Personal Liability Risks - Swiss Law On Stock Corporations

In recent years, a number of highly publicized liability suits brought against board members and auditors of Swiss stock corporations have made the public at large aware of the considerable risks which the acceptance of corporate duties in Switzerland involves. Today, whoever is elected to a board of directors or agrees to perform auditing services for a Swiss stock corporation often experiences the uneasy feeling of sitting on the top of a volcano.

The following remarks provide an overview of the prevailing legal situation as it emerges from the revised Swiss law on stock corporations which became effective on July1, 1992, and from recent court practice.

CORPORATE LIABILITY APPLIES TO ALL PERSONS INVOLVED IN:

- the administration, management and liquidation of a stock corporation ("Organhaftung"). Executive organs include: all members of the board of directors and all persons who in effect make decisions which are generally reserved to the board of directors or to the management or who otherwise substantially influence the corporation's affairs;

- the incorporation procedure ("Grundungshaftung"). Incorporation liability applies not only to all persons who officially act as founders, but, more broadly, to everyone substantially involved in the founding proceedings;

- the issuance of a prospectus ("Prospekthaftung"), i.e. all persons (e.g. the founders, the board of directors, advisors or banking institutions) who essentially contribute to the issuance and distribution of a prospectus or equivalent documents upon incorporation and at times of capital increases or when debt instruments are issued;

- auditing services ("Revisionshaftung"), i.e. all persons engaged in the auditing of annual accounts and consolidated statements during incorporation procedures, capital increases or reductions as well as during the regular course of business.

IN ORDER TO ESTABLISH LIABILITY ON THE PART OF THE ABOVE PERSONS THE FOLLOWING PREREQUISITES MUST BE FULFILLED:

1. Damages

Damages suffered by the corporation or its creditors are known as direct damages. If the corporation itself suffers damages (directly), then the shareholders suffer so-called indirect damages, as their equity interests depreciate. In bankruptcy cases it is the creditors who suffer indirect damages when a corporation can no longer meet its financial obligations.

2. Intentional or negligent failure to perform one's duty

A person fails to perform his duty if he does not fulfill all corporate responsibilities which are assigned to him by law or by the Articles of Incorporation.
The law does not specify in which specific cases a person involved in the administration, management or liquidation of a stock corporation is to be considered as having neglected his duties. However, an extensive body of court precedents exists on this subject. Of particular significance is the question of liability in the context of a delegation of authority. Whoever lawfully and correctly delegates the execution of specific duties to a third party is only liable for damages caused by the latter if he is unable to prove that he used the required care in the selection, instruction and supervision of such third party. A delegation of duties is considered lawful if it takes into account the formal prerequisites and the material limits set by law.
When issuing a prospectus, grounds for liability are the publication or distribution of incorrect or misleading information or of material which does not comply with the legal requirements. Moreover, anyone having intentionally or negligently contributed thereto may also be held liable.
Duties which auditors must observe are not explicitly specified in the new provisions of liability, but ensue from the auditing rules and regulations applied in Switzerland.
The failure to perform one's duty must be at fault. Any contributory faulty behaviour - even minor negligence - is sufficient grounds for liability.
Wilful misconduct and negligence are to be examined in light of every person's duty to exercise due diligence. At the basis of the obligation to exercise due diligence is an objective assessment of breach of duty. From this objectified approach it follows that a subjective release from liability - e.g. because of ignorance - is not an acceptable defense. The more demanding an activity of the responsible person is, the more specific the qualifications become for the exercise of an adequate level of due diligence.

3. Adequate causality (relation of cause and effect)

Adequate causality must exist between the negligent behaviour (or wilful misconduct) and the incurred damages.

4. Lack of grounds for exclusion

A claim may be precluded or the right to sue may be excluded for a variety of different reasons, e.g. a court judgment, a settlement or the expiration of the statute of limitations. Moreover, actions based on a decision taken by the general meeting of shareholders or with the approval of all shareholders are also excluded. However, a resolution to release board members from liability is valid only when the shareholders have been duly informed of the specific facts. Furthermore, said resolution takes effect only vis-a-vis the corporation itself. In addition, only those individual shareholders who voted in favour of such resolution are excluded from bringing suit against the corporation. Finally, such resolution does not in any way limit the creditors' right to bring suit in the event of the corporation's bankruptcy.

ENTITLEMENT TO THE CLAIM; LIABILITY

The corporation itself, the individual shareholder, the so-called "participants" (equity holders without voting rights) and - in case of bankruptcy - the creditors are the parties who may bring suit for damages.
In principle, the entire damage is to be compensated unless there are reasons for a reduction of damages. If several persons are held liable under the law, each and every one of them is jointly and severally responsible for the entire amount of damages to which he contributed. It is up to the judge to rule on the internal apportionment of indemnification amongst the wrongdoers by taking into account individual causal contribution and fault.

The number of personal liability claims arising in connection with corporate matters has risen dramatically in recent years. The respective risks become even more evident when one considers the heavy financial burden which affected parties often had to bear. A comprehensive analysis of both published and non-published court decisions as well as the authors' experience as advisors result in the following

TEN GOLDEN RULES

that all members of boards of directors should follow in order to avoid corporate liability claims:

1. Play the game of stock corporations - stick to corporate formalities

2. Always act as a conscientious and diligent businessman would

3. Let minority shareholders live

4. Establish an appropriate organization

5. Personally execute all tasks which you may not delegate

6. Grant powers of attorney only with caution

7. Ensure that all bookkeeping requirements are fulfilled

8. Select a qualified auditor

9. Clearly regulate fiduciary relationships

10. Verify compliance with all regulations on taxes and public social levies

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.