Legal guide for company directors in Switzerland

In Switzerland, companies have a single board of directors (“Verwaltungsrat”). Many companies however use the flexibility offered by Swiss corporate law essentially to create a two-tier board system, with the Verwaltungsrat being the supervisory board above a management board.  

The role of supervisory directors is the supervision of the management (CO 716a para. 1 no. 5), which may consist of board members (“Delegierte") and/or non-board members (“Direktoren”). However, there are certain competences which by law cannot be delegated (CO 716a para. 1). For example, deciding on the fundamental strategy of the company is the responsibility of the entire board, including non-executive/supervisory directors.  

The only Swiss specific mandatory requirement prescribes that at least one person domiciled in Switzerland must be able to validly represent the company (i.e. have sufficient signatory power). Such a person can either be a board member or an officer. If such a person does not have sole signatory power, the requirement can also be met by two persons domiciled in Switzerland having joint signatory power (i.e. being able to validly represent the company jointly). 

Further, the law provides that at least one board member (whether domiciled in Switzerland or abroad) must be in a position to validly represent the company (i.e. have sole or joint signatory power with another director). 

Swiss company law no longer contains a shareholding requirement. Directors and members of the management are, however, entitled to attend shareholders’ meetings and, in case of directors, to propose resolutions. 

Unlike in other jurisdictions, companies – whether or not incorporated in Switzerland – cannot be appointed as directors. Only the individuals who represent these companies can be appointed as such. 

Generally a director may only be appointed by resolution of the shareholders’ meeting. In the absence of particular quorum requirements in the articles of incorporation, the appointment must be approved by a majority of the votes of shares represented at the meeting. The chairman is either appointed by the members of the board of directors or, if the company’s articles of incorporation so provide or if the company is listed, by the shareholders’ meeting. Further, the board of directors may establish a nomination committee setting out the governing rules for the selection of candidates and for their re-election. 

The minimum number of directors is one (or such higher number as is prescribed by the corporation's articles of incorporation). However, if there are different classes of shares, the articles of incorporation must provide for at least one representative of each class to the board. There is no maximum number of directors unless so provided by the corporation's articles of incorporation. 

Appointments are generally made for a fixed term of three years, unless otherwise provided in the articles of incorporation; a director's term of office must, however, not exceed six years. In listed companies, the maximum term of office is limited to one year. Reappointment at the end of the term is possible, both in listed and non-listed corporations. In listed corporations directors have to elected individually, whereas in non-listed corporations the articles of association or the chairman in the respective meeting, with approval of all present shareholders, can opt for collective election of all directors. 

A director may resign from the board at any time by notice to the corporation (although such resignation may constitute a breach of contract). 

Further, a director may be removed by resolution of the shareholders’ meeting at any time and without cause by a majority of the votes of shares represented at the meeting unless the articles of incorporation provide for a different quorum. Delegates (i.e. managing directors or officers) may on the other hand be removed from their position by the board of directors at any time. Such removal may, however, constitute a breach of contract (cf. question 8 “What contractual relationship does the director have with the company?” below) between the corporation and the respective director or delegate. 

In any case, resignation or removal of a board member or delegate must be filed with the Commercial Register of the canton where the corporation is incorporated. Although the liability of a board member usually ends with removal from the board, such removal must be filed with the Commercial Register immediately. The resigning or removed board member may notify the Commercial Register itself if the company fails to do so. 

As a general rule, each member of the board of directors has the authority to represent the corporation individually and can perform all legal acts that may arise within the corporation’s purpose. If a special delegation of powers of the board to a managing director, a committee of directors or to independent external officers has been validly made (cf. question 7 “How does the board operate in practice?” below), the delegates have the same authority to represent the corporation. Internally (i.e. between a director or delegate and the company), organisational or other regulations or the contract between the director (or any other representatives) and the company may limit such authority. 

However, internal restrictions on the powers of directors to represent the company are not enforceable against third parties acting in good faith (so-called bona fide third parties) unless those restrictions were filed with and entered into the Commercial Register. They can relate to the fact that: (i) the company may only be validly represented collectively by several directors (usually two); or (ii) the authority of certain directors is limited to the representation of either the principal establishment or a given branch. Bona fide third parties are protected by the courts usually interpreting the corporate purpose – within which a director may validly represent the company – very broadly.

Moreover, a third party’s good faith is presumed unless the party knew or should have known that there was an internal limitation of authority. 

Finally, notwithstanding the restrictions registered in the Commercial Register, bona fide third parties may also be protected under concepts of apparent and ostensible authority, respectively (e.g. in case of a delegate’s transgression of such restrictions which the board was aware of and tolerated; misleading statements of the board about the representative’s authority to represent the company). 

The Swiss share corporation normally has a one-tier board of directors which may take decisions on all matters which, by law or the articles of incorporation are, to the extent permissible, not allocated to the shareholders’ meeting. Except for the (few, but substantial) statutory non-transferable and inalienable duties of the board of directors (cf. question 10 “What other general duties does a director have?” below), the CO allows for a delegation of the company’s management to a managing director, to a committee of the board or to independent external officers, which may in fact lead to a two-tier management structure. Such (limited) delegation of the board’s powers is admissible subject to setting out the organisational framework in the company’s organisational regulations (except if the articles of incorporation expressly prohibit a delegation of the board's powers). These regulations regulate the management of the company’s business, stipulate the required bodies, define their duties and, in particular, regulate the company’s internal reporting. If these requirements are met, the delegates have the (internal) authority to act – within the matters defined in the organisational regulations – in the name and on behalf of the corporation without prior board approval. The liability of the delegating members of the board of directors is then limited (cf. question 14 “How can a director limit their liability?” below). 

The establishment of atwo-tier management structure falls within the competence of the board of directors (provided that the shareholders do not forbid the delegation of powers in the articles of association). Members of the board of directors as well as delegates of the board have to be registered in the Commercial Register of the canton where the corporation is incorporated. 

Board meetings may be held in person, or by way of telephone or videoconference or other electronic means. Further, circular board resolutions in writing or by electronic means are permissible. 

The appointment of a director creates a basic legal relationship with the company containing both contractual and corporate aspects. The contractual relationship with the company is based on a mandate agreement or, in particular in case of executive directors, an employment agreement. In any case, according to Swiss case law as well as the prevailing opinion of legal scholars, directors are entitled to reasonable remuneration in exchange for their services. The rules regarding the determination of the remuneration depend on whether the company is listed or not. 

In non-listed corporations, such remuneration is determined by the board in compliance with general principles of company law (e.g. duty of care and loyalty, reimbursement of unjustified benefits). The company may also set up a compensation committee which issues the rules governing directors’ and senior management’s remuneration. 

In listed companies, the shareholders’ meeting has to vote annually (binding vote) on the aggregate amount of the remuneration for each of the board of directors and executive management; the articles of association have to specify the mechanism of the say-on-pay vote (various mechanisms are possible). 

As regards termination of a directorship, different considerations apply for the corporate aspects (cf. question 5 “How is a director removed from office?” above) and the contractual aspects of such termination. A contractual termination will not automatically terminate the directorship (although the contract may require that the director resigns in such circumstances) and the (corporate) removal of the director will not automatically terminate the director’s contract. The termination of the directorship pursuant to corporate law may constitute a breach of the related contract. 

Generally, a director must disclose to the board any conflict of interest and not participate in a decision-making process if there are conflicting interests. Equally, the other directors should ensure that they do not do so. 

A director may not enter into a transaction with the company (self-dealing) except in cases where either: (i) the transaction has been approved by non-conflicted board members or by the shareholders’ meeting; or (ii) the transaction does not jeopardise the company’s interests, i.e. is carried out at arm’s length (market prices; fairness opinion). Whenever a director acts for himself/herself (or a third party) and for the company, the underlying transaction must be concluded in written form to be valid unless the value of the consideration given by the company in such transaction does not exceed CHF 1,000 and qualifies as an ordinary business transaction. These rules are relevant for both the authority and representation of the corporation as well as the director’s liability. 

As a consequence of their fiduciary duty, a director must not take personal advantage of corporate opportunities in which the corporation itself may have an interest. 

If the board member’s remuneration is determined by the board itself (in non-listed companies), conflicts of interest inevitably arise in relation to the board members’ remuneration. 

Directors have a general duty of loyalty towards the company and must safeguard its interests. In a group of companies, a director must generally safeguard the interests of the company where they are a director and not of the group as a whole (however, when determining the individual interests of a specific company, the fact that such company belongs to a group of companies may be considered).

Directors must perform their duties with due care, i.e. with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. Further, the shareholders must be treated equally in like circumstances.

A director’s general duty of care under Swiss law entails numerous specific duties, which cannot all be listed here.

The law defines some particularly important duties of the board which are non-transferable and inalienable. The decision-making process as regards these non-transferable duties cannot be delegated to a committee of the board, to a managing director or to independent outside officers; however, the board of directors may “delegate” the preparation and implementation of its decisions. The following duties are non-transferable:

• strategic management of the company and the issuing of necessary directives
• establishment of the organisation of the company
• organisation of the accounting, financial control and financial planning systems as required for the management of the company
• appointment and removal of persons entrusted with managing functions
• overall supervision of the persons entrusted with managing the company, in particular with regard to compliance with the law, articles of association, and organisational regulations and directives
• preparation of the business report and the financial statements as well as – for listed companies – the compensation report
• preparation of the shareholders’ meetings and implementation of the shareholders’ resolutions, and
• making a motion for a debt restructuring moratorium as well as the notification of the courts in case of over-indebtedness of the corporation.

With the exception of these non-transferable duties, the board of directors may fully delegate (including the delegation of the decision-making process) the management of all or part of the company’s business. If the board has validly delegated all or part of its transferable duties to a committee of the board, to a managing director or to an independent external officer, the standard of care to be observed by the respective delegates is determined by the specific scope of the delegation.

With regard to the company’s creditors, directors are under a legal duty to supervise the liquidity of the company. If the company is at risk of becoming illiquid, the directors must take measures to ensure the liquidity and, if necessary, further restructuring measures or to propose to the shareholders’ meeting such restructuring measures falling within the shareholders’ meetings’ powers. If required, the directors must make a motion for a debt restructuring moratorium. Overall, the directors must act with the required urgency (applies also to the below obligations).

Further, if the last annual balance sheet shows a capital loss (i.e. half of the share capital, the non-distributable legal capital reserves and legal profit reserves are no longer covered by the company’s net assets), the directors are under a legal obligation to take adequate measures to rectify such capital loss and, if necessary, further restructuring measures or to propose to the shareholders’ meeting such restructuring measures falling within the shareholders’ meetings’ powers. If the company has opted out of the limited annual audit, the last annual balance sheet must, prior to approval by the shareholders’ meeting, be audited (limited audit) by a licensed auditor (zugelassener Revisor), which the directors must appoint for such purpose (unless the directors made a motion for a debt restructuring moratorium).

Moreover, in case of substantiated concern of over-indebtedness, interim accounts must be prepared, as a rule of thumb, both at going concern values and at liquidation values. Such accounts must be submitted to the auditors for examination. If the company has opted out of the limited annual audit, the interim accounts must be audited (limited audit) by a licensed auditor (zugelassener Revisor), which the directors must appoint for such purpose.

If the interim accounts show that the company’s liabilities are no longer covered (as a rule, both  at going concern values and at liquidation values), the board of directors is under a legal duty to notify the court unless (i) certain company creditors subordinate their claims to those of all other company creditors in the amount of the over-indebtedness or (ii) there is reasonable prospect that the over-indebtedness can be cured within an appropriate period of time (max. 90 days) from the date when the audited interim accounts became available and provided that the debts owed to creditors are not exposed to additional risk.

Upon receiving a notification, the court usually opens bankruptcy proceedings. Nevertheless, on application by the board of directors or by a creditor, the court will grant a debt restructuring moratorium, unless such application constitutes abuse of law, in particluar if the debt restructuring moratorium has no chance to succeed..

The directors of a Swiss limited company generally owe their duties to the company. However, the directors may also owe certain duties to the shareholders and to the creditors.

One cannot say that the director’s duties change. Rather, the same duties as usual apply, but they do intensify to some degree. For example, directors must have an even closer eye on the financials of the company and must have interim accounts drawn up if they suspect the company to be over-indebted. Also the general supervision of the management needs to be closer during a crisis.

The members of the board of directors, any delegate of the board and any persons engaged in the management of the company (including shadow directors) are personally liable towards the company, its shareholders and creditors for any damage caused by intentional or negligent violation of their duties (cf. para. “Duties” above). The legal standing to claim such damages depends on: (i) whether such damage was suffered by the company (directly) or by a (/an individual) shareholder or creditor, respectively; and (ii) whether the company is insolvent or not. 

The damage suffered by the company may not only be claimed by the corporation itself, but also by the shareholders and – upon opening of insolvency proceedings of the company – by creditors. If the company is not insolvent, the compensation claimed by the corporation or a shareholder, respectively, has to be paid to the company. Upon opening of bankruptcy proceedings, the right of shareholders and creditors to sue the liable persons is, however, suspended and the bankruptcy trustee is first entitled to recover damages in favour of the company or the bankruptcy estate, respectively. Where the bankruptcy trustee waives its right to bring such a claim, any shareholder or creditor is entitled to claim the damage suffered by the (insolvent) company. 

Apart from liability towards the company, the relevant persons may become directly liable towards individual shareholders or creditors (in particular in case of misrepresentation and fraud). 

In addition to civil liability, the Swiss Penal Code provides for criminal liability of directors in the event of (among others) false statements about the commercial business (i.e. statements made in a prospectus for a public offer of shares), filing false statements with the Commercial Register, the artificial reduction of assets to the prejudice of creditors, disclosing trade or commercial secrets, mismanagement, granting of preferences to certain creditors, appropriation of seized property, economic espionage, and the failure to comply with accounting regulations. 

Criminal (and administrative) liability for insider trading and price manipulation is governed by the Stock Exchange Act. 

A study of the University of St. Gallen (HSG) has shown that in Switzerland every year around 1500 directors are sued in court due to violation of their duties. The majority of the liability actions refer to (civil) liability of directors for failing to promptly notify the courts of the company’s over-indebtedness and for unpaid social security contributions in order to overcome liquidity shortage. 

Generally, directors cannot limit their responsibility by agreement or in the articles of association beyond the general possibility to limit the board’s liability by delegating certain duties, if admissible (cf. question 7 “How does the board operate in practice?” above). The responsibility of the directors for properly delegated tasks is limited to using due care in selecting, instructing and supervising the delegated persons. 

The director’s liability to the company is also excluded if the shareholders have granted them a full and unqualified discharge (“Entlastung”). Such discharge, however, is only valid with regard to: (i) facts that have been duly disclosed to the shareholders; and (ii) claims of the company and of those shareholders who have consented to the discharge resolution. Shareholders who have not consented to given resolutions have 6 months to file their claim. 

Further, the company may take out directors’ and officers’ liability insurance cover (“D&O”) in favour of the directors which de facto also “limits” the directors’ liability.