Post by Isabel von Fliedner on Feb 6, 2010 23:11:28 GMT 4
Isabel von Fliedner, Avocate
Switzerland: Revision Of The Law Of The Limited Liability Company
03 February 2010
On the 16th December 2005, the Swiss Parliament adopted the new law of the limited liability company (LLC), which came into force during the second half of the year 2007. Companies founded under the aegis of the former text had to adapt to the new legislation.
Summary
The revision aimed to give to the LLC the attributes of a real equity company but still with some personal elements.
The current regulations allow the foundation of an LLC by a sole individual. The equity upper limit, previously set at 2 million Swiss Francs (CHF), has been abolished because it pointlessly used to slow down the growth of a company that needed substantial equity. The minimum required amount of the equity remains set at 20'000 CHF. The latter must always be paid up in full. In return, the joint and several liabilityof the general partners up to the whole equity has been paid up in full has been abolished.
Unlike the previous law which held that a partner can only own one "quota"1 (aCO 774 II), the new one allows a distribution of the financial contribution from each partner in several quotas.
The present law improves the minority partners' protection, particularly the right to information and access to documents, and the preferential allotment of a new quota in case of an increase in capital. It settles the option to exit and the exclusion of a partner, two features of the LLC (especially as regards the indemnity of the partner that leaves the company).
Taking into consideration the needs of the small enterprises, it is in general not provided for that the LLC must have its accounts checked by an auditor. Only companies fulfilling some particular conditions are forced to do it. This obligation may also be stipulated in the Memorandum and Articles of Association.
1. General provisions
1.1.Context
The LLC was introduced in the Swiss Code of Obligations2 in 1936. Until the coming into force of the revised joint-stock company law, the LLC hadn't truly become established in Switzerland. Between 1992 and 2001, the number of LLC didn't stop increasing, rising from 2'964 in 1992 to 52'395 by the end of October 2001.
This "craze" for the LLC mainly originated in the new requirements imposed on the joint-stock companies since the revision in 1991: the increase of the equity's lower limit from 50'000 to 100'000 CHF as well as the implementation of the compulsory auditing of yearly accounts by an independent auditor led the small enterprises to move over to the LLC more and more regularly. It is worth mentioning that the joint-stock company has been chosen too mechanically for a long time by little businesses, taking no notice of the option of the LLC.
Let's recall the drawbacks of the former LLC:
* The joint and several liabilityfor the company's debts up to the equity entered in the Register of Commerce weighing on every partner (aCO 802). Under certain circumstances, this liability could widely exceed the face value of a quota subscribed by a partner.
* The legal text did not specifically provide for the foundation of a LLC by a sole individual.
* The assignment of a quota made difficulties because the latter and the agreement related to it were valid only if drawn up by a notary (aCO 791 IV). The amount of each partner's quota had to appear in the Memorandum and Articles of Association (aCO 776, cipher 3). As every partner was able to own one quota only (aCO 774 II), the quota's face value had to be modified every time another partner increased his participation. This change involved an amendment of the articles of association, which of course required a notarized deed as well (aCO 784 par. 1).
* The minority partners' protection showed some shortcomings, especially for those who did not manage the company. Their right to information and supervision were insufficient (aCO 819). The regulations concerning the option to exit and the partner's exclusion were incomplete, regarding the indemnity for instance (aCO 822).
* A partner's bankruptcy could result in the LLC's dissolution (aCO 793 and 794). Even if the managing partner didn't run the company for himself and on his own account, he was ex lege subject to bankruptcy proceedings (LP 39 paragraph 1, cipher 5 LP). This is not compatible with the principle of the separation of the spheres of liability applying to equity companies.
* The powers distribution between the managing partners on the one hand, and the partners' meeting, on the other hand, was not precisely defined (aCO 810). Unless provided otherwise by the articles of association, all partners had to and were allowed to manage and represent the company only collectively (aCO 811).
* Regulations concerning the obligation to refrain from competing (aCO 818) did not seem satisfactory especially because they did not apply to a whole set of people responsible for the management.
* At the beginning of each calendar year, a list giving the name of all partners, their contributions and benefits had to be sent to the Register of Commerce (CO 790 paragraph 2).
1.2.Skimming through the project
1.2.1.The LLC - an equity company with some personal elements
The current law aims to give to the LLC the attributes of a real equity company with some personal elements. The concept of the equity company rests on the shareholders' investment in the capital; the individual is relegated to the background. As for the LLC though, the law allows to take into account the individuality of the partners and the circumstances of every concrete case.
The present LLC regulations were thought out in response to the needs of the companies with limited and close circle of partners. The text doesn't state prescriptions designed for the setting up in the stock market on purpose. The LLC, an organization having personal elements, doesn't suit companies that hold a large number of partners, nor those willing to take part in the equity market. If the circle of the partners greatly broadens or the company intends to enter onto the public stock market, the joint-stock company is the suitable legal form. In these cases, the "merger law"3 settles the transformation of an LLC into a joint-stock company.
On several important points, the rules are not mandatory. It enables to fit the structure of the LLC, by contract, to the practical circumstances and the relations between the partners. However, the provisions protecting creditors and minority partners, or those related to the mainstays of the LLC are imperative. In the external relations, the LLC is then subject to the main statute measures of protection as any other equity company is. On the other side, the partners have more freedom in the configuration of their internal relations.
The following mechanisms give the opportunity to organise the company with a focus on the partners' individuality: privity in deed to make additional assets or to offer extra provisions, regulations concerning the duty of loyalty and the prohibition of competition, issue of preferential quotas in terms of voting rights or in contrast, limitations affecting voting rights, right of veto, heavy restrictions on assignment of the quotas, requirement of the partners' meeting's approval of certain decisions of the managing partners and finally the option to exit and the possibility to exclude a partner.
1.2.2.The forming of a company by a sole individual
We must admit that an appropriate legal form for companies run by a sole individual was necessary. For that reason, the project permits the forming of a company by one single individual and provides therefore a clear legal basis. This greatest innovation matches with the development of law in the countries bordering on Switzerland and with the E.E.C Directives.
1.2.3.Equity upper and lower limit
In the interest of the small enterprises that don't have a substantial need of equity capital (for example in the field of the service providers), the text doesn't rise the equity lower limit, even though we consider how meagre such an amount is to secure the liability. This amount remains set to 20'000 francs (CO 773). Given the modest sum required, it shall obviously be paid up in full (CO 777c, paragraph 1).
1.2.4.Full payments of the allowances
This simplifies the regulations and allows giving up the joint and several liability up to the registered equity which might put the partners in danger.
The text ensures that the quotas are really paid up in full by bringing the same requirements as those applied to the joint-stock company regarding the payment of the allowances and its checking (CO 777c, paragraph 2, cipher 3). The rules relating to the allowances in kind and the contribution of property in the joint-stock company are taken up for the LLC as well.
1.2.5.Increase in capital after the foundation
As the joint and several liability up to the entire equity was abandoned, it was possible to stop asking all partners for their consent in order to allow an increase in capital. Nevertheless, the decision remains as an important one. So the law lays down that it must be taken by the partners' meeting and meet with a two-third qualified majority of the present voters and the half of the votes plus one of the equity's value allowed to vote (CO 808b, paragraph 1, cipher 5).
Furthermore, the partners' preferential allotment of new quotas is now better protected thanks to the reference to the provisions of the joint-stock company law (CO 781, paragraph 5, cipher 2).
Protection for third parties
The reliability and the credit of the LLC are especially guaranteed by the following measures:
* The quotas shall be paid in full.
* To ensure the full payments, the law has adopted, for the allowances in kind and the contribution of property, the payment by set-off or with the help of the equity capital which is at the LLC's disposal, regulations that close the way to all kinds of abuses efficiently (report of foundation or increase of capital, checking of these reports by an auditor).
* The big companies must have at least their yearly accounts checked by a certified auditor.
1.2.7.Quotas
The text reduces the quotas' minimum face value from 1'000 to 100 CHF (CO 774, paragraph 1). With a minimum equity of 20'000 francs, the quotas' minimum face value set to 100 francs enables 200 partners to take part in the company, which makes it sufficiently accessible to third parties. As for the companies having an even larger circle of partners, the form of a joint-stock company would be more suitable in most of the cases.
1.2.8.Limitation to the assignment of a quota
In harmony with the personal side of the LLC, the law maintains a strong control over assignment of quotas. Unless exemptions are provided for by the Memorandum and Articles of Association, the assignment requires the partners' meeting's approval without calling for any justifying reason (CO 786, paragraph 1). This legal limitation might usually meet with the needs of the small companies in particular. Then, most of the time, it will prevent from complex contractual provisions.
Nevertheless, the articles of Association may depart from the legal system as described above. The law states an exhaustive list of alternatives (CO 786, paragraph 2): firstly, it maintains the possibility of the complete prohibition of the assignment of a quota; secondly, it also permits the free transferability. In addition, the articles of Association can provide for the reasons that justify the refusal to approve an assignment.
The current regulations have been conceived according to the needs of small companies. It can lead to the inalienability of the minority partners' quotas. Besides, the refusal to approve the assignment without justifying reason is only subject to a limited judicial control.
1.2.9.The privity in deed to make additional assets or to offer extra provisions
The law limits the possible privity in contract to make additional assets to the double of the face value of the quota to which this privity is attached (CO 795, paragraph 2). Departing from the former law (aCO 803, paragraph 1), the new text put the additional assets into the same category as equity capital. Their payment and their return follow particular rules. Resorting to additional assets is no longer restricted to the extinction of loss emerging from the balance sheet; on the contrary, it has spread on different cases such as the lack of available funds causing the impossibility of getting the company running on with diligence or a need of equity capital for any reason provided for by the Articles of Association (CO 795a, paragraph 2).
The privity to offer extra provisions results in a wide array of possibilities (CO 796). It must be understood in a large sense. The commitment of the partners can consist as well in an obligation to do a particular thing as to refrain from doing it or to tolerate it. However, the Memorandum and Articles of Association can only command privities to offer extra provisions that serve the goal of the company or that maintain its independence or the line-up in the circle of the partners. The principle and the extent of the privity must be delineated in the Articles of Association. The details can be incorporated into a specific regulation subject to the approval of the partners' meeting.
The subsequent introduction and extension of a privity to make additional assets or extra provisions always requires the approval of the whole group of partners concerned (CO 797).
1.2.10.The duty of loyalty and the prohibition of competition
Whereas the shareholders are not subject to any legal obligation of loyalty towards the company, the managing partners and the partners of a LLC must respect a duty of loyalty (CO 803, paragraph 1 and CO 812, paragraph 2). This rule takes particularly into account the personal and generally close bonds between the partners and to the company as well as their extended right to information on the business of the company and access to documents and account books (cf. CO 802).
The law specifically forbids the managing partners to compete with the company's business, in addition to their duty of loyalty. Furthermore, the Articles of Association may suppress or on the contrary broaden the prohibition of competition to non-managing partners (CO 803, paragraph 2 and 812, paragraph 3).
In order to offer as much flexibility as possible, it is provided for that the partners can allow one of them to transgress the duty of loyalty or the prohibition of competition in an individual case, though only if they take the decision unanimously (CO 803, paragraph 3 and 812, paragraph 3).
1.2.11. Drawing up of the yearly accounts
Following divergent opinions expressed in the doctrine, the Swiss government already stated, in answer to a parliamentary initiative, that the provisions of the joint-stock company law introduced in 1991 (article 662 and CO next one) applied to the drawing up of the yearly accounts of the LLC.
1.2.12. Organisation of the LLC; management and representation
The LLC remains distinguished by a great freedom in the configuration of its internal relations.
The law settles what remits mandatorily fall to the partners' meeting (CO 804, paragraph 2), to the managing partners (CO 810, paragraph 2) and, if need be, to the auditor (CO 818, paragraph 2 CO, in connection with CO 728). However, it leaves enough room for manoeuvre to make up an arrangement focused on particular needs.
The Memorandum and Articles of Association can provide for that the managing partners shall subject specific decisions, which need to be precisely defined, to the approval of the partners' meeting. If so provided, the managing partners may also subject some questions to the approval of the partners' meeting on their own initiative (CO 811).
According to circumstances, it is possible to act upon the making of decisions of the partners' meeting by the issue of preferential quotas in terms of voting rights or by providing limitations affecting voting rights. Besides these tools adopted originally from the joint-stock company law, the Articles of Association of the LLC may grant the partners a right of veto concerning particular decisions (CO 807).
As opposed to what is stated in the joint-stock company law, the decisions of the partners' meeting may also be taken in writing, unless a partner requests a discussion (CO 805, paragraph 4).
The law offers a regulation, not compulsory, for the management and the representation on the basis of the needs of the enterprises. As a rule, all partners manage the company (CO 809, paragraph 1) collectively. According to article 814, paragraph 1 CO, every managing partner has the power to represent the company. This difference is justified by practical matters: when a company has several managing partners, the collective representation is hardly conceivable. The Articles of Association can depart from the legal system, with regard to the management as well as to the representation, and according to the specific needs of the company. It is indeed possible to transfer the management to third parties - who are not partners for example. However, one managing partner at least shall be allowed to represent the company (CO 814 paragraph 3).
Finally, it is not necessary that the majority of the managing partners or external managers are domiciled in Switzerland.
1.2.13. Checking of the yearly accounts
Under the aegis of the joint-stock company law, the auditor and the related prescriptions to the drawing up of the accounts are a corollary of the limited liability of a corporation up to its own fortune. They are not only useful to manage a company in a reliable way but help to protect the creditors as well as the minority partners. Legal requirements connected with the checking of the yearly accounts by an auditor are especially important to protect the small creditors - suppliers for example - whereas other money-lenders – banks in particular - are able to secure their loans without particular legal regulations.
The law is drafted so as to provide for both the legitimate interests of small businesses as well as for the fact that the LLC will be also open to big companies as the upper limit of the equity has been deleted (cf. above cipher 1.2.3.)
Hence, the text states distinct solutions. In view of the small enterprises, the LLCs don't have to resort to an auditor in general, but only if some specific requirements are fulfilled, that is:
* if one of the partners subject to the privity to make additional assets requires it, or
* if the amount of the equity is equal or superior to 100'000.- CHF, or
* if two of the following values are exceeded during two consecutive periods of twelve months :
* total of the balance sheet over 5 million CHF;
* turnover over 10 million CHF;
* 50 full-time jobs on annual average.
Moreover, a partner who has left the company is still able to require the designation of an auditor as long as he has not been fully indemnified (CO 825a, paragraph 4).
With this method, the law does its best to consider in an adequate way the opposing contradictory interests of the company and its various stakeholders.
On the 23rd June 2004, the Swiss government adopted new rules taking into consideration the necessity of stricter auditing practices after the occurrence of the Enron scandal. They are not the subject of the present article.
1.2.14. Exit and exclusion
The option to exit or a partner's exclusion corresponds to the highly personal element of the status of an LLC partner (cf. article 822 CO, in contrast to the joint-stock company, which is only possible to exit by assigning one's actions).
Every partner can require at all times to the court the permission to leave the company for peremptory reasons that justify his request. In addition to this option to exit laid down in an imperative way by the law, the partners are perfectly at liberty to provide in the Memorandum and Articles of Association a more general option to exit the company and to subordinate its exercise to defined conditions (CO 822 CO 822, paragraphs 1 and 2). As a partner's exit may represent a drawback for the other ones, the law sets a mode of joint exit, in order to ensure the equality of treatment among all partners (CO 822a).
The company can request the court to exclude a partner if peremptory reasons justify it. The law also allows to lay down in the Articles of Association that the partners' meeting has the right to exclude a partner for precise reasons clearly defined in the Articles of Association (CO 823 and CO 822, paragraph 3).
Some provisional order may prove to be necessary within the context of a legal proceeding related to the partner's exit or exclusion. The court can notably decide that all or part of the rights and obligations of the concerned partner are suspended (article 824 CO).
The text clearly states that the partner who leaves the company has the right to an indemnity corresponding to the real value of his quota (CO 825). This right is not only given to him when he exits but also when he's excluded, because the exclusion must not be similar to an expropriation.
The payment of the indemnity turns out to be everything but simple because, although the law aims to secure the actual payment of indemnities, this payment must not endanger the fulfilment of the claims of the creditors external to the company significantly (cf. CO 825a). The excluded partner may see his claim partly postponed, for example.
Translation from French into English by Saskia von Fliedner, Bachelor of Law.
Bibliography: Message of the Swiss Federal Council of the 19.12.2001.
Footnotes
1. We call a quota this particular kind of stock participation.
2. Swiss Law of Contracts
3. RS.221.301 (Classified Compilation of Federal Legislation)