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26 September 2005
According to the definition set out in Article 620 of the Swiss Code of Obligations,
a 'corporation' is a company with its own company name whose predetermined capital
(share capital) is divided into parts (shares) and whose liability is limited
to the company's assets. Having a predetermined share capital and a certain
number of shares with a certain value results in a fixed number of possible
members (shareholders) of the corporation. Although there is a fixed number
of possible shareholders, the number of actual shareholders varies, since a
shareholder can hold either a single share or several shares.
This system aims to protect the corporation's share capital, and ultimately the company's creditors. Therefore, a shareholder in a corporation has no right to exit the corporation, cancelling its membership and reclaiming the invested amount. The impossibility to cancel membership in a corporation is compensated for by the principle of free transferability. A shareholder can get rid of its membership by selling its shareholding to a third party and retrieving the invested amount. Unless the corporation has issued registered shares with restricted transferability, a shareholder can do so without any need to obtain the permission of other shareholders or the corporation itself. The possibility to sell the shares is a fair replacement for the lack of a cancellation right as long as there is a liquid market for the shares. However, especially in the case of smaller, unlisted corporations, the shareholder may find it difficult to find a buyer for its shares; until it can, it is stuck with its shareholder status.
It is controversial in Swiss legal doctrine whether an exit right can be established in a company's articles of incorporation. The traditional view is that there is no possibility to introduce a shareholders' right to exit, cancel or reclaim the amount invested. More recently, however, some legal commentators have suggested that under certain conditions, the company bylaws can introduce an exit right. They argue that if the reasoning behind the lack of an exit right is the need to protect the company's share capital, such a right could be introduced if the exit proceedings were in line with the provisions for a reduction in share capital set forth in Articles 732 and following of the Swiss Code of Obligations.
As a last resort, minority shareholders that cannot get rid of their shares by selling them and are therefore stuck with their participation in the corporation can sue the company to be dissolved. According to Article 736(4) of the Swiss Code of Obligations, shareholders that together represent at least 10% of the share capital can request dissolution of the company for valid reasons. According to the Swiss Supreme Court,(1) the dissolution claim should in particular protect minority shareholders against majority shareholders' abuse of power. However, because of its drastic effects - not only for the shareholders but also for employees and third parties - dissolution is regarded as the very last resort to resolve a conflict between minority and majority shareholders. Accordingly, the Swiss Supreme Court stated in passing in this decision that, in practice, the dissolution of a large publicly owned company would be excluded due to the interests of the company, and its employees in particular.
Article 736(4) further provides that instead of dissolution, the judge may decide on another solution that is appropriate in the circumstances and acceptable to the interested parties. Adopted from the Anglo-Saxon civil procedure concept, this provision is somewhat exceptional in Swiss law, since it permits the judge to identify a solution himself or herself, rather than just allowing the parties' petitions. Instead of dissolving the company, the judge may, for example, order a reduction in the share capital or a buyback of the minority shareholder's shares. In this way, the minority shareholder can finally exit the company.
However, the possibility to exit a company by way of a dissolution claim is by no means equivalent to a direct exit right provided in the Code of Obligations or in the company's articles of incorporation. The dissolution claim not only is as cumbersome and costly as any lawsuit, but also can have an unpredictable outcome. If the judge rules that the company is to be dissolved, the minority shareholder - as well as every other shareholder - will lose some of its investment due to its reduced liquidation value. Therefore, any shareholder would be well advised to make sure it invests in a company whose shares can be resold. Otherwise, the shareholder may find it difficult to exit the company in the future.
For further information on this topic please contact Markus Dörig at Badertscher Dörig Poledna by telephone (+41 1 266 20 66) or by fax (+41 1 266 60 70) or by email (firstname.lastname@example.org). The Badertscher Dörig Poledna website can be accessed at www.bdp.ch.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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