Swiss Board of Directors - marc bauen

Marc Bauen
Silvio Venturi
Swiss Board of Directors
Organisation
Powers
Liability
Corporate Governance

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© Schulthess Juristische Medien AG, Zurich · Basel · Geneva 2009
ISBN 978-3-7255-5572-7 Schulthess Juristische Medien AG, Zurich · Basel · Geneva
ISBN 978-2-8027-2644-9 Bruylant, Bruxelles
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www.bruylant.be

Table of Contents
Foreword V
Summary VII
List of Abbreviations XXIII
Bibliography XXXI
Introduction LIII
§ 1 General Provisions 1
1. Introductory Remarks
1.1 The Board of Directors as the Executive of a Company Limited
3
by Shares 3
1.2 Monistic or Dualistic System of Organisation 3
1.3 Personal Requirements 5
1.3.1 Age limit 5
1.3.2 Limitation of the number of directorships 6
1.3.3 Limitation of the term of offi ce 6
1.3.4 Independence 7
1.3.5 Personal qualifi cations 8
1.3.5.1 No qualifi cation certifi cate 8
1.3.5.2 Indirect qualifi cation standard 8
1.3.5.3 Financial Literacy 9
2. Acquisition and Termination of Board Membership 10
2.1 Acquisition of Board Membership 10
2.1.1 Requirements for election
2.1.1.1 Ability to make judgements and capacity
10
to act 10
2.1.1.2 No need to be a shareholder 11
2.1.1.3 Nationality and residence requirement
2.1.1.4 Requirements for election under the articles
11
of association
2.1.1.5 Incompatibility of membership of the board
12
of directors with the offi ce of auditor 13
2.1.1.6 Members of the board of directors who are
employees of the company 13
2.1.2 Election, term of offi ce and re-election 13
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2.2 Termination of Board Membership 15
2.2.1 Expiry of the term of offi ce 15
2.2.2 Removal 15
2.2.3 Resignation 16
2.2.4 Further grounds for termination 17
2.2.5 Deletion from the Commercial Register 17
3. Composition of the Board of Directors 18
3.1 Number of Members of the Board of Directors 18
3.2 Group Representatives on the Board of Directors 19
3.2.1 Representatives of classes of shares 19
3.2.2 Minority or group representatives 21
3.2.3 Removal of class, group or minority representatives 22
3.2.4 Representative for participants 22
3.2.5 Representatives of public law corporations on the
board of directors 22
3.3 No Representation for Non-Shareholders 23
3.4 Vacancies on the Board of Directors 23
4. Special Issues 24
4.1 Board Members Acting in a Fiduciary Capacity 24
4.2 Violation of the Duty to Report and ad hoc Board Affi liation 25
4.3 Company without a Board of Directors 26
4.4 Excessive Number of Board Members 27
4.5 Suspension of a Board Member 28
§ 2 Legal Status of Board Member 29
1. Legal Relations between the Members of the Board of
Directors and the Company 31
2. Rights of the Board Member 32
2.1 Equal Status and any Special Status 32
2.2 Management Right and Authority to Act as Representative 33
2.3 Right to Information 34
2.3.1 Relationship between information and responsibility 34
2.3.2 The right to information 35
2.3.3 Information procedures and institutionalised reporting
in the board of directors 36
2.3.4 Information within meetings 39
2.3.5 Information outside meetings 40
2.3.6 Preparation for meetings: right to prior information 41
2.3.7 The right to documents 42
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2.3.8 The right to consult documents 42
2.3.9 Decisions of the entire board of directors 43
2.4 Board Members Right to Remuneration 43
2.4.1 Director’s fees or remuneration 43
2.4.2 Amount of remuneration 44
2.4.3 Remuneration in the form of shares and options 45
2.4.4 Disclosure of remuneration 47
2.4.5 Severance Payments 48
2.4.6 Tax treatment of remuneration 49
2.4.6.1 General remarks
2.4.6.2 Members of the board with domicile in
49
Switzerland 50
2.4.6.3 Taxation of board members domiciled abroad 53
2.5 Right of the Board Members to Exoneration (Discharge) 55
3. Obligations of Board Members 55
3.1 Personal Duties 55
3.2 Exercise of Due Care and Diligence 56
3.2.1 The object of due care 56
3.2.2 Degree of care 57
3.2.3 Due care and the «Business Judgement Rule» 58
3.3 Duty of Loyalty and Good Faith 60
3.3.1 General remarks 60
3.3.2 Precedence of the company’s interests 60
3.3.3 Ban on competition 60
3.3.4 Ban on insider dealing 61
3.3.5 Main shareholder’s duty of loyalty
3.3.5.1 Main shareholder’s duty of loyalty as a board
62
member
3.3.5.2 Major shareholder’s duty of loyalty to the
62
company
3.3.5.3 Major shareholder’s duty of loyalty to the
62
minority shareholders 62
3.3.6 Minority representatives’ duty of loyalty in the board
of directors 63
3.3.7 Duty of loyalty following departure from the board 63
3.3.8 Requirements on secrecy and confi dentiality 63
3.3.9 Mismanagement in criminal law 64
3.4 Cases Involving Confl icts of Interest 64
3.4.1 General remarks 64
3.4.2 Practical code of conduct in confl icts of interest 65
3.5 Equality of Treatment 67
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3.5.1 Principle of relative equality of treatment 67
3.5.2 Practical signifi cance of equality of treatment 67
3.5.3 Enforcement of the principle of equality of treatment 69
3.6 Consequences of Breach of Duty 70
§ 3 Organisation 71
1. Basic Principles of Organisation 74
1.1 Autonomy of Organisation 74
1.1.1 Potential organisation of the board of directors 74
1.1.1.1 Basic legal rules: overall management by
the board of directors 74
1.1.1.2 Other organisational forms 74
1.1.2 Limits of organisational autonomy 76
1.2 Constitution of the Board of Directors 76
1.3 Executive Bodies of Companies Limited by Shares 77
1.3.1 Chairman of the board 77
1.3.1.1 Defi nition of term
1.3.1.2 Leadership and liaising with company
77
management 77
1.3.1.3 Position 78
1.3.1.4 Removal 79
1.3.2 Honorary chairman 80
1.3.3 Vice-chairman of the board of directors 80
1.3.4 Delegates of the board of directors 81
1.3.5 Lead director 82
1.3.6 Secretary of the board of directors 82
1.3.7 Board committees 84
1.3.7.1 General 84
1.3.7.2 Formation of board committees:
role of non-executive directors 86
1.3.7.3 Audit Committee 87
1.3.7.4 Compensation committee 89
1.3.7.5 Nomination committee 91
1.3.7.6 Further committees 91
1.3.8 Advisory committees 92
1.3.9 Management, authorised signatories and other
authorised representatives 92
1.3.9.1 Management
1.3.9.2 Authorised signatories and other authorised
92
offi cers 93
1.4 Removal and Suspension from Offi ce 94
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2. Board of Directors: Meetings and Resolutions 95
2.1 Board Meetings 95
2.1.1 The chairman of the board 95
2.1.2 Preparation for and convening meetings 95
2.1.3 Procedure for meetings 97
2.1.3.1 Chairing meetings 97
2.1.3.2 Participation of persons who are not
members of the board 97
2.2 Resolutions 98
2.2.1 Quorums 98
2.2.2 Quorums for the resolutions 98
2.2.2.1 Quorum for the board of directors 98
2.2.2.2 Attendance quorum 100
2.2.3 Resolutions of the entire board of directors 100
2.2.4 Secret ballots 100
2.2.5 Casting vote from the chair 101
2.3 Voting by Board Members 101
2.3.1 Casting a vote 101
2.3.2 Representation at meetings of the board of directors 102
2.3.3 Written vote 102
2.3.4 Tele-conferences or remote involvement in meetings 103
2.3.5 Voting agreements binding board members 103
2.4 Circular Resolutions 104
2.4.1 Basic procedure 104
2.4.2 Proof of dispatch and minutes 105
2.5 Minutes and Share Register 106
2.5.1 Minutes of board meetings 106
2.5.1.1 Purpose and function 106
2.5.1.2 Content 106
2.5.1.3 Taking minutes in single-person boards 107
2.5.1.4 Approval of the minutes and confi dentiality 107
2.5.2 Minutes of committee meetings 108
2.5.3 Right to inspect the minutes and supplying copies 109
2.5.4 Keeping the share register 109
2.6 Invalid Board Resolutions 110
2.6.1 Legal consequences and action for annulment 110
2.6.2 Grounds for nullity 111
2.6.2.1 General remarks 111
2.6.2.2 Interference in board members’ inspection
rights 111
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2.6.2.3 Disregard for the basic structures of the
company limited by shares or violation of
the provisions on capital protection 111
2.6.2.4 Nullity due to serious formal irregularities 112
3. Delegation of Management Duties to an Executive Board 113
3.1 Transfer of Duties in the Organisational Regulations 113
3.1.1 A limited «monistic» system 113
3.1.2 Organisational regulations 114
3.1.2.1 Delegation of powers 114
3.1.2.2 Defi nition 114
3.1.2.3 Content 115
3.1.2.4 Disclosure 119
3.1.3 Delegation with reserved power of consent 120
3.2 Specifying the System of Delegation 122
3.2.1 Principle of autonomy of organisation 122
3.2.2 Delegate of the board of directors 122
3.2.3 Board of directors and separate management board 123
3.2.3.1 Approximation to the dualistic model 123
3.2.3.2 Advantages and drawbacks 123
3.2.4 Combined leadership positions 124
3.2.4.1 Effi ciency of combining positions 124
3.2.4.2 Evaluation of combined positions 125
3.2.5 Banks and securities dealers 127
3.2.5.1 Banks 127
3.2.5.2 Securities dealers 128
3.2.6 Delegation of management and representation to
outside parties 128
§ 4 Powers 131
1. Powers in General 134
1.1 Statutory Presumption of the Board’s Authority 134
1.2 The Board’s General Duty of Management 135
1.3 Further Statutory Powers of the Board 136
2. Inalienable and Irrevocable Powers of the Board of Directors 137
2.1 General Remarks 137
2.2 Supreme Management 138
2.2.1 Supreme management as a structuring task 138
2.2.2 Strategic management of the company 139
2.2.3 Supervising and directing the executive management 141
2.2.3.1 Directives 141
2.2.3.2 Supervision of the executive management 142
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2.2.4 Central function of the chairman of the board 142
2.2.5 Supreme management in the corporate group
(group direction) 143
2.3 Establishing the System of Organisation 143
2.3.1 Establishing the system of organisation in its essential
features 144
2.3.2 Organisational regulations 145
2.3.3 Control as an element of management structure 145
2.3.4 Reviewing and modifying organisation 147
2.3.5 Criminal implications of inadequate organisation 147
2.4 Financial Responsibility 148
2.4.1 General Remarks 148
2.4.2 Organisation of accounts 148
2.4.3 Organisation of budgetary control
(«Internal Control System») 150
2.4.4 Organising fi nancial planning 151
2.5 Appointment and Removal of the Executive Board 152
2.5.1 Appointment of the executive board 152
2.5.2 Removal of the executive board 153
2.6 Ultimate Supervision 155
2.6.1 Nature and scope of ultimate supervision 155
2.6.2 Exercising ultimate supervision 156
2.6.2.1 General remarks 156
2.6.2.2 Compliance
2.6.2.3 Auditors’ explanatory report and
157
«management letters» 158
2.6.2.4 Audit committee 159
2.7 Annual Business Report and Preparation of the General
Meeting 159
2.7.1 Annual business report (annual accounts and
annual report) 159
2.7.2 Preparation of the general meeting 160
2.8 Notifying the Court in the Event of Overindebtedness 162
2.9 Committees 162
3. Importance and Eff ects of the Statutory Regulation of Powers 163
4. Statutory Regulation of Responsibilities and Special Situations 164
4.1 Single Person Board of Directors
4.2 Boards of Directors of Small and Medium-Sized Companies
164
(SMEs) and Family Companies 165
4.3 The Board of Directors of a Group Subsidiary 167
4.4 The Board of Directors of a Joint Venture Company 169
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4.5 Boards of Directors of Banks 169
4.6 Member of a Board of Directors as the Representative of
a Participating Legal Entity or Commercial Undertaking 171
4.7 The Board of Directors of the Target Company in a Takeover 172
§ 5 Representation of the Company and Corporate Liability 173
1. Representing the Company 175
1.1 General Remarks
1.2 The Purpose of the Company as an Overall Restriction on
175
Powers of Representation 176
2. Persons Authorised to Represent the Company 178
2.1 General Remarks 178
2.2 The Delegation of Power to Appoint Representatives 180
3. Restrictions on Powers of Representation 180
3.1 External Restrictions 180
3.2 Internal Restrictions 181
4. Form of Signature 182
5. Registration in the Commercial Register and Titles that may
be Registered 183
5.1 Application for Registration in the Commercial Register 183
5.2 Titles that may be Registered in the Commercial Register 184
6. Contracting with Oneself and Double Representation 185
7. Specifi c Cases: Passive Representation and Representation
based on Attributed Knowledge (Wissensvertretung) 186
8. Liability of the Company for the Acts of Corporate Bodies 187
8.1 General Remarks 187
8.2 Specifi c Conditions for Liability 187
8.2.1 The «corporate body» 187
8.2.2 Managing the aff airs of the company 188
8.3 Other Conditions 189
8.4 Liability for the Acts of Auxiliaries 190
8.5 Procedural Matters 190
§ 6 Loss of Capital, Overindebtedness and Restructuring 193
1. The Board of Directors in a Crisis 195
1.1. The Company in a Crisis 195
1.2. The «New» Role of the Board of Directors 196
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2. Loss of Capital 197
2.1. Loss of Half of the Capital 197
2.1.1 Calculation 197
2.1.2 Interim Balance Sheet 199
2.1.3 Income Statement and Cash Flow Statement 200
2.2 Convening a General Meeting 200
2.3. Restructuring 202
2.3.1 General Remarks 202
2.3.2 Restructuring Measures 202
3. Overindebtedness 204
3.1. General Remarks 204
3.2. Confi rmation of Overindebtedness 205
3.2.1 Interim Balance Sheet 205
3.2.2 Inspection of the Interim Balance Sheet 207
3.3. Extra-judicial Restructuring 207
3.4. Subordination and «Letter of Comfort» 208
3.4.1 Subordination 208
3.4.1.1 General Remarks 208
3.4.1.2 Eff ect 210
3.4.2 «Letters of Comfort» 211
4. Declaration of and Deferral of Bankruptcy (Summary) 212
4.1 The Declaration of Bankruptcy 212
4.2 Deferral of Bankruptcy 213
4.2.1 General Remarks 213
4.2.2 The Eff ects 214
4.2.3 Appointing an Administrator 215
4.2.4 Dispensing with Public Notice of a Deferral 216
4.3 Digression: the Composition Agreement 217
§ 7 Liability 219
1. General Remarks 223
1.1 The Development of Liability 223
1.2 Forms of Liability 223
2. Liability for Management 224
2.1. In General 224
2.2 Corporate Body 225
2.2.1 The Corporate Body in the Formal Sense 225
2.2.2 The Corporate Body in the Material Sense 226
2.2.2.1 General 226
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2.2.2.2 Legal Entity Shareholders 227
2.2.2.3 Company Groups 228
2.2.2.4 Single or Majority Shareholder 228
2.2.2.5 Summary 229
2.3 Title to Sue 229
2.3.1 In General 229
2.3.2 Title to Sue other than in Bankruptcy Cases 231
2.3.2.1 Direct Damage Suff ered by a Creditor or
Shareholder 231
2.3.2.2 Damage Sustained by the Company 231
2.3.3 Title to Sue in the Event of Bankruptcy 233
2.3.3.1 In General 233
2.3.3.2 Direct Damage Sustained Solely by a Shareholder
or Creditor (Individual Proceedings) 233
2.3.3.3 Damage Sustained Solely by the Company
(Collective Action Instituted by All Creditors) 234
2.3.3.4 Direct Damage Suff ered by a Creditor and
by the Company 236
2.4 Basic Conditions for Liability 237
2.4.1 Damage 237
2.4.2 Causal Link 238
2.4.3 Fault 239
2.4.4 Breach of Duty 241
2.5 Limitations on Liability in the Case of Delegation 244
2.5.1 Conditions of Delegation 244
2.5.2 Eff ect of Delegation 244
2.6 Limitation of Liability in the Event of Discharge 246
2.7 Joint Liability and the Right of Recourse 247
2.7.1 Joint Liability 247
2.7.2 Right of Recourse 249
2.8 Procedure 250
2.8.1 Statute of Limitations 250
2.8.2 Place of Jurisdiction 251
2.9 Liability and Corporate Governance 252
3. Liability for the Prospectus and Incorporation 254
3.1 Liability for a Share Issue Prospectus 254
3.1.1 Responsible Persons and Entitled Claimants 254
3.1.2 The Material Conditions of Liability 255
3.2 Liability on Incorporation 257
3.2.1 Scope of Liability and Parties Entitled to Take Action 257
3.2.2 Material Conditions for Liability 257
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4. Liability under Banking Law (Summary) 259
5. Liability under Public Law (Summary) 259
5.1 Liability under Tax Law (Summary) 260
5.1.1 Income Tax and Wealth Tax 260
5.1.2 VAT 260
5.1.3 Withholding Tax 261
5.2 Liability and Social Insurance Law (Summary) 262
6. Criminal Liability (Reference) 265
7. Some Recommendations for Limiting the Risk of Liability 265
7.1 Increased Risk of Liability
7.2 Recommendations on the Acceptance of a Place on
265
the Board 266
7.3 Recommendations on Being a Member of the Board 268
7.4 Recommendations Relating to Resignation 269
§ 8 Insurance 271
1. General Remarks 273
2. Transfer of Risk to the Company 273
2.1 Indemnifi cation by the Company 273
2.2 Indemnifi cation by the Main Shareholder 274
2.3 Indemnifi cation by the Company for Legal Costs 275
2.3.1 Advance Payment of Legal Costs 275
2.3.2 Ultimate Assumption of Legal Costs 276
3. Transfer of Risk by Insurance Contract 277
3.1 General Remarks 277
3.2 Types of Contract 278
3.2.1 Individual and Collective Insurance 278
3.2.2 D&O Insurance 278
3.3 Typical Content of a D&O Insurance Policy 279
3.3.1 Scope of the Insurance Cover 279
3.3.2 Insured Person 279
3.3.3 Cover for Future Risks 280
3.3.4 Extending the Insurance Cover 280
3.3.5 Claims Connected with the Employment Relationship 280
3.3.6 Cover for the Costs of Criminal Proceedings 281
3.3.7 Insurance Cover for Gross Negligence 281
3.3.8 Insurance Term 281
3.3.9 Territorial Validity 281
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3.3.10 Deductible 282
3.3.11 Limitations and Exclusions of Insurance Cover 282
3.3.12 General Provisions 283
3.4 Conclusion 283
§ 9 Corporate Governance 285
1. Introductory Remarks 290
2. Nature and Defi nition of Term 291
2.1 Corporate Governance: A Pragmatic Approach 291
2.1.1 General Remarks 291
2.1.2 Methodical Approach: «Comply or explain» 292
2.2 The Concept of Corporate Governance 293
2.2.1 Diversity of Defi nitions 293
2.2.2 Agency Problem: the Restriction to Publicly Traded
Companies 293
2.3 Central Questions of Corporate Governance 294
3. International Developments 296
3.1 Introductory Remarks 296
3.2 Development of Corporate Governance in the USA 297
3.2.1 General Remarks 297
3.2.2 «Blue Ribbon Report» (1999):
Recommendations on the Audit Committee 298
3.2.2.1 General Remarks 298
3.2.2.2 Selected Recommendations 298
3.2.3 The Sarbanes-Oxley Act (2002) 300
3.2.3.1 General Remarks 300
3.2.3.2 Amendment Act in Three Parts 301
3.2.3.3 Main Content
3.2.3.4 The Sarbanes-Oxley Act from the Swiss View-
301
point 304
3.2.4 Revised Listing Standards of the NYSE 305
3.2.4.1 General Remarks 305
3.2.4.2 Revised Points of the Listing Standards 306
3.3 Development of Corporate Governance in Britain 308
3.3.1 General Remarks 308
3.3.2 The Turnbull Report (1999) 309
3.3.3 The Combined Code (1998/2003) 309
3.3.4 The Higgs Report (2003) 310
3.3.5 Smith Report (2003) 312
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4. Corporate Governance in Switzerland 313
4.1 Introductory Remarks 313
4.1.1 Developments since the Reform of Company Law
in 1991 313
4.1.1.1 General 313
4.1.1.2 Irrevocable and Inalienable Powers of
the Board of Directors 314
4.1.1.3 Company Law of 1991 from the Point of
View of Corporate Governance 316
4.1.2 Special Legislation for Publicly Traded Companies:
the Stock Exchange Act 316
4.1.3 Publicity Function of the Commercial Register 316
4.2 Corporate Governance Off ensives in 2001 and 2002 317
4.2.1 Swiss Texts on Corporate Governance 317
4.2.2 Essential Points of the SCBP for Boards 318
4.2.2.1 Implementation and Relationship with
Company Law 318
4.2.2.2 Conduct towards Shareholders
(SCBP Sec. 1–8) 319
4.2.2.3 Harmonisation of Finances and Strategy
(SCBP Sec. 9) 320
4.2.2.4 Balanced Membership of the Board of
Directors and Continuing Education for
Members (SCBP Sec. 12 and 13) 320
4.2.2.5 Board’s Discussion of its own Performance
(SCBP Sec. 14) as an «Appropriate Procedure» 321
4.2.2.6 Information for the Board of Directors
(SCBP Sec. 15) 322
4.2.2.7 Dealing with Confl icts of Interest and
Advance Information (SCBP Sec. 16) 323
4.2.2.8 Chairman of the Board of Directors and CEO:
Joint or Separate Function (SCBP Sec. 18) 324
4.2.2.9 Internal Control System: Risk Management
and Compliance (SCBP Sec. 19/20) 325
4.2.2.10 Board Committees (SCBP Sec. 21) 326
4.2.2.11 Independent Members of the Board
(SCBP Sec. 22) 327
4.2.2.12 The Audit Committee (SCBP Sec. 23 and 24) 327
4.2.2.13 Compensation Committee and Nomination
Committee (SCBP Sec. 25–28) 329
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4.2.3 Annual Disclosure of Information on Corporate
Governance 331
4.2.3.1 General Remarks 331
4.2.3.2 Disclosure of Payments to Members of
the Board of Directors and the Management
Board 332
4.2.3.2.1 General Remarks
4.2.3.2.2 Information that Must Be Disclosed
332
and Examples of Payments
4.2.3.2.3 Further Information to be Provided
332
in the Annex to the Balance Sheet
4.2.3.2.4 Expanding the Disclosure of Share-
333
holdings
4.2.3.3 Overview of the Main Points on Disclosure
334
(DCG) 334
4.2.3.4 To what Extent is the DCG Binding? 338
4.2.3.5 Enforcement 338
5. Corporate Governance in Unlisted Companies 339
5.1 General Applicability of Corporate Governance 339
5.2 Recommendations for Good Corporate Governance in SMEs 340
5.2.1 General Recommendations 340
5.2.2 Internal Control, Risk Management, Internal Audit and
Compliance 343
6. Proposals for Reform 343
6.1 Introductory Remarks 343
6.2 Improvement of Corporate Governance 345
6.2.1 General Remarks 345
6.2.2 Disclosure of Directors’ Remuneration 345
6.2.3 Strengthening Shareholders’ Rights 346
6.2.3.1 Right to Information and Inspect Documents 346
6.2.3.2 Special Investigation
6.2.3.3 Right to Convene Meetings and to Place
347
Items on the Agenda 347
6.2.3.4 Board Members’ Electoral Rights 348
6.2.3.5 Action for the Refund of Unjustifi ed Payments 348
6.2.4 Disclosure of Information by the Commercial Register 349
6.2.5 Institutional Proxy Voting 349
6.2.6 Organisation of the Board of Directors 350
6.2.7 Liability of Auditors 351
7. Overall Appraisal of Corporate Governance 352
Index 355
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