SWITZERLAND Law and Practice Contributed by: Daniel Haeberli and Simone Gloor, Homburger
provider is not required to make any periodic filings to maintain it over time. 5.4 Restrictions on Upstream Security Swiss corporate law imposes restrictions on the granting of security by Swiss capital companies, in particular share corporations ( Aktiengesells - chaft ) or limited liability companies ( Gesellschaft mit beschränkter Haftung ), when such security is granted for the benefit of either: • a direct or indirect parent company (upstream security); or • another group company not fully owned by the party providing the security (cross-stream security). The permissibility of granting such upstream or cross-stream security must be assessed based primarily on the benefits received by the security provider for granting the security. This determines whether such financial assistance is granted on arm’s length terms. However, the requirement for “arm’s length terms” can lead to practical difficulties for the following reasons: • shareholders often do not wish to provide any consideration for the granting of the security; and • it is difficult to determine what consideration would be adequate. Due to these difficulties, it is standard practice to assume that the granting of security is not at arm’s length and therefore constitutes a distribu- tion by the company to its shareholders. Conse- quently, the following applies: • the board of directors and the shareholders must approve the granting of the security; • any such upstream or cross-stream security must be covered by the security provider’s
purpose as set forth in its articles of incorpo- ration; and • enforcement of the security is limited to the freely distributable equity capital of the company at the time of the enforcement, the amount of which must be confirmed by the company’s auditors. While this limitation applies by law, limitation terms are typically included in the finance documents to further establish this legal limitation. Certain aspects of the concept of upstream and cross-stream security and other benefits will remain unclear until the Swiss Federal Supreme Court decides a case dealing specifically with all of these matters. However, the Swiss Fed- eral Supreme Court has already stated certain additional requirements for determining the amount of the freely distributable equity capital available for the use of enforcement proceeds of any upstream or cross-stream security or the payment under any upstream or cross-stream guarantees. While these requirements do not directly impact the granting of upstream or cross-stream guarantees or security, they are relevant for determining the amount of the freely distributable equity capital of a Swiss security provider at the time of the enforcement of such security. A Swiss security provider must build a reserve if it has upstream or cross-stream share- holder loans outstanding that were not granted on arm’s length terms. This will result in a reduc- tion of the freely disposable equity amount. Granting upstream and cross-stream security can also raise issues of directors’ liability, both criminal and civil. The directors of a Swiss com- pany have a general obligation to act in the com- pany’s interest, including when granting security for the benefit of third parties.
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