Conflicts of Interest under the Revised Corporate Law – an Overview and Recommendations

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This article addresses the question when and how members of the executive management (Managers) and members of the board of directors (Directors) must report (potential) conflicts of interest to the board of directors (Board), how the Board must assess such (potential) conflicts of interest and what measures must be taken.

The revised new corporate law, which entered into force on 1 January 2023, introduced an explicit provision on handling conflicts of interest to the Swiss Code of Obligations (CO). According to this provision, Directors as well as Managers must inform the Board immediately and completely about any conflicts of interest affecting them (article 717a para. 1 CO). It is irrelevant whether the conflict of interest has already occurred or is only a potential conflict of interest.

Legally Relevant (Potential) Conflict of Interest – Initial Assessment by the Affected Persons themselves

First of all, an affected Director or Manager must ask him- or herself whether there is a “conflict of interest” concerning him or her that triggers the duty to inform the Board accordingly. In other words, the question – which usually cannot always be answered unambiguously – arises as to the existence of a legally relevant (potential) conflict of interest and its differentiation from other, non-relevant interests.

The provisions of the CO do not provide for a clear definition of the term “conflict of interest”, which is understandable considering the versality of how (potential) conflicts of interest can present themselves. The legislative message on the revised corporate law exemplarily stipulates that a conflict of interest may exist if a Director has close business or private ties with a third party who wishes to enter into business relations with the company. However, a lack of time could also lead to a conflict of interest if the (other) activities of a Director have become so demanding that he or she no longer has sufficient time to perform his or her duties as a Director with the necessary diligence and care.

It is generally agreed that a legally relevant conflict of interest must be of an intensity that is at least likely to jeopardise the decision-maker’s ability to form an unbiased judgement. Of course, there are clear cases of relevant (potential) conflicts of interest, e.g., where a contractual relationship is to be concluded between the company and the Director or the Manager as a counterparty. But what applies if a Director is related to a person who is associated with a company with which a contractual relationship is to be entered into? Does the degree of relationship matter in this case? Or is it much more the “actual” closeness and affinity that is relevant?

The above examples show that a “legally relevant (potential) conflict of interest” cannot be clearly defined. Therefore, the standard to be applied in assessing whether a legally relevant (potential) conflict of interest exists is all the more important.

As yet to be shown below, a strict due diligence standard applies when assessing whether a legally relevant (potential) conflict of interest exists. Having said this, we can form the following initial recommendation for those who are subject to the information duty pursuant to article 717a para. 1 CO: No strict requirements should be placed on the initial assessment of whether a “relevant (potential) conflict of interest” exists. If the ability to form an unbiased judgement is at least doubtful or if there is even any appearance of a conflict of interest, the Director or Manager concerned must immediately inform the Board of the circumstances in question. Whether the assessing committee then concludes that a “legally relevant (potential) conflict of interest” indeed exists and, if so, measures are to be taken, is another question and must be dealt with in a second step (see below).

Information Obligation

The Director or Manager concerned must inform the Board “immediately and completely” if a (potential) conflict of interest exists.

Immediately means that the information must be provided when the person concerned has recognised (or should have recognised when acting diligently) the (potential) conflict of interest or any appearance of a (potential) conflict of interest. In the case of permanent conflicts of interest (e.g., the case of the Director whose spouse is employed by a main supplier of the company), it is not necessary to constantly inform about these circumstances. However, the necessary measures must be taken.

Completely means that the information to the Board must be as comprehensive as possible so that the Board (or the relevant committee) can, as a first step, reasonably assess whether a legally relevant (potential) conflict of interest exists and, if so, take appropriate measures as a second step.

The information duty applies to both the Directors and the Managers. According to the wording of the respective legal provision the addressee of the information is the “board of directors”. In practice, most organisational regulations would foresee that the information is to be addressed to the chairperson of the Board, who then informs the other Directors; if the chairperson of the Board him- or herself is subject to a potential conflict of interest, he or she will turn to the vice-chairperson or, in the absence of such, to all other members of the Board. Decisive in each case are the applicable rules and regulations that the Board establishes for handling (potential) conflicts of interest.

Responsibility for Assessing whether a Legally Relevant Conflict of Interest actually exists

The existence of a (potential) conflict of interest must be reported to the Board or the chairperson of the Board (see above on the information obligation). The legislator has not regulated who exactly is responsible for assessing whether or not a legally relevant (potential) conflict of interest exists which requires respective measures. The CO states that the Board shall take the necessary measures to safeguard the interests of the company (article 717a para. 2 CO). The Board has certain inalienable and non-delegable duties which are exhaustively regulated (article 716a para. 1 CO). The task of assessing whether a legally relevant (potential) conflict of interest exists is missing in this list of non-delegable tasks.

In our opinion, the Board can therefore delegate the assessment of a potential conflict of interest to a committee or to an individual Director – for example, to the chairperson or, in his or her absence, to the vice-chairperson of the Board. The committee or the individual Director may pass a resolution to this effect (confirmation resolution); in our opinion, this also applies to the resolution on the appropriate measures to be taken in the event of a legally relevant conflict of interest (see below) (resolution on measures). The responsibility for this task and its execution should be addressed within the framework of the organisational regulations or special regulations concerning the treatment of conflicts of interest.

Margin of Judgement and Pitfalls

The Directors are liable to the company as well as to the individual shareholders and the creditors of the company for any damage they cause by intentionally or negligently violating their duties (article 754 para. 1 CO). If the performance of a duty is permissibly delegated to another body, liability only applies if it cannot be proven that the selection, information and supervision of the body was carried out with due diligence and care (article 754 para. 2 CO).

The courts are restrained in judging business decisions retrospectively, provided that they have been made in a proper decision-making process based on adequate information and free of conflicts of interest. In addition, and as a pre-criterion, the business decision must be in the interest of the company. This rule of restraint is known as “business judgment rule”; it is of great importance for the activities of the Board.

In our opinion, the decision as to whether a legally relevant conflict of interest exists is a decision on the application of the law and not a business decision. Consequently, the business judgment rule does not apply when assessing whether or not a legally relevant conflict of interest exists. The “legal judgment rule”, according to which the courts should be restrained when reviewing a decision on the application of the law, has unfortunately not (yet) prevailed. The question of whether a legally relevant conflict of interest exists is therefore subject to a strict standard of due diligence – hence, a “correct” assessment is owed. With regard to the liability of the members of the Board, this results in the following: Firstly, the result of the assessment of whether or not a legally relevant conflict of interest exists must be “correct”. Secondly, the protection of the business judgement rule does not apply if the decision was wrong. The Board – or the responsible committee or individual Director – are well advised not to underestimate the assessment and to exercise the best possible care.

Measures concerning Conflicts of Interest

According to the law, the Board must take measures that are necessary to protect the interests of the company. The legislator has deliberately refrained from establishing a mandatory duty to abstain from the passing of resolutions. Likewise, the legislator refrained from establishing mandatory independence requirements with regard to the composition of the Board.

This also means that a (potential) conflict of interest should not per se prevent the respective Director or the Manager from participating in a meaningful way in the decision-making process of the respective body, since often the knowledge of the Director or the Manager who is subject to a (potential) conflict of interest is important for the decision-making process of the respective body.

This conscious decision by the legislator in favour of a certain flexibility and autonomy for the Board is welcomed. At the same time, however, it is important for the Board to handle this flexibility and autonomy correctly and, in particular, to avoid liability risks that could arise if (potential) conflicts of interest are handled incorrectly.

When taking appropriate measures, we distinguish between three categories: Prevention, intervention and corrective measures:

Prevention measures:

  • Establishing a guideline on how to deal with (potential) conflict of interest. The guideline can also be integrated into the organisational regulations.
  • Training of the Managers and the Directors on how to deal with (potential) conflicts of interest.
  • Managers and Directors shall inform once a year about their personal interests. Although this goes beyond the legally required ad hoc information obligation, it can serve to raise awareness of (potential) conflicts of interest.
  • At the beginning of each meeting of the Board, the chairperson of the meeting shall ask the Directors whether a Director is subject to an even only potential conflict of interest. The procedure shall be recorded in the minutes. In the case of written resolutions of the Board, a corresponding passage shall be included in the resolution, according to which the signing Directors confirm that they are not subject to an even only potential conflict of interest.

Intervention measures:

If it is determined that a legally relevant (potential) conflict of interest exists, then the following measures are possible – these should be proportionate in view of the respective individual case:

  • Impartial Opinion: The rules for handling conflicts of interest are intended to guarantee that the decision-making can take place flawless, g., without any biases. If there is a (potential) conflict of interest that affects a large majority of the Directors or the entire Board, or if there is a risk that a circumstance could be interpreted as a conflict of interest, an independent third-party opinion (impartial opinion) may be obtained on the business transaction.
  • Dual Resolution: The Director concerned shall participate in the first resolution on the business transaction, but not in the second resolution. A resolution on the business transaction is only passed if it is adopted twice.
  • Simple Abstention: The Director concerned takes part in the discussion but not in the resolution.
  • Qualified Abstention: The Director concerned does not take part in the discussion or in the resolution. If several Directors are affected, it is recommended to form a special committee that is conflict-free.
  • Chinese Wall: The Director concerned does not take part in the discussion or the resolution, nor does he or she receive any information on the matter (in particular, he or she does not have access to the minutes). Due to the fundamental right to information of a Director, this regulation should be anchored in the organisational regulations or in other specific regulations for dealing with conflicts of interest.
  • Approval: The Board, including the member which is subject to a potential conflict of interest, passes a resolution and submits it to the general meeting as the superior body for approval.
  • Ultima Ratio: If the entire Board is subject to a conflict of interest and is no longer capable of acting, an application must be made to the court for the appointment of an administrator / a trustee. If only one Director has a permanent conflict of interest that makes it impossible for the Director to properly perform his or her duties on the Board, the Director must be asked to resign. In our opinion, the fact that the Director was elected by the general meeting, possibly even with knowledge of the conflict of interest, does not lead to a less strict application of the rules for dealing with conflicts of interest; the rules are intended to protect not only the shareholders but also the creditors of the company.

Corrective Measures:

  • If a conflict of interest becomes known only after a resolution has been passed, the Board must re-open the matter and take a new resolution on it. In doing so, it must take the appropriate intervention measures (see above).

Immediate Need for Action

The Board was under the former corporate law already obliged to take appropriate measures in case of conflicts of interest due to its general duty of care and loyalty. Therefore, the revised corporate law does not lead to a new legal situation, but primarily increases the awareness of the issue. However, corporations should do the following given the newly introduced explicit rule on the handling of conflicts of interest:

  • Establishing rules for dealing with conflicts of interest – g., within the framework of the organisational regulations or a separate set of regulations.
  • At physical Board meetings, ensuring that the absence of an even only potential conflict of interest is recorded in the minutes. A corresponding passage should be included in the written resolution of the Board.
  • The Managers and the Directors should be trained in dealing with (potential) conflicts of interest.

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More Information:

If you have any questions on how to handle conflicts of interest, please do not hesitate to contact the authors of this article and the MLL Legals’ Corporate & M&A practice group. If you have general questions on the revised corporate law, we recommend reading our FAQ on the subject (see link above).

This article does not constitute legal advice. It only states the authors’ current understanding of the legal issue, without taking into account individual circumstances. Any liability for the contents of this article is excluded. Furthermore, MLL Legal is under no obligation to inform the readers of this article about new case law, changes in practice or any other changes.

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