Already in 2021, the Swiss Supreme Court determined that the term of office for the board of directors of a Swiss corporation ends six months following the end of the relevant business year if a director's term expires that year and he/she is not re-elected by the shareholders (148 III 69). In case of a one-year term and a business year following the calendar year, the re-election must occur by June 30 of the following year. Without timely re-election, directors are out of office and can no longer act on behalf of the corporation.
In a recent decision (4A_387/2023, 4A_429/2023), the court confirmed that decision and in addition ruled that directors not duly re-elected cannot validly convene shareholders' meetings. The court explicitly rejected the view that directors whose term of office expired can validly convene meetings based on a de facto director status, a position taken by many legal practitioners. The court also confirmed that shareholder resolutions passed at meetings convened by directors whose term of office expired are null and void.
As a result, if directors are not re-elected in time, the corporation risks becoming defunct due to the lack of a duly appointed board. In such cases, one possible remedy outside of court seems a resolution by all shareholders electing new directors.
This decision has significant practical implications, as many private companies do not observe the six-month deadline to hold their annual shareholders' meetings. In particular corporations with a larger shareholder base failing to timely re-elect directors risk becoming defunct, as an alignment of the shareholders without a duly appointed board may prove to be difficult. Directors not re-elected in time should carefully consider what actions they (still) may or need to take on behalf of the corporation. Resolutions taken by directors whose term of office expired may (also) be null and void.
Preliminary Recommendations
- Compliance with Statutory Deadlines: Boards must ensure compliance with the statutory deadline of six months after the business year ends to hold the annual shareholders' meeting, including director elections. For corporations with a business year ending on 31 December, if the annual meeting has not been held, it should at least still be convened in June. Our interpretation of the case law suggests that a meeting convened within six months but held after this deadline should be valid.
- Remedy if Deadline is Missed: If the deadline is missed and directors are out of office, they should not call a shareholders' meeting. Instead, a resolution with the participation of all shareholders must be taken to properly (re-)elect directors. Ideally, these resolutions should be unanimous, but according to our reading of the case law, written or electronic circular shareholder resolutions must be permissible even if not unanimous.
- Extended Term of Office: For private corporations, we recommend introducing a two- or three-year term of office for board members while still holding annual (re-)elections. This prevents directors from losing office inadvertently if an annual shareholders' meeting is postponed.
- Listed Corporations: Listed corporations have a statutory one-year term limit for board members. Hence, if a postponement of the annual shareholders' meeting is unavoidable, they should – despite the additional cost – consider holding an earlier extraordinary shareholders' meeting within the six-month period for (re-)election of the board.
- Past Non-Compliance: Boards and shareholders shall determine the implications of past non-compliance on an individual basis. They should consider whether any past shareholder and board resolutions are at risk of being considered null and void based on the recent case law and analyze potential remedies. Legal due diligence teams should also pay close attention to this issue.
- Counterparties: Third parties dealing with a Swiss corporation can continue to rely on a director's registration with the commercial register to assess such director's representation rights unless the third party is actually aware that the director's term of office has expired without re-election.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.