Latest developments in Swiss corporate law: the end of bearer shares

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 bearer shares and to the record-keeping of the registers of ultimate beneficial owners and the shareholders’ register. 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 register of the ultimate beneficial owners and a list of the bearer shareholders were added to the Swiss Code of Obligations. Because the FATF considered these provisions were not sufficient to ensure transparency, a quasi-complete cancellation of bearer shares came into force in Switzerland in November 2019. Thus, only bearer shares listed on the stock exchange or issued in the form of intermediated securities (titres intermédiés/Bucheffeckten) remain.

This newsletter details how bearer shares shall be converted into registered shares and the related consequences. This newsletter also explains the impact of these new provisions on M&A transactions.

2.       Conversion of bearer shares

a.       Voluntary conversion into registered shares

Following the implementation of the new provisions in the Swiss Code of Obligations, every corporation (société anonyme/Aktiengesellschaft) and limited liability company (société à repsonsabilité limitée/limited liability company) which holds bearer shares must convert those into registered shares within 18 months following the amendment of the Swiss Code of Obligations, i.e. by 30 April 2021.

Such conversion must occur by way of a shareholders’ meeting and the articles of association of the company must be amended. These amendments must then be filed with the commercial registry.

b.       Automatic conversion into registered shares

If a company has not converted its bearer shares into registered shares before 30 April 2021, its shares will be automatically converted into registered shares. The conversion will be effective, even if the articles of association and the commercial register mention that the company holds bearer shares.

The nominal value of bearer shares converted into registered shares will remain the same. Similarly, preference shares (in terms of voting rights and dividend rights) will remain the same.

c.       Consequences for former bearer shareholders not mentioned in the shareholders’ register

After the conversion of bearer shares into registered shares, the company will be required to record in the shareholders’ register the shareholders who have reported themselves to the company.

However, the voting rights and rights to receive dividends of bearer shareholders who have not reported themselves to the company following the conversion of their shares into registered shares will be cancelled. The Board of Directors shall ensure that no shareholder can exercise their rights if they are not registered in the shareholders’ register. Moreover, the Board of Directors must record in the shareholders’ register that such shareholders have not complied with their disclosure obligation.

That being said, shareholders whose bearer shares have been converted into registered shares and who have not reported themselves to the company may ask the judge before 31 October 2024 to be registered into the shareholders’ register. The legal fees of these proceedings shall be borne by them. The shareholders will be able to vote and to receive the dividends only after their registration in the shareholders’ register further to court proceedings.

d.       Possible compensation for cancelled shares

The shares of shareholders who have not asked to be registered in the shareholders’ register before 31 October 2024 will be automatically cancelled. These shareholders will no longer be entitled to any of the rights related to those shares (voting rights, right to receive dividends, etc.). These shares will be replaced by treasury shares of the company.

However, shareholders – whose shares have been cancelled without any fault from said shareholders – will be entitled to claim compensation from the company within ten years following the cancellation of their shares if they can prove that they were shareholders at that time. The compensation will equal the value of the shares at the date of their conversion. If the value of the shares on the day of the claim is lower than the value of those shares at the time of their conversion, the compensation will correspond to the lowest value. Moreover, compensation by the company will only be possible if it has sufficient freely disposable equity.

e.       Concerns raised by the new legal provisions

The new legal provisions raise many questions. For example : what will happen if the shares which have been cancelled and converted into treasury shares represent more than 10% of the company’s capital (which is the limit of treasury shares allowed by the Swiss Code of Obligations)? A possible answer is that all the shares exceeding this 10% cap should be disposed of or cancelled as part of a share capital reduction. Moreover, what would happen if a significant number of shares are cancelled and converted into treasury shares, which would result in the failure to meet attendance quorum during the shareholders’ meeting? Another (even worse) situation would be if the company is owned by a single shareholder whose shares have been converted into treasury shares. In such case, no decision could be taken during the shareholders’ meeting. In addition, what would happen to options on bearer shares which have been issued before the entry into force of the new provisions of the Swiss Code of Obligations? Could they be exercised? And if so, would they result in registered shares or bearer shares?

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 of all, the buyer will have to ensure, as part of the due diligence, that bearer shareholders have not taken part in shareholders meetings without having validly report themselves to the company. Indeed, decisions taken by shareholders’ meetings, which have not validly been formed, could be declared null and void. Thus, important decisions of the shareholders’ meeting, such as capital increases or appointment of new directors, could be invalid, even several years after the date of said shareholders’ meeting.

In addition, the purchaser should require that the target company converts its bearer shares into registered shares prior to the acquisition (or shall do it as soon as possible after the acquisition).

4.       Conclusion and Recommendations

As highlighted in this newsletter, companies holding bearer shares should act now. Unless they are entitled to keep their bearer shares, a voluntary conversion by 30 April 2021 is recommended. In addition, it should be ensured that shareholders which are not registered in the shareholders’ register do not take part in shareholders’ meetings and do not receive dividends. Moreover, companies facing these issues should check whether shareholders’ meetings have already been held in order to assess the consequences.

In addition, bearer shareholders are advised to report themselves with the company as soon as possible, in order to avoid having to do so by means of burdensome and expensive proceedings.