Start-ups: Considerations on the reference size according to OR 725
When raising funds from investors, we believe that start-ups are well advised to pass a resolution on the allocation of the unblocked part of the premium to be paid into the free reserves at the same time as the capital increase resolution at the general meeting. The reasons for this and up to what amount this is permissible are explained in this article.
"Start-up investors are aware that their investment is being "burned" for development."
Start-ups function differently from regular companies in certain areas. A key difference is the financing of the company by raising equity capital. Capital increases of start-ups are usually structured in such a way that the nominal share capital is increased as little as possible with a high premium. This is done in the awareness of the subscribers that this premium will be "burnt" to build up and develop the business model.
This type of corporate financing has consequences regarding the board of directors' obligations to act in the context of a legal underbalance. After all, the interest of the start-up and the investors is to avoid an underbalance for as long as possible, because as soon as it occurs, money has to be raised again from investors. The longer this process can be delayed, the higher the share price is likely to be in the following round of capital increases. This is at least under the assumption that the start-up's efforts are successful and therefore the value increases over time.
According to Art. 725 para. 1 CO, the board of directors must immediately convene a general meeting and propose restructuring measures if the last annual balance sheet shows that half of the share capital and the legal reserves are no longer covered. In its current version, company law subsumes the general reserve, the reserve for own shares and the revaluation reserve under the term legal reserves. According to the new accounting law, the legal reserves are to be divided into legal capital reserves and legal retained earnings (cf. art. 959a para. 2 item 3 CO). The criterion for allocation is the origin of the respective reserve.
According to Art. 671 para. 2 item 1 CO, the share premium is to be allocated to the general reserve. According to the case law of the Federal Supreme Court, no action by the AGM is required for this, since the legal provision directly allocates the share premium to the general reserves (BGE 140 III 533, E. 6.2.1). As far as the general reserve exceeds half of the share capital, it may be freely used (art. 671 para. 3 e contrario). This part is often called the unblocked part of the general reserve. Accordingly, the paid-in share premium that exceeds half of the share capital may also be distributed.
Against this background, the question arises whether the general reserve as a whole or only the blocked part, i.e. the part that does not exceed 50% of the share capital, is to be added to the share capital for the calculation of the reference value according to Art. 725 para. 1 CO. This question is disputed in the doctrine. Peter Böckli, some commercial registry offices as well as the audit standard 290 of EXPERTsuisse are of the opinion that the entire general reserve has to be taken into account when calculating the reference value. This is because the decision on the use of the unblocked part of the general reserve falls within the competence of the general meeting (Art. 698 CO).
According to this argumentation, we believe that it should be permissible for the AGM to decide at the same time as its resolution on the increase of the share capital that the unblocked part of the paid-in share premium should be allocated to the free reserve. This would prevent this part from being added to the calculation of the reference value according to Art. 725 para. 1 CO. In our opinion, the reasons for the admissibility of this resolution are that, firstly, the order of competences is not violated by this resolution because the AGM decides on the appropriation and not the Board of Directors and, secondly, this solution would probably also correspond to the message according to which the legal reserves are to be used with the amount that was approved by the last AGM in accordance with Art. 698 CO. The fact that the resolution of the AGM in the context of the capital increase is not an approval resolution is irrelevant in our opinion.
Finally, it can be stated that it is often advisable for start-ups to pass another resolution on the allocation of the unblocked share premium to the free reserves at the same time as the AGM resolution on the capital increase. This procedure makes it possible for the start-up to get into the situation of a legal underbalance less quickly and thus increases the chances of a higher valuation in the next financing round.
For individual questions and as direct contact persons, Balthasar Wicki and Sebastian Wälti are at your disposal.