Key Message: An accident, a serious illness or a stroke – the sudden incapacity to act of an entrepreneur or founder can shake even established companies. Sole proprietorships, “single-shareholder companies” and start-ups, as well as small and medium-sized enterprises (SME), are particularly affected. Often, there is a lack of timely provision to ensure the continuation of operations, maintain customer relationships and guarantee financial stability.
In this article you will find out what the risks are, what action you should take and how planning will not only protect your company but also build trust with customers and partners.
A clear checklist with the most critical aspects every entrepreneur should consider ensuring company continuity can be ordered via email with the subject line "Company Incapacity Checklist."
1. The risk of sudden incapacity to act as an entrepreneur: What is at stake?
The Swiss business landscape is characterized by micro and small enterprises. There are more than 608,000 of them in Switzerland, compared with just over 10,000 medium-sized and large companies (Statistics on the Business Structure STATENT, as at 22.08.2024). A large proportion of these micro and small enterprises are run as sole proprietorships, companies limited by shares (AG) or limited liability companies (GmbH) – with one peculiarity: often a single person combines the roles of owner and manager in a personal capacity combining ownership and management. This person is also the only person legally authorized to represent the company. Often there is also a lack of statutory representation.
While this management structure allows for short decision paths, high flexibility and full control by the owner, it also carries an enormous risk. If the owner loses the ability to make sound decisions due to an accident, a serious illness or a stroke, this not only has a serious impact on the private, personal level and on the family. The company also becomes immediately incapacitated – often bringing (almost) all operations to a standstill from one day to the next, and within a few days/weeks causing major problems with even the simplest business transactions (e-banking orders, issuing quotations, etc.). If the owner and manager is unable to work, who will take over? Who has access to the accounts and ensures that wages are paid on time? Who signs contracts?
In addition to the operational blockade, there is also a corporate problem: the company suffers from an organizational deficiency. The law (Swiss Code of Obligations) requires at least one member of the board of directors who is authorized to represent the company, but the entrepreneur is currently the only member of the board and is unable to attend. Not only can the board of directors no longer act because the entrepreneur is also the sole shareholder, but general meetings can no longer be held, and the board of directors can no longer be reappointed. Voting rights can no longer be exercised at the general meeting.
Important: These risks also apply to companies where representation is limited to two persons with joint signing authority. If one of these persons is no longer available, the company will also be unable to act.
2. Without a proactive solution: the legal "solution" is slow and uncertain
There is a high risk that the adult protection authority (APA, KESB) will intervene if an incapacitated entrepreneur is no longer able to manage his or her own affairs. This is because, even if the entrepreneur is married, the spouse can only manage the entrepreneur's assets on a day-to-day basis. This does not include the management of a company. The APA then usually sets up a deputyship (Beistandschaft), which takes some time. Usually people are appointed as deputies (Beistand) who do not have the necessary business knowledge, entrepreneurial expertise and skills to manage a company, as the interests of the company are not at the forefront. In addition, the deputy must obtain the APA's approval for major transactions, such as the sale of the company or its assets. A potential buyer of the company would not have the patience; the process is too uncertain and takes too long. The legal solution is therefore slow and hinders the company's survival. In addition to the APA, the commercial register also takes action to remedy organizational inadequacy. The company has been given a deadline to remedy the inadequacy. If there are no authorized representatives, the matter is ultimately referred to a court. The liquidation of the company is then the final step.
Furthermore, the exercise of the mandate as a director in the company is personal. This means that neither a spouse nor an deputy may exercise this mandate on behalf of a director.
Appropriate and simple precautions can be taken in good time. Various instruments at the personal, corporate and operational levels ensure that the company is able to act.
3. Possible solutions at the personal level of the entrepreneur
a. Advance care directive
With an advance care directive (Vorsorgeauftrag), an entrepreneur can authorize one or more natural or legal persons to take care of his or her personal and financial affairs and to represent him or her in legal matters in the event of his or her incapacity. By granting an advance care directive, the entrepreneur is free to decide who will take care of his or her affairs. In doing so, the entrepreneur should precisely describe the individual tasks he entrusts to certain persons and also regulate their powers. This means that the entrepreneur can, for example, authorize his wife in the advance care directive to safeguard his membership and property rights as a shareholder. He can also give specific instructions, e.g. who should or should not be elected to the board of directors in his place.
The advance care directive is only valid if it is drawn up in the correct form. Either the advance care directive is written entirely by hand and signed by the entrepreneur (i.e. like a will), or it is notarized. If the entrepreneur loses capacity, the APA must check the advance care directive and then validate it.
b. Power of attorney
The advance care directive can also be combined by a power of attorney (so-called ageny, Stellvertretung) in favor of a trusted person. However, the power of attorney must be issued in such a way that it applies "beyond the onset of incapacity". It is recommended that the power of attorney be attached to the advance care directive, especially as there may be some uncertainty during the validation process of the advance care directive by the APA. As a rule, the same persons are appointed as representatives by both the power of attorney and the advance care will. It is important that the two instruments are coordinated, otherwise there is a risk of additional conflicts and risks.
The entrepreneur may grant the power of attorney to a person who is to represent him or her permanently at the general meeting. In doing so, the entrepreneur should expressly grant the following powers to the person appointed to represent him:
• Vote on the (re)appointment of the board of directors;
• Right to submit proposals and motions;
• Convening the general meeting (if the entrepreneur is the sole shareholder), as a general meeting can be held as a result.
In addition, the entrepreneur can give instructions to the person appointed as agent in the power of attorney regarding the exercise of the voting right and thus which person is to be elected as a member of the board of directors.
The power of attorney may also be in the form of a general power of attorney (Generalvollmacht). In any case, the agent should be expressly authorized to carry out transactions with special, far-reaching consequences. Such transactions include, for example, property transactions, litigation or borrowing.
However, care should be taken with the power of attorney. If the power of attorney is issued in such a way that it only takes effect when the entrepreneur becomes incapacitated, recent legal opinions require that the power of attorney comply with the formal requirements of the advance care directive. Such a power of attorney would therefore also have to be written entirely by hand. The situation is different if the power of attorney is drafted in such a way that it is already valid when the entrepreneur is still capable of acting and is to continue to apply when he becomes incapable of acting (so-called survival clause). In this case, the power of attorney can even be made free of formal requirements. However, written form is essential – if only for reasons of proof.
It should always be borne in mind that banks often only accept their own forms for granting power of attorney. This should be clarified and considered before granting power of attorney for banking transactions.
4. Possible solutions at the corporate level
a. Organisational structure
The owner and sole shareholder of the company can appoint other persons to the board of directors. This automatically increases the number of persons legally authorized to represent the company. The new members of the board of directors can be granted joint signatory powers in order to provide a certain degree of control. However, in order for the joint signatory powers to be effective externally, i.e. vis-à-vis third parties, they must be entered in the commercial register.
If an entrepreneur and sole shareholder has issued a power of attorney to represent him at the company's general meeting, the representative can hold a general meeting and elect one or more persons to the board of directors if the entrepreneur is incapacitated. In this way, the organizational inadequacy can be remedied quickly and in the interests of the entrepreneur.
b. Signatory powers: statutory representation
By granting powers of attorney, the day-to-day business and thus the operational level of the company can be secured. For example, a power of attorney can be granted.
The power of attorney is registered in the commercial register and goes further than other legal powers of attorney. A registered attorney (Prokurist) is specifically authorized to carry out all legal acts on behalf of the company that are necessary for the purpose of the trade or business. The registered attorney may also be granted a collective registered power of attorney (Kollektiv-Prokura). The necessary entry of the registered power of attorney in the commercial register creates trust with the company's contractual partners or other third parties, which can be crucial in situations where the entrepreneur cannot act himself. In the (internal) relationship between the entrepreneur and the registered attorney, the registered power of attorney can be restricted, but these restrictions do not apply externally. This is determined by the entry in the commercial register.
The entrepreneur may also grant other forms of commercial agency (Handlungsvollmachten) provided for by law. However, these power of attorneys may only carry out those legal acts within the scope of the power of attorney that are usually carried out by the company.
Want to know more about representing your company to third parties? Read our blog post about representing your company to third parties [Link auf Ivanas Blogbeitrag v. 5.2.25].
5. Systematic preparation: Where will your relatives and business partners find the documents they need in an emergency?
As soon as individuals are considered for representation (by proxy) or for election as members of a board, their availability and willingness should be clarified. These individuals should be ready and willing to accept any mandates if appointed. Their long-term intentions and integrity should also be considered.
Access to relevant documents and information is often overlooked in personal and social arrangements. The best provisions are of no use if the documents cannot be found or are kept in a bank safe deposit box to which only the (now incapacitated) entrepreneur has access. An emergency folder can also be used to take precautions at this practical level.
For example, an emergency folder can be used to store relevant documents and information or to list the custodian. Legally relevant documents, such as a power of attorney to vote at a general meeting or an advance care directive, can be kept with a lawyer or a fiduciary (Treuhänder). The depositary will then ensure that only the authorized and appointed persons receive the relevant documents.
As soon as the nominated persons take up their management role, they should also be given access to the following information as soon as possible: banking access (e.g. e-banking), business plan, organization chart, insurance policies, statement of assets and liabilities, contact details of key suppliers and subcontractors and other partners, and IT back-up. Finally, access to the company's IT infrastructure should be secured in advance and key people in the company should also be informed of the contingency plan.
Last but not least, it is important to review the plan regularly and adapt it to new circumstances. If necessary, new powers of attorney should be granted and old ones revoked.
6. Conclusion: prevention is a management issue
Sudden incapacity can affect many companies. With clear provisions and well-thought-out contingency plans, the company can continue to be managed even in crisis situations.
Comprehensive corporate provision should also be made for the risk of death. In this respect, comprehensive estate planning is essential for an entrepreneur, since – in addition to corporate law issues – other questions arise in the context of family and inheritance law.
