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Overview
The number of campaigns by activist shareholders in Switzerland is still relatively low compared with other jurisdictions, in particular the United States. However, in the past few years, up to the covid-19 pandemic, the Swiss market has seen a growth of shareholder activism, including high-profile campaigns against large multinational companies. The spread of covid-19 led to a decrease in the number of campaigns. While most of these campaigns still focus on board representation, share repurchases, distributions and more generally on the company’s strategy, in the annual shareholders’ meeting season in 2018, shareholders started to express their dissatisfaction with the board of directors (the board) or the management by rejecting board proposals regarding directors or executive management compensation in ‘say-on-pay’ votes. The annual shareholders’ meeting season 2021 brought a new topic on the radar screen of activist shareholders: environmental, social and governance (ESG) matters. With the introduction of new reporting obligations on non-financial matters for companies of public interest and the mandatory shareholder vote on such reports, which entered into effect on 1 January 2022, this topic will likely gain heightened shareholder attention. We expect these developments and the consequential potential increased support base for activist shareholders to further foster shareholder activism in Switzerland.
The key factors that have contributed to Swiss companies appearing on the radar of activist shareholders are not materially different from the drivers in other parts of the world:
- the company has underperformed its peers, in particular based on its shareholder return;
- the company has a low market value relative to its book value, but is profitable;
- the company’s cash reserves are relatively high historically and relative to its peers, but the company is not prepared to make material adjustments to its distribution policy or has not committed to a significant share buy-back;
- a particular business segment has underperformed;
- the company’s structure seems improvable, that is, by pursuing or preventing M&A activities; and
- corporate governance issues, in particular if the company does not meet ‘best practices’ recommended by proxy advisory firms or if the management’s performance is below average.
Legal and regulatory framework
i The Swiss Code of Obligations
The most important tools available to an activist shareholder in Switzerland are included in the Swiss Code of Obligations (CO). The corporate law contained in the CO governs shareholders’ rights, the duties of the board, and the division of power between the board and the shareholders’ meeting.
On 19 June 2020, the Swiss Parliament approved a bill modernising Swiss corporate law (the Swiss Corporate Law Reform Bill), which will enter into effect in 2023. On the same date, the Swiss Parliament approved a bill introducing reporting obligations on non-financial matters for companies of public interest of a certain size as well as due diligence and transparency obligations in the area of conflict minerals and metals and child labour for certain companies with place of incorporation or head office in Switzerland (the Swiss Non-Financial Reporting, Due Diligence and Transparency Bill). These new obligations entered into effect in 2022. The companies must apply the new provisions for the first time with respect to the financial year beginning in 2023. The first reports based on the new statutory provisions must therefore be issued in 2024–2025 with respect to the financial year beginning in 2023.
ii The Swiss Ordinance against Excessive Compensation
The Swiss Ordinance against Excessive Compensation (the Ordinance), which entered into effect on 1 January 2014, introduced additional shareholders’ rights that may be used by activist shareholders of listed companies. With the entry into effect of the Swiss Corporate Law Reform Bill the Ordinance will become part of the CO. The most prominent elements of the Ordinance are the binding say-on-pay votes on directors and executive management compensation. Further, the Ordinance limits the term of office of board members of listed companies to one year, thus abolishing the staggered board structure many companies used as a defence mechanism. The Ordinance gives shareholders the right to elect the members of the board’s compensation committee directly and obliges certain pension funds to exercise their voting rights with respect to certain agenda items; in particular, the election of the members of the board and the chair of the board, and the compensation of the directors and the executive management. The Ordinance further provides that any institutional representation of shareholders can be done only through an independent proxy elected annually at the shareholders’ meeting, and no longer through a company representative.
iii The Swiss Financial Market Infrastructure Act, the Swiss Financial Market Infrastructure Ordinance, the Financial Market Infrastructure Ordinance of FINMA and the Takeover Ordinance
An activist shareholder building its stake will have to comply with the disclosure rules included in the Swiss Financial Market Infrastructure Act and the Financial Market Infrastructure Ordinance of the Swiss Financial Market Supervisory Authority (FINMA), which apply to companies incorporated in Switzerland with a primary or secondary listing on a Swiss stock exchange (or foreign companies with a primary listing on a Swiss stock exchange). Pursuant to these rules, persons who directly, indirectly or in concert with other parties acquire or dispose of shares of a company listed on a Swiss stock exchange, or purchase or sell rights or obligations relating to such shares (including call options, put options, derivative instruments and cash-settled financial instruments), and, thereby, directly, indirectly or in concert with other parties reach, exceed or fall below a certain threshold relative to the company’s voting rights (whether exercisable or not) must notify the issuer and the stock exchange of the acquisition or disposal. Unlike in most other jurisdictions, the initial threshold that triggers a disclosure obligation is not set at 5 per cent, but at 3 per cent (calculated by reference to the relevant company’s share capital registered in the commercial register). The additional disclosure thresholds are set at 5, 10, 15, 20, 25, 33.3, 50 and 66.6 per cent.
If an activist shareholder, directly, indirectly or acting in concert with third parties, acquires equity securities that, when added to the equity securities already owned, exceed the threshold of 33.3 per cent of the voting rights of a target company, whether exercisable or not, the activist shareholder must submit a mandatory public tender offer to all shareholders of the company to acquire all listed equity securities of the target company. Target companies may raise this threshold to 49 per cent of the voting rights in their articles of association or exclude the obligation of submitting a mandatory offer entirely. Only a few Swiss companies have done so.
iv The Listing Rules of the SIX Swiss Exchange
The obligation of companies listed on the SIX Swiss Exchange (SIX) – Switzerland’s pre-eminent stock exchange – to disclose price-sensitive, non-public facts as set out in the SIX Listing Rules and the SIX’s Directive on Ad hoc Publicity may have an impact on the extent to which the discussions between the company and the activist shareholders, or the campaign of an activist shareholder, can be held confidential.
v The activist shareholder’s toolbox
The following section provides an overview of the variety of tools available to an activist shareholder in Switzerland.
Private discussion and engagement with the company
Typically, the first tools that activist shareholders utilise are discussions with the management and the board in an effort to seek consensus with respect to specific changes that activist shareholders believe the company should adopt. Swiss companies targeted by activist shareholders have traditionally engaged in this form of communication with activists. Subject to limited exceptions (e.g., equal treatment of shareholders and non-disclosure of insider information), Swiss law generally permits this kind of interaction between the management or the board and shareholders. Shareholders do not have any possibility, however, to force management or the board to engage in discussions if they refuse to do so.
Public campaigns and contact with shareholders
Following or in parallel with the discussions with the board or the management, activist shareholders usually launch public campaigns, through print and online media specifically dedicated to such shareholders’ campaigns, in particular the ‘vote no’ campaigns where an investor (or coalition of investors) urges shareholders to withhold their votes from one or more of the board nominees, rejects board proposals regarding directors and executive management compensation, or engages in an actual proxy contest; for example, by nominating own board candidates or proposing corporate governance changes (e.g., changes to capped voting rights provisions, the rules regarding board composition or the size of the board, or a change to the proposed distribution to shareholders).
As shareholders of a Swiss company have no right to request direct access to the company’s shareholder register, direct contact by the activist shareholder with other shareholders is limited to those shareholders whose interest in the issuer is publicly known; for example, owing to public filings such as those disclosed on the SIX ‘significant shareholder’ platform, or through searches of other publicly available sources (Bloomberg, FactSet). Hence, contact with most of the shareholders must occur through media campaigns, special websites or proxy advisers.
Even if the other shareholders are known, depending on an activist shareholder’s interest in a company and its willingness to disclose its shareholdings or to submit a public tender offer, an activist shareholder is well advised to carefully consider the form of discussions it engages in with other shareholders prior to a shareholders’ meeting. Discussions among shareholders may qualify as ‘acting in concert’, with the consequence that disclosure obligations and mandatory offer obligations could be triggered if the thresholds for the disclosure obligations or mandatory offers are reached or crossed.
Right to participate in, and exercise of voting rights at, the general meeting
Every shareholder registered in the share register at the relevant record date has the right to participate in, and exercise its voting rights at, the company’s general meeting. In addition, each shareholder, including shareholders having requested the inclusion of an item on the agenda, is entitled to explain its position regarding a certain agenda item or submit proposals with respect to duly notified agenda items.2 The board may restrict the length of speeches, but must treat all shareholders equally.
Although this right to speak gives activist shareholders a platform to communicate with other shareholders and promote their campaign, its benefit is limited because of the decision-making process shifting from the general meeting to the run-up to the general meeting. The independent proxy, who is obliged to vote in accordance with the shareholder’s instructions, typically represents the majority of the votes at the general meeting. Hence, any activist shareholder’s speech, no matter how persuasive, is unlikely to change the outcome of the shareholders’ vote at the general meeting. This holds true all the more for proposals submitted at the general meeting itself, as proxy forms typically provide, as part of the general voting instructions, that absent specific voting instructions, the independent proxy would vote on the shares for which proxy is granted in accordance with the recommendations of the board.
Right to request the inclusion of an item on the agenda of a general meeting and right to call an extraordinary general meeting
For a shareholder to be able to request the inclusion of an item on the agenda of a general meeting or to call an extraordinary general meeting, the shareholder must hold, as an owner of record, the number of shares required pursuant to the company’s articles of association. Absent specification in the articles of association, the default rule – companies are not permitted to introduce stricter provisions – is that shareholders holding shares with a par value worth in the aggregate 1 million Swiss francs or more have a right to request the board to put a specific item on the agenda of a general meeting. According to a significant view in Swiss legal writing – a persuasive authority under Swiss law – shareholders who hold 10 per cent of the company’s share capital – a reference to the issued share capital, rather than outstanding shares – may also request the inclusion of an item on the agenda of a general meeting. These thresholds will be lowered to 0.5 per cent of the share capital or votes (for non-listed companies to 5 per cent) with the entry into effect of the Swiss Corporate Law Reform Bill. In addition, the Swiss Corporate Law Reform Bill will introduce the right of shareholders to request the inclusion of a proposal to an existing agenda item on the proxy card.
Unless the articles of association provide for a lower threshold, shareholders who hold 10 per cent of the share capital have the right to request the board to call an extraordinary general meeting. Also, a significant part of legal writing has adopted the view that, alternatively, shareholders holding shares with a par value worth at least 1 million Swiss francs would have the right to call an extraordinary general meeting. With the entry into effect of the Swiss Corporate Law Reform Bill these thresholds will be lowered to 5 per cent of the share capital or votes (for non-listed companies to 10 per cent).
Upon receipt of a request to call an extraordinary general meeting, the board must comply with the request within a reasonable period. According to precedents, this generally means between four and eight weeks, depending on the circumstances. Pursuant to the Swiss Corporate Law Reform Bill, the board will have to comply with the request at the latest within 60 calendar days, otherwise the shareholders may request a court to convene the shareholders’ meeting. If the board does not comply with the request, the shareholder would have to seek a court order to enforce its request. The court would either require the board to call a meeting within a certain time or, in exceptional circumstances, call the meeting itself.
If a valid and complete request for inclusion of an item on the agenda has been submitted to the board, the board is in principle obliged to include the agenda item and the proposal in the proxy card.
Until the entry into effect of the Swiss Corporate Law Reform Bill, shareholders do not, however, have the right to request the inclusion of explanatory notes in the company’s proxy card. In practice, many companies would, however, include a short explanatory statement of the activist shareholder. With the entry into force of the Swiss Corporate Law Reform Bill, this right will be introduced in the CO.
Share register, information and inspection rights, special audit
Under the CO, a shareholder has the right to inspect the share register with regard to its own shares (but not with regard to the shares of other holders) and otherwise to the extent necessary to exercise its shareholder rights. No other person has a right to inspect the share register.
At a general meeting, any shareholder is entitled to request information concerning the affairs of the company. Shareholders may also ask the auditor questions regarding its audit of the company. The board and the auditor must answer shareholders’ questions to the extent necessary for the exercise of shareholders’ rights, and subject to prevailing business secrets or other material interests of the company. The Swiss Corporate Law Reform Bill will introduce a right for shareholders to request information outside shareholders’ meetings, but since this right is limited to shareholders’ of non-listed companies, activist shareholders will in most cases not benefit from it.
The books and correspondence of a Swiss company may be inspected with the express authorisation of the general meeting or by resolution of the board, and subject to the safeguarding of business secrets. With the entry of the Swiss Corporate Law Reform Bill, the approval requirement will be abolished, but at the same time a threshold of 5 per cent or more of the share capital for the exercise of the inspection right will be introduced.
In addition, if the shareholders’ inspection and information rights as outlined above prove to be insufficient, any shareholder may propose to the general meeting that specific facts be examined by a special commissioner in a special investigation. If the general meeting approves the proposal, the company or any shareholder may, within 30 calendar days of the general meeting, request the court at the company’s registered office to appoint a special commissioner. If the general meeting rejects the request, one or more shareholders representing at least 10 per cent of the share capital or shares in an aggregate par value of at least 2 million Swiss francs may ask the court to appoint a special commissioner. With the Corporate Law Reform Bill, the threshold for listed companies will be lowered to 5 per cent and the 2 million Swiss francs threshold will be abolished. The court will issue such an order if the petitioners can demonstrate that the board, any member of the board or an officer of the company infringed the law or the company’s articles of association, and thereby damaged the company or the shareholders. Under the Corporate Law Reform Bill, the damage must no longer be demonstrated; it will be sufficient if a shareholder demonstrates that the behaviour of the board, any member of the board or an officer is going to damage the company or shareholders. The costs of the investigation would generally be allocated to the company and only in exceptional cases to the petitioners. Although rarely used, Article 731a of the CO provides for the right of a shareholder to also request the general meeting to appoint an expert to examine the management or parts thereof. Unlike the special commissioner, the expert may assess and appraise facts, and is not limited to fact-finding.
Litigation
Within two months of a general meeting, any shareholder may challenge shareholders’ resolutions adopted in violation of applicable laws or the company’s articles of association. Resolutions of the board, however, are not challengeable, except if the resolutions were to be considered void.
At the end of 2020, an effective tool available to activist shareholders, namely the blockage of commercial register entries, was abolished. With this tool, activist shareholders were able to temporarily block transactions that required registration in the commercial register for them to become effective, through the submission of a written objection to the commercial register. Since 1 January 2021, activist shareholders wishing to block registrations in the commercial register will need to obtain a preliminary injunction from a competent court.
Shareholders may also file liability lawsuits against members of the board and the management for breaches of their fiduciary duties. Directors and the persons engaged in the management of the company are liable to the company, the shareholders and, in bankruptcy, the creditors for any losses arising from any intentional or negligent breach of their duties. A rule similar to the business judgement rule applies. There are almost no reported cases of directors’ and officers’ liability outside insolvency matters. In addition, Switzerland is a non-litigious environment partly due to the fact that class actions are not permitted, and a plaintiff must bear court costs in a shareholder lawsuit and reimburse the defendant for attorney’s fees if the shareholder loses the case. Liability claims against directors and executives are typically derivative in nature, and therefore the remedy would be to seek damages payable to the company. Only in extraordinary circumstances could direct damages (payable to the shareholder submitting the liability claim) be requested.
Structural defences and director duties
Many companies have included structural defences in their articles of associations designed to make activist campaigns more difficult. The key elements available to Swiss companies are capped voting rights, and qualified presence quorums and supermajority.
Capped voting rights
A company may limit the voting rights of shareholders to a certain percentage (usually between 2 and 5 per cent), above which the registration with voting rights in the company’s share register may be refused. Through this feature, a company may also be able to limit coalitions between shareholders. As a consequence, the shareholders’ voting rights are capped at the relevant percentage limit.
Qualified presence quorums and supermajority
Swiss law does not stipulate any presence quorum requirements; however, the company’s articles of association may do so, for example, for matters such as increase in the board size or the removal of board members. Once qualified presence quorum provisions have been introduced, the board does not have the authority to waive quorum requirements stipulated in the articles of association. Under the CO’s default rules and subject to certain supermajority requirements, the shareholders generally pass resolutions and make elections by the affirmative vote of an absolute majority of the shares represented and voting at the general meeting. The articles of association may, however, include increased majority requirements (e.g., two-thirds of the shares entitled to vote) for matters such as dismissal of board members or the increase in the size of the board to prevent the election of additional board members. There are a number of corporate actions that under Swiss law by default require a qualified majority of two-thirds of the votes and an absolute majority of the par value, each as represented at the general meeting. Among other things, share capital increases without pre-emptive rights, the introduction of authorised share capital and merger transactions fall into this category.
Defences against public tender offers
There are relatively strict limitations to the board’s ability to take defensive measures on its own, without authorisation of the general meeting, at least once a public tender offer has been submitted. However, a board may seek authorisation in the authorised share capital included in the articles of association to issue shares under withdrawal of the shareholders’ preferential subscription rights. Although there have been a number of companies that have included such provisions in their articles, there have not been any instances where these types of provisions have been used to issue shares to white knights.
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