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Suter Howald Rechtsanwälte
Switzerland

On 1 November 2019, the Federal Act on the Implementation of Recommendations of the Global Forum on Transparency and Information Exchange for Tax Purposes (Implementation Act) will enter into force. Going forward, bearer shares will only be permitted for companies that are publicly listed or have structured their bearer shares as intermediated securities. For all other companies, bearer shares are no longer permitted; under some conditions, this can lead to a loss of the rights associated with the bearer shares. The Implementation Act also contains clarifications regarding reporting obligations and introduces criminal sanctions for reporting obligation violations as well as for improper keeping of registers of shareholders or beneficial owners respectively.

I. BACKGROUND AND PURPOSE

On 26 July 2016, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) published the peer review report phase 2 of Switzerland. The report contains various recommendations concerning the transparency of legal entities and the exchange of information. The measures taken in the Implementation Act are intended to safeguard Switzerland’s "largely compliant" rating through Phase 2 in the next Global Forum review.

II. BEARER SHARES ONLY PERMITTED WITHIN NARROW LIMITS

According to the new Art. 622 para. 1bis revised Swiss Code of Obligations (revCO), bearer shares are only permitted if the company has listed equity securities on a stock exchange or if the bearer shares are structured as intermediated securities as defined by the Federal Act on Intermediated Securities and are deposited with a custodian designated by the company in Switzerland, or are entered in the main register.

The new Art. 622 para. 2bis revCO then stipulates that a company with bearer shares must enter in the commercial register whether it has equity securities listed on a stock exchange or has structured its bearer shares as intermediated securities.

Concerning the stock exchange listing, it is sufficient for a company to list only a part of its equity securities on a stock exchange, whereby the bearer shares do not necessarily have to be included with the listed equitiy securities. In addition, the equity securities do not necessarily have to be listed on a stock exchange in Switzerland. Listing abroad is also permitted, provided that the foreign stock exchange law guarantees an equivalent level of transparency as under Swiss stock exchange law.
Bearer shares are no longer permitted for all other companies. This applies not only to companies founded after 1 November 2019, but also to companies in existence with bearer shares on that date. For companies in the latter category, grace periods apply.

Bearer participation certificates are also covered by this amendment to the law on the basis of Art. 656a Para. 2 OR. They are only permissible for non-listed companies if structured as intermediated securities.

III. ACTION REQUIRED FOR ALL COMPANIES WITH BEARER SHARES

Companies listed on a stock exchange and companies with bearer shares in the form of intermediated securities must request registration with the competent Commercial Register Office in accordance with Art. 622 para. 2bis revCO. I.e. the company must record whether they have listed equity securities on a stock exchange or whether their bearer shares are structured as intermediated securities. Companies are given 18 months, i.e. until 1 May 2021, to complete this requirement.

All other companies which have bearer shares on 1 November 2019 may voluntarily convert their bearer shares to registered shares and accordingly enter this conversion in the commercial register by 1 May 2021. During this period, companies may also structure their bearer shares as intermediated securities or have their equity securities listed on a stock exchange and complete the corresponding required entries in the commercial register as mentioned in the preceding paragraph in accordance with Art. 622 para. 2bis revCO

IV. CONVERSION TO REGISTERED SHARES BY OPERATION OF LAW

For all companies that by 1 May 2021 still have bearer shares and have not requested the registration mentioned above in section III in accordance with Art. 622 para. 2bis revCO, bearer shares shall be converted to registered shares by operation of law.

The converted shares retain their nominal value, payout ratio and characteristics in terms of voting rights and property rights. The registered shares created as a result of conversion by operation of law are freely transferable.

The conversion to registered shares is effective for everyone, irrespective of company statutes to the contrary and even if a company has securitized its bearer shares. The Commercial Register Offices will officially record conversions to registered shares with the relevant companies with the remark that the documents available at the Commercial Register contain data deviating from the entry.

Companies whose bearer shares have been converted to registered shares by operation of law must adapt their articles of association to the conversion upon the next amendment of the articles of association, i.e. they must in particular adapt the article concerning the types of shares issued. If a company fails to make this adjustment upon an amendment to the Articles of Association, the Commercial Register Office will reject any application for registration of other Articles of Association amendments.

Registrations of changes to company bodies and authorized signatories however will be completed, even if the amendment to the Articles of Association concerning the conversion to registered shares has not yet taken place.

V. DUTY TO KEEP THE SHARE REGISTER

Irrespective of whether bearer shares are converted to registered shares voluntarily or by operation of law, there is also action required by the Board of Directors. The board is responsible for keeping the share register, in which the names and addresses of owners and usufructuaries must be entered. In relation to the company, the person registered in the share register (Art. 686 CO) is deemed to be a shareholder or a usufructuary.

Holders of bearer shares who have complied with their reporting obligation pursuant to Art. 697i CO and have disclosed their first and last names or their company name and address will be entered in the share register with their name and address following conversion of their bearer shares to registered shares.

Since 1 July 2015, this reporting obligation has applied to holders of bearer shares who already held bearer shares of a non-listed company on this date, which are also not structured as intermediated securities or have acquired bearer shares since that date.

If a holder of bearer shares fails to fulfill his reporting obligation in accordance with Art. 697i CO and by the time of the conversion to registered shares, his membership rights associated with the shares shall be suspended and his property rights forfeited. Accordingly, the Board of Directors must note in the share register, regarding the shares concerned, that the notification by the shareholder concerned has not been made and that the rights associated with these shares cannot be exercised. The Board of Directors must ensure that such shareholders cannot exercise their membership rights and that no dividends are paid to them.

VI. CONSEQUENCES OF MISSED REPORTING

Once bearer shares have been converted to registered shares, shareholders who have not fulfilled their reporting obligations pursuant to Art. 697i CO and who have therefore not been entered in the share register, will have to go to court to apply for entry in the share register. Shareholders have 5 years to do so, i.e. until 1 November 2024.
In order for the court to approve an application for registration, the shareholder submitting the application requires the prior consent of the company. The Implementation Act does not define the conditions under which the company must or may refuse consent for registration. It can be assumed that the company may refuse consent if it has doubts about the shareholder's entitlement to the shares.

The shareholder must prove to the court that he is a shareholder. If the court approves the motion, the shareholder is entered in the share register. From the time of approval by the court, the shareholder may assert the property rights and membership rights arising from that time.

VII. LOSS OF SHAREHOLDER RIGHTS

If a shareholder does not file an application for entry in the share register with the competent court by November 1, 2024, his shares will be legally null and void and he will lose the rights attached to his shares.

The Implementation Act stipulates that the null and void shares are to be replaced by shares held by the company (i.e. own shares). Own shares are subject to the rules of Art. 659 et seq. CO. This means that the voting rights and the associated rights of the own shares are suspended. In addition, the own shares held by the company may not represent more than 10% of the share capital. If this threshold is exceeded, the company must sell the corresponding number of shares or cancel them by reducing the share capital.
The Implementation Act grants shareholders whose shares have become null and void through no fault of their own a right to compensation from the company. For this purpose, they must prove that they were shareholders at the time the shares became null and void and that they were not at fault. The compensation corresponds to the actual value of the shares at the time of the conversion of bearer shares to registered shares. If the actual value of the shares is lower at the time the claim is asserted, there is only a claim to this lower value. A claim for compensation is not possible if the company does not have the required freely disposable equity capital available. Such a claim for compensation may be asserted by the shareholder within ten years after the shares have become null and void. This provision contains considerable potential for conflict with regards to the determination of the actual value and the question whether the shares became null and void due to the shareholder's fault.

VIII. CLARIFICATION OF REPORTING OBLIGATIONS

In addition to the reporting obligations for holders of bearer shares already mentioned in Section V, reporting obligations effective since 1 July 2015 concerning the acquisition of registered or bearer shares of non-listed companies whose shares are not structured as intermediated securities apply, if such an acquisition reaches or exceeds the threshold of 25% of the votes or capital. In such a case, anyone who, be it alone or in concert with third parties, acquires registered or bearer shares to this extent, must notify the company the identity of the beneficial owner of the acquired shares, including first name, surname and address, within one month following the acquisition. In addition, the company must also be notified of any change to the beneficial owner’s first or last name or address (Art. 697j para. 1 and 2 CO or Art. 790a para. 1 and 2 CO with analogous provisions for the GmbH).

Since 1 July 2015, unlisted companies or companies whose bearer shares are not structured as intermediated securities must keep a register of the beneficial owners reported to them, including the beneficial owners’ first and last names and addresses. The supporting documents on which a report is based must be retained for ten years after the person has been removed from the register. The register must be kept in such a way that it can be accessed at any time in Switzerland.

Since these regulations contain some ambiguities, the Implementation Act was also used to clarify some uncertainties in the provisions in force since 1 July 2015. Thus, Art. 697j para. 2 revCO and Art. 790a para. 2 revCO (for the GmbH) now specify that in the case of an acquisition of shares by a legal entity or partnership (hereinafter referred to as the "Acquiring Company"), with which the above-mentioned threshold of 25% is reached or exceeded, the Acquiring Company must report each natural person as the beneficial owner who controls the acquiring company in analogous application of Art. 963 para. 2 CO. This is any natural person who directly or indirectly holds a majority of the voting rights in the Acquiring Company at the general meeting of shareholders (or at the general meeting of members at the GmbH), directly or indirectly has the right to appoint or remove the majority of the supreme management or administrative body of the Acquiring Company or can exercise a controlling influence over the Acquiring Company on the basis of the articles of association, a contract or comparable instruments. Now it is also made clear that the Acquiring Company must make a declaration even if there is no such person.

Furthermore, Art. 697j para. 3 revCO and Art. 790a para. 3 revCO respectively specify what applies if the acquirer who reaches or exceeds the threshold of 25% of the votes or the capital with his acquisition of shares is a listed company, if the acquirer is controlled by a listed company within the meaning of Art. 963 para. 2 CO or if the acquirer controls a listed company within this meaning. In such a case, only this fact must be reported along with the corporation’s company name and registered office.

Furthermore, changes to the beneficial owner must now be reported within three months (Art. 697j para. 4 revOR or Art. 790a Para. 4 revOR).

IX. TIGHTENING OF THE SANCTIONS REGIME

9.1 LACK OF ORGANIZATION

The Implementation Act also entails an amendment to Art. 731b CO, which regulates the organizational deficiencies of a company. Thus, pursuant to Art. 731b para. 1 no. 3 revCO, the keeping of the share register or the register of beneficial owners in violation of the regulations now also qualifies as an organizational deficiency. Art. 731b para. 1 no. 3 revCO also applies to the corresponding registers to be maintained by the GmbH and the cooperative.

As of 1 May 2021, it will be considered an organizational deficiency if a company issues bearer shares without having equity securities listed on a stock exchange or having structured the bearer shares as intermediated securities (Art. 731b para. 1 no. 4 revCO).

These organizational deficiencies may result in the competent court, at the request of a shareholder, a creditor or the commercial registrar, setting a deadline for remedying the deficiency, threatening to dissolve the company in case of non-compliance. However, the court may also dissolve the company without prior notice and order its liquidation in accordance with the provisions on bankruptcy.

9.2 CRIMINAL SANCTIONS

In accordance with Art. 327 of the revised Criminal Code (revStGB), the intentional breach of the obligation set out in Point VIII to report the beneficial owner of shares in accordance with Art. 697j para. 1-4 revCO or Art. 790a para. 1-4 rev. CO newly qualifies as a criminal offence. This also includes the intentional failure to report changes to the beneficial owner within three months.

The previous civil law sanctions pursuant to Art. 697m CO continue to apply in the event of a violation of the reporting obligation set out in Section VIII. Thus, the membership rights attached to the acquired shares are suspended until the acquirer has fulfilled his reporting obligation. The person obliged to report may only assert the property rights associated with these shares once he has fulfilled his reporting obligation; if he does not fulfil his reporting obligation within the time limit of one month after acquisition, the property rights are forfeited. If he makes the notification more than one month later, he may assert property rights arising from the date of the notification.

Furthermore, the new Art. 327a revStGB prescribes fines for anyone who intentionally fails to keep the share register and the register of beneficial owners or the corresponding registers at the GmbH and at the SICAV or the register of cooperative members at the cooperative in accordance with the regulations or violates corresponding obligations under company law.

In this context, it is a criminal offence to intentionally keep incorrect registers, intentionally fail to keep registers or intentionally violate the law to retain the documents on which an entry is based.

The maximum penalty is a fine of CHF 10,000 for both Art. 327 revStGB and Art. 327a revStGB. A conviction for a fine of more than CHF 5,000 leads to an entry in the penal code.

X. CONCLUSION

Companies that are neither listed nor have their bearer shares structured as intermediated securities should use the period until 1 May 2021 to either convert their bearer shares to registered shares or to structure them as intermediated securities or to carry out a listing. Listed companies and companies with bearer shares structured as intermediated securities are recommended to apply as soon as possible for registration with the competent commercial register office with regards to listing on the stock exchange or the structuring of bearer shares as intermediated securities.

In view of the drastic sanctions, it is advisable for companies’ supreme management or administrative bodies to pay special attention to the correct keeping of the registers of shareholders and beneficial owners and to ensure that the documents on which entries are based are kept for ten years after the deletion of a person from the register. In this context, it should also be noted that the registers must be kept in such a way that they can be accessed at any time in Switzerland.

Holders of bearer shares are advised to verify compliance with and, if still needed, to fulfil their reporting obligations as quickly as possible