How are the Powers of Shareholders and Management delineated?
Shareholder Activism Series: A Primer on the Swiss Legal Framework
This blog series puts the spotlight on legal issues relevant to activist shareholders and event-driven institutional investors in Swiss target companies and introduces market participants from abroad to the pillars of Switzerland's legal framework.
The General Meeting is where Shareholders exercise their powers in a Swiss Company
A key question for activist shareholders and event-driven institutional investors is how powers are delineated between the shareholders and the management of a company. The forum in which shareholders of a Swiss company are able to exert their influence in the most direct way is the general meeting. The first element to answering the question is therefore what competences the general meeting of shareholders has and which powers are reserved to management (comprising the board of directors and the executive management to which the day-to-day management is typically delegated in practice). The second element, namely how shareholders call a general meeting and exercise their further shareholder rights, will be outlined in a future blog post.
In terms of the delineation of power, Swiss corporate law is based on the so-called 'parity principle', according to which each corporate body (general meeting, management and auditors) has certain non-transferable and inalienable competences. These competences are set out in a granular way in statutes and precedents of the Swiss courts and do not always lead to an intuitive allocation of power. In very broad terms, the management of a Swiss listed company is the ultimate responsibility of the board while the most fundamental decisions regarding the company and its structure are reserved to the general meeting. Accordingly, the general meeting of a Swiss listed company could not, for instance, instruct the board to adjust its strategy in a particular way or to make a specific acquisition or disposal. On the other hand, management could generally not alter the fundamental nature of the company (e.g. by abandoning the company's main line of business) without shareholder approval.
Corporate Transactions and Equity Funding do not always require Shareholder Approval
In more detail, corporate transactions such as acquisitions and disposals generally fall within the management's powers. Outside of a takeover context, there is no statutory rule pursuant to which corporate transactions of a certain size (e.g. expressed as a percentage of turnover or balance sheet) require shareholder approval. In the exceptional case that such a transaction implies a change of the corporate purpose or a factual liquidation of the company, the approval of the general meeting would however be required. Apart from that, the remit of management's powers ends where the transaction involves a specific element that is within the general meeting's competences. In particular, for statutory mergers and demergers as well as transactions which involve a change to the company's capital structure shareholder approval is generally required.
Changes to the company's capital structure (e.g. the issuance of additional shares or the introduction of separate share classes) require an amendment of the articles of association and therefore, with limited exceptions, the approval of the general meeting. Moreover, a limitation or exclusion of the shareholders' subscription rights in a capital increase requires a qualified majority in the general meeting. However, by way of an authorized or conditional capital increase, the general meeting can authorize the board of directors to issue a limited number of shares without further shareholder approval and without regard to the existing shareholders' subscription rights. This gives management some room to maneuver, e.g. if company shares are envisaged to be part of the consideration in a corporate transaction.
Management Powers are restricted in a Takeover Context
The situation is somewhat different in a takeover context. Once a tender offer has been published (or pre-announced), the target company's board may not take measures which would significantly alter the assets or liabilities (including off-balance-sheet positions) of the target company without shareholder approval. The relevant thresholds are 10 percent of the company's balance sheet or earnings. The management's powers to issue shares based on a conditional capital increase and to deal in treasury shares (including related derivatives) are also curtailed while the company is subject to a tender offer. However, these restrictions are designed to keep management from frustrating the success of the offer rather than being a general delineation of powers.
Board Changes secure Shareholders' ultimate Control
What rests firmly in the hands of shareholders is the election and removal of the board. Each member and the chairman of the board of a listed Swiss company must stand for re-election individually at every annual general meeting. It is therefore no longer possible to stagger the board. Shareholders of a listed Swiss company also have a solid say on pay. The total compensation of the board and the executive management must be subject to a separate, binding vote each year.
The power to change the composition of the board is a potent, albeit indirect way for shareholders to influence how a listed Swiss company is run, even with respect to matters of management that are outside of the general meeting's competences. Barring exceptional circumstances, like the now resolved Sika situation which was to a significant extent due to the company's somewhat unusual capital structure, ultimate control over a Swiss company and its management is therefore with the shareholders.