Practical issues to be considered by the Swiss subsidiary of a multinational group

Transcription

1 Practical issues to be considered by the Swiss subsidiary of a multinational group September 29, 2011, Villa Principe Leopoldo, Lugano Paolo Bottini Gilles Benedick

2 Overview 1. Duties of the Board of Directors 3 2. Granting of Upstream Loans 9 3. Granting of Upstream Guarantees Capital Loss and Over Indebtedness (art. 725 CO) Civil Responsibility Criminal Responsibility

3 Duties of the board of directors Parent Company Swiss Subsidiary Practical example: the parent company of a Swiss subsidiary is encountering a liquidity problem. Due to the general financial distress, banks are reluctant to grant a loan. On the other hand, the Swiss subsidiary has the necessary freely disposable equity. The parent company therefore requests the Swiss subsidiary to grant a loan in the appropriate amount. Fundamental question: Which interests shall the board of directors take into account? The interests of the group or the interests of the Swiss subsidiary? 3

4 Duties of the board of directors - Art. 663eCO Swiss law lacks a coherent set of rules applicable to a group of companies (so-called "Konzernrecht"). It is, in fact, limited to providing for consolidated accounting of groups. Consequently, there is no legal provision dealing with the duties of a BoD of group companies. 4

5 Duties of the board of directors - Art. 717 CO General Swiss law provision: The members of the board of directors and third parties engaged in managing the company's business must perform their duties with all due diligence and safeguard the interests of the company in good faith. Within the scope of the duty to consider the subsidiary's interests, legal doctrine maintains that the organizational integration and the commercial "dependence" must have an impact on the legal situation of subsidiaries, and hence its board of directors. 5

6 Duties of the board of directors - Art. 716a CO - PETER BÖCKLI, Schweizer Aktienrecht, 4 th edition, Zurich 2009, 13 n. 471 et seq. Accordingly, the full statutory catalogue of core duties is, in principle, only applicable to stand-alone companies, and a board of directors of a wholly-owned subsidiary, integrated in the group, is left with an adjusted, "residual" scope of duties, such as: the implementation of the group's strategy the supervision of organizational, financial, controlling/compliance measures of the group within the own sphere, and/or the supervision of the top executives sent by group to manage the subsidiary; and the compliance with local laws. 6

7 Duties of the board of directors Despite the aforementioned adjusted responsibilities, it is important to note that the practice of courts regarding the liability of directors clearly focuses on the individual legal entity, and therefore tends to ignore the specific situation of subsidiaries. - Decision of the Swiss Supreme Court 130 III 213 and 113 II 52 In accordance with settled case-law, it has to be stressed that the board of directors of the subsidiary must always put the interests of the company above the shareholders' (i.e. the parent company). Put it differently, in case of conflicting interests, the interest of the Swiss subsidiary prevails group interest. 7

8 Duties of the board of directors How to address the conflicting interests that the Swiss subsidiary shall take into consideration? It may be advisable to insert clear reference in the articles of incorporation to the fact that the Swiss subsidiary is part of a multinational group, e.g.: o "The scope of the company, as member of the X-Group, is the distribution of products of X-Group" o "The Company belongs to the X-Group, which focus its activities in " 8

9 Granting of Upstream Loans Responsibility of the board of directors o Which interests shall the board of directors take into account? The interests of the group or the interests of the Swiss subsidiary? 9

10 Granting of Upstream Loans Requirements under corporate law o The Upstream Loan must meet arm's length conditions: o considering the borrower's creditworthiness as well as willingness and ability to repay the loan; o customary terms of duration and termination; o borrower should pay adequate interests on a regular basis; o the Upstream Loan should be adequately secured 10

11 Granting of Upstream Loans Requirements under corporate law (continued) o Upstream Loan to be Covered by the Company Purpose o As a general rule, a commitment entered into on behalf of a Swiss company is binding on the company, to the extent it is within the company's business purpose; o The fulfillment of this prerequisite is often questionable for Upstream Loans which are not entirely on arm's length terms; o Whenever in doubt, it is advisable for the Swiss Lender to amend its articles of incorporation by extending the purpose article to provide explicitly for the granting of financial assistance to group companies, including through Upstream Loans. 11

12 Granting of Upstream Loans Requirements under corporate law (continued) o Granting of the loan should not qualify as a concentration risk for the lender; o The lender should have freely disposable equity in the amount of the loan. An Upstream Loan exceeding the free equity threshold could be deemed to be an unlawful return of the shareholder's capital contributions and to violate the statutory limitations on the use of the company s legal reserves. As a consequence, such Upstream Loan could be challenged by any party as being null and void from the outset. 12

13 Granting of Upstream Loans Requirements under tax law o Issue: Ordinary as well as hidden profit distributions by resident companies are subject to Swiss withholding tax (currently at 35%) at source; o The tax may be fully or partially refunded to the recipient of the profit distribution; o But: for non-swiss recipients, such a refund may only be granted based on a double tax treaty between Switzerland and the country of residence of the recipient; o Profit distributions are not income tax deductible. 13

14 Granting of Upstream Loans Requirements under tax law (continued) o From a tax standpoint, a constructive dividend is assumed when a company executes non-arm's length transactions with related parties. In particular, the assessment is based on the following elements: o The interest rate may not be lower than the interest rate accepted by the Swiss tax authorities; o The repayment of the loan cannot reasonably be expected, e.g. because of the bad financial situation of the borrower; o If the Upstream Loan is considered to be fictitious, that is, if there has never been any intention of repaying the loan, the tax authorities might characterize the total loan amount as a constructive dividend that is subject to withholding and income tax. 14

15 Granting of Upstream Guarantees Parent Company Bank The analysis set forth for Upstream Loans applies also to Upstream Guarantees; Swiss Subsidiary In particular, the guarantee must be granted at arm's length; If arm's length requirement is not met, the shareholders' meeting shall unanimously resolve to ratify the guarantee. 15

16 Capital Loss and Over Indebtedness (art. 725 CO) 1. Capital Loss (art. 725 (1) CO) Assets Assets Capital Loss Liabilities Share capital + legal reserves - Share capital includes the nominal share and participation capital of the company and legal reserves includes the general reserve (Art. 671 CO), the reserve for own shares (Art. 671a CO) and the revaluation reserve (Art. 671b CO). The reserves provided for by the articles of incorporation (Art. 672 CO) and the retained earnings do not have to be taken into consideration. Capital loss means that at least half of the share capital and the legal reserves of a company are no longer covered by net assets. The concept of "capital loss" is meant to be an alarm bell and trigger point under Swiss company law for the board of directors to adopt restructuring measures. It relates to the stand-alone statutory balance sheet (as prepared in accordance with the CO) only and does not affect any consolidated accounts. The calculation of capital loss is usually based on the last statutory balance sheet of the company. However, if the board of directors has a substantiated concern of capital loss during the business year, he is obliged to prepare an interim balance sheet. 16

17 Capital Loss and Over Indebtedness (art. 725 CO) The duties of the board of directors in the event of capital loss - Art. 670 CO In case the balance sheet shows there is a capital loss, the board of directors shall immediately and without any delay convene a general meeting of shareholders and propose restructuring measures. Such restructuring measures may include the following: real property or participations whose real value has risen above acquisition or manufacturing cost may, be revalued up to a maximum of such value; reduction of share capital that may or may not be followed by a fresh increase; increasing the share capital to offset debts; composition between debtors and creditors; releasing reserves; payments à-fonds-perdu by shareholders. 17

18 Capital Loss and Over Indebtedness (art. 725 CO) Assets Assets Liabilities 2. Over Indebtedness (art. 725 (2) CO) A company is deemed to be over-indebted when it has fewer assets than liabilities. Over Indebtedness Share capital + legal reserves 18

19 Capital Loss and Over Indebtedness (art. 725 CO) The duties of the board of directors in the event of over indebtedness Where there is good cause to suspect over indebtedness, the board of directors is obliged to prepare an interim balance sheet (not a consolidated but an individual company balance sheet) to examine whether the company is over indebted or not. In a first step, the interim balance sheet has to prepared based on on-going business values. If the interim balance sheet at on-going business values shows a over indebtedness or if the continuation of the company is at risk (e.g. because of liquidity problems), the interim balance sheet has to be prepared based on liquidation values as well. The board of directors shall submit both versions of the interim balance sheet to the auditors for examination. 19

20 Capital Loss and Over Indebtedness (art. 725 CO) The duties of the board of directors in the event of over indebtedness (continued) If the interim balance sheets show that the claims of the creditors of the company are neither covered if the assets are neither appraised at on-going business values nor at liquidation values, the board of directors is obliged to notify the bankrupcty judge unless creditors of the company subordinate their claims to those of all other creditors to the extend of such insufficient coverage 20

21 Capital Loss and Over Indebtedness (art. 725 CO) The duties of the board of directors in the event of over indebtedness (continued) "Subordination" means that the creditors agree to their claims being ranked lower than the company's other debts. Subordination must satisfy the following three cumulative conditions to be valid: 1. irrevocably defer payment of the principal and, except in particular cases, interest; 2. it must remain in force at least all traces of overindebtedness has been eliminated; and 3. be financially viable for the creditor (to avoid the threat of an action to revoke the subordination by the company s creditors). Subordination enables the company to avoid notifying the court, but it does not constitute a restructuring measure. 21

22 Civil Responsibility Responsibility of the members of the board of directors of the Swiss subsidiary Directors and persons engaged in the management of a Swiss corporation are generally liable for the damage caused by an intentional or negligent violation of their statutory duties. The risk of personal liability for a director of a Swiss corporation materializes most often in the event of insolvency of a corporation if the board does not immediately file for bankruptcy when it realizes that the company's net assets do not cover the liabilities and the damage arising for the creditors is aggravated due to the fact that the losses are increased as a result of the belated bankruptcy filing. 22

23 Civil Responsibility Responsibility of the members of the board of directors of the Swiss subsidiary (continued) In the event of insolvency of a corporation, quite often unpaid Swiss withholding taxes and social security contributions give rise to personal liability of directors. 23

24 Criminal Responsibility Responsibility of the members of the board of directors of the Swiss subsidiary - Art. 164 Swiss Criminal Code ("SCC") - Art. 165 SCC - Art. 166 / art. 325 SCC - Art. 167 SCC Harming creditors by diminishing assets Mismanagement The debtor who, by mismanagement, particularly by means of an insufficient capital endowment, exorbitant expenses, hazardous speculation, the concession of or use of credit in an unreasonable manner, the sale under value of assets or culpable negligence in the exercise of his profession or the administration of his assets, causes or aggravates his overi ndebtedness Failure to keep books / Irregular keeping of books Creditor preference The debtor who, although he is aware of his insolvency, commits acts with the intent to favor certain creditors to the detriment of others, particularly by paying debts before maturity, by paying a mature debt in some form other than cash or ordinary values, by drawing upon his own resources in order to give security for a debt although he is not obligated to do so 24

25 Thank you for your attention 25

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