(Dismissal) election of the Board of Directors: avoidance by not convening the Annual General Meeting?
The election of the Board of Directors is one of the inalienable powers of the General Meeting of a public limited company. The term of office of the Board of Directors is governed by Art. 710 of the Swiss Code of Obligations. For listed companies, it ends at the latest with the conclusion of the next Annual General Meeting and for other companies generally after three years, subject to amendments to the Articles of Association, but at the latest after six years. Re-election of the Board of Directors is possible in all companies.
What happens if the Board of Directors does not convene a General Meeting, or if the election of the Board of Directors does not take place at such a meeting because it is forgotten, for example?
And how long can a Board of Directors wait before convening an Extraordinary General Meeting to dismiss the Board of Directors and elect a new one?
The Federal Supreme Court and the Commercial Court of Zurich have dealt with these issues in the decisions BGE 148 III 69 and HE220074.
BGE 148 III 69
Prehistory
In the specific case, the respondent, a stock corporation and the majority shareholder of the appellant, demanded that the board of directors of the latter convene an ordinary general meeting. At that time, the last ordinary general meeting had already been held two years previously. However, no invitation to a general meeting had been issued.
In the specific case, the Articles of Association of the complainant stipulated that the term of office of the members of the Board of Directors was one year and ended on the day of and at the end of the next Annual General Meeting.
The respondent appealed to the Zurich Commercial Court and essentially requested the appointment of a (temporary) administrator for the purpose of holding an extraordinary general meeting. Among other things, a board of directors and an auditor were to be appointed at this general meeting and subsequently entered in the commercial register.
In its ruling dated August 13, 2021 (HE210084), the Commercial Court determined that the members of the Board of Directors were last confirmed on April 16, 2019 for the statutory term of office until December 31, 2019. Accordingly, the Board of Directors' mandate ended on 30 June 2020, taking into account Art. 699 para. 2 CO (according to which the Annual General Meeting is held annually within six months of the end of the financial year) and the Articles of Association. Since then, the appellant no longer had a properly constituted Board of Directors and suffered from an organizational deficiency. The lower court subsequently took the necessary measures based on Art. 731b para. 1 CO to remedy the organizational deficiency.
Specifically, the Commercial Court appointed a trustee for the complainant and instructed him, among other things, to duly convene a general meeting and, in particular, to put the election of the Board of Directors and the auditors on the agenda. The appellant lodged an appeal against this in civil matters with the Federal Supreme Court and demanded that the commercial court's ruling be set aside.
Reasoning
As already explained at the beginning, the General Meeting of Shareholders elects, among other things, the Board of Directors (Art. 698 para. 2 no. 2 CO), whereby this is a non-transferable and irrevocable power. In accordance with Art. 699 para. 2 CO, an ordinary General Meeting of Shareholders is held annually within six months of the end of the financial year; extraordinary meetings are convened as required.
The complainant took the position that the term of office of the members of the Board of Directors did not end automatically six months after the end of the financial year, but was tacitly extended (i.e. without a specific agreement), which meant that there was no organizational deficiency. It thus followed the part of Swiss doctrine that assumes such a tacit extension (see instead of many: Müller / Lipp / Plüss, Der Verwaltungsrat, 5th ed. 2021, para. 1.233 et seq., Tanner, Zürcher Kommentar, 3rd ed. 2018, n. 11 on Art. 705 CO).
Another part of the doctrine assumes that the Board of Directors mandate ends with the expiry of the six-month period pursuant to Art. 699 para. 2 CO and that a tacit extension is excluded. Only an active (re-)election or a positive expression of will by the general meeting could justify a valid continuation (instead of many: Bohrer / Kummer, Zürcher Kommentar, 3rd ed. 2018, N. 30 on Art. 731b CO).
Case law
The Federal Supreme Court followed the latter doctrine, which excludes the continuation or tacit extension of the Board of Directors' mandate in the event of a failure to hold a General Meeting or to elect a Board of Directors.
Following the principle of BGE 140 III 349, in which it was decided that the Board of Directors mandate ends if the re-election does not take place due to a stalemate, the Federal Supreme Court decided in BGE 148 III 69 that an explicit expression of will by the General Meeting is necessary with regard to the election of the Board of Directors.
The Federal Supreme Court stated that the General Meeting's irrevocable authority to appoint the Board of Directors would be undermined if the Board of Directors could extend its mandate by not convening the General Meeting. Unlike the appellant, the Federal Supreme Court was of the opinion that the impending loss of the Board of Directors' ability to act was not an argument for extending the term of office, as the Board of Directors can convene the General Meeting itself and thus influence its ability to act.
The Federal Supreme Court also did not consider the protection of the good faith of third parties in the commercial register entry to be jeopardized by this. In principle, third parties may rely on the commercial register entry unless they are positively aware that the term of office of the registered members has ended (Art. 936b para. 3 CO).
In addition, the Federal Supreme Court held that this also protects the company, shareholders and company creditors, because the liability under Art. 754 CO also continues to apply to board members acting as de facto bodies (see BGE 146 III 37 E. 6.1; BGE 128 III 29 E. 3a).
HE220074
Prehistory
In this case, the petitioners, majority shareholders of the respondent, demanded that the sole Board of Directors of the respondent convene an Extraordinary General Meeting with the agenda item "Dismissal and election of the Board of Directors" within a period of 23 days.
Just under a month later, the Board of Directors of the respondent made the following statement:"An AGM will be convened as soon as possible, but I will set the date at a suitable time", whereupon the petitioners requested the Commercial Court to convene an extraordinary general meeting.
In its statement, the Board of Directors of the respondent justified its actions with a vacation absence, which it failed to substantiate. He also claimed that he wanted to deal with other agenda items at the Extraordinary General Meeting and therefore needed more time to prepare.
Reasoning
Even during a current term of office or during a current financial year, the General Meeting has the option of dismissing elected members of the Board of Directors (Art. 705 CO). To do so, the Board of Directors must convene a General Meeting and expressly list the dismissal as such in the invitation as an agenda item (Art. 700 para. 3 CO; the reference to "elections" in the invitation is not sufficient according to the prevailing practice).
Pursuant to Art. 699 para. 4 CO, the court must order the convening of a General Meeting at the request of the applicant if the Board of Directors does not comply with this request within a reasonable period of time. The court does not subject the request to convene a meeting and place it on the agenda to any substantive examination, but merely checks whether the formal requirements of Art. 699 para. 4 CO have been met.
In this case, the formal requirements were met and the court ordered the respondent to convene an extraordinary general meeting within 10 days of the judgment becoming final.
In its reasoning, it stated that if the requirements for convening an Extraordinary General Meeting are met, this should not be delayed. The court considered a notice period of 23 days to be reasonable.
Conclusion
A tacit extension of the Board of Directors mandate is excluded. In accordance with the case law of the Federal Supreme Court, the term of office of members of the Board of Directors ends when
the (legal/statutory) term of office has expired and
no ordinary Annual General Meeting was convened within six months of the end of the financial year (pursuant to Art. 699 para. 2 of the Swiss Code of Obligations) at which a decision could have been taken on the re-election / new election.
The Board of Directors' mandate can also be terminated beforehand at an Extraordinary General Meeting. If such a meeting is requested and the requirements are met, it must be convened promptly, even if other issues are pending.
In practice, this means that the Board of Directors must give appropriate weight to the Annual General Meeting, convene it with the appropriate priority and care and should not delay or prevent the election or removal of the Board of Directors.
Balthasar Wicki will be happy to answer any questions you may have regarding the appointment of members of the Board of Directors.