• Dominique Gottret, Partner |
  • Fabio Rohrer, Expert |

The legal requirements on the transfer of registered shares according to the provisions of company and securities law are complex. In practice, a legal due diligence often reveals that the ownership of the registered shares in question is unclear respectively cannot be allocated to the negotiating seller(s). Due to the complexity of share transfers and the frequency of transactions, it can be assumed that many privately held companies limited by shares in Switzerland do not legally belong to the shareholders listed in the share registers. The problem of erroneous share transfers often only becomes apparent in the context of a contemplated purchase of shares respectively in the context of a legal due diligence carried out for this reason, which is why this blog will also use this example to further highlight the problem.

Legal due diligence regarding ownership of the registered shares

A due diligence serves the purpose of the examination of a company to be purchased in the phase prior to the conclusion of the share purchase agreement. The verification of the legal ownership of the shares is an essential part of the legal due diligence, as the potential buyer wishes to ensure that the seller has the right to sell and to legally transfer the legal ownership of the registered shares. If the transfers of legal ownership in the past were not free of defects and the seller was therefore not the owner of the shares to be sold, the buyer may not acquire legal ownership of the registered shares despite payment of the purchase price in accordance with the agreed share purchase agreement.

Only if there is an unbroken chain of assignment respectively chain of endorsement up to the date of issuance of the relevant registered shares (“chain of title”) and the other requirements of the previous share transfers described below are fulfilled, the proof of ownership with respect to the registered shares can be provided by the seller.

Legally valid transfer of registered shares

When transferring registered shares, it must first be clarified whether the shareholder rights are certified or not. Certification in a security is not a requirement for the creation and transfer of shareholder rights. However, the transfer of registered shares in the form of a security differs from the transfer of registered shares in the form of an uncertificated security.

Transfer of uncertificated registered shares

The following requirements must be met for an uncertificated registered share to be legally transferred (i.e. sold):

  1. Valid obligation transaction (written contract containing the obligation to sell the shares and the obligation to purchase the shares);
  2. Assignment (i.e. written assignment) of the shares;
  3. Consent of the company to the transfer of shares if the registered shares have restricted transferability according to the articles of association (“Vinkulierung”).

Transfer of certified registered shares

The following requirements must be met in order for a certificated registered share to be validly transferred (i.e. sold):

  1. Valid obligation transaction (written contract containing the obligation to sell the shares and the obligation to purchase the shares);
  2. Physical handover of the security (i.e. the share title or the share certificate);
  3. Endorsement on the share title or on the share certificate;
  4. Consent of the company to the transfer of shares if the registered shares have restricted transferability according to the articles of association (“Vinkulierung”).

The endorsement on the share certificate or share title set forth in item 3 can be replaced with a written assignment on a separate document.

The solution - Cleaning up the chain of title

If the legal due diligence reveals that mistakes were made in the past when shares were transferred, it is possible to clean up the chain of title by means of a so-called “share clean-up”. Some of these share clean-ups are complex, but in the experience of the authors, they can be successfully completed on a regular basis.

The following solutions might resolve the issue:

  • If share transfers of uncertificated registered shares were erroneous in the past, it is possible that the shareholder who has not transferred ownership due to an error can assign the relevant registered shares directly to the seller before the share purchase agreement is being signed. However, this approach presupposes that the persons involved can be reached and are willing to cooperate. If there is no willingness to cooperate, it must be examined whether a settlement can be achieved by means of a squeeze-out merger.
  • If certificated registered shares have been destroyed or lost in the past, they may be declared invalid by a court. Subsequently, the company may issue new share certificates by means of a valid resolution of the board of directors, thereby restoring the correct shareholder structure.

In cases of erroneous share transfers, it is always advisable to consult experts. The legal experts of KPMG Law are happy to assist you.

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