Scope of Release of the Board of Directors Clarified - International Law Office

Background

Under Swiss law, the general shareholders' meeting can release the members of the board of directors from liability(1) either for a specific period of time, such as the previous business year, or for a particular business transaction. According to Article 695 of the Swiss Code of Obligations, persons who have taken part in the management of the company have no right to vote on resolutions concerning the release of the board of directors.

In Switzerland, the board of directors commonly asks to be released during the ordinary general shareholders' meeting for the past financial year. The importance of the release results from its effect on potential claims against the board of directors for administration, management or liquidation. The release shelters the board members from liability claims by the company arising from the intentional or negligent violation of their duties. However, the resolution of release passed by the general shareholders' meeting is effective only for facts that have been disclosed and only with regard to the company and those shareholders that consented to the resolution or acquired shares subsequently with knowledge of the resolution. Moreover, the right of shareholders that did not consent to the release to file an action expires six months after the resolution of the release.(2)

Decision

In a decision delivered on June 29 2005 the Supreme Court dealt with a case involving the release of three members of the board of directors. The court defined the scope of application and the effects of a release granted to the board members. The claimant, a Swiss corporation, had sued its former board members for breach of their financial management duties by tolerating highly speculative options dealing and by not intervening to prevent losses. The company reproached the three board members for allowing an asset manager to invest all the liquid assets of the company, causing the company to suffer a substantial loss between March 30 1998 and January 6 1999.

The first issue the Supreme Court addressed was whether the general shareholders' meeting of November 25 1998 had validly resolved upon the release. The claimant alleged that the resolution of release was not only open to objection but null and void, as the resolution was exclusively passed with the votes of an allegedly material legal body that has no voting rights according to Article 695 of the code. However, the court held that resolutions of release that are passed by the contribution of non-voting persons are subject to challenge according to Article 706 of the code and that, in the absence of a challenge, the release had subsequently been validly granted. Therefore, the court did not have to decide whether persons who should have been excluded (according to Article 695) had participated in the vote.

The resolution of release passed by the general shareholders' meeting is effective only for facts that have been disclosed.(3) The claimant argued that the information regarding the options dealing given to shareholders during the general shareholders' meeting was insufficient and that therefore no valid resolution could have been passed. The court dismissed this reasoning and stated that facts that have been made known to the shareholders are deemed as disclosed if their importance is not downplayed and the shareholders are not misled by their presentation.

Finally, the claimant argued that the lower court had mistakenly given effect to the resolution of release from June 30 1998, thereby covering actions outside the business year 1997/1998. The general shareholders' meeting for the business year July 1 1997 to June 30 1998 took place on November 25 1998; however, the options dealings which later resulted in a loss took place between April 7 and August 28 1998. In its first meeting in the following business year on September 3 1998, following losses in July and August, the board of directors criticized options trading as too risky and changed its investment policy to abandon option purchases.

The Supreme Court followed the reasoning of the lower court, which had held that it is the point in time at which the actions contrary to duty occurred that is significant, and not the point at which those actions had an effect. The Supreme Court held that although the company had carried on its investment policy in the first two months of the business year 1998/1999, it had its origins in the business year 1997/1998. Thus, the Supreme Court held that no violations that would not be covered by the resolution of release could be identified.

For further information on this topic please contact Markus Dörig or Philipp Schaller at Badertscher Dörig Poledna by telephone (+41 44 266 20 66) or by fax (+41 1 266 20 70) or by email (doerig@bdp.ch or schaller@bdp.ch).

Endnotes

(1) Article 698(2)(5) of the Swiss Code of Obligations.

(2) Id at Article 758.

(3) Id.