Fundamental Decision Of The Swiss Federal Court On Capital Increases

The new Swiss law on corporations introduced to new forms of capital increases, i. e. the authorised capital (art. 651 et seq. Code of Obligations, CO) and the conditional capital (art. 653 et seq. CO). Both forms raise several questions as to shareholders' pre-emptive rights and the separation of powers between the shareholders' meeting and the board of directors. After examinations by legal authors, the Swiss Federal Court now officially published a leading case in the official court reporter (OCR 121 III 219 ff.).

The case involves a resolution of the shareholders' meeting of one of the three big Swiss Banks, the Union Bank of Switzerland ("UBS"). Its shareholders' meeting resolved, among others, to establish an authorised capital in the amount of CHF 200 million. The new shares were intended to be placed with the existing shareholders. However, the articles of incorporation empowered the board of directors to withdraw the shareholders' pre-emptive rights in the event the shares are to be used for the takeover of enterprises, of parts of an enterprise, of participations or in the event of a placement of the shares to secure financing for such transactions. In addition, the shareholders' meeting resolved to create a conditional capital which could lead to a maximum increase in an amount of CHF 100 million subject to the exercise of options held by bondholders or by employees. The shareholders' resolution also provided that the board of directors may withdraw the advance subscription rights (Vorwegzeichnungsrecht) of the shareholders when issuing new bonds connected with conversion or option rights. In this event the bonds were to be issued at current market conditions.

This resolution has been challenged by BK Vision AG, UBS's largest minority shareholder, controlling roughly ten per cent of the voting rights. The Zurich Commercial Court has invalidated the resolution.

The Swiss Federal Court first dealt with two of the objectives of the revised corporation law, i. e. the enhancement of shareholder protection and the strengthening of the companies' flexibility to obtain new funds through the capital markets. The latter implies that certain powers be delegated from the shareholders' meeting to the board of directors, since only the board is in a position to react quickly enough when engaging in takeovers and similar transactions. Because such delegation includes the decisions regarding shareholders' pre-emptive rights, a conflict arises between the two above-mentioned objectives. It is indeed not possible that the shareholders' meeting resolves whether the pre-emptive rights shall be granted or withdrawn, since the final purpose the authorised capital is to be created for, for instance the takeover of an enterprise, is not yet determined at the time of the shareholders' meeting.

The Court weighed the two objectives against each other and established the following guidelines: As a matter of principle, both new forms of capital increases require that the shareholders' meeting decides whether the pre-emptive rights may be withdrawn. However, a delegation to the board of directors is possible as far as the resolution of the shareholders' meeting itself foresees in which cases, as a matter of principle the board is allowed to withdraw the pre-emptive rights. The smaller the company and the higher the amount of the planned capital increase the more the situations foreseen must be concrete. Moreover, the requirements are less strict, when the new bonds or shares are issued at market conditions, since in this event, shareholders can purchase shares on the stock markets.

With respect to authorised capital, the Court held that UBS fulfilled these requirements, since the resolution referred explicitly to takeovers and participations which are reasons foreseen by the law (CO, art. 652b (2) CO). Moreover, the capital increase would not exceed 7.8 per cent of the existing share capital. In particular, the Court also allowed a withdrawal of the pre-emptive rights (and the delegation of such resolution to the board) for the financing take-overs, etc. Thereby, it explicitly referred to the needs of big international corporations to place new shares on the international markets.

With respect to the conditional capital increase the Court held that the articles of incorporation, or the resolution of the shareholders' meeting respectively, have to state how many shares shall be allocated to bondholders and how many to employees (BGE 121 III 240). This differentiation is important, because to the extent shares or options are allocated to employees the pre-emptive rights of the shareholders have to be withdrawn as a corollary, while they can be granted indirectly when issuing convertible bonds and similar instruments by observing the advance subscription right required by law (art. 653 CO). Since the challenged resolution did not state how many shares are to be allocated to bondholders and how many to employees, it did not meet this requirement, and, therefore, was invalidated by the Court.

The Court further held that the decision regarding the withdrawal of the advance subscription rights may be delegated to the board, if the shareholders' meeting names in its resolution the important reasons in abstract which allow a withdrawal. Such requirement cannot be dispensed with by stating that the options or the convertible bonds have to be issued at market conditions, since the latter preserves only the economic and not the membership side of the advance subscription or the pre-emptive rights, respectively.

In sum, this leading case cleared important questions related to pre-emptive rights and the delegation of respective powers to the board of directors by the shareholders' meeting. Differentiating reasonably between large corporations and privately held companies, the Swiss Federal Court convincingly preferred the interpretation which makes it easier for the board of directors to effectively use the new forms of corporate financing.

The content of this article is intended to provide general information on the subject matter and is not a legal advice. An individual matter requires legal advice according to the specific circumstances.