Corporate Housekeeping for Start-ups

1.—Chain of title and legally valid assignments

With a view to a future exit, it is important for investors that the ownership documentation regarding the shares is complete and traceable (so-called chain of title). In the event of a trade sale, the buyer of the company will scrutinise the chain of title. If there are any deficiencies, these must be rectified, usually at great expense. An incomplete chain of title will also lead to stricter liability provisions in the purchase agreement and, in the worst case, even to a lower purchase price.

A professional investor who invests in the growth phase with a view to a later exit is aware of this. If his/her due diligence reveals that shares have not been legally transferred between the shareholders (e.g. because there is no valid purchase agreement or the hand-signed declaration of assignment is missing), he/she will usually insist that the deficiencies are rectified before he/she provides the company with new funds. A properly managed chain of title is therefore crucial from the first financing round with professional investors at latest.

The following questions should be asked regarding the chain of title:

1. Is there a current share register signed by the Board of Directors?
2. Is there a purchase agreement for every past share transfer?
3. Is there a hand-signed declaration of assignment or (if the company has issued one) a properly indorsed share certificate by the seller for each past share transfer?
4. The shares of most Swiss companies are restricted, i.e. their transfer must be authorised by the Board of Directors. Have all share transfers been authorised accordingly?

2.—Conducting the Annual General Meeting within the deadline

The Annual General Meeting (AGM) is convened by the Board of Directors (BoD) or, if necessary, by the auditors. The ordinary AGM must be held annually within six months of the end of the financial year (article 699 para. 2 CO). As a rule, this is by 30 June of the following year, as the financial year usually ends on 31 December.

Due to confirmed Federal Supreme Court case law, particular caution is required in complying to this deadline. If this deadline is not met, the Federal Supreme Court has ruled that the mandate of the BoD ends when the deadline for conducting the AGM expires. In other words, the company simply no longer has a BoD if it is not re-elected within the six-month period. It follows that any delayed resolution of the BoD is invalid. Moreover, it may even be questionable whether contracts signed by the non-re-elected BoD are valid. Finally, the company would even be fundamentally blocked, as it would also be impossible for the BoD to convene a general meeting. As there is formally no longer a BoD, it can no longer convene an AGM to re-elect it. The re-election or new election of the BoD would at least be possible through a universal meeting within the meaning of article 701 CO. If this is also not feasible, the only remaining option is to convene a general meeting by the auditors or by appealing to the court, which should be avoided if possible (see BGE 148 III 69; BGer judgement 4A_387/2003, 4A_429/2023 of 2 May 2024).

graphic: MLL Legal

Grafik: MLL Legal

It is therefore important that the AGM is also held on time for start-ups through forward-looking planning and coordination (in particular with regard to the early preparation of the annual financial statements) in order to ensure that the BoD is able to operate and make decisions. In this respect, the minutes of the last AGM held are also of particular importance for a potential investor in the context of due diligence.

3.—Storage of contracts and company documents

The importance of the correct storage of important company documents is often underestimated by founders – at the latest from the Series A financing round onwards, the company documents are important for the due diligence to be carried out. It is usually very time-consuming to compile the missing documentation retrospectively. In the worst case, this can delay the completion of the financing round.

Therefore, all important company documents should be stored centrally – namely the accounting documents, the employment, rental and loan agreements, the minutes of the BoD and AGM, the share register and the purchase agreements and declarations of assignment for all past share transfers.

4.—Conclusion of a shareholders’ agreement (SHA)

Although there is no obligation to conclude a shareholders’ agreement, one is generally concluded. Without this, the shareholders have no further obligations apart from the duty of payment, i.e. the duty to pay the issue price of their shares. However, it is often considered important that further obligations are agreed between the shareholders. This in particular prevents unwelcome third parties from acquiring shares or the company from becoming unable to act due to a deadlock.

The timing for the conclusion of an SHA must be determined on a case-by-case basis. The basic rule is as early as possible. As the company matures and professionalises, an SHA is certainly indispensable. As soon as a professional investor acquires a stake in the company, he/she will insist on a detailed SHA anyway. At least the following main points are regulated:

• Corporate Governance – the shareholders agree on who is authorised to appoint many BoD members, who appoints the Chairman, which transactions must be decided by the BoD and, in particular, the majorities with which these transactions must be decided. Similar regulations are made at AGM level; here, too, the quorums with which certain transactions must be approved are determined. Such quorums primarily serve to protect minority shareholders: certain resolutions cannot be implemented without their consent.
• Purchase Rights – if certain predefined events occur with a shareholder (e.g. death or serious breach of the SHA), the remaining shareholders may purchase the shareholder’s shares at a predetermined price.
• Right of First Refusal and Pre-Emption Rights – if a shareholder wishes to sell his/her shares (either on his/her own initiative or because he/she has received a corresponding offer), the shares must be offered to the other shareholders for purchase before they can be sold to the third-party purchaser. Like the purchase right, rights of first refusal and pre-emptive purchase rights are intended to prevent shares from being acquired by unfavourable third parties.
• Drag-Along and Tag-Along Rights – the drag-along right represents a co-sale obligation for the remaining shareholders if a prospective buyer wishes to acquire 100% (or possibly a smaller stake in the company) and an authorised shareholder exercises his/her drag-along right. Conversely, a tag-along right gives the remaining shareholders the right to sell their shares in such cases, even if the buyer does not necessarily want to acquire them.

As the start-up develops, the level of detail of the SHA should also adapt. Professional venture capital investors often demand additional provisions:

graphic: MLL Legal

Grafik: MLL Legal

For more detailed information on the SHA, please also consult this article by MLL Legal (in German).

5.—Discontinuation of the opt-out of the limited audit

As is generally known, a company that is not obliged to have an ordinary audit and has an annual average of less than ten full-time employees can waive the limited audit pursuant to article 727a CO with the consent of all shareholders (so-called opt-out).

However, growing start-ups often ignore the discontinuation of this simplification, i.e. by exceeding the threshold of ten full-time employees across all employment contracts. From then on, at least a limited audit is mandatory. The auditors will examine the accounts and the underlying documents and contracts when they are appointed, but at the latest during their first audit. This demonstrates once again the importance of proper corporate housekeeping: if the necessary documents are not available, processes must be documented retrospectively at great expense. Management is distracted from day-to-day business. In the worst case, the auditors issue their opinion with a delay or with reservations, which can have a negative impact on future financing rounds.

6.—Authorisation to sign and organisational regulations

When the company is entered into the commercial register, the authorised signatories and their signatory rights must also be entered in (individual signatories, joint signatures at two, procuration, etc.). In principle, these persons can sign all contracts that are covered by the company’s purpose.

In the external relationship, this authorisation to represent the company cannot be restricted: A third party can rely on the fact that a person entered into the commercial register is actually authorised to sign these contracts. Accordingly, they are valid even if the signatory did not have the corresponding authorisation internally. Nevertheless, it is important to precisely regulate the signing authorisations in the internal relationship: experience shows that hardly any employees sign contracts if they are prohibited from doing so by regulations. The organisational regulations are the basic regulations of every company: they delineate the powers of the Board of Directors and the Executive Board and, as mentioned above, regulate who (Board of Directors, Executive Board, other employees) may conclude which contracts.