Latest developments in corporate law: consequences of poor record-keeping of the shareholders’ register and the register of ultimate beneficial owners

1.       Introduction

On 1 November 2019, Switzerland put into law the recommendations of transparency from the Financial Action Task Force (FATF; GAFI), amending among others the Swiss Code of Obligations and the Swiss Criminal Code. The changes apply to (i) the record-keeping of the registers of ultimate beneficial owners (BO’s register) and the shareholders’ register and (ii) bearer shares. We discussed the latter aspect in another newsletter (see article here).

In 2015, some FATF recommendations had already been implemented : new provisions related to the holding of a BO’s register and a list of the bearer shareholders were added to the Swiss Code of Obligations. Because the FATF considered these provisions not sufficient to ensure transparency, some stronger measures came into force in Switzerland in November 2019.

This newsletter details how shareholders’ register and BO’s register shall be kept and the consequences of poor record-keeping. This newsletter also briefly explains the impact of these new provisions on M&A transactions.

2.       New provisions related to the shareholders’ register and BO’s register

a.       Clarifications related to beneficial owners

Since the 2015 reform, when new shareholders acquire 25% of a Swiss company’s shares, they have to report to the company the name of their ultimate beneficial owners. These persons have to be registered in the BO’s register of the company.

The new provisions, which came into force in November 2019, specify how to determine who are the ultimate beneficial owners of a company. Indeed, until then, the law defined the ultimate beneficial owners as “the natural persons on whose behalf the shareholder ultimately acts”. This unsatisfactory definition left too much room for interpretation, making it difficult to know up to which “level” the reporting should be made, and how many natural persons should be recorded in the BO’s register. With the upholding of the new legal provisions, the concept of beneficial owner now refers by analogy to the notion of control of a provision of the Swiss Code of Obligations related to accounting. Thus, according to this provision, a person controls another if it (i) directly or indirectly holds a majority of votes in the highest management body; (ii) directly or indirectly has the right to appoint or remove a majority of the members of the supreme management or administrative body; or (iii) is able to exercise a controlling influence based on the articles of association.

Moreover, the new legislation clarifies and confirms that when a company is ultimately owned by a listed company, no natural person shall be reported. The shareholders must only disclose the fact that its shareholder is a listed company as well as the name and address of said listed company.

Finally, the new provisions of the Code of Obligations specify that changes related to the ultimate beneficial owner of the company (such as name or address) must be notified to the company within 3 months.

b.       Consequences in case of poor record-keeping of the BO’s register and the shareholders’ register

i.         Impact on voting rights and dividends

It is very important that Swiss companies and beneficial owners comply with the reporting duties set forth by the new legal provisions because the consequences in case of default are detrimental to the shareholders.

Indeed, a shareholder, after the acquisition of more than 25 % of the shares of a company, cannot exercise its voting rights as long as it has not complied with its disclosure obligations.

Likewise, a shareholder can only benefit from its economic rights (in particular the right to receive dividends) once it has complied with its reporting obligations. If a shareholder fails to comply with its reporting obligations within one month after the acquisition of the shares, its economic rights disappear. If the shareholder remedies this default at a later stage, it may only benefit from its economic rights arising from that date.

It is the Board of Directors’ responsibility to ensure that no shareholder exercises their rights in breach of their reporting obligations.

ii.       Dissolution of the company?

According to the new provisions of the Code of Obligations, poor record-keeping in the BO’s register – but also in the shareholders’ register! – now constitutes a case of defect in the organization of a company, similar to the absence of a corporate body (e.g. board of directors).

Hence, if the shareholders’ register or the BO’s register of a company are not maintained in accordance with the law, the judge can take – at the request of a shareholder, creditor or officer of the commercial register –  the necessary measures to restore the situation; such measures may ultimately result in the liquidation of the company.

iii.       Criminal consequences

The recent implementation of the FATF Recommendations also foresees criminal consequences in case of breach of the obligations to report beneficial owners of a shareholder. It is important to note that those sanctions arise not only in the event of a breach of the duty to report the ultimate beneficial owner beneficiary of the company but also if a change of name or address of the ultimate beneficial owner beneficiary is not reported! According to the Criminal Code, the sanction is a fine of up to CHF 10,000. Although one can only be sanctioned if one acts intentionally (and not negligently), acting recklessly – i.e. the fact that a person contemplates the harmful result and accepts such potential result – is sufficient.

Moreover, since November 2019, the Swiss Criminal Code now imposes sanctions against a person who, intentionally, poorly maintained the shareholders’ register and the BO’s register. The sanction is the same as for the breach of the reporting obligations of the ultimate beneficial owners. As these obligations to maintain the shareholders’ register and the BO’s register are the responsibility of the board of directors, each director could be affected by such a criminal sanction!

It is worth highlighting that, under Swiss law, (i) the shareholders’ register shall mention the name and address of the shareholders, (ii) this register must be accessible anytime in Switzerland and (iii) every recording within this register shall be based on a supporting document (which shall be kept for 10 years).

Finally, it should be noted that the criminal sanctions mentioned above are also applicable to limited liability companies (Sàrl/GmbH).

3.       Consequences in the field of mergers & acquisitions

The new provisions implementing the FATF recommendations will have a significant impact in the field of mergers and acquisitions and in particular during the due diligence of the target company.

First, the buyer shall ensure, as part of the due diligence, that the shareholders of the target company have always complied with their obligations to report their beneficial owners, as the case may be. Indeed, decisions taken by shareholders which were not entitled to vote could be declared null and void. Thus, important decisions of the shareholders’ meeting, such as capital increases or the appointment of new directors, could be invalid, even several years after the date of the concerned general meeting. The same is true for distribution of dividends to shareholders who were not entitled to receive dividends.

Moreover, it should be checked, as part of the legal due diligence, that the registers (of shareholders and of beneficial owners as the case may be) are kept in accordance with the law, in order to avoid any criminal exposure.

4.       Conclusion and Recommendations

While the new provisions of the Swiss Code of Obligations are welcome to a large extent, such as the increase of transparency of the shareholders in Swiss companies and the clarifications of the concept of ultimate beneficial owners, other aspects, such as the criminal consequences of certain actions, are unfortunate.

All companies are advised to check that the record-keeping of their shareholders’ register and their BO’s register comply with current legal requirements, in particular in light of potential criminal consequences.