We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
03 February 2021
On 29 November 2020 the Swiss public voted on the so-called 'Corporate Responsibility Initiative' (CRI). Although a small majority of voters voted in favour of the CRI, the majority of the cantons (including numerous smaller cantons) rejected it. The CRI therefore failed, as the majority of both voters and the cantons must approve an initiative in order for it to be adopted.
The CRI aimed to amend the Federal Constitution by establishing a new provision introducing extensive due diligence duties regarding international human rights and environmental standards. However, its most controversial feature was the new liability regime, according to which Swiss companies could have been held liable before the Swiss courts if their controlled companies abroad committed violations of international human rights or environmental standards.
Since the CRI was rejected, an indirect counterproposal drafted by Parliament will likely enter into force. The counterproposal is less extensive than the CRI and – as a main difference – does not include any provisions under which Swiss companies would be liable for violations committed by controlled companies abroad. The counterproposal consists of two separate elements:
The potential penalties and liability, as well as the potential reputational risks stemming from violations of these new duties, are also relevant for the acquisition of or investments in Swiss companies. Therefore, the counterproposal will affect the scope of due diligence in M&A and financing transactions. More concretely, in the context of due diligence, an interested purchaser or investor should also verify:
A company will be subject to the reporting requirements if it meets the following requirements (cumulatively):
Under the counterproposal, companies subject to the reporting duties must write an annual report on non-financial matters. The report must give an account of environmental concerns (especially CO2 targets), social issues, employee concerns, respect for human rights and the fight against corruption. It must contain the information necessary to understand the course of business, the operating result, the state of the company and the impact of its activities on these non-financial matters.
The report must be written in an official Swiss language (ie, German, French or Italian) or in English. In particular, it must include:
Should a company not pursue a policy with regard to one or more of the above matters, this must be declared in the report with a clear and substantiated reason ("comply or explain").
The due diligence duties apply to companies which have a statutory domicile, head office or principal branch in Switzerland and:
The government will determine in an ordinance the conditions under which small and medium-sized companies and low-risk companies need not check whether there are reasonable grounds to suspect child labour.
Companies subject to the due diligence duties under the counterproposal must maintain a management system in which they define:
Companies must further identify and assess the risks of harmful effects in their supply chain, create a risk management plan and take measures to minimise the identified risks. Further details thereto will be governed by the government in an ordinance, which will be modelled on internationally recognised regulations (eg, Organisation for Economic Cooperation and Development (OECD) guidelines).
The highest management or administrative body of the company (ie, the board of directors) must write an annual report providing information about its compliance with the due diligence duties. This must be written in an official language of Switzerland (ie, German, French or Italian) or in English. Such report must be published electronically within six months of the end of the financial year and remain publicly available for at least 10 years. Companies which offer products and services from companies that have written a report need not write a report for these products and services themselves.
Under the counterproposal, a fine of up to Sfr100,000 (in case of intent) or Sfr50,000 (in case of negligence) can be imposed on anyone (including natural persons) who, respectively, intentionally or negligently:
Pursuant to the general rules of Swiss criminal law, the statute of limitation is three years, meaning that criminal prosecution will be possible within three years of a failure to comply with the reporting or retention and documentation duties.
As mentioned above, no additional liability provisions are included in the counterproposal. However, a breach of the new due diligence duties could still pose a risk for potential liability claims against a company's board of directors. Companies which fall under the scope of the new duties and which are not subject to an exemption should therefore take adequate measures to comply with the new duties.
The efforts required by companies to ensure compliance with the counterproposal will depend to a substantial extent on the status quo. Companies which already adhere to, for example, the OECD Guidelines for Multinational Enterprises or the OECD Due Diligence Guidance for Responsible Business Conduct or which are signatories to the United Nations Global Compact might be required to perform only administrative tasks in order to comply with the counterproposal. By contrast, companies which fall within the scope of the counterproposal and have yet to implement a proper supply chain policy will face bigger challenges. In any event, all companies concerned by the counterproposal should conduct a gap analysis in order to identify any need for action in a timely manner.
As explained above, the new duties will have to be considered in the context of any transaction aimed at the acquisition of or an investment in a Swiss company subject to the reporting duties. More concretely, the scope of the due diligence regarding such a transaction should be expanded in those cases to include a review of the reports and, to a certain degree, their compliance with the new law.
On the one hand, formal aspects – for example, the existence of the respective report, the electronic publication of the report and the retention policy – should be reviewed.
On the other hand, the contents of such reports is also worth a closer look for various reasons: First, it should be kept in mind that false statements in reports can lead to criminal penalties and could eventually pose a liability risk. Second – and maybe more importantly, because it is easier to assess – the reports could reveal potential risks with respect to a target's supply chain or non-financial matters. Such non-financial risks could lead to financial consequences or reputational damages, which may significantly jeopardise the value of an acquired company or investment. The reports could therefore provide useful additional information which is not included in a target's contracts or conventional corporate documentation. Risks identified in the reports can then be made subject to representations, warranties or indemnities in a share purchase or investment agreement.
Therefore, from a purchaser's or investor's perspective, the new reporting and due diligence duties can be a helpful source of information, which can reduce risks arising from transactions. However, this will be the case only if the reporting and due diligence duties are properly covered during the due diligence. If a purchaser or investor fails to do so, the counterproposal will likely lead to higher risks.
The counterproposal was adopted on the condition that the CRI was rejected by Swiss voters or the cantons. As this is the case, the government will now publish the counterproposal in the Federal Gazette.
Within 100 days of its publication, 50,000 voters could require that Swiss voters (and not the cantons) also decide on the counterproposal. At present, it seems unlikely that there will be a referendum against the counterproposal, as no major political party or other group has announced that it wants to launch an attempt to collect 50,000 signatures.
Therefore, the counterproposal will likely enter into force on 1 January 2022. In any case, the counterproposal cannot enter into force before the expiry of the 100-day deadline to collect 50,000 signatures if (contrary to the general expectation) 50,000 signatures should be collected before the vote on the counterproposal takes place and the counterproposal is confirmed by voters. In any event, interested purchasers and investors should incorporate the due diligence duties into their due diligence as from the counterproposal's entry into force at the latest. That said, in view of the potential financial consequences and reputational damages arising from non-financial matters, companies should address such aspects in transactions that take place before the counterproposal's entry into force. Any shortcomings discovered in the course of such due diligence will need to be remedied after it enters into force anyway. Therefore, it would be useful to discover any potential gaps at an early stage.
According to the transitional provisions, the reporting duties apply with respect to the financial year that begins one year after the counterproposal's entry into force. This means that the first reports will likely need to be prepared with respect to the financial year beginning in 2023.
For further information on this topic please contact Alexander Vogel or Renato Bucher at Meyerlustenberger Lachenal by telephone (+41 44 396 91 91) or email (firstname.lastname@example.org or email@example.com). The Meyerlustenberger Lachenal website can be accessed at www.mll-legal.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.