Key Takeaways:
- Under Swiss law, shareholders can temporarily block the entry in the Commercial Register of a company’s decision with which they disagree.
- Since 2021, a change to the rule makes it more difficult to institute such blockage; Swiss companies now have better options to defend themselves against unjustified blockages.
- In-house counsel should consider filing letters to preemptively oppose initiatives that are aimed at blocking commercial register entries.
Introduction
Until the end of 2020, it was possible for anyone to make use of the so-called commercial register blockage pursuant to the Swiss Commercial Register Ordinance (hereinafter "CRO") to prevent an unwanted entry into the commercial register for 10 days, without going to court. This tool was, for example, an effective means for a shareholder who disagreed with a company's decision on a capital increase, a merger, or other restructuring to temporarily block the action. Individual shareholders could easily delay large and important transactions of the company. With the revision of the Commercial Register Ordinance that came into force on 1 January 2021, all provisions on the commercial register blockages have been repealed.
The key features of the revision are:
- The possibility to prevent commercial register entries without going to court has been abolished; a party wishing to prevent an entry into the commercial register must file an application for an interim injunction directly with the competent court.
- Companies can defend themselves by filing a protective letter with the competent court; an option that did not exist in proceedings before the Commercial Register Office.
The rule change results in higher hurdles for temporary prevention of commercial register entries.
Procedure to obtain register blockages under the former CRO
The former provisions of the Commercial Register Ordinance had set very low hurdles for blocking a register entry. Under former art. 162 et seq. CRO, anyone was entitled to file an objection to an entry with the Commercial Register Office located at the seat of the company. Proof of interest was not required. The objection had to be made in writing, but did not need to be reasoned. It was sufficient that the written objection made it clear precisely against which of the facts that were subject to registration it was directed.
The review competence of the Commercial Registrars was very limited. Thus, they were only authorized to reject an objection to an entry if the right of objection was misused in an obvious manner. In practice, this meant that almost every objection led to an automatic blockage of the commercial register for ten days without the company or third parties being able to take a position on it.
After the receipt of an objection, the Commercial Register set a deadline of ten days for the objector to prove that he had filed an application for interim injunctions with the competent court. Hence, under the old rules, the courts came into play only in a second step. If the objector wanted to maintain the blockage, it had to request the competent court to confirm it by means of an application for interim injunctions.
Risk of unjustified blockages
The described procedure for interim relief resulted in a risk of abuse. In practice, minority shareholders used this tool to effectively block entries in the commercial register of elections, or capital increases with which they disagreed. For instance, the execution of an ordinary capital increase decided at the general shareholder meeting could easily be blocked, or at least delayed, by an unjustified blockage of a register entry. In the case of a necessary restructuring, this could be a threat to the survival of the company. Also, there was a risk of chain blockages, in which various objectors could string their objections together, to block the entry for a long time without a court being able to decide on it. The assessment of such sensitive issues is now exclusively left to the courts from the outset. Thus, the risk for companies of being exposed to unjustified blockages decreases as of 2021.
How can commercial register entries be temporarily prevented under the new rules?
The possibility to prevent commercial register entries was not abolished under the new regulation. However, the new rules now require the objector to seize a court right from the beginning, which increases the hurdle and limits the risk of abuse.
More precisely, the objector must file an application for interim injunctions with the court competent for the main subject matter or at the place where the injunction (if granted) would be enforced, which as a rule is the seat of the affected company. The objector must request the court to order the Commercial Register Office to refrain from making a specific entry into the register.
In cases of special urgency, the objector may apply for ex parte interim injunctions. If the requirements are met, the court orders the measures immediately without hearing the opposing party, i.e., the affected company. The application for (ex parte) interim injunctions can be submitted to the court orally or in written form. However, the application must be sufficiently substantiated from the outset. In addition, the objector must pay a court fee retainer before the court takes any action.
According to art. 261(1) of the Swiss Civil Procedure Code (hereinafter "SCPC") the applicant has to provide prima facie evidence of the following requirements:
- the objector is entitled to the underlying substantive right or claim;
- the company violates such right or claim, or threatens to violate it;
- the violation is likely to cause the objector a prejudice that cannot be easily remedied;
- there is urgency (or special urgency in case of ex parte interim injunctions according to art. 265(1) SCPC); and
- the requested measure complies with the principle of proportionality.
How can companies can defend themselves?
Art. 270 SCPC provides a procedure for filing a protective letter if someone believes it will be confronted with an application for ex parte interim injunctions without the opportunity of being heard. The protective letter is kept on record for six months after it has been filed and becomes ineffective afterwards. In-house counsel fearing objections from third parties or shareholders against a planned change requiring an entry into the commercial register, e.g., a capital increase, may set out the company's position in advance by filing a protective letter. This possibility did not exist in the former proceedings before the Commercial Register Office.
In order to fulfil its purpose, a protective letter would have to be submitted before a planned entry is confirmed at the general shareholder meeting and then registered with the Commercial Register. A protective letter will only be made available to the potential opposing party if ex parte interim injunctions are actually filed by that party.
Moreover, a company may claim damages from the objector for unjustified injunctions, unless the objector proves it acted in good faith (art. 264(2) SCPC). Also, if it is anticipated that the injunctions may cause loss or damage to the opposing party, the court may make the interim injunctions conditional upon the payment of security by the objector (art. 264(1) SCPC). It is likely that the court will order the payment of a security if the company as the opposing party plausibly demonstrates that it faces a risk of loss or damage. In case of an important decision such as a capital increase, there may indeed be the risk of significant damage.
If their request is rejected, objectors must bear substantial costs, i.e., court fees and the attorney’s fees incurred by the company. Both are determined based on the amount in dispute, which can be very high in this type of disputes. For this reason, under the new regime, a potential objector will need to consider carefully whether to submit an application for interim injunctions.
Conclusion
The abolition of the CRO provisions on commercial register blockages makes it more difficult to prevent a commercial register entry. The stricter requirements for granting an application for (ex parte) interim injunctions are justified by the potential damage that a delayed entry may cause to the affected company. The shareholders’ rights continue to be duly protected as they may request an injunction, although the bar for such request has been raised compared to the former regime. Overall, the change in the rules will lead to increased transaction security.
The key takeaway for in-house counsel is that since the beginning of 2021 Swiss companies have far better options to defend themselves against unjustified blockages of commercial register entries. To use these options effectively, in-house counsel should assess in advance whether the company faces a risk of an application for interim injunctions by individual shareholders. Such assessment should be conducted before a planned entry into the Commercial Register is approved at the general shareholder meeting. If such a risk exists, it is recommended to prepare a protective letter ahead of the general shareholder meeting, to ensure its submission to the competent court on the same day the planned entry is approved at the general shareholder meeting. In addition to setting out that the commercial register entry is justified, it is essential to explain in the protective letter why a delay would result in damage to the company.
Authors: Christian Oetiker, Partner in VISCHER's Litigation and Arbitration Team; Raphael Butz, Partner in VISCHER's Litigation and Arbitration Team; Prabhjot K. Singh, Associate in VISCHER's Litigation and Arbitration Team, VISCHER Ltd.
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