Allocation of Reserves and Appropriation of Profits Under the New Stock Corporation Law

As part of the revision of the Stock Corporation Law, the provisions on reserves have been restructured and brought into line with accounting law (Art. 671 – 673 Code of Obligations (CO)) and the order in which they are to be set off against losses has been determined (Art. 674 CO).

| Christian Maeder, Yves Ducrey

In order for a dividend to be lawfully distributed, the annual financial statements approved by the General Meeting of Shareholders must show sufficient available capital to cover the amount to be distributed. In addition to the equity capital (share capital and, if applicable, participation capital), the non-usable portion of the statutory capital reserve and the statutory profit reserve (usually 50% of the share capital) are also subject to prohibition on distribution. To determine the available capital, any reserves for own shares and revaluation reserves must also be deducted from the total capital of the company. This means that, after priority allocation to the statutory profit reserves and after deduction of any reserves for own shares in the group and revaluation reserves, the available capital is used to arrive at the so-called freely available, and therefore distributable capital.

In other words, distributions to shareholders can only be determined after the mandatory allocations to the reserves have been made. In the case of disclosed reserves, they are shown in the balance sheet. In the case of hidden reserves, they result from the difference between the book value of an asset and its higher market value, or the difference between the book value of a liability and the lower future cash outflow that is expected to result from this liability. In the case of disclosed reserves, a distinction must be made between tied reserves (restricted by law) and free reserves (generally distributable).

Statutory Capital Reserve (Art. 671 CO):

The statutory capital reserve consists of funds paid in by the holders of equity securities. It largely corresponds to the portion of the former general reserve (Art. 671 para. 2 no. 1 fCO). Under the new law, the proceeds from the issue of shares and in excess of the nominal value (Surplus (Agio)) must also be shown in the statutory capital reserve. In addition, as before, capital gains and any other contributions and subsidies relating to shares (and participation certificate) must be allocated to the statutory capital reserve.

Statutory Profit Reserve (Art. 672 CO):

In addition to the statutory capital reserve, there is also the statutory profit reserve (see also Art. 959a para. 2 item 3 letter c CO). This reserve corresponds to the part of the former general reserve. The statutory profit reserve is formed from retained earnings. Pursuant to Art. 672 para. 1 CO, 5% of the annual profit must be allocated to the statutory profit reserve until it (together with the statutory capital reserve) reaches half of the equity capital. In the case of holding companies, this allocation is only required until the statutory profit reserve reaches 20% of the equity capital. The new Stock Corporation Law has dispensed with a second allocation in the case of so-called “super dividends”, i.e., the obligation to make a second (gradual) allocation after the distribution of a dividend of 5% on the registered share capital, previously provided for in Art. 671 para. 2 item 3 of the former Swiss Code of Obligations is no longer applicable. If there is a loss carried forward, the annual profit must first be used to offset it (Art. 672 para. 1 sentence 2 CO).

Voluntary Reserves (Art. 673 CO):

As under the old law, the general meeting may create voluntary reserves in the articles of association or by resolution (Art. 673 para. 1 CO). Allocations to “voluntary reserves” can be voluntary or formulated as an obligation based on the articles of association or a resolution of the general meeting. Such a mandatory allocation based on the company’s internal rules takes precedence over any distribution to shareholders until the general meeting resolves otherwise or amends the articles of association. The formation of voluntary reserves is only permitted if “the lasting prosperity of the company, taking into account the interests of all shareholders, justifies it” (Art. 673 para. 2 CO). The general meeting of shareholders decides on the distribution of profits at its own discretion, but shareholders do not have to put up with a clearly unreasonable dividend policy. For example, it would not be permissible to create voluntary revenue reserves, or to carry forward profits, in order to “starve out” minority shareholders.

Set-off Against Losses (Art. 674 CO):

If the yearly financial statements result in a deficit, the issue of offsetting it against any previously accumulated profits and reserves arises. In paragraph one of Art. 674 CO, there is a prescribed order in which yearly losses should be offset. As per Art. 674 CO, yearly losses should be offset against reserves in reverse order to the equity classification, i.e., “from bottom to top”. Firstly, the profit carried forward is offset, followed by the voluntary reserves, then the statutory profit reserve, and finally the statutory capital reserve. Set-off against the statutory capital reserve or the statutory profit reserves is optional. Any annual loss is carried forward to the new balance sheet in the corresponding amount, creating a loss carried forward (Art. 674 para. 2 CO). This must be presented separately as a negative item in the capital.

Other Restrictions on the Ability to Pay Dividends

The payment of dividends may not jeopardise the liquidity position of the company. Even if the statutory requirements are complied with, dividends may only be paid to the extent that the company has sufficient liquidity, also taking into account for events after the balance sheet date. Otherwise, the board of directors that proposes such a dividend to the general meeting of shareholders violates its duty of care under Art. 717 CO.

Account must also be taken of any blocking effects arising from existing claims against related parties in the form of loans. If such claims exceed the freely available capital in total, the relevant contracts must be examined more closely with a view to a third-party comparison. A lack of written form, unusual interest or repayment conditions or the absence of collateral may indicate that the claims do not stand up to third-party comparison and that the prohibition on the repayment of capital contributions pursuant to Art. 680 para. 2 CO has been violated.

Christian Maeder
Attorney at Law, Certified Tax Expert
[email protected]
Yves Ducrey
MLaw, Attorney at Law
[email protected]

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