Bearer shares to be abolished – Need for action by companies

Von Stefano Caldoro,, +41 44 250 29 29

On  September 27, 2019, the Swiss Federal Council decided to bring into force on November 1, 2019 the “Federal Act on the Implementation of Recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes” adopted by Parliament on June 21, 2019.

Need for action

  1. Companies with bearer shares which meet the requirements of one of the two exceptions (listed company or bearer shares as uncertificated securities) must request the entry of the corresponding exception at the Commercial Register Office by April 30, 2021.
  2. Companies with bearer shares that do not meet the requirements of the exceptions are recommended to convert the bearer shares into registered shares by April 30, 2021. If these companies wish to retain the bearer shares, they must either issue the bearer shares as uncertificated securities by April 30, 2021 (and deposit them with a custodian in Switzerland or enter them in the main register) or enter at least part of their equity securities on a domestic stock exchange and then enter this exception in the commercial register.
  3. After the conversion of bearer shares into registered shares, the Company must enter the shareholders in the share register. Shareholders who have not yet fulfilled their reporting obligations must be identified and entered in the share register. If not entered in the share register by October 30, 2024, the shares will be null and void.
  4. All companies and cooperatives must check and, in case, correct their lists and books, as needed depending on their legal form (e.g. share/participation register, list of beneficial owners, register of cooperatives) and the corresponding supporting documents and must ensure access to the registers at all times.

In view of the possible legal consequences of an infringement (lack of organization and criminal sanctions), these measures are necessary.

Overview on the new rules

A. Abolition of bearer shares with two exceptions

The bearer shares are generally abolished and are only permitted in two exceptional cases: (a) if the Company has listed equity securities on a stock exchange or (b) if the bearer shares are structured as uncertificated securities and deposited with a custodian designated by the Company in Switzerland or entered in the main register. If these conditions are met, the company must have the relevant exception entered in the commercial register.

B. Conversion into registered shares and amendment of the Articles of Association

If companies still have inadmissible bearer shares on May 1, 2021, i.e. without an exemption being entered in the commercial register, these are automatically converted into registered shares by law.

The nominal value, the paid up ratio, the characteristics with regard to voting rights and property rights as well as the transferability of the converted shares remain unaffected.

However, the Commercial Register Offices will officially enter the corresponding change (conversion into registered shares) in the Commercial Register, together with the remark that the supporting documents contain data deviating from the entry. In addition, the companies must adapt the Articles of Association to the conversion at the next amendment of the Articles of Association. Without this amendment to the Articles of Association, any other application for registration of an amendment to the Articles of Association will be rejected by the Commercial Register Offices.

No amendment to the Articles of Association is necessary for companies with a valid exception which has not been registered yet (listed company or bearer shares as book effects) if (i) the General Meeting decides to convert the converted shares back into bearer shares (without changing the number, nominal value or share category), and (ii) the company requires the corresponding exception to be registered with the Commercial Registry Office

C. Notification obligation and entry of the shareholders concerned in the share register

After the conversion of the bearer shares into registered shares, the company shall enter in the share register the shareholders who have fulfilled their notification obligation under the existing law pursuant to Art. 697i CO.

The membership rights of shareholders who have not complied with their reporting obligation are suspended and their property rights forfeit during the period of non-registration (see Art. 697m CO). Shareholders may apply to the court for entry in the share register within five years of the entry into force of the new provisions, i.e. until October 30, 2024. This requires the prior approval of the Company and proof of the status of shareholder.

D. Nullity of shares and compensation

If no application for entry in the share register is filed within this period, the shares concerned shall be null and void by operation of law on November 1, 2024 and the shareholder concerned shall lose all rights attaching to the shares. The null and void shares shall be replaced by own shares of the Company. The legal provisions on own shares (Art. 659 et seq. CO) apply; the company must sell the portion exceeding the threshold of 10% of own shares or destroy it by reducing the capital.

A shareholder whose shares have become null and void through no fault of his or her own may claim compensation from the company within ten years of the date on which the nullity of the shares occurred, provided that he or she proves that he or she was a shareholder at the time when the nullity of the shares occurred. The compensation corresponds to the lower of the following values: (a) the actual value of the shares at the time of the conversion into registered shares or (b) the actual value of the shares at the time of the assertion of the claim for compensation. Compensation is, however, excluded if the company does not have the required freely usable equity capital.

E. Changes as regards the reporting obligation of beneficial owners

In addition to the abolition of bearer shares and the relevant transitional provisions, the new legal regulation provides for clarifications regarding the reporting obligation of beneficial owners.

Already according to current regulations, anyone who acquires shares in an unlisted company (AG/Ltd or GmbH/LLC) alone or by agreement with third parties and thereby reaches or exceeds the threshold of 25 percent of the company’s capital or votes must notify the company within one month of the name and address of the natural person for whom he is ultimately acting (beneficial owner). In the case of such a participation by a legal person or partnership, the new regulation defines as “beneficial owners” those natural persons who control this legal person or partnership in analogous application of Art. 963 para. 2 CO (Majority of the votes in the supreme body; right to appoint/revoke the majority of the members of the supreme management body; controlling influence based on the articles of association, the deed of foundation, a contract or comparable instruments). If there is no such person, the shareholder must notify the company of this circumstance.

If the reporting shareholder is, or is controlled by, a listed corporation or controls such a corporation, it need only report that fact as well as the name and registered office of the listed corporation.

In addition, the law sets newly a deadline of three months for reporting changes in the name and address of the beneficial owner to the company.

Legal consequences of infringements

Defects in the organization

If (a) a company still has inadmissible bearer shares on May 1, 2021 or (b) a company or cooperative does not keep the required registers, as needed depending on its legal form (e.g. share register, the register of beneficial owners, register of cooperative members) in accordance with the regulations as of November 1, 2019, there is a defect in the organization pursuant to Art. 731b CO. The court seized may order a time limit for the re-establishment of the lawful situation or the dissolution and bankruptcy liquidation of the company/cooperative.

Criminal sanctions

A fine will be imposed on shareholders who intentionally fail to comply with the reporting obligations to the beneficial owners (including notification of changes of name and address).

A fine will also be imposed on anyone at the company/cooperative who deliberately fails to keep the required registers (e.g. share register, the register of beneficial owners, register of cooperative members) in accordance with the regulations or violates the obligations under company law associated with the obligation to keep the register (e.g. keeping records, ensuring access to the registers at all times).