Late election of the members of the board – unintended consequences

What?

Surprisingly often, directors and shareholders of public limited companies are not aware that there is a deadline for the election of the board of directors: The election must take place at a general meeting of shareholders (Art. 698 para. 2 item 2 of the Code of Obligations (CO)) and the general meeting must be held within 6 months of the end of the financial year (Art. 699 para. 2 CO).

There are many reasons why a company does not hold the general meeting (and thus the election of the board of directors) in time:

• The annual financial statements with the audit report are not yet available.
• The company is part of a group and the representatives of the parent company do not want to arrive until later.
• Pure negligence.
• Tactical considerations, e.g. if there is a dispute between shareholders. E.g., the chairman of the board of directors wants to avoid being voted out of office by simply not calling a general meeting or not putting the election of the board of directors on the agenda.

A company without an elected board of directors is incapable of acting and is in danger of sliding into a crisis. In the past it was therefore suggested that in such a situation a “tacit extension” of the term of office of the members of the board of directors should be assumed. Various companies included corresponding formulations in their articles of association.

The Federal Supreme Court recently put a stop to these attempts in a clear decision (DFT 148 III 69), stating that the term of office of a member of the board of directors ends 6 months after the end of the last business year of his term of office (the term of office can be longer than 1 year, mind you!) if no general meeting has been held within this period.

So What?

What this means is illustrated by the case submitted to the Federal Supreme Court:

The public limited company in question had held an extraordinary general meeting on 16 April 2019, which confirmed two directors in office, this for a term of office until 31 December 2019. As no general meeting was held in 2020, the term of office of these two directors ended at the end of the 6-month period for holding the general meeting of shareholders on 30 June 2020.

The Zurich Commercial Court, which was called upon by a minority shareholder, found that there was a lack of organisation pursuant to Art. 731b CO and appointed an administrator who had to manage the business in place of the board of directors from then on. In particular, the administrator was ordered to convene a general meeting of shareholders and to put on the agenda the election of a new board of directors.

Such circumstances can lead to considerable uncertainties for the company:

– Are decisions made by the (no longer validly appointed) board of directors valid?

– Who will make urgent decisions until an administrator is appointed (and also capable of acting)?

– Is the administrator at all professionally/personally capable of managing the company?

For the shareholders, a particular uncertainty arises from the fact that the judge called upon in the case of a lack of organisation can make other, drastic decisions, because he can order the “necessary measures” at his own discretion. These go as far as the dissolution and liquidation of the company.

Do What?

The ordinary general meeting should be held in good time in the first half of the year. If this is not possible for important reasons (e.g. if the annual financial statements are not yet available), an extraordinary general meeting should be convened in good time before the expiry of the term of office of the members of the board of directors, which only deals with the election. If the articles of association contain provisions that provide for tacit re-election or similar, it is better to delete them so that no misunderstandings arise about their validity.