Need for action triggered by the Ordinance Against Excessive Compensation in listed stock corporations (follow-up)

Yearly election by the annual general Meeting

Starting on 1 January 2014, the annual general meeting (AGM) has to individually elect the members and the chairman of the board of directors, the members of the compensation committee (who have to be members of the board of directors) and the independent proxy for the next AGM. Any member of the board of directors who intentionally prevents such election can be held criminally liable. The individual appointment as a member and as the chairman of the board of directors, or as a member of the board of directors and as a member of the compensation committee, is permitted to take place in one step. In the event where the AGM has not yet elected the independent proxy for the AGM 2014, the independent proxy is to be appointed by the board of directors. In the event where the position of the chairman is vacant or the compensation committee is not complete, the board of directors shall nominate a new chairman or fill such positions in the compensation committee for the remaining term of office, unless the articles of incorporation provide otherwise.

Beginning on 1 January 2014, proxies by a member of a corporate body and custodian representatives are no longer permitted. Members of the board of directors who appoint such proxies intentionally can be punished by law. Shareholders must be given the option to electronically issue powers of attorney and instructions to the independent proxy (known as “indirect voting”) no later than at the second AGM after implementation of the OAEC. Members of the board of directors may be punished by law when they intentionally do not make the necessary arrangements and prevent the shareholders from giving the independent proxy the necessary powers of attorney and instructions. Direct electronic voting is permitted, but not mandatory.

Vote of the AGM on compensations

Every year (no later than at the second AGM after implementation of the OAEC) the AGM must vote separately on the total amount of all payments to be made to the board of directors, executive board and advisory board. This vote is binding. Members of the board of directors who intentionally and successfully prevent the annual general meeting from voting can be punished by law. The details of the voting have to be set out in the articles of incorporation, which have to be amended no later than at the second AGM following the implementation of the OAEC. In case the second AGM has not yet implemented the details of the voting procedure, the board of directors shall set out the details. The voting can be prospective, i.e. determining the payments until the next AGM (or for the next business year). Alternatively, the voting can be retrospective for a past reference period. A combination is also possible, e.g. retrospectively for the variable remuneration and prospectively for the fixed remuneration. The chosen reference period does not have to be equal for members of the board of directors and members of the excecutive board. Furthermore, the articles of incorporation may provide whether the vote qualifies as approval (with a petition right of the shareholders) or as a resolution (without a petition right of the shareholders). In the event that the voting of the AGM is prospective and the AGM refuses the approval, the articles of incorporation may provide instructions on the further procedure, e.g. the board of directors may submit a new motion to the same AGM or has to call for an extraordinary general meeting within a certain time limit.

In the event that the voting of the AGM is prospective, the articles of incorporation may provide that the AGM passes a resolution on an additional amount for new members appointed to the executive board after the AGM has taken place, whereby such additional amount has to be determined or at least determinable and goes beyond the total amount of the remunerations already approved by the AGM. The additional amount does not have to be approved by the next AGM again. Nevertheless, the additional amount may only be called upon if the total amount approved by the AGM is insufficient to pay the new members of the executive board.

The board of directors has to prepare a written compensation report for the financial year beginning after or on 1 January 2014. The compensation report must provide the separate amounts of all payments made to the board of directors, the executive board and the advisory board and also list the amount paid to each individual member of the board of directors and the advisory board, with their names and functions. For the executive board, the highest amount paid to a single member must be indicated together with his/her name and function. The auditors must review the compensation report in light of its compliance with the law as well as the OAEC and must submit a written report on the results of their audit to the AGM. The report should be ready for the shareholders for inspection at the company’s registered office and available for order from the company at the latest 20 days before the AGM.

Inadmissible compensations

Beginning on 1 January 2014, in principle no severance pay, advance compensations and commissions for restructurings within the group may be paid to members of the board of directors, the executive board and the advisory board. Any member of the board of directors, executive board or advisory board who intentionally receives or makes such payment can be punished by law. However, it should be mentioned that sign-on bonuses are still admissible and have to be treated differently than prohibited advance compensations. Sign-on bonuses are compensations for claims the employee had against his former employer but were cancelled due to the job change. Furthermore, market-value compensation payments for postcontractual non-competition clauses are still allowed. However, the explanatory report makes clear, that such compensation payments and in particular fixed-term multi-year employment contracts can also be considered as hidden severance payments. According to the OAEC the duration of a fixed-term employment contract and the duration of the notice period of an indeterminate employment contract may not exceed one year. In effect, all current employment contracts have to be adapted accordingly before 1 January 2016. Until such amendments have been implemented, compensations that have been contractually committed based on employement agreements agreed upon before enactment of the OAEC are still permitted. Unless provided otherwise in the articles of incorporation, loans, credits, pension benefits beyond occupational pension schemes, performance-related bonuses and the allocation of shares, options and conversion rights are not permitted. However, until the second AGM after enactment of the OAEC the arrangement of such payments is still allowed even if the OAEC-compliant basis is not provided for in the articles of incorporation.

Pension funds

Beginning on 1 January 2015, pension funds governed by the Federal Law on Vested Benefits are subject to a voting obligation for directly held shares and are, therefore, also obliged to have themselves entered in the share register of listed companies. For indirectly held shares the voting obligation does only apply if the pension fund has a right to vote or if the direct holder of the shares is controlled by the pension fund (e.g. single-investor fund). The obligation to vote applies to announced proposals of the board of directors with regard to specific provisions set out in the OAEC (elections, provisions of the articles of incorporation and compensations). Abstention is allowed if this is in the best interest of the insured persons. The highest governing body of the pension fund has to define the principles which best substantiate the interests of the insured.

The pension funds must submit a comprehensive report on their compliance with their voting obligations to the insured persons at least once a year. The intentional violation of the voting or disclosure obligations by a member of the highest governing body or a person entrusted with the management of any such pension fund can be punished by law.

Penal provisions: Offenders and threat of punishment

The penal provisions contain special offenses. With regard to the arrangement or payment of inadmissible compensations, basically only members of the board of directors, the executive board or the advisory board can be held liable. For the other criminal offenses the circle of offenders is limited only to members of the board of directors. However, attorneys, fiduciaries and auditors, may be held liable as aiders and abettors. Additionally, as far as pension funds are concerned, persons entrusted with the management and the members of the highest governing body of the pension fund might be responsible. If the offense is related to a decision by a committee (e.g. resolution of the board of directors), every member should be judged by his/her voting record, whereby the attribution principle will be applied meaning that only those members who approved the decision can be held liable.

Members of the board of directors, executive board and advisory board can be punished for the payment or receiving of inadmissable renumerations by a custodial sentence of up to three years and a fine. For the other types of criminal offenses, the potential sentence for the members of the board of directors is milder, such as either a custodial sentence or fine. For pension funds, the punishment is a fine of up to 180 daily rates. Furthermore, all offenses are only punishable if they were committed with a direct intent (“against better knowledge”). Therefore, conditional intent and negligence are not punishable.

Need for action, in particular with regard to the articles of incorporation and employment Agreements

Swiss companies listed on a Swiss or foreign stock exchange must incorporate these changes into their articles of incorporation and regulations no later than at the second AGM following the enactment of the OAEC.

The articles of incorporation must contain mandatory provisions on four issues:

1) on the permitted number of group-external mandates for members of the board of directors, the executive board and advisory board in the highest governing and executive bodies of legal entities that must be registered in the Commercial Register (or a corresponding foreign register);
2) on the permitted term for employment contracts for members of the board of directors and the executive board (duration and period of notice shall be no longer than one year – the employment contracts themselves must be adapted before 1 January 2016);
3) on the principals of the tasks and responsibilities of the compensation committee, and
4) on the details concerning the voting of the AGM on compensations, which the board of directors, executive board and advisory board receive directly or indirectly from the company.

Any member of the board of directors who intentionally prevents the articles of incorporation from containing the necessary provisions set out above in clause 1 and 2, e.g. by failing to submit the necessary motion, can be held liable.

Furthermore, the following provisions have to be included in the articles of incorporation in order to be binding (provisions of the articles of incorporation that are relatively mandatory):

1) on the amounts of any loans, credits and pension benefits beyond occupational pension schemes for the members of the board of directors, the executive board and the advisory board;
2) on the principals of performance-related compensations and the allocation of shares, options and conversion rights to the members of the board of directors, executive board and advisory board;
3) on the authorisation to transfer the management (it should be mentioned that the management may not be transferred to an entity, except in case of a transfer of the asset management);
4) on the additional amount for the remuneration of members of the executive board appointed after the voting of the AGM on compensations;
5) on the procedure to be applied should the AGM reject the proposed compensation;
6) on the remediation of a lack of organisation in case of a vacancy of the chairman, a member of the compensation committee or of the independent proxy, as far as this competence is not to lie in the power of the board of directors; and
7) on the remunerations of the members of the board of directors, the executive board and the advisory board for activities within companies that are directly or indirectly controlled by the company.”