Geopolitical tensions, rising interest rates, inflation and supply chain problems pose numerous challenges. This article focuses on boards' duties within group companies and effective management of group interests.
The complex task of a group company's board
Many Swiss businesses belong to larger, often international groups. Subsidiaries may depend heavily on other group companies and be unable to operate without parent or sister company support.
Unlike some foreign jurisdictions, Switzerland has no separate body of group company law. Each company is legally independent. The board of a Swiss group company must therefore act in that company's best interests, independently of the interests of the group or other group companies. This duty cannot be changed by contract. A subsidiary's board consequently faces a complex challenge, particularly if its members also hold senior positions in the parent or another group company, or if a centrally managed group issues clear instructions.
In normal times, this challenge is generally manageable because group and subsidiary interests align and the group can provide financial support when needed.
The board's role in a crisis: handling group challenges
The board of a Swiss company must always act in the best interests of the company it serves. This also applies within groups and is particularly important when a subsidiary faces insolvency or overindebtedness. Under current case law, group interests may be considered in certain circumstances if doing so benefits the subsidiary overall.
Balancing interests is demanding. Sound professional advice is recommended in such situations.
Loans to parent or sister companies and cash pool participation are particularly sensitive during financial distress.
Conditions for granting intragroup loans
Loans to parent or sister companies (upstream or cross-stream loans) are permitted if granted on arm's-length terms. Their amount must in any event not exceed the company's freely available equity.
An upstream or cross-stream loan is on arm's-length terms if a third party, such as a bank, would provide a comparable loan on the same conditions. Relevant factors include security, borrower creditworthiness, amount, term and termination rights.
Earlier Federal Supreme Court decisions, particularly concerning Swissair, raised doubts about whether unsecured intragroup loans could ever be on arm's-length terms. A more recent decision recognises that unsecured upstream or cross-stream loans may meet this test where the borrower has good creditworthiness.
Close monitoring is especially important in a crisis. If intragroup borrowers' creditworthiness deteriorates, new loans should be granted only if covered by freely available equity or secured. For existing unsecured loans, consider adjustments or termination in accordance with the loan agreement.
Cash pools: significance and management during a crisis
A cash pool transfers group liquidity to a group company acting as cash pool leader. Each participant holds an account with a credit or debit balance that is regularly settled. A subsidiary's credit balance represents a loan whose amount is continually adjusted. Cash pools therefore require the same duties of care and considerations as
other loans. Participation is permitted if the corresponding conditions are met.
Because cash pool balances fluctuate constantly, the cash pool leader's creditworthiness must be monitored regularly, especially in a crisis and where no security exists. If repayment is at risk, appropriate steps such as terminating participation should be taken. Federal Supreme Court case law permits an overall assessment, allowing participation to continue in exceptional circumstances. This occurred in the Swissair case, where the subsidiary depended on numerous services from other group companies that would also have ended on withdrawal.
The parent's role in a crisis: dependence and support
Legally, a parent is simply a shareholder of its subsidiaries. Apart from contributing the original capital, a shareholder of a Swiss company has no further duties, particularly no obligation to contribute additional funds. A parent therefore has no legal duty to support its subsidiaries financially.
In practice, subsidiaries often rely on an implicit 'group guarantee'. Such an assurance is not legally enforceable. A subsidiary's board seeking to rely on group support must obtain binding commitments, such as subordination agreements or financing obligations. The guarantor must also have sufficient creditworthiness. Only an enforceable claim can, for example, justify avoiding notification of the court in an overindebtedness situation.
Balancing often divergent group interests is a major challenge for the board. Qualified advice, clear communication and a sound legal assessment are essential for lawful and effective management. This enables the board to fulfil its responsibility towards the subsidiary and guide it through a crisis.