Shareholders may often find themselves in a challenging situation where they want to remove another shareholder. The reasons for doing so may vary, including situations where the shareholder is not actively participating in the company's operations, abusing their rights or when personal conflicts arise between the co-shareholders.
In this article, we explore different legal options that can be considered when tackling this challenge. However, it is important to note that every option has its drawbacks, and there is always a chance of legal disputes arising between parties. As such, it is essential to evaluate all possibilities carefully and make informed decisions that weigh all interests and risks.
If possible, the first recommendation is to remove the unwanted shareholder from the board of directors and terminate any applicable employment contracts. This can help reduce their influence on the business. From there, there are the following options to think about:
Purchase of the Shares (Buy-Out) or Sale of the Business (Asset Deal)
Voluntary Buy-Out
A voluntary buy-out is a process that requires the consent of both parties, not only on the sale itself but also on the purchase price. However, if the parties have not agreed on a fixed valuation or valuation method to be used during the buy-out, it can become challenging to reach an agreement on the price. Emotions may run high, making negotiations difficult.
Nevertheless, if both parties can come to an agreement, a voluntary buy-out is the most amicable way to part ways.
Forced Buy-Out
In the case where a shareholders' agreement is in place, it's common for the agreement to include purchase options. Therefore, before exploring other options, it's crucial to review the shareholders' agreement to determine whether there are any options available to force a shareholder to sell their shares. A forced buy-out based on a contractual agreement is a viable option for removing an unwanted shareholder, but it's essential that the shareholders' agreement is well-drafted and includes a valuation clause.
It's important to note that a forced buy-out can be challenged and subject to court review.
Transfer of the Business (Asset Deal)
One option to consider is selling the business assets to another company not affiliated with the unwanted shareholder. The board of directors is usually responsible for such actions, which may involve transferring the assets to a newly formed entity or a subsidiary whose shares can then be sold to certain shareholders. However, if the sale of assets results in a complete liquidation and the company becomes essentially inactive, the shareholders must approve the decision to sell to protect the directors from personal liability.
It is crucial to ensure that the price of the assets is reasonable and based on market value. An independent valuation report is recommended to establish the price. Additionally, when transferring assets, it is important to transfer all relevant employment relationships and obtain the approval of all contractual partners.
Before proceeding with a sale of assets, one should also carefully consider tax implications and potential reputational damage.
Company Liquidation and Incorporation of a New Company
Another option is to dissolve the "old" company and form a new one without the unwanted shareholder. However, dissolving a Swiss stock corporation requires approval from at least two-thirds of the share votes represented and an absolute majority of the share values represented at the AGM. If the quorum is not reached, shareholders representing at least 10% of the share capital may petition a court to dissolve the company based on important reasons.
If the decision to liquidate is made, the assets cannot be distributed until three months after the last debt call if the company works with an auditor. If not, the distribution may take place after 12 months. The release of all hidden reserves as a liquidation dividend will result in significant income tax for the shareholders.
It is important to note that liquidation may cause significant damage to the company's reputation and may not be suitable for resuming operations.
Merger or Demergers
Squeeze-Out Merger (90% Shareholder Approval Required)
Swiss merger laws provide the option of a squeeze-out merger in which one or more shareholders who control at least 90% of the voting rights can decide to merge with another company and squeeze-out and compensate the remaining shareholders. The merger agreement is reached between the board of directors of both companies, and it stipulates that shareholders of the transferring company receive only a cash compensation and no shares in the acquiring company. The compensation should correspond to the actual value of the shares and be audited by an independent auditor. The shareholders' meeting of both companies must approve the merger, which requires at least 90% of all share votes.
Once the merger is approved, the shareholders of the transferring company only receive a cash payment and lose their voting rights in the acquiring company. If the compensation is inadequate, each shareholder can seek a judicial determination of the payment through a court review. However, a squeeze-out merger requires meticulous planning and there are several risks associated with it. Violations of Swiss merger laws can result in successful challenges to the merger resolution. Moreover, in case of breach of duty, the board of directors and the auditor may be held liable for the resulting damage.
Asymmetric Demerger
Swiss merger laws also allow for the splitting of companies into two or more companies while adjusting the shareholdings, which is known as asymmetric demerger. The company's assets are generally divided into two companies owned by two competing shareholder groups, with shareholdings in the two new companies not necessarily being identical to the holdings before the split.
For a successful asymmetric demerger, at least 90% of the share votes must pass a resolution. The procedure for asymmetric demerger is similar to that of a merger, and the value of the parts of the business to be split off, as well as all other relevant circumstances, must be considered in the exchange ratio.
Increase or decrease of the Share Capital
Capital Increase
A capital increase may not necessarily lead to the removal of a shareholder, but it can be utilized to dilute the shares of a non-participating shareholder. For an ordinary capital increase with cash contributions, a simple majority of the share votes represented at the general meeting is required. Each shareholder generally holds a subscription right to new shares, which can only be suspended by the shareholders' meeting for significant reasons such as the acquisition of companies or participation of employees. It is essential to carefully evaluate the circumstances before suspending the subscription right.
In cases where some shareholders are aware that another shareholder cannot participate in a capital increase, a capital increase can be used as an effective method to reduce the shareholder's influence.
Capital Cut (Capital Reduction and immediate Capital Increase)
In the event that a company requires financial restructuring, the shareholders' meeting may resolve to reduce the share capital to zero, followed by a subsequent increase in the capital, resulting in the extinguishment of the shareholders' previous shares due to the reduction. Upon the subsequent increase, existing shareholders are granted an irrevocable subscription right, which is pro rata. If a shareholder is no longer able or willing to invest in the company, they forfeit their shareholder position as a result of the decrease and subsequent increase.
The capital decrease and subsequent increase generally require an absolute majority of the votes represented at the general meeting, unless the articles specify otherwise or the capital increase requires a higher quorum. It is worth noting that shareholders may partially exercise their subscription right to maintain their position in the company, such as by subscribing to only one share.
The use of a capital decrease and subsequent increase is a feasible solution to eliminate a shareholder, but only if the company necessitates restructuring.
Court Proceedings
Under Swiss law on stock corporations, shareholders do generally not have the right to request that a court exclude another shareholder from a company, unlike in the case of a GmbH. However, if the conflict with a shareholder leads to the company's inability to function, an organizational defect may arise, and any shareholder may apply to the court for necessary measures to be taken.
Organizational deficiency proceedings, such as a court-ordered auction of shares among shareholders, can be carried out in such cases. It should be noted that the court is not bound by the parties' requests, and the measures that a court may take to address organizational deficiencies are up to the court.
Nevertheless, court proceedings can be considered as an option when other remedies are unavailable, and the company is no longer able to function.
Are the shares of your company only partially paid-in?
If the shares of a company are only partially paid-in, the board of directors may establish a deadline for the shareholders to subsequently pay their full contributions. If a shareholder fails to make the payment despite being requested to do so, the board may grant a grace period. If the shareholder still does not pay within the grace period, the board of directors has the authority to declare the shareholder deprived of their rights from the share subscription and to issue new shares for this purpose. This option is however only available if the shares are only partially paid in.
Swiss company law generally provides robust protection for a shareholder's position, and disposing of a shareholder is a challenging task. If parties can reach an agreement, a voluntary sale of shares is ideal. If no agreement can be reached, the options described above should be evaluated with caution.
Disclaimer: The information contained in this article is for general information purposes and does not constitute legal or tax advice. In specific individual cases, the present content cannot replace individual advice from expert persons.
