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27 January 2014
In Spring 2013 Swiss voters approved the 'fat cat' initiative by amending the Swiss Constitution (for further details please see "Voters say yes to 'fat cat' initiative"). The federal government has adopted the respective implementing ordinance, which became effective on January 1 2014. The new ordinance against excessive salaries clarifies many open questions for the around 240 Swiss companies listed on either a Swiss or foreign stock exchange. Several say-on-pay issues are left to the decisions of the shareholders meeting. The criminal penalties are more lenient than in the first draft.
Forbidden forms of compensation and related criminal provisions
The following forms of compensation for board, top management board and advisory board members are explicitly forbidden (ie, null and void) if agreed on:
The new ordinance specifies that only the first three forbidden compensation types are subject to penal provisions. In these first three cases, board members, top management and the advisory board are liable to imprisonment of up to three years and a monetary penalty if they grant them to others or accept them themselves, provided that they acted with direct unlawful intent. Other transactions entered into with direct unlawful intent to avoid the new ordinance are also issued with the same penalties. This applies to:
However, the 'direct unlawful intent' requirement is rigid under Swiss penal law, as a result of which the new penal provisions will foreseeably be of limited importance in practice. Only the conscious payment or receipt of non-approved compensations and other conscious infringements of the new ordinance against better knowledge are included.
Severance payments required by law (eg, labour law is particularly relevant in some foreign jurisdictions), compensation payments for non-competition covenants, compensation for loss of entitlements and bonus payments for acquisition or divestiture of companies not controlled by the Swiss listed company are still allowed to the extent that they reflect a fair market value. The AGM may also adopt an extra amount for new hires not then known, which allows the Swiss listed company to make the new hires before the next AGM and to grant them a signing bonus to the adopted amount (eg, as compensation for entitlement losses with the previous employer).
Viable say-on-pay models
The new ordinance stipulates only that the AGM must separately and bindingly vote each year on the total amount of compensation payments for the board, top management and board of advisers, whereby the ordinance does not favour any specific model. Each Swiss listed company may choose its own compensation determination model and has, for example, the following possibilities for as long as it is fully reflected in the articles:
Prospective voting enables the board and shareholders to know what to expect in the future. However, shareholders may be reluctant to agree to huge compensation amounts in advance. A consultative retrospective voting or a combination of prospective voting for fixed compensation amounts with a retrospective voting for variable amounts based on performance goals may thus better serve the interests of the shareholders. All retrospective voting enables shareholders to make a decision based on actual financial results. However, the board cannot foresee the shareholders' reaction in advance, and a shareholder may react differently from expected and deny compensation payments expected in good faith.
Summary of required amendments to the articles
Amendments to the articles of Swiss listed companies must include the following:
Transitional implementation rules
The following must be implemented by Swiss listed companies at the 2014 AGM:
The following must be implemented by Swiss listed companies at the 2015 AGM:
From January 1 2016 all employment agreements must be amended to comply with the new ordinance. In particular, the term and notice period for board members, top management and supervisory board may not exceed 12 months.
Swiss listed companies must start early to implement all changes to their articles, other regulations, employment contracts (including bonus systems and participation plans), as well as AGM voting procedures, as these decisions fundamentally affect the rights of their shareholders. Likewise, foreign board and top management members contemplating joining a Swiss listed company should familiarise themselves with special Swiss requirements early, with a view to avoiding personal liability. Shareholders with important interests in Swiss listed companies are also advised to inform themselves well in advance of the next AGM about the opportunities offered by the new Swiss say-on-pay rules.
For further information on this topic please contact Markus Dörig at BADERTSCHER Rechtsanwälte AG by telephone (+41 44 266 20 66), fax (+41 1 266 20 70) or email (firstname.lastname@example.org). The BADERTSCHER Rechtsanwälte AG website can be accessed at www.b-legal.ch.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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