process:
- In case of a conversion of bearer shares into registered shares after the 18-month lapse by operation of law, companies must record remarks in the share register regarding those shares for which no shareholder identified itself as a (bearer) shareholder. The remark must state that the membership rights attached to those shares are suspended and the respective monetary rights are forfeited. Those sanctions are in line with the sanctions pursuant to the Swiss Code of Obligations already in force.
- Shareholders who have not identified themselves prior to an eventual (automatic) conversion of bearer shares into registered shares upon lapse of the 18-month period can no longer be registered in the share register by the company, but must seek a court decision within a five-year grace period after the new legislation enters into force. To that end, a shareholder will have to prove his shareholder status. Furthermore, a respective request can only be submitted to the competent court with the company's prior approval.
- Any shares converted into registered shares by operation of law upon the lapse of the 18-month period which are held by shareholders who have not been listed in the share register or failed to request a court order to be entered during the five-year grace period will become null and void. These shareholders will lose all rights attached to their shares. The voided shares will be replaced with treasury shares held by the company.
- Shareholders, who "through no fault of their own" (ohne eigenes Verschulden) have lost rights attached to voided shares and who can prove their previous shareholder status, are entitled to claim a monetary compensation from the company for ten years following the annulment of their shares. Such compensation amounts to the fair market value of the shares at the time of conversion into registered shares or at the time the claim for monetary compensation is asserted – whichever is lower. In any event, the compensation, in accordance with existing corporate law, is limited by the freely distributable equity of the company.
Is the revCO appropriate?
While the revCO – at least, partially – addresses criticisms of the Pre-Draft in our first newsletter – the essence of our criticisms still holds true. Furthermore, the revCO's new regime concerning the transition period raises these further issues:
- The conversion is triggered by the lack of an entry in the commercial register making reference to one of two exemptions (i.e. a listing on a stock exchange or the bearer shares being issued in the form of intermediated securities). This formal trigger may lead to unreasonable conversions of shares. Namely, bearer shares may be converted by operation of law despite being lawful (e.g. bearer shares that are listed). The revCO addresses this issue by "allowing" for the reverse conversion into bearer shares provided that the shareholders' meeting supports such a conversion and the company enters the exemptions into the commercial register.
- The contemplated statutory specifications of the new registered shares may lead to impractical situations in the event that a company currently has both bearer shares and registered shares. For example, certain companies might end up with one set of registered shares where the transferability is restricted (i.e. pre-existing registered shares with transfer restrictions) and one set of registered shares, which are freely transferable (i.e. the current bearer shares that will be converted into registered shares). In regard to such entities, it seems questionable how future transfers of registered shares should be handled given that it would be hard to conclusively assess whether or not, for such share transfer, a board or shareholder resolution approving the transfer is required.
- The revCO does not address whether a court decision and prior approval of the company are also required to register bearer shareholders who have not identified themselves prior to a voluntary conversion of bearer shares into registered shares within 18 months following the new legislation. Since this scenario is not explicitly addressed in the rules concerning the transition period, we would argue that, in the event of a voluntary conversion of bearer shares (prior to an eventual automatic conversion by operation of law), a shareholder can be registered in the share register, both before and after the end of the 18-month period, without court approval (based on the necessary notice only). However, we cannot conclusively confirm that, in the event of a dispute, a court would confirm this view.
- The revCO provides that a court order for registration in the share register can only be requested with the company's prior approval. It seems that it was intended to protect companies from a potential wave of court proceedings (that could be deliberately initiated to harm the company). It is up to the (alleged) shareholder, however, to prove his status. As a result, the prerequisite of the company's approval could be misused by companies to get rid of certain shareholders. The revCO does not include any specific mechanism to protect shareholders from companies denying approval.
- Pursuant to the revCO, shares will not be voided if, during the five-year grace period, a shareholder has requested (with the company's consent) a court order to be registered in the share register. The revCO does not address the possibility that such a request, pending upon lapse of the five-year grace period, will later be denied. While it seems consistent that the respective shares would be deemed voided upon termination of the court proceedings, such harsh effects (loss of title to the shares), if indeed intended by lawmakers, should have been expressly provided for.
- Shareholders who have not identified themselves during the grace period will definitively lose all rights attached to the shares, which could raise concerns about the constitutional guarantee of ownership (art. 26 of the Swiss constitution). While certain additional prerequisites (e.g. a longer grace period) and the possibility of monetary compensation were introduced after the Pre-Draft, it remains more than questionable whether the automatic loss of rights is an appropriate sanction for non-compliance with a mere identification obligation.
- The possibility for shareholders who lose title to their shares to request monetary compensation is an approach to mitigate the above-mentioned concerns relating to the guarantee of ownership. However, it is not apparent under which circumstances the prerequisites for such compensation will be fulfilled. The voiding of shares is triggered by the violation of a mandatory statutory shareholder obligation. Against this background, we would, on the one hand, assume that such loss of title can only in exceptional circumstances be considered to take place "through no fault of the shareholder" (ohne eigenes Verschulden des Aktionärs). On the other hand, to minimise the tension with the constitutional guarantee of ownership, this prerequisite should be viewed as broadly as possible. For example, a shareholder inheriting shares during the five-year grace period, but only finding out about these shares after the lapse, could be a potential claimant for monetary compensation. Other claims could arise in connection with companies denying the required consent to shareholders seeking court orders for their registration in the share register.
- In regard to the new (registered) shares issued after the annulment of shares upon the lapse of the five-year grace period, the Swiss Federal Council stated that the company can freely dispose of these shares by keeping them, selling them, distributing them to shareholders or canceling them in a capital decrease procedure. Unfortunately, the (corporate law) issues that might arise as a consequence remain unsolved, and the Swiss parliament – being fully aware of the issue – opted not to provide any solution for entities ending up with more than 10% treasury shares and struggling to abolish this excess within two years as prescribed by art. 659 CO.
Recommendations: convert bearer shares
We encourage companies to consider converting bearer shares into registered shares voluntarily prior to an eventual automatic conversion. A voluntary conversion will require an amendment of the articles of association and a corresponding entry into the commercial register. If physical share certificates have been issued, they should be called in, cancelled and, if desired, re-issued as registered shares. If companies dispose of both bearer shares and registered shares with transfer restrictions, we recommend introducing the transfer restriction to the converted registered shares as well.
Bearer shareholders who have not yet identified themselves vis-à-vis their company should do so as soon as possible to comply with the already existing statutory obligations and to avoid the loss of rights attached to their shares.