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In its decision BGE 148 III 69, the federal supreme court of Switzerland ruled that a stock corporation can become incapable of acting if it does not convene its annual general meeting in time. In the latest blog post by Lex Futura, you can find out how you can prevent your company from becoming incapable of acting and what you can do if this has already happened.
1. In a nutshell
Reason for the incapacity to act
The members of the board are elected for a limited term of office. According to the decision of the federal supreme court, this mandate cannot be tacitly extended. When the term of the board expires, an annaul general meeting must be convened within six months of the end of the financial year, at which the board is re-elected. Otherwise, the company will become incapable to act.
Consequences of the incapacity to act
The convening of a general meeting is one of the non-transferable tasks of the board. After the expiry of the mandate, the board can therefore no longer validly convene a general meeting and thus has no possibility of remedying the incapacity to act. However, all other resolutions that are reserved for the board according to the law or the articles of association can no longer be passed either. Externally, on the other hand, the company remains capable of acting. The former members of the board act as de facto organs of the company. Therefore, they can continue to conclude valid legal transactions with third parties.
Solutions to the incapacity to act
The simplest solution to the incapacity to act is to convene a universal assembly («Universalversammlung»). All shareholders of the company can jointly convene a general meeting at which they elect a new board. If this is not an option, the auditor of the company may also convene the annual general meeting if necessary. The last resort is for the court to appoint a board at the request of a shareholder. The appointed board can then convene a general meeting.
Preventive measures
To prevent an incapacity to act in the first place, various preventive measures are available. The simplest way of prevention is, of course, to convene the annual general meeting on time. If the annual financial statements or audit report are not completed in time, it is advisable that the board nevertheless convenes a general meeting within six months of the end of the financial year with the sole item on the agenda of extending the mandate of the board. Your company is safest if the board is elected for a term of at least two years, but the election of the board is repeated every year. This means that there is no incapacity to act, even if the general meeting is not convened in time.
2. Convening and holding of the general meeting
By law, the annual general meeting must take place annually within six months of the end of the financial year. This is a regulatory provision («Ordnungsvorschrift»), which means that non-compliance with the deadline has no consequences and, in particular, does not harm the binding nature of the resolutions of the general meeting. The board may therefore also schedule the annual general meeting after the expiry of the deadline, as long as it convenes the annual general meeting and places the election of new members of the board on the agenda within the statutory period. If, on the other hand, the annual general meeting is convened invalidly, i.e. convened by members of the board that are no longer validly mandated, all resolutions passed at this annual general meeting are null and void.
3. Consequences of incapacity to act
Resolutions
If the mandate of the board expires and no new board has been elected within the six-month period, the company will no longer have a board. Resolutions on all topics that are part of the non-transferable and inalienable tasks of the board according to the law can no longer be validly passed thereafter. However, the articles of association may assign further tasks to the Board within the limits of the law. In these areas no decisions can be made during the period of incapacity either.
Actions with third parties
As already explained, the company remains capable of concluding legal transactions with third parties. The actions of the former members of the board continue to be binding for the company, as they act as de facto organs. In addition, the contracting parties may rely on the power of attorney of the members of the board entered in the commercial register, provided that they are not aware of the company's incapacity to act.
Liability of the board
The action for liability («Verantwortlichkeitsklage») can be brought not only against members of the board, but also against all other persons involved in the management. The former members of the board, who continue to act on behalf of the company as de facto organs, are therefore liable to the Company as well as its shareholders and creditors even during the period of incapacity. Therefore, the expiry of the mandate does not create a liability gap. It is important to note that even failure to comply with the six-month deadline for convening a general meeting can be grounds for an action for liability provided the company or its shareholders or creditors suffer damage as a result.
4. Universal Assembly
The owners or representatives of all shares may convene a general meeting without complying with the rules applicable to convening («Universalversammlung»). The convocation is therefore taking place without a corresponding resolution of the board. At this meeting, resolutions can be passed on all matters that fall within the scope of business of the general meeting, i.e. also on the election of the board. This solution for the incapacity to act is only suitable for small companies with few shareholders, as all shares must be represented at the universal meeting without exception.
5. Convening by the auditor
The auditor of the company has the right to convene the annual general meeting "if necessary". It should therefore only use this right in exceptional cases, whereby it is at the discretion of the auditor to determine when this is necessary. If the company becomes incapable to act due to the expiry of the mandate of the board, such an exceptional case is clearly given.
In its judgment 4A_387/2023 of May 2, 2024, the federal supreme court ruled that the mandate of the auditor, unlike that of the board, cannot end with the passage of time. Instead, the mandate only ends with the approval of the last annual financial statements by the general meeting. One problem in connection with this solution for the incapacity to act is that a large proportion of Swiss stock corporations do not have an auditor at all, as the general meeting waived the requirement for an audit (so-called opting-out).
6. Appointment of a board by the court
If the mandate of the board ends due to the expiry of time, the company lacks a mandatory organ, which leads to an organizational defect («Organisationsmangel»). In this case, every shareholder, usufructuary and creditor of the company is entitled to request the court to take the necessary measures to restore the lawful situation. The court can then appoint a new board, which in turn is entitled to convene the general meeting. Usually, the court will appoint the previous board to this position.
7. Our solution: early extension of the mandate
As explained above, the easiest way to prevent the company's incapacity to act is to convene and hold the general meeting on time. In everyday business, however, not everything always goes according to plan. The possibility of convening a general meeting with the sole agenda item to extend the mandate of the board should be avoided if possible. In practice, this is very inconvenient for both the board and the shareholders and involves unnecessary costs. Lex Futura therefore recommends that the board be elected for at least two years, but that the mandate be renewed every year thereafter, or at the latest one year before the end of the mandate. This way you are on the safe side and do not risk your company becoming incapacitated.
