Many Swiss companies are controlled by major shareholders but new developments are giving minority shareholders a voice. Pestalozzi's Jakob Hoehn reports

Many Swiss-listed companies are controlled by a major shareholder or a shareholder group, quite often by a family. While most of these companies are only of mid-size, there are also some quite large companies, including Roche and Swatch, to which this applies.

Investors interested in these companies must carefully analyse the extent to which Swiss law affords them protection against the controlling shareholder and the board typically consisting of members close to the controlling shareholder.

Rights of the minority shareholder

A minority shareholder that is invested in a Swiss-listed company controlled by a major shareholder has all the rights afforded by corporate law. Depending on the stake owned by the minority shareholders, the minority shareholder can avail itself of certain rights.

In addition, Swiss law does not allow a company with minority shareholders to be integrated into the group of the controlling shareholder. All transactions between the company and the controlling shareholder and its affiliates must be at arm's length. The board of directors of the controlled company is required to ensure that this principle is observed with respect to transactions with the controlling shareholder. If directors of the controlled company are too close to the controlling shareholder so they can no longer exercise unbiased judgement, conflict of interest issues must be addressed by delegating the matter to a group of non-conflicted directors and/or by obtaining a fairness opinion from an independent third party.

Change of control

If the majority shareholder decides to sell its majority stake, other than in very specific cases the new controlling shareholder must submit a mandatory offer to the minority shareholders.

The entire offer process is regulated and reviewed by the Swiss takeover board. Also, the new controlling shareholder must comply with the following pricing restrictions: the offer price must be at least equal to the 60-day volume-weighted average price prior to the announcement of the offer and must not be less than 75% of the highest price paid during the year prior to the offer.

In addition, the board of the company is required to ensure that the minority shareholders have all the information to decide whether they want to accept or reject the offer: the board must issue a report to the minority shareholders explaining the pros and cons of the offer. The report must also disclose actual and potential conflicts of directors. If directors are close to the selling controlling shareholder or to the buying controlling shareholder the board must take actions to address these potential conflicts. The board must either establish a committee of two directors who are truly disinterested (ie, have no ties with the former or the new controlling shareholder) or obtain a fairness opinion from an independent investment bank.

Thus, while minority shareholders are generally protected in case of a change of control, there remains one important gap: it is legally permissible for a majority shareholder to sell its stake at a premium to what is being paid to minority shareholders.

Squeeze out

A controlling shareholder may try to squeeze out the minority shareholders by trying to merge the company into itself and give the minority shareholders their own shares (regular merger). Or, if the controlling shareholder, following a public offer, holds more than 98% of the shares, it may squeeze out the minority shareholders in squeeze out proceedings before the court. If the controlling shareholder holds at least 90% of the shares, it may squeeze out the remaining minority shareholders by merging the company and providing cash consideration to the minority shareholders.

The merger process is directed by the boards of the two companies. The board of each company must ensure that the merger is in the best interest of the company. Because the proposed merger is with a company controlled by the controlling shareholder, the board has to ensure that conflicts of interest are adequately addressed (conflicted directors must recuse themselves or a fairness of opinion must be obtained). 
The merger must be approved by the shareholders' meetings of the merging companies. The merger resolution must be adopted by a majority of at least 66% of the shares represented and 50% of the share capital represented at the meeting. The merger becomes legally effective only upon registration in the commercial register.

A minority shareholder may oppose the merger as follows: a minority shareholder who has voted against the merger may challenge the shareholders' resolution approving the merger within two months from the merger resolution in the courts.

In order to ensure that the merger does not go forward, a challenging shareholder may try to block the registration of the merger in the commercial register. For this, it is sufficient for a shareholder to submit prior to the registration of the merger a written request to the commercial register to block the registration. This request must be followed by an application to the court to issue injunctive relief ordering that the registration be blocked. Such request must be made within 10 days after the blocking request was submitted to the office of the commercial register.

If the court does not grant the order to block the registration, the merger will be registered. If the court grants injunctive relief blocking the registration, the registration will be blocked pending the outcome of litigation concerning the challenge of the merger. This can significantly delay the consummation of the merger.

Any shareholder believing the proposed merger does not adequately secure the existing position of the shareholders or that compensation is inadequate is entitled to sue the surviving company for an additional payment. Any judgment of the court will affect all shareholders concerned – to the extent that they are in the same position as the claimant(s). The cost of such litigation is borne by the surviving company, unless specific circumstances justify the allocation of a part or all of the cost to the claimant shareholder.

Jakob Hoehn is head of Pestalozzi's corporate group in Zurich.