Untraceable shareholders: What is a company to do?

In the age of digitalisation, transparency and the automatic exchange of information internationally, securities' days are numbered. They have to be converted, located, or eliminated.

As of 1 November 2019, bearer shares must be converted into registered shares. Shareholders, on the other hand, must make themselves known to the company in order to ensure that their rights are recognised and in compliance with the new law.

From now on, only registered shares will be issued (with the exception described in section 1.2 below). Many companies' share capital was divided into registered shares long before the new law came into force. These companies are already experiencing the problem of not being able to find all their shareholders. We will therefore analyse what scope of action is available to them.

It is also important to note that this article will only deal with shares in unlisted public limited companies. This is because listed public limited companies have special regulations concerning the issues raised above, which we will not discuss.

1.         Untraceable shareholders?

1.1.      Global Forum and FATF

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) is the main transnational body responsible for ensuring compliance with and uniform application of international standards for exchange of information on request and automatic access to information in tax matters.^[1] The World Forum currently has 162 member countries, including Switzerland.^[2] In order to ensure compliance with international standards, the World Forum conducts periodic country peer reviews. Such a review was conducted in Switzerland and published on 26 July 2016.

This report resulted in the rating of “partly compliant”. The main action to be implemented is the following: “Switzerland must see to it that appropriate mechanisms are established to ensure the identification of bearer unit holders in all circumstances.”[3]

The main task of the Financial Action Task Force on Money Laundering (FATF) is to develop international standards for combating money laundering and terrorist financing and to monitor the effective implementation of those standards through legislative, regulatory and operational measures.^[4] The FATF Act, which came into force on 1 July 2015, aims primarily to increase the transparency of legal entities by introducing notification obligations for shareholders. The objectives of the Global Forum and the FATF are therefore largely the same.

At risk of ending up on the Global Forum’s list of non-cooperative states, known as the “blacklist”, Switzerland implemented these recommendations by adopting the amendment of 21 June 2019 to the Federal Act on the Implementation of the Recommendations of the Global Forum on Transparency and Exchange of Information for Tax Purposes, which came into force on 1 November 2019.

1.2.      New regulations

The introduction of the amendment of 21 June 2019 mainly resulted in the introduction of Art. 622 para. 1bis CO, which provides that bearer shares will only be permitted in future if the company has listed equity securities or if they are issued as intermediated securities. Transitional provisions have also been introduced.

The key deadline resulting from the above changes was 30 April 2021. Indeed, companies limited by shares (Ltd) whose share capital was divided into bearer shares and which did not benefit from one of the exceptions specified in Art. 622 para. 1bis CO had until that date to convert their bearer shares into registered shares.

A transitional legal regime (transit. prov.) specifies a very specific procedure for cases where the shares are not converted by the deadline, as well as shareholders' notification obligation and the consequences of not identifying all shareholders.

On 1 May 2021, bearer shares in companies not covered by Art. 622 para. 1bis CO were automatically converted into registered shares, irrespective of whether the shares were issued as certificates or not. To enable shareholders with bearer shares to retain their membership and property rights, while not freezing the company with unknown shareholders, Art. 7 transit. prov. provides that shareholders must comply with the notification obligation under Art. 697i CO of the previous law, which is retained under the new law only for bearer shares, so that these shareholders can be entered in the share register and thus benefit from all the rights attached to their shares. 

As long as such notification has not been made, the membership rights shall be suspended and the pecuniary rights extinguished (Art. 6 para. 2 trans. prov.). Until 31 October 2024, i.e. 5 years after the Act came into force, shareholders who have not yet contacted the company may have their entitlement recognised by means of a court application. As of 1 November 2024, the shares of shareholders who fail to have their rights recognised by this deadline shall be cancelled by operation of law. The shareholders forfeit their rights and the cancelled shares are replaced by the company's own shares (Art. 8 para. 1 transit. prov.).

Shareholders whose share has been cancelled through no fault of their own have a final opportunity to claim compensation from the company until 31 October 2029 (Art. 8 para. 2 transit. prov.).

1.3       Duties of the board of directors

According to Art. 697m CO, the board of directors must ensure that no shareholder exercises his rights in breach of his notification obligations. From this article, we can presumably infer a duty of loyalty and fidelity on the part of the board of directors, who must do their best to preserve the equal treatment of all shareholders, whether or not they have contacted the company.

The board of directors should, according to the aforementioned provision, be active towards known shareholders who have not contacted the company.

1.4.      Consequences

The procedure is strict and very clear. Above all, it allows the company not to be slowed down in its activities and not to get lost in eternal searches to find its shareholders. Inattentive and inactive shareholders are treated severely. The legislator considered that this consequence was not disproportionate, even though it simply cancels actions within a relatively short period of time.

It is particularly interesting to note that the shares of the untraceable shareholders are finally cancelled by law and replaced by the company's own shares. The law, in this way, expresses a clear desire not to have “phantom shareholders” in nature.

However, a number of issues remain unresolved by the transitional provisions. Cancellations of shares may significantly change the majorities in the general meeting, as well as lead to significant conflicts that could put the company in uncomfortable positions. In particular, the question of the consideration that may be given to a shareholder who comes forward within the 10-year period or even afterwards: Does the company have to take account of all unpaid dividends? Hasn't the company - or the other shareholders - become unjustly enriched in the meantime? The question remains unsettled. 

2.         Untraceable holders of registered shares?

2.1.      Principle

As seen above, the procedure for companies incorporated before 1 November 2019 with bearer shares is regulated. After that date, the founders of a company limited by shares may not provide for bearer shares except in the cases provided for in Art. 622 para. 1bis CO. Therefore, only registered shares will be on the market in the future. However, many companies have already been using registered shares for a long time now.

A registered share, whether ordinary or restricted, is an order instrument, i.e. a negotiable security.[5] It may be transferred by endorsement or by written declaration, unless the articles of association of the company specify otherwise.^[6]

By default, registered shares are not evidenced by a negotiable security or share certificate. The shares exist upon being issued, i.e. upon incorporation of the company, upon an increase in the share capital or upon a share split.^[7]

Registered shares may be incorporated into a security as soon as they are created or issued, later in the life of the company or never. The company's articles of association may even provide for a so-called “suspended printing” clause prohibiting the company from issuing its shares in the form of negotiable securities.^[8] This possibility of a clause in the articles of association arises from the fact that the only right acquired by the holder of a registered share is the issuance of evidence of title and not of a negotiable security.^[9]

2.2.      Shareholder register

Pursuant to Art. 686 para. 4 CO, only a person duly entered in the share register is deemed to be a shareholder vis-à-vis the company.^[10] The company, i.e. the board of directors, is obligated to keep such a register. The registration serves only as a declaration and creates a rebuttable presumption that the registered person is a shareholder.

Registration in the share register does not, however, result in the legal transfer of the registered share.^[11] Indeed, to legitimise his status as a shareholder, the person entered in the share register will have to produce, where the share has been physically issued, the security endorsed in his favour and, where the share has not been physically issued, a written assignment.

The company does not have to worry about share transfer agreements. In fact, as long as the new shareholder is not registered in the share register, the former shareholder may continue to exercise his property and membership rights and remains registered in the share register in accordance with Art. 685c para. 1 CO.

Company law does not provide for any sanctions against a board of directors that fails to maintain its share register in accordance with the applicable legal provisions.^[12] To remedy this shortcoming, the Legislature introduced in Art. 731b para. 3) (which came into force on 1 November 2019) the possibility for a shareholder or a creditor to apply to a court to take the necessary measures in response to this situation. Generally, the court sets a time limit for the company to restore its legal position, the last resort being the dissolution of the company.^[13]

The question also arises as to whether a liability action may be brought against the board of directors for failing to comply with its duty under Art. 686 para. 1 CO.

2.3       Shareholders who are registered but untraceable

A shareholder with a registered share is, in theory, not obligated to notify the company. In practice, however, an unlisted public limited company knows relatively well who its shareholders are.

A situation in which the company cannot find all its shareholders is rare but possible. Multiple inheritances, successive unreported sales or unreported changes of address may result in the company not being able to locate the persons entered in their shareholder register.

As mentioned above, the board of directors is obligated to keep an accurate and up-to-date shareholder register. It will therefore have to take all necessary steps to locate all its shareholders. If all these searches are unsuccessful, the board may decide not to go further or it may decide to cancel the shares of those shareholders who have not been found.

As soon as shares (registered or bearer) are issued, the provisions of the Code of Obligations governing securities apply to them.^[14] According to the case law, this applies particularly to Arts. 971 and 981 CO. Then, according to Art. 971 CO, “A negotiable security that has been lost may be cancelled by the court”. This judicial cancellation of securities is open to all securities and only to them.^[15] As mentioned above, this condition is met for registered shares. 

2.4       Judicial cancellation of securities (Art. 971 CO)

The first condition is the “loss” of the security. This also includes the involuntary destruction of the security or the involuntary divestiture of the holder thereof, with or without the involvement of a third party.^[16] The security is considered destroyed as soon as it could be reassembled from the missing elements. This is because a bona fide third party could acquire the reconstituted security and must therefore be protected by the cancellation procedure. Therefore, the company must prove it has taken all necessary steps to locate all the persons entered in its share register.

The second condition relates to having standing before a tribunal. A person who claims to have a legitimate interest in obtaining a cancellation order from a judge is entitled to bring an action for cancellation.^[17] The company presumably has the right to know who its shareholders are.

Consequently, the company concerned may file an application for the judicial cancellation of issued registered shares that have not been found or are lost. If the court approves the cancellation of these shares, the company must either replace the cancelled shares with new shares, which it may freely dispose of,^[18] or reduce its share capital by the number of cancelled shares through a reduction of the share capital, which requires that a resolution be passed at a general meeting held before a notary.

The cancellation procedure is non-contentious and is addressed, by means of a summons, to the unknown holder of the securities (issued registered shares).

2.7       Consequences

In non-listed companies, the board of directors generally knows the shareholders of the company. However, it is possible, especially for older companies, not to be able to locate all the persons entered in the share register.

It will therefore be up to the company to decide whether or not to act, and unlike the new rules for bearer shares, there is no deadline to meet or even any obligation to act. We have no choice but to regret this. Indeed, it is therefore the company that must be active, i.e. take all necessary steps in order to identify all its shareholders and, where appropriate and without obligation, initiate a judicial cancellation of the share.

In the age of transparency and the automatic exchange of information internationally, it might have been prudent to provide for a simplified cancellation procedure also for registered shares whose holders are untraceable.

Conclusion

We therefore note that, with regard to bearer shares, under the new legislation that came into force on 1 November 2019, the ball is in the bearers' court. They must contact the company to be entered in the share register and to have their rights recognised. Otherwise, within a period of five years, they will forfeit their rights and their shares will be cancelled.

Conversely, for registered shareholders, the ball is in the court of the company, which must seek out its shareholders in order to comply with the legal requirements and to be able, if necessary, to fulfil the conditions of a judicial action for the cancellation of the lost shares. A shareholder who does not take any action retains his rights and the shares can only be cancelled if the company brings an action in court.

This dichotomy may seem surprising in view of the recommendations of the Global Forum and the FATF, especially as regards the transparency and traceability of the shareholding of joint stock companies. Indeed, with regard to shareholders holding untraceable registered shares, there is no time limit or obligation for the board of directors to search for them in order to keep an accurate and up-to-date shareholder register, nor is any sanction envisaged. In the end, the holders of registered shares are much more protected than those of bearer shares, a situation that runs counter to the interests of the company limited by shares.

[1] Patricia Cartier, Vanessa Déglise, Mise en œuvre des recommandations du Forum mondial sur les actions au porteur – réglementation minimale ou Swiss finish ?, Reprax 2/19, p. 39.

[2] https://www.oecd.org/tax/transparency/who-we-are/members/, 04.07.2021 at 11:00.

[3] Switzerland’s Phase 2 Peer Review Report, p. 76.

[4] Patricia Cartier, Vanessa Déglise, Mise en œuvre des recommandations du Forum mondial sur les actions au porteur – réglementation minimale ou Swiss finish ?, Reprax 2/19, p. 40.

[5] SCD 92 III 20, JdT 1966 II 51, c. 3.

[6] Carlo Lombardini, Art. 622 CO Commentaire romand - Code des obligations II, 2^nd ed., 2017, n. 10.

[7] Rita Trigo Trindade, Art. 684 CO, Commentaire romand - Code des obligations II, 2^nd ed., 2017, n. 6a.

[8] Rita Trigo Trindade, Art. 684 CO, no. 8.

[9]                Ibid.

[10] Nicolas Rouiller, Marc Bauen et al., La société anonyme suisse, 2^nd ed., Schulthess Editions romandes, Geneva/Zurich, 2017, p. 96.

[11] Rouiller, Bauen, La société anonyme suisse, p. 97.

[12] Cartier, Déglise, Mise en œuvre des recommandations du Forum mondial sur les actions au porteur – réglementation minimale ou Swiss finish ?, p. 46.

[13]              Ibid.

[14] Carlo Lombardini, Art. 622 CO, no. 22.

[15] François Bohnet, Art. 971 CO, Commentaire romand - Code des obligations II, 2^nd ed., 2017, no. 3.

[16] François Bohnet, Art. 971 CO, no. 7.

[17] François Bohnet, Art. 971 CO, no. 16.

[18] Cartier, Déglise, Mise en œuvre des recommandations du Forum mondial sur les actions au porteur – réglementation minimale ou Swiss finish ?, p. 50.