Overview (January 2008) - International Law Office

Legislative Framework
Contract Law
Forms of Business Association

Legislative Framework

The primary source of commercial and company law is the Swiss Code of Obligations of March 30 1911, which consists of five main parts:

• Part 1 - General Provisions (Articles 1-183);
• Part 2 - Types of Contracts (Articles 184-551);
• Part 3 - Commercial Companies and Cooperatives (Articles 552-926);
• Part 4 - Register of Commerce, Company Names and Commercial Accounting (Articles 927-964); and
• Part 5 - Securities (Articles 965-1186).

Further statutes which are particularly relevant at federal level include the Ordinance of the Register of Commerce and the Insurance Contract Statute.

As the Code of Obligations dates back to 1883, and the code's reform in 1911 introduced only minor changes, case law is also an important source of law in this area. Many principles of commercial and company law cannot be found in the legal provisions, but instead were developed by scholars and the Federal Supreme Court of Switzerland.

Contract Law

Swiss law acknowledges the principle of freedom of contract, which includes the freedom to conclude a contract and the freedom to choose the contractual party. Within the limits of law, the parties themselves can agree on the obligations and standards which will govern their behaviour. Contracts which refer to an impossibility, have illegal content, or violate public morality or basic personal rights are null and void.

Under Swiss law, a contract is concluded through manifestation of the parties' mutual consent, which may be either expressed or implied. An enforceable contract is formed once the parties have come to an agreement about all essential elements. In contrast to common law, Swiss law does not recognize due consideration as a requisite element in the formation of a valid simple contract.

In order to enter into a contractual relationship, one of the parties may make an offer which the other party, the offeree, is free to accept. The offer is binding if it is made with sufficient certainty and finality that the offeree can properly infer that his own assent is all that is necessary to conclude the bargain. When an offer is made at a distance and without setting a time limit, the offeror remains bound until the point at which he can reasonably expect receipt of a reply dispatched properly and in due time. An offer must be distinguished from an invitation to treat. A typical invitation to treat involves the sending of tariffs and prices. According to Swiss law, however, the display of goods with an indication of their price is generally considered as a binding offer.

The validity of a contract is dependent on a particular form only where this is required by law or where the parties have agreed on a specific contractual form. Where the law requires the contract to be in writing, the contract must bear the signatures of all parties who are bound by it. Contracts which must be in writing include:

• assignments of claims;
• sale contracts which provide for payment in instalments; and
• donation pledges.

A public deed is required by law for a number of contracts, including:

• contracts for the sale of real estate;
• pledges to donate real estate; and
• agreements of inheritance.

Even if negotiations have been successfully completed and the contract meets the necessary formal requirements, defences are still available against enforcement of the contract. These include:

• obligor's non-performance;
• unenforceability due to lapse of time;
• defects in the contract's conclusion, including material defects, essential errors, wilful deception, duress, force or threats of force;
• unfair bargaining;
• a change in circumstances;
• a lack of legal capacity to contract; and
• faulty performance or delay, under certain conditions.

The Code of Obligations contains general provisions which apply to all contracts and special provisions which are applicable to certain types of contract. Most of the provisions are not mandatory. The code's special provisions relate to those contracts which are of most economic importance (ie, purchase and barter; donation; rental agreement; usufructuary lease; lending; employment contract; work contract; publishing contract; mandate; agency contract; commission; contract of carriage; bailment; and guarantee). However, there are no legal provisions relating to, for example, leasing contracts and distributorship agreements - in such cases the existing rules are applied by analogy.

Swiss law fully admits the possibility of concluding contracts through an agent. As a rule, the principal defines the scope of the mandate. However, in commercial law such limitation is not valid. The agent is deemed to be authorized to perform all types of commercial transactions and legal acts in the principal's name within the purpose of the principal's business or enterprise.

Swiss law on electronic signatures allows for certified electronic signatures to have the same status as handwritten signatures. All transactions which Swiss law requires to be signed may thus be concluded validly by email if an electronic signature is used.

Forms of Business Association

Companies are principally organized under one of five corporate forms: simple partnership, general partnership, limited partnership, corporation or limited liability company. Corporations with unlimited partners also exist, but this corporate form is rarely used in practice. Some companies are also organized as foundations or cooperatives.

Article 934 of the Code of Obligations provides that anyone who conducts trading, manufacturing or other business activities in a commercial manner must register with the Register of Commerce at the place of the company's head office. Each canton keeps at least one register of commerce. The Register of Commerce, its application files and supporting documents are open to the public. In general, entries into the Register of Commerce are published in the Swiss Official Journal of Commerce.

Corporation
The most widely used corporate form for business companies, whether public or private, is the corporation or 'share company'. Swiss corporation law provides for a flexible structure, and so this form can be utilized equally by small family concerns and large business enterprises whose shares are listed on the stock exchange. According to the legal definition in Article 620(1) of the Code of Obligations, a 'corporation' is a company with its own company name whose predetermined capital is divided into shares and whose liability is limited to the company's assets. The popularity of this corporate form lies in the fact that the shareholders have no personal liability, and that ownership can be transferred simply by transferring the shares. In addition, incorporation is easy. The share capital amounts to a minimum of Sfr100,000, and incorporation can even be undertaken by an authorized third party. The corporation may be incorporated by one or more natural or legal persons or other commercial companies. Once the corporation has been incorporated, which must be certified by a notary, it will be entered in the local register of commerce.

The corporation has three bodies: the general shareholders meeting, the board of directors and the auditors. The shareholders are entitled to vote in the general shareholders meeting, which is, at least formally, the supreme corporate body. The shareholders can form groups by concluding shareholders agreements which govern the relationships between them. By making suitable contractual arrangements, it is possible for the shareholders to provide for issues such as the allocation of seats on the board of directors and rights of first refusal.

The board of directors is the company's managing body. It can delegate a number of its functions to the management by agreement, although there are some duties which cannot be delegated. These include:

• the control of finances;
• the establishment of the organization; and
• the appointment and removal of persons entrusted with the company's management.

Until recently, the majority of the members of the board of directors were required to have Swiss citizenship and be domiciled in Switzerland. Subsequent to amendments to the Company Law, which entered into force on January 1 2008, none of the members of the board of directors need be domiciled in Switzerland or have Swiss citizenship. The new law requires only that at least one person authorized to represent the corporation be domiciled in Switzerland. This requirement may be fulfilled either by a member of the board of directors or by a manager of the corporation.

Audit obligations vary depending on the size and economic significance of the corporation.

An ordinary audit is required for all publicly held corporations and all corporations of economic relevance which are required to prepare consolidated financial statements, or which exceed two of the following values in two consecutive financial years:

• total assets of Sfr10 million;
• sales of Sfr20 million; or
• 50 full-time employees.

The ordinary audit consists of a comprehensive report to the board of directors and a summary audit report to the shareholders' meeting.

Small and medium-sized corporations require only a limited audit based primarily on surveys, analytical audit procedures and a limited test of detail. The limited audit merely consists of a summary audit report to the shareholders' meeting.

Very small companies - that is, corporations which do not, on average, have more than 10 full-time employees annually may waive the limited audit altogether if all shareholders agree.

The corporation's governing framework is the articles of incorporation, which determine the most important issues, such as:

• the company's name, seat and purpose;
• the total number, par value and type of shares issued; and
• the corporate bodies.

Limited liability company
In recent years the limited liability company has become more popular, since its only corporate body is the members meeting. In addition, all members are presumed to be entitled and obliged to manage and represent the company collectively. As in the case of a corporation, the limited liability corporation must be represented by at least one person domiciled in Switzerland. This requirement may be fulfilled by a manager or a director. A limited liability company may be formed as a single shareholder company. The registered capital must amount to at least Sfr20,000 and may not exceed Sfr2 million. The capital is divided into company contributions of the individual members, which must be at least Sfr1,000 or multiples thereof. Accounting regulations are analogous to those of corporations, including the obligation to prepare a financial statement and an audit report.

Partnerships
The main reason for the use of partnerships is a special feature of Swiss tax law: while the distributed income (dividends) of corporations is taxed twice - once at corporate level and then again at stockholder level - the distributed income of partnerships is taxed only once, as the partners' personal income. However, the drawback is that the partners are personally liable for the company's obligations.

For further information on this topic please contact Markus Dörig or Olivier Bauer at Badertscher Doerig Poledna by telephone (+41 1 266 20 66) or by fax (+41 1 266 60 70) or by email (doerig@bdp.ch or bauer@bdp.ch). The Badertscher Dörig Poledna website can be accessed at www.bdp.ch.