What do I need to know as the member of a Swiss board of directors in times of the coronavirus?
The spread of the coronavirus (SARS-CoV-2) is causing turnovers to crash and is plunging the Swiss economy into an unprecedented crisis. If the board of directors fails to respond to this crisis, its members risk becoming liable.
Here you will find the answers to the six most important questions regarding a Swiss board member's duties in the wake of the corona crisis:
Under Swiss law, are board of directors' duties of care and loyalty changing in the corona crisis?
No, but the board of directors must show leadership.
Under Swiss law, the board of directors can delegate the management of the company. However, certain non-transferable and inalienable duties always remain with the board of directors, in particular, the strategic and financial overall management of the company. The board of directors performs its duties in a standard leadership cycle by planning the strategy and giving management the necessary directives, by monitoring and controlling the management and, if necessary, intervening and adjusting the organisation and strategy. Under normal circumstances, meetings held at regular intervals (for instance, four times per year) are sufficient to properly perform these duties.
For a vast majority of companies, the corona crisis is trashing all planning. In industries subject to the mandatory shut down (such as in the retail sector, the travel industry or the catering industry) business collapsed. Even in industries without shut downs, loss of customer orders or interruption of supply chains slow business massively. It is very much an open question as to how long the corona crisis will continue and what lasting impact it will have on businesses.
In view of this and the upcoming challenges, the board of directors must radically adapt its leadership cycle. They must get information more frequently and board meetings must be held on an impromptu basis and be followed up by meetings at shorter intervals. All members of the board of directors must be available at short notice. The board's chairperson should initiate this acceleration of the leadership cycle. However, if the chairperson fails to act, each member of the board of directors is well advised to be proactive and request the chairperson to provide all available information and to promptly convene a meeting.
On which issues should a Swiss company's board of directors focus during the coronavirus situation?
The company's liquidity should be the primary focus.
In the corona crisis, most companies are suffering a slump in turnover while costs remain. In view of the massive cash drain, many companies will be on the verge of insolvency within a short time unless countermeasures are taken. Thus, the board of directors must regularly review the management's liquidity planning and evaluate and deliberate whether the measures taken to control the cash drain are appropriate.
The most effective measures are often reduced working hours and emergency loans. You can find detailed information on the possible measures in our blog posts:
- Reduced working hours
- Mass dismissals
- Contract adjustments in general (only German)
- COVID-19 emergency loans and bridging loans
- How to maintain existing of financing
- Rent reductions (only German)
- Tax relief (only German)
The board of directors should carefully examine all possible measures and ensure that those selected are promptly implemented. If the management seems overstrained or is not up to the task, the board must take action itself, for instance, by having the chairperson or another board member assume an active role in the management.
How can corporate resolutions be taken despite the Swiss Federal COVID-19 ban on meetings?
Shareholders' meetings can be held in writing, electronically or by proxy, and meetings of the board of directors can be held virtually.
Under Swiss law, shareholders' meetings can only be held as physical meetings (i.e. no virtual meetings are allowed) and must take place within six months of the end of the financial year (i.e. for most of the companies before the end of June 2020). Given the Swiss Federal COVID 19 blanket ban on meetings, the Swiss government is temporarily allowing shareholders' meetings to be held without the shareholders being physically present.
For listed companies or companies with a large shareholder base, voting through the independent proxy seems the method of choice. But, the Federal emergency ordinance also permits electronic resolutions or resolutions in writing. Thus, companies with a smaller shareholders base could hold their shareholder meetings as a video conference or by voting through prior written declarations to the meeting's chairperson (in addition to voting by proxy, which is always possible). Notwithstanding these relaxations of the rules, the board must adhere to the invitation deadline and must inform shareholders at least four days prior to the shareholders' meeting on how they can cast their votes.
Likewise, according to the Federal Health Office's recommendations, boards of directors should not meet in person. Unless the articles of association or the organisational rules expressly provide otherwise, there is no problem with holding these meetings as video or telephone conferences.
Despite the constraints, it remains pivotal to hold formally correct board meetings. This is even more important during a crisis. An informal exchange of information between the board members does not meet the requirements. Rather, minutes must be taken painstakingly, and the discussions must be recorded comprehensibly. Circular resolutions are not suitable for difficult and delicate decisions in the wake of the coronavirus crisis.
What needs to be considered under Swiss law regarding overindebtedness and restructuring measures?
In the event of an imminent overindebtedness, the board of directors must act immediately.
A company is overindebted if the company's assets, neither as a going concern or at liquidation values, cover the company's liabilities. If there is a threat of overindebtedness, the board must have an audited interim balance shee prepared. If this shows that the company is in fact overindebted, the board of directors must file for bankruptcy or take restructuring measures.
So far, the corona crisis has mainly resulted in liquidity problems for Swiss companies, though, it is likely that balance sheet problems and overindebtedness will follow, triggering the board of directors' obligation to take restructuring measures.
In such cases, the board of directors has to act nimbly and vigorously. Various options have to be examined in short time, negotiations have to be conducted with a multitude of parties and the solution selected has to be implemented quickly. This will be a tremendously challenging and stressful time for the board of directors. In order to mitigate this, depending on the financial situation of the company, it is advisable to evaluate possible scenarios and restructuring measures as part of a contingency plan well in advance.
In view of the corona crisis, is it advisable under Swiss law to resign from the board of directors?
Preferably not.
In the vast majority of Swiss directors and officers' liability cases, it was not bad decision-making, but the failure to act that triggered the board members' liability. Thus, a board member should not resign, but become active, gather information, act and lead. In any event, board members would remain liable for acts or omissions prior to their resignation from the board. Further, a resignation in times of crisis, when each board member is needed, would be highly disloyal to the fellow board members.
What are the possible consequences of a breach of directors' duties under Swiss law?
The members of the board of directors could become liable for damages in the event of a breach of their duties.
The board members and all persons involved in the company's management are liable for any loss or damage arising from any intentional or negligent breach of their duties. Breaches of certain directors' duties could even result in criminal prosecution.
In particular, the board of directors may be held liable if it fails to make decisions, shows a lack of commitment or in case of conflicts of interest. Even if a decision of the board subsequently proves to be wrong, if such decision has been taken as part of a proper decision-making process, based on adequate information and such decision seemed reasonable at the time, a Swiss court will not hold the board liable for breach of directors' duties.
Recommendation
In the wake of the corona crisis, a Swiss company's board of directors will have to take a series of delicate decisions. In doing so, the board of directors is well advised to adopt an active approach. If you have any questions on this topic, your trusted contacts at VISCHER and the VISCHER Corporate and Commercial team will be happy to assist.
Authors: Benedict F. Christ, Flavio Langenegger
