On 1 July this year new transparency rules come into force in the context of combating money laundering. Breaches of these rules incur tough sanctions both for the shareholders and management bodies.

The Federal Council is bringing into force on 1 July 2015 the first part of the new federal law to implement the 2012 Revised Recommendations of the Financial Action Task Force (FATF) concerning the tightening of money laundering provisions. This concerns, in particular, the provisions in the Code of Obligations (CO) concerning increased transparency requirements for legal entities. Taking limited companies (Aktiengesellschaften) as an example the following summarizes the key provisions on transparency and potential sanctions and explains when action is necessary. The amendments also affect limited liability companies (GmbHs) and cooperatives (Genossenschaften). Ultimately, these Swiss companies have to adapt their statutes and regulations to meet the new requirements within two years of their entry into force.

No more anonymity for new shareholders acquiring non-listed bearer shares.

To date, the acquirer of a bearer share remained basically anonymous. This will no longer be possible. Whoever acquires even a single bearer share must report the acquisition as well as their first and last names and address to the company. The acquirer must be identified to the Company (by an official ID with photo or a Commercial Register extract). The shareholder must report to the company any change of first or last name, company or address. In contrast to the stock exchange law, there are no thresholds for these reporting requirements. The board of directors must keep a directory containing the date of birth and nationality of the acquirer or shareholder in addition to the first and last name or the business name and the address. The requirements of the legislator thus go beyond what the law requires in the case of registered shares.

According to the law, the general meeting of shareholders may decide that the report is not to be made to the Company, but to a financial intermediary. The Federal Council's dispatch notes that the relation between the Company and the financial intermediary can be structured in a way that the shareholders remain anonymous to the Company. The board of directors will appoint the financial intermediary and make the shareholders aware of who has been appointed.

Obligation to report the beneficial owners for both registered and bearer shares

Whoever acquires shares in a company whose shares are neither listed on an exchange nor issued in the form of intermediated securities and thereby reaches or exceeds the limit of 25% of the share capital or voting rights, must report to the company the first and last name and the address of the natural individual(s) for whom he is ultimately dealing (beneficial owner) or confirm that he himself is the beneficial owner. This disclosure obligation applies to the acquisition of both bearer and registered shares. In contrast to the disclosure law for listed companies, the obligation to report is not imposed on the beneficial owner, but rather on the shareholder. The shareholder must notify the Company of any change in the first or the last name or the address of the beneficial owners.

The companies must keep a record of the reported beneficial owners.

As far as the reporting obligation results from the purchase of bearer shares, the company may again have the general meeting of shareholders decide to have the reporting made to a financial intermediary rather than to the company itself. This is not possible in the acquisition of registered shares.

Obligation to retain the reported information

The supporting documents for the report must be kept for ten years after the deletion of a person from the directory. The directory must be kept in such a way that it can be accessed at any time in Switzerland. At least one member of the board of directors or a director residing in Switzerland must have access to the directory (and in the case of registered shares to the share register). If the company has designated a financial intermediary then they are responsible for the updating of the directory and keeping supporting documents.

Sanctions in the event of breach of the reporting obligation to report the new shareholder of bearer shares or the beneficial owners for bearer or registered shares

Both the obligation to report the new shareholder of bearer shares and the obligation to report the beneficial owners are to be fulfilled within one month of purchase. As long as the shareholder fails to meet its reporting obligations, the corresponding voting and other membership rights are suspended. The relevant property rights (esp. the right to receive dividends) can also not be claimed. It should be emphasized that the shareholder, if he does not fulfil the reporting requirements within one month of acquisition, forfeits the property rights. Even if reporting is completed at a later time, the property rights are only effective from the actual reporting date.

Directors‘ liability risks

The board of directors must ensure that no shareholder can exercise their rights in violation of the reporting requirements, i.e. in particular to take part in the general meeting of shareholders or receive a dividend. Otherwise, the members of the board of directors may be open to responsibility claims under Art. 754 CO. In addition, relevant decisions of the general meeting of shareholders can be subject to appeal under certain circumstances due to the participation of unauthorized persons. With respect to dividend payments to a defaulting shareholder there is also the question of whether it is an infringing deposit refund by the company or a hidden distribution of earnings.

No reporting requirements for intermediated securities

There is no obligation to notify the Company or the Company's appointed financial intermediary when the shares are issued in the form of intermediated securities (Bucheffekten) i.e. deposited or registered with a custodian. Instead it is up to the custodian to make the necessary inquiries about the owner, controlling owners and beneficial owners as provided in the Money Laundering Act and the corresponding implementing regulations. The law does not provide for forfeiture of property rights.

Many open questions

The consequences of a violation of the new rules on transparency are hard for both shareholders and the board of directors. It is therefore all the more surprising that this part of the revision came into force despite the law not explicitly addressing many questions. Some examples have been singled out in the following questions:

• Who is to be regarded as a beneficial owner? Are there thresholds and if so, what are they?
• What happens if a shareholder does not have access to the information which requires to be reported, because it e.g. has its registered office abroad and the beneficial owners are not subject to any reporting requirement towards him?
• Is it sufficient if listed companies, which hold shares in Swiss subsidiaries, report only those of their beneficial owners which, in turn, have been reported to them according to stock exchange disclosure regulations?
• Are the exceptions to the reporting duty also valid when the shares are only listed on a foreign exchange?
• Does the forfeiture apply even if name changes are not communicated within the one month deadline?
• What applies to participation certificates?

Transitional provisions

Individuals who already hold bearer shares on 1 July 2015 have to comply with their respective reporting obligations within one month. This also applies in respect of the reporting of the beneficial owners. The deadline for the forfeiture of property rights does not expire until 31 December 2015. The suspension of voting rights takes effect from 1 August 2015.

There is no retrospective reporting requirement for registered shareholders, who are in possession of shares prior to 1 July 2015. In other words the reporting obligations arise only for registered shares, which are purchased from 1 July 2015.

What action has to be taken?

Given the draconian sanctions, we recommend that limited companies with bearer shares should consider whether they want to convert their bearer shares into registered shares or, if, in particular in case of a very broad shareholder base, they want to issue them in the form of intermediated securities i.e. deposit them with a custodian. The decision should be made as soon as possible but no later than before the date of the next dividend payment.

If limited companies want to retain bearer shares they should investigate whether a financial intermediary should be appointed and, if so, whether the Company’s access rights should be restricted to preserve anonymity.

Listed companies which hold shares in Swiss Subsidiaries should observe the development of the practice carefully and consider the issuance of intermediated securities for the subsidiaries; the latter, in particular, if they do not hold 100% of the Swiss subsidiaries.

All limited companies (with registered or bearer shares) should take the necessary preparatory measures as soon as possible to ensure that their obligations regarding the updating of directories and keeping of supporting documentation can be met on 1 July  2015. For Swiss companies in which legal persons are invested, the board of directors should deal with the question of how the obligation to report the beneficial owners must be implemented in their particular case. Given the ambiguities, this must, in any case, be checked again before the next dividend date in case the implementation needs to be adjusted.

Individuals who hold bearer shares in a Swiss limited company should prepare themselves so that they are in a position to provide the appropriate information to the company by 1 August 2015.

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