The members of the board of directors are elected for a term of three years, unless the articles of association stipulate a different term of between one and six years. This is provided for in the Swiss Code of Obligations, which also allows for re-election (Art. 710 CO).
In practice, it may happen that the re-election or by-election of the members of the board of directors is forgotten, especially if the term of office exceeds one year and therefore a re-election or by-election does not have to be carried out at every annual general meeting. Even if the term of office of the various members of the board of directors does not end at the same time as a result of a staggered election, a re-election or a by-election can quickly be forgotten. In rare cases, the re-election or by-election is deliberately not put on the agenda, e.g. if the shareholders are at odds.
In such cases, the question arose as to whether a tacit extension of the term of office can or must be assumed. This issue was disputed in the doctrine.
Organizational defect
The Swiss Federal Supreme Court has now ruled for the first time that there is no tacit extension of the term of office of members of the board of directors (BGE 148 III 69). Rather, the term of office of the board member ends with the expiry of the sixth month after the end of the relevant business year if no annual general meeting of shareholders has been held or if the election of the board of directors has (intentionally or unintentionally) not been put on the agenda. This is because the Swiss Code of Obligations stipulates that the ordinary general meeting of shareholders must take place annually within six months after the end of the business year (Art. 699 para. 2 CO). In addition, according to the Federal Supreme Court, the shareholders' right to vote would otherwise be impaired (Art. 698 para. 2 item 2 CO).
It is true that the last elected members of the board of directors, who continue to serve despite not being re-elected, qualify as de facto directors and are thus still subject to directors' liability according to the Swiss Federal Supreme Court (Art. 754 CO). In principle, third parties may also rely on the entry in the commercial register, unless they are positively aware that the term of office of the registered board members has ended.
Instead of a tacit extension of the term of office, however, according to the Federal Supreme Court there is in principle an organizational defect after the expiry of the term. This must be remedied by making up for the missed election.
In a more recent decision (4A_387/2023, 4A_429/2023), the Federal Supreme Court has now ruled that members of the board of directors that were not re-elected in time are no longer authorized to convene a general meeting, not even if the only business would be to deal with the election of the relevant board members. All resolutions passed by general meetings which were convened by a member of the board of directors that was not re-elected on time are not merely contestable, but null and void. The nullity of such resolutions of the general meeting can be asserted at any time by anyone who has a credible legal interest.
At the same time, the Federal Supreme Court has stated that, unlike the term of office of members of the board of directors, the term of office of the auditors only ends with the approval of the last annual financial statements of their term of office (Art. 730a para. 1 CO).
This case law has far-reaching consequences, particularly for SMEs, where the re-election of the members of the board of directors is often forgotten or at least not carried out within six months of the end of the relevant financial year.
Recommendations
To avoid the harsh consequences that may result from the Federal Supreme Court's case law, there are a number of recommendations.
- It should always be ensured that no election of the board of directors and the auditors is forgotten, but is carried out at the latest by the end of six months after the end of the business year (if a term of office actually ends). Particularly in group relationships, care must be taken to ensure that this deadline is met not only at the parent company level but also in the subsidiaries. It has not been clarified whether it is sufficient if at least the convocation to the relevant general meeting is issued within the aforementioned period.
- If the annual general meeting cannot be held in time because the annual financial statements and, if applicable, the auditor's report are not yet available, it may be advisable to hold an extraordinary general meeting to elect the board of directors, especially if important board resolutions are pending.
- If an election of the board of directors is not held or not
held on time, the election must be held as soon as possible.
However, as shown, it is not possible for a member of the board of
directors who has not been re-elected on time to convene such a
general meeting. Instead, the following alternatives are available:
- The simplest option would be to hold a universal general meeting, i.e. a general meeting with the participation of all shareholders. The invitation formalities can be dispensed with at a universal general meeting, which is why the participation of the board of directors is not required. The resolution of the universal general meeting can also be passed in writing or in electronic form, provided no shareholder requests an oral deliberation. Unanimity is not required for any of these options.
- Since the term of office of the auditors, unlike that of members of the board of directors, only ends with the approval of the last annual financial statements of their term of office, the general meeting of shareholders can also be convened by the auditors, who are even obliged to do so if necessary (Art. 699 para. 1 CO). However, not every company has auditors.
- Alternatively, a shareholder of a non-listed company who holds 10% of the share capital or votes (for listed companies, the threshold is 5%) can file an action with the competent court for the appointment of a custodian to convene a general meeting or request that the court convene the meeting directly (Art. 699 para. 3 and 5 CO).
After the formally correct re-election (or, if applicable, by-election) of the members of the board of directors, any resolutions passed in the meantime at general meetings which were convened by a member of the board of directors who was not re-elected in good time should be repeated due to nullity (resolutions passed at universal meetings do not have to be repeated).
The same applies to resolutions passed by the board of directors in the meantime, which must consequently also be qualified as null and void. However, if at least some of the members of the board of directors were correctly re-elected, the validity of the corresponding resolutions of the board of directors must be analyzed in detail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
