The Capital Band in Practice

Preliminary Remark

The revision of stock corporation law, which will come into force on 1 January 2023, is not only on everyone’s lips, but a lot of ink has already flowed over it.

The innovative review report “capital band” enjoys a high status in the numerous discussions of the new law, yet questions that are particularly important for practice have remained unanswered until now.

This is what it is all about:

The general meeting of shareholders can authorise the board of directors by means of a capital band (Art. 653s et seq. of the new Swiss Code of Obligations, hereinafter “nCO”) to increase and/or decrease the share capital entered in the commercial register as desired within a certain range and for a maximum period of five years. In both directions, however, by a maximum of half of the share capital entered in the commercial register.[1] The minimum capital of 100,000.00 must be maintained at all times (Art. 621 para. 1 nCO). The new capital band develops the (still) valid authorised capital increase, replaces it, and also creates the transactional counterpart, namely a kind of authorised capital reduction.[2]

Let’s get straight into the details:

Implementation Decision

If the board of directors wish to make use of the authorisation granted to it by the general meeting of shareholders by means of a capital band, this requires an implementation resolution in accordance with Art. 653u para. 2 nCO. In this resolution the board of directors decide to make use of the capital band and to carry out a capital increase and/or a capital reduction.

Will the implementation resolution of the board of directors have to be publically certified?

The answer is no. It is true that the requirement of notarisation could be derived from the regulations, which would be in place with the ordinary capital increases (Art. 650 et seq. nCO) and the analogous applicability of the regulations on the capital increase and the capital reduction (Art. 653j nCO). However, this is contradicted by the fact that the authorising provision already provides the content of a resolution of the general meeting of shareholders which has to be notarised. The implementing resolution of the board of directors does not yet constitute an amendment to the articles of association which implies notarisation (Art. 653u para. 4 nCO). Moreover, the requirement of notarisation is otherwise explicitly mentioned in the new articles of the stock corporation law (see, among others, Art. 653u para. 4 nCO), but not in this case (Art. 653u para. 2 nCO). The authorisation must be publicly deeded as it concerns the articles of association, followed by the declaration and recording of the increase/decrease in the articles of association. The implementing decision of the board of directors in between does not affect the articles of association. For this reason alone, but also systematically, there is no need for certification. This result is also a logical consequence of the lack of an obligation to notarise the implementation decision within the framework of the (still) valid authorised capital increase (Art. 651 f. nCO).

Applicability of the Provisions of the Law on the (Ordinary) Capital Increase in the Corresponding Sense

If the capital band is used for a capital increase, its implementation (and thus also the content of the corresponding implementation decision of the board of directors) is subject to the analogous application of the legal provisions on the conditional or ordinary capital increase (Art. 653u para. 5 in conjunction with Art. 650 et seq. nCO).

Correspondingly is to be understood broadly in this context. The mere adoption of Art. 650 para. 3 nCO into the instruments of the capital band requires a creative approach. According to this provision, the capital increase must be registered with the commercial registry office within six months after the resolution of the general meeting, otherwise the resolution lapses.

How can Art. 650 para. 3 nCO now be applied correspondingly to the capital band?

The six month period cannot – indeed must not – refer to the resolution of the general meeting concerning the introduction (or relevant adjustments) of the capital band. This would mean that the legislator itself would reduce the authorisation period, which is set at a maximum of five years, to six months. The board of directors would no longer be allowed to implement the capital increase after the expiry of the six month period, as the basis for the authorisation would no longer exist. There would no longer be any question of an authorisation for a defined period of time. The attractiveness of the instrument of the capital band would thus fall behind that of the authorised capital increase replaced by the latter. This would contradict the legislative view and even justify an interpretation contra legem.

Likewise, it cannot be the opinion of the legislator that in addition to (and after) the resolution of the general meeting concerning the introduction (or relevant adjustments) of the capital band, another resolution of the general meeting is required, which then triggers the term of the six month period. This would also contradict the purpose of the capital band, which is precisely that the board of directors is authorised to carry out a capital increase without a new resolution by the general meeting. A second resolution by the general meeting is not conceivable and could not be derived from the wording or system of the law with the best (or rather worst) will in the world.

Applied correctly (i.e. in accordance with the rules of interpretation provided for in Art. 1 CC) by analogy, the six month period referred to in Art. 653u para. 5 nCO, in conjunction with Art. 650 para. 3 nCO, must refer to the time limit of six months. Art. 650 para 3 nCO must refer to the implementing decision adopted by the board of directors pursuant to Art 653u para. 2 nCO within the framework of its authorisation by the general meeting of shareholders, i.e. it begins to run as soon as this decision has become legally binding.

Applicability of the Provisions of the Law on the Capital Reduction in the Corresponding Sense

If the capital band is used for a capital reduction, its implementation is subject to the analogous application of the articles on capital reduction (Art. 653j et seq. in conjunction with Art. 653u para. 5 nCO).

Two questions are at the forefront here: (again) the first being, the start of the six month implementation period pursuant to Art. 653u para. 5 in conjunction with Art. 653j para. 4 nCO, and the second, the starting of the date of the balance sheet pursuant to Art. 653l in conjunction with Art. 653u para. 3 nCO.

With regard to these topics, the term correspondingly should also be understood broadly.

The six month period cannot – indeed must not – refer to the general meeting resolution concerning its introduction (or relevant adjustments), even in the context of a capital reduction using the capital band. Thus, the legislator itself would reduce the authorisation period, which is set at a maximum of five years, to six months, also with regard to the capital reduction. The board of directors would no longer be allowed to implement the capital reduction after the expiry of the six month period.

Likewise, it cannot be the opinion of the legislator, that in addition to (and after) the resolution of the general meeting concerning the introduction (or relevant adjustments) of the capital band, a further resolution of the general meeting is required, which then triggers the term of the six month period. This would also contradict the purpose of the capital band, which is precisely that the board of directors is authorised to carry out a capital reduction without a new resolution by the general meeting.

Applied correctly (i.e. in accordance with the rules of interpretation provided for in Art. 1 CC) by analogy, the six month period mentioned in Art. 653u para. 5, in connection with Art. 653j para. 4 nCO, must extend to the period of six months. Art. 653u para. 5 in conjunction with Art. 653j para. 4 nCO, with regard to the implementation of the capital reduction, must refer to the implementation decision adopted by the board of directors pursuant to Art. 653u para. 2 nCO within the scope of its authorisation by the general meeting. It therefore begins to run as soon as this decision has become legally binding.

The next question is whether the decisive point in time for the (interim) balance sheet also relates to the implementation decision of the board of directors?

It is undisputed that the age guillotine set out in Art. 653u para. 3 nCO, with regard to the balance sheet date, also applies within the framework of the capital band. The law itself explicitly states that “in the event of a reduction of the share capital within the capital band, the provisions [….] on interim financial statements [….] shall apply correspondingly in the case of an ordinary capital reduction”[3]; but only correspondingly. The original draft of the new company law provided for a direct applicability of Art. 653l nCO to the capital band.[4] According to this, it would have been the introduction (or the respective adjustments) of the capital band, through the resolution of the general meeting, that would have determined the point in time of the expiry of the last (interim) balance sheet for the purposes of the capital reduction. The corresponding provision (Art. 653w nCO) wanted to enable the board of directors to carry out a capital reduction without requiring a request to the creditors or an audit confirmation by a licensed auditor at that time. However, it was deleted in both councils.[5]

Thus, the meaning here can only be, that the date of the expiry of the last (interim) balance sheet for the purposes of the capital reduction is determined by implementing the decision of the board of directors. Thus, the cut-off date of the (interim) balance sheet used for the purposes of the capital reduction in question may not be further back than six months since the implementing decision.

A general consideration does not show anything different either: neither the wording nor the systematics of the new law allow other conclusions to be drawn.

This substitution of the resolution of the general meeting by the decision of the board of directors, which is absolutely necessary with regard to the balance sheet date, also makes it possible for the six month period for the implementation of a capital reduction within the scope of the capital band, to apply in the first place. This substitution thus creates consistency. Moreover, it supports what was said above about the capital increase within the scope of the capital band.

We will be happy to advise you in connection with the revision of company law and support you with our services during the implementation process.

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[1] Dispatch of 23 November 2016 on the amendment of the Code of Obligations (Stock Corporation Act), BBI 2017, p. 435.

[2] Dispatch of 23 November 2016 on the amendment of the Code of Obligations (Stock Corporation Act), BBI 2017, p. 435.

[3] Art. 653u para. 3 nCO.

[4] Dispatch of 23 November 2016 on the amendment of the Code of Obligations (Stock Corporation Act), BBI 2017, p. 436.

[5] Flag 2018 IV S: 16.077n: S1-2 D.pdf – Flag Draft 1 Winter Session 2018 Council of States; Flag 2019 IV N: 16.077n: N1-55 D.pdf – Flag Draft 1 Winter Session 2019 National Council Decision; Federal Act concerning the Amendment of the Swiss Civil Code (Fifth Part: Code of Obligations) of 30 March 1911 (as at 1 January 2023; SR 220; OR).